Socially Responsible Investment in General Equilibrium

Socially responsible investment in analyzed in a general equilibrium context. This is important in order to understand the ultimate consequences of SRI on the decisions of economic agents. Building on models by Brock (1982) and Merton (1987), SRI is modelled as the choice to voluntarily give up investment in stocks and bonds issues by a firm producing an externality. The model is used to analyze the utility costs of SRI to the responsible investor and the impact on the price of the stock issued by the firm which is responsible for the externality. The results shed light on the factors which may magnify or reduce the impact of SRI, among which are crucial the wealth commended in relative terms by the responsible agents and the diversification possibilities offered by the firms which are excluded from the investment opportunity set. A set of firms targeted by SRI may be seriously affected by SRI only if the responsible investors command a large portion of overall wealth; moreover the same firms are more likely to be hit by SRI behavior if they do not represent important diversification instruments. Firms with unique characteristics from the point of view of overall diversification are less likely to be the target of SRI.General equilibrium, Redistributive effects, Public goods

The Nontradable Share Reform in the Chinese Stock Market

Nontradable shares (NTS) are an unparalleled feature of the ownership structure of Chinese listed companies and represented a major hurdle to domestic financial market development. After some failed attempts, in 2005 the Chinese authorities have launched a structural reform program aiming at eliminating NTS. In this paper, we evaluate the stock price effects of the actual implementation of this reform in 368 firms. The NTS reform generated a statistically significant 8 percent positive abnormal return over the event window, adjusting prices for the compensation requested by tradable shareholders. Results are consistent with the expectation of improved economic fundamentals such as better corporate governance and enhanced liquidity.Chinese Equity Market, Financial Market Development, Split-Share Structure

International shocks and national house prices

The paper investigates linkages between general macroeconomic conditions and the housing market for the G-7 area. Among the key results of the paper, it is found that the US are an important source of global fluctuations not only for real activity, nominal variables and stock prices, but also for housing prices. Yet, also regional factors may be relevant to account for house prices dynamics. Secondly, albeit distinct driving forces for real activity and ?nancial factors can be pointed out, sizeable global interactions can be found. In particular, global supply-side shocks are found to be important determinant of G-7 house prices fluctuations. The linkage between housing prices and macroeconomic developments is however bidirectional, since evidence of signi?cant wealth e¤ects can be found, with investment showing in general a stronger reaction than consumption and output.G7, house prices, international business cycle, factor vector autoregressive models, common factors

Is M&A different during a crisis? Evidence from the European banking sector

The financial crisis has affected the landscape of the banking sector around the world. We use a sample of transactions taking place in Europe in 2007-2010 to study the acquirer’s stock price market reaction to announcements and completions of acquisitions. We find that there are no significant abnormal returns around the announcement of an acquisition while there are positive abnormal returns at completions. We study the cross-sectional determinants of abnormal returns and find that announcement returns are mainly explained by the acquirer bank characteristics, while completion returns depend on opacity of the target and in large part on the drop in volatility associated with a reduction of uncertainty.Mergers and Acquisitions; Banks; Opacity; Financial crisis

Comovements in International Stock Markets

In the paper monthly realized moments for stock market returns for the US, the UK, Germany and Japan are employed to assess the linkages holding across moments and markets over the period 1973-2004. In the light of the theoretical framework proposed in the paper, the results point to a progressive integration of the four stock markets, leading to increasing comovements in prices, returns, volatility and correlation. Evidence of a positive and non spurious linkage between volatility and correlation, and a trend increase in correlation coefficients over time, is also found. All the above mentioned linkages seem to be particularly strong for the US and Europe, while the persistent stagnation of the economy and the weak fun-damentals over the 1990s may have been the cause of the more idiosyncratic behavior of the Japanese stock marketrealized volatility, realized correlation, stock markets, financial integration, economic integration.

Net Inflows and Time-Varying Alphas: The Case of Hedge Funds

The growth in the size of the hedge funds industry has led some in-vestors to worry about a decline in alphas, associated with reduced arbitrage opportunities in international financial markets. We introduce a multivariate components model for returns and net relative inflows into hedge funds, accounting for time-varying market premia. We estimate alpha as an unobserved component variable of the econometric model. We then assess whether several categories of hedge funds do produce extra profits and whether the flows of funds into the industry are dynamically related to returns. Our results point to a positive correlation between past returns and future flows, while the evidence concerning the linkage between past flows and future returns is mixed. However, we do not find any structural decline in alpha for most hedge fund categories.Hedge funds, performance, asset pricing models, unobserved components models

Scenario Modeling of Selective Hedging Strategies

We study currency risk management in the context of scenario analysis. We develop scenario-based optimization models that jointly determine the portfolio composition and the hedging strategy within each currency. Thus the model prescribes optimal selective hedging policies. We then study empirically the performance of the models. The new elements of our empirical analysis are: various horizons (one month and one semester), various currency bases, explicit incorporation of realistic transaction costs. The results show that transaction costs are very important in determining the profitability of various currency risk management strategies for both stocks and bonds at the one month horizon.

Scenario Modeling for the Management of International Bond Portfolios

We address the problem of portfolio management in the international bond markets. Interest rate risk in the local market, exchange rate volatility across markets, and decisions for