Biotech - the End of Big Pharma? Given the risks of investments in biotechnology and pharmaceutical stocks, have the returns exceeded what would be predicted by financial asset pricing models?

The objective of this thesis is to investigate whether biotech and pharma stocks have exceeded the returns of what would be predicted by financial asset pricing models. More specifically, we examine whether the stocks in these sectors have delivered positive abnormal returns. We study value-weighted biotech portfolios and pharma portfolios with return data from January 2010 to June 2022. We limit the analysis to stocks in developed countries. We apply the Fama-French five-factor model, in which the dependent variable is the excess return over the risk-free rate. The estimated alphas determine the existence of abnormal returns. We study different regions, time periods and comparable sector indices in our main analysis. We also conduct a robustness analysis with results from other multi-factor models, as well as portfolios with annually rebalancing and equally-weighting. We find significantly positive alphas for the value-weighted biotech portfolio in Europe and the equally-weighted biotech portfolio in developed countries, i.e., these portfolios deliver positive abnormal returns. We discuss the potential of R&D as a systematic risk factor that can explain the abnormal return. We do not find any significant abnormal returns for the pharma portfolios. Moreover, we find that both biotech and pharma stocks are positively exposed to the market factor and negatively exposed to the value factor. Additionally, the biotech portfolio is positively exposed to the size factor and negatively exposed to the profitability factor. The pharma portfolio is positively exposed to the investment factor.nhhma

From Code to Capital: A Study of How Emerging Technologies Shape Stock Markets

[eng] Recent white papers have described how emerging technologies will shape the future (World Economic Forum, 2017) and how institutions are responding to the increasingly salient trend (EU Commission, 2021). From an investment perspective, emerging technology offers major potential for growth, but also entails considerable uncertainty and risk, as these technologies are just beginning to exist, grow and develop (Cambridge, 2023). By nature, these can be associated to uncertainty since the final stages of their development, market acceptation and impact, indeed, are uncertain. Mishkin (2016) posits that stock prices reflect optimal expected forecasts based on available information. Expectations regarding future profits from emerging technology are thus embedded in current stock prices. Evidence shows that disruptive technology firms exhibit unjustifiably high stock returns and volatility (Pástor and Veronesi, 2006; Gharbi, Sahut, and Teulon, 2014; Schwert, 2002), suggesting bubble-like patterns driven by market irrationality (Shiller, 2000; Pérez, 2003). This thesis delves into the intersection of technology and finance, focusing on how emerging technologies shape the landscape of financial assets risks and returns dynamics and to encourage investors and analysts to use emerging technologies strategically to engage with market return and volatility. This thesis is a self-contained scientific document composed of six chapters, and each one entails certain particularities regarding the research approach and methodology. The thesis begins with an Introduction. Chapter 2, entitled “The Rubik’s Cube of Emerging Technologies and Stock Volatility” presents a systematic review of the literature on the constellation of emerging technologies and asset return volatility, documenting several potential explanations for how emerging technologies drive stock volatility. Several specific features of emerging technologies are identified across the literature review, which are described as diffusive, persistent, heterogeneous, and momentum-oriented. The main conclusion of this chapter is that emerging technologies systemically contributes to an increased stock return volatility driven by their inherent uncertain nature, the greater complexity to calculate fundamental values, over-enthusiastic and novice investors, and their idiosyncratic properties. The review of recent empirical evidence contributes to the technological innovation, economic and finance literature by providing a state of the art of the relationship between emerging technologies and asset returns and asset return volatility. Chapter 3, entitled “Regime Switching in High-Tech ETFs: Idiosyncratic Volatility and Return” shows how investors’ expectations regarding emerging technologies are reflected across Exchange Traded Funds (ETFs), as a particular type of financial security. A Markov regime-switching (MRS) modeling involving time series analysis has been used for this study. The main finding contributes to the idiosyncratic risk literature by showcasing a significant relationship between idiosyncratic risk and return and suggest that idiosyncratic volatility matters in high-tech ETF pricing. The evidence demonstrate that idiosyncratic risk is priced negatively or positively depending on volatility regimes. The main contribution is toward diversification strategy for investments in the high-tech sector, idiosyncratic risk can play an important role in terms of managing idiosyncratic volatility and return. Chapter 4, entitled “Impact of emerging technologies in banking and finance in Europe: A volatility spillover and contagion approach”, investigates the time series properties of the correlations, volatility cluster, spillover, and persistence for asset returns and emerging technology-related assets across the Spanish Banking sector, the Spanish Market, and the finance industry in the European Union. The main findings show that developments in emerging technology are a relevant factor for capturing the level of risk and volatility and that emerging technology-related assets are highly integrated. The findings shed light on the importance of considering sector, industry, and market specific features that need to be contemplated and can result in heterogeneous insights into the relationship between emerging technology and assets risk and returns. The contribution of this study is a more in-depth analysis of opportunities and challenges related to FinTech and the banking industry in the past, present, and future. Chapter 5, “The impact of disruptive technologies on Spanish banking under different volatility regimes”, contributes to the innovation and finance literature and explores whether and how disruptive technology impacts banking stock returns under high volatility and low volatility regimes. A classical CAPM was adapted into a two-factor model with heteroscedastic Markov switching regimes. Using the Spanish banking sector the results indicate that disruptive technologies have an impact on Spanish banking stock returns and that the effects are volatility regime dependent. Additionally, we found that intensity depends also on the existing market circumstances, having a more significant influence under unfavorable market conditions and less influence under stable ones. These findings suggest that investors are informed about and acknowledge the advantages of disruptive technologies and will use their adoption as a business strategy to offset adverse market circumstances. Chapter 6, “Banking FinTech and stock market volatility? The BIZUM case”, reviews whether and how the adoption of FinTech by incumbent banks affects their stock price volatility. Using the case of BIZUM, a FinTech solution, the effect on Spanish incumbent banks has been analyzed by applying a GARCH-M GED methodology. The results indicates that investors are not indifferent to the adoption of a disruptive technology, driving to a reduction in the incumbent banks stock volatility. One might suspect investors to have anchored the benefits and competitive advantages that FinTech might offer for the incumbents, being in line with the theoretical argument proposed by Jun and Yeo (2016) that FinTech will complement incumbent banks and lead to positive impact. To sum up, this thesis provides a number of contributions to the fields of financial economics and innovation. First, it investigates and presents evidence on a significant relationship between emerging technologies and stock market dynamics. Second, it provides evidence that the impact of emerging technologies on the stock market varies depending on the stock market conditions. Third, it shows that the intensity of the impact also depends on the market circumstances reflected through volatility regimes. Moreover, and fourth, we found that emerging technologies are providing new market opportunities, which entail novel volatility patterns. However, the results also highlight that the impact of emerging technology on market dynamics varies across security types, industries, sectors, and country levels. Therefore, a case-by-case approach is paramount. Further studies are necessary to formulate a generalized statement. In summary, emerging technologies reshape stock markets, impacting volatility levels. Researchers and practitioners must navigate this dynamic landscape to make informed decisions

Options-based systemic risk, financial distress, and macroeconomic downturns

In this study, we propose an implied forward-looking measure for systemic risk that employs the information from put option prices, the Systemic Options Value-at-Risk (SOVaR). This new measure can capture the buildup stage of systemic risk in the financial sector earlier than the standard stock market-based systemic risk measures (SRMs). Non-parametric tests show that our measure exhibits more timely early warning signals (up to one month earlier) regarding the main turbulent events around the global financial crisis of 2007-2009 than the three main stock market-based SRMs. Moreover, this new measure also shows significant predictive power with respect to macroeconomic downturns as well as future recessions. Our results are robust to various specifications, breakdowns of financial sectors, and controlling for the other main risk measures proposed in the literature

The relationship between strategies and performance in the manufacturing sector in ZImbabwe during economic crisis

There are different views on the nature and content of strategies that ensure positive performance in the economic crisis environment. This has created the need for studies focusing on the relationship between strategies and performance in different economic crises. Manufacturing firms in Zimbabwe have experienced declining performance since 1996. It is against this background that this study examined the dimension of strategic orientations (as measures of strategies) exercised by firms to determine their relationship with performance during the economic crisis. Data on the various dimensions of strategic orientation was collected through questionnaires, while data on performance were collected through questionnaires and financial statements. The study sample was obtained through a stratified sampling technique which falls within the sphere of probability sampling methods. The multiple regression analysis was used to examine the relationships between the six dimensions of strategic orientation and performance. The analysis dimension of strategic orientation was dominantly exercised by many firms. The analysis dimension of strategic orientation was also the most effective because it had a positive relationship with performance (positive profitability and growth). This makes the analysis dimension of strategic orientation relevant in economic crisis. The study showed that the pro-activeness dimension of strategic orientation focused by very few firms had a positive relationship with performance (positive profitability and growth) and hence making it relevant in economic crisis. Moreover, it was established that the relationship between aggressiveness and riskiness dimensions of strategic orientation was negative and hence less relevant in economic crisis. It is therefore recommended that, for manufacturing firms in Zimbabwe to survive, improve performance and ensure sustainability in the current economic crisis environment, they need to focus dominantly on the analysis and pro-activeness dimensions of strategic orientation. This requires firms to invest more in research and development, develop strategic partnerships with other firms, strong networks, innovative and creative capabilities. In addition, firms must avoid fighting competitors and taking risky decisions. This study considered firms that are currently operational and it is recommended that future studies consider firms that closed during the economic crisis to acquire a deeper understanding of the effective strategies in economic crisis.Business ManagementD.B.L

Multinational Enterprise Parent-Foreign Subsidiary Governance

This dissertation investigates how a multinational enterprise’s (MNE) corporate headquarters governs its foreign subsidiaries. It draws on agency theory, prospect theory, and corporate governance literatures to develop a framework that describes select MNE parent-foreign subsidiary governance mechanisms expected to predict foreign subsidiary performance, measured as foreign subsidiary survival and profitability. To test this framework, I first conducted a pilot Canadian study. It was followed by the main multi-country study. The Canadian study used mixed methods. It analyzed quantitative data, compiled from different sources, and qualitative data, collected through personal interviews with subsidiary managers. The main multi-country study used survival analysis and multinomial/binary logistic regression techniques to analyze longitudinal datasets/sub-datasets for 2000-2008. The Canadian study showed Japanese MNE parents of Canadian foreign subsidiaries that had high survival were governed through nonlinearly higher parent ownership, greater expatriate numbers, and lower risk levels, by their MNE corporate headquarters. The main multi-country study confirmed most of the findings of the Canadian study and provided new findings that demonstrated foreign subsidiaries that were more likely to survive also tended to be governed by regional headquarters (RHQ) in addition to corporate headquarters (CHQ). It also showed that parent ownership interacts with expatriates in a foreign subsidiary. They thus tend to complement and/or substitute for each other as MNE parent-foreign subsidiary governance mechanisms predicting foreign subsidiary survival. Further, it showed that although these select parent-subsidiary governance mechanisms (ownership, expatriates, risk, and RHQ) predict a foreign subsidiary’s survival, they do not predict a foreign subsidiary’s profitability

Australian Dollar Price Shocks and the Australian Stock Market

This thesis presents three studies on the Australian dollar price shocks and the Australian stock market. In this thesis, we study the volatility of the major currencies, identify the effect of the Australian dollar return and volatility on six sectors of the Australian stock market, evaluate volatility from the Australian dollar to the big four banks’ shares volatility in Australia, and finally identify the risk factors for the real estate market in Australia at the fundamental factors and macroeconomies level. In chapter two, we investigate the influence of volatility of the foreign exchange rate of the US, the UK, Euro-zone, Japan, and Singapore on the volatility of the six Australian sectors within the investigated period, controlling for the time period’s global financial crisis 2007-2008. The volatility in this study was estimated by using GARCH (1,1) models. Daily data was collected for a period of 2002 to 2014. The dataset is divided into three sub-periods: before GFC (July 2002 to July 2007), during GFC (July 2007 to July 2009) and after GFC (July 2009 to July 2014). The estimated results find a strong relationship between exchange rates for the five countries with volatility of the six Australian sectors, except the health care sectors during GFC. The same relationship is evident before the GFC, except in the banks sector. The statistically significant impact of these foreign exchanges on the five Australian sectors continues after the GFC, except that the materials sector is weakly viii significant. This result is important for the investors and other market participants to understand the risk factors related to the sectors of the Australian stock market. In chapter three, we examine the volatility of the Australian dollar return and the big four Australian banks, using unique high-frequency-hourly-data from September 2012 to September 2016. This study applies an extended version of the generalised autoregressive conditional heteroskedasticity (GARCH) specifications. The GARCH variants specification includes the basic GARCH (1,1), TGARCH (1,1), EGARCH (1,1) and PARCH (1,1) models. This chapter varies from the previous Australian research studies in that detached hourly returns are used over a four-year sample period. The findings show that the volatility of the Australian dollar positively affects the big four banks in Australia in the four models and the short-term interest rate volatility negatively affects the big four banks’ volatility. The outcomes show that significant ARCH term and GARCH term impacts are present in the data, and that the standard error of PARCH model defines the volatility process better than the other three models for Commonwealth Bank (CBA), Westpac and National Australia Bank (NAB). In addition, the best model to describe the volatility for the Australia and New Zealand Banking Group (ANZ) is the TARCH model. This study is important to the market participants and investors, who want to understand the risk factor of Australian dollar volatility on the big four banks in Australia. Chapter four incorporates two objectives of the Australian real estate market. First, this research investigates the effect of TWI return on the Australian REITs volatility from 2009 to 2016 by using monthly panel data. We use fixed and random effect ix models. In the second objective, we examine the linkage between the fundamental factors and the real estate market for three major states in Australia at unit price and house price. These states are New South Wales (NSW), Victoria (VIC), and Queensland (QLD). This research uses monthly data covering the period from 2009 to 2016 by applying the VAR model. This research is important for investors, investment managers and operational decision makers to get a better understanding of how they can manage their investments more effectively during times of any changing macroeconomics factor. The findings of this research will help the real estate investment and Australians funds to reduce macroeconomics exposure. The panel fixed, and random effect models analysis concludes that there is a positive and significant relationship between the market risk and TWI with the Australian REITs, hence the hypothesis of a positive connection was accepted. The Vector Autoregressive Model (VAR) indicated that there is a positive relationship between the NSW real estate market and rental yield, while it is negative with auction clearance rate at a 5% level of significance. For Victoria, the real estate price has a positive significant effect on the Victorian rental yield and average stock on the market, while the auction clearance rate is negative. In Queensland, there is a negative relationship between the auction clearance rate and the average stock on the market with Queensland’s real-estate price. The results of this chapter help portfolio managers to reduce exposure to interest rate risks inherent in property investments by choosing externally managed REITs with low levels of debt. The topic of this thesis is timely, and the outcomes provide significant information to various groups of market participants, such as portfolio managers, policy makers and x risk managers, and to market participants who wish to understand the volatility of major currencies. Since the exchange rates and the stock market are considered as two important markers of financial markets, the outcomes of this thesis provide guidance on how investors and the market participants construct their portfolios. When the Australian dollar shocks are imminent, investors and market participants can adjust or rebalance their portfolios by looking at the sensitivity of each sector to oil price shocks and adjusting accordingly

Equity characteristics and investor preferences; empirical evidence from Finland and Sweden

The goal of the thesis is to test whether retail investors show preference towards certain type of companies. I compare the similarities between domestic and foreign equity holdings. I add to previous research by analysing also equity mutual funds and testing whether some preferences are seen also there. I use data from a Swedish brokerage company. The data contains the domestic and foreign shareholdings of Finnish retail investors and the foreign shareholdings of Swedish investors. In addition, I was able to get data of the equity mutual fund holdings of these two countries. I combine this unique data set with variables taken form Thomson Financial concerning the individual firms and data collected of the mutual fund equities. I follow the same methodology as earlier research in running regressions on the explanatory variables and classifying the stocks into portfolios. As explanatory variables I test such measures as firm size, leverage, volatility, price-to-book ratio etc. Retail investors show a preference towards smaller sized companies both in the domestic as well as in the foreign shareholdings. Similar type of preference can be noticed also among mutual fund holdings. There the relation is however not linear with respect to equities size and also other variables influence the results, especially the size of fund assets under management. The results are based on using the ownership share in a firm or a fund as the dependent variable, in line with previous research. An earlier study has offered as an explanation the fact that institutional investors show a preference towards large sized companies. My results of mutual fund holdings however do not confirm this as the only reason. Retail investors show a preference towards value stocks in domestic shareholdings, whereas based on the foreign shareholdings the preference was more towards growth stocks. None of the other variables except size seemed to perform consistently well in explaining the observed shareholdings. The second best performing variable was the amount of liquid assets with respect to company market value. One possible reason for this might be that investors invest in companies which have or have had high profitability

Economic Growth, Investment and Asset Pricing: Empirical Evidence

Drawing upon economic development under uncertainty, this thesis investigates some channels of nations' prosperity in three different but related topics. First, in chapter 2, panel data for 130 countries from 1981 to 2009 are employed to scrutinize the impact of multiple forms of human capital and energy consumption on per capita GDP growth. With the application of an expanded neoclassical growth model, the individual effects of primary, secondary and tertiary education enrolment ratios as well as average years of schooling is studied. In addition, the effect of health variables (such as life expectancy and the infant mortality rate) on GDP per capita growth is examined. The education and health variables have a significant effect on economic growth with the secondary enrolment ratio being the most effective. Energy has long been argued as an essential factor for the development of the economy and it should be in line with other production factors of neoclassical economics, capital (K) and labour (L). Energy consumption is found to support higher growth. Exploring the differential effect for the developed and oil-exporting countries, the education variables are found to have no differential impact in the oil exporting countries nor the developed countries, however, health human capital affects the growth of the developed countries differently. Energy consumption per capita has a significant positive effect in both types of countries. Second, crude oil price behaviour has become more volatile since 1973 which has a significant impact on major macroeconomic variables such as GDP, inflation and productivity. Studies considering the effects of oil price changes on decisions at the firm level are comparatively few. Oil price volatility represents a source of uncertainty affecting the cost of an important input, oil, which creates uncertainty regarding firm profitability, valuations and investment decisions. Chapter 3 builds on related strands in the literature that focus on investment decisions by firms. Investment theory is combined with modern econometric approaches to examine the effects of industry uncertainty and market instability on total investment expenditures in the UK firms. Generalized method of moments estimation techniques are applied to a panel data set that covers 2694 non-financial firms and 416 financial firms from Worldscope DataStream over the period 1986-2011. Tobin’s Q theory which connects investment to the ratio Q is applied to estimate the investment model that is augmented with measures for both macroeconomic and industry specific uncertainty; specifically this is done by including stock market and oil price volatility in the model. Stock price uncertainty seems to be positively related to investment among the companies in both samples. On the other hand, empirical results are presented to show that there is a U shaped relationship between oil price volatility and firm investment. The results should be useful to decision makers, investors, managers and policy makers who need to make investment decisions in an uncertain world. Third, recent empirical research has found evidence of a relationship between changes in oil price and stock prices. Most published papers investigate the relationship between oil price movements and stock prices using either economy-wide measures of stock prices or industry sector measures of stock prices. The aim of Chapter 4 is to scrutinize the responses of some of the UK transportation, travel and leisure, and oil and gas firms to oil price changes. Fama-French-Carhart's (1997) four-factor asset pricing model is augmented with the oil price risk factor to study the association of oil and stock prices of 25 firms over the period from January 1998 to December 2012. The extent of the exposure of UK transportation and travel and leisure firms is generally negative but it is particularly significant for a number of firms including delivery services, travel and tourism, and airlines. Oil price risk exposures of UK oil and gas companies are generally positive and significant. With the aid of asymmetric and scaled specifications, some firms show strong evidence of asymmetry in the reaction of stock returns to changes in the price of oil comprising travel and tourism, airlines, and integrated oil and gas. Moreover, the results document that oil price risk exposures vary over time. In particular, the global recession of 2008 has significantly contributed to the oil price risk exposure of travel and tourism and integrated oil and gas firms. These results should be of interest to financial analysts, corporate executives, regulators and policy makers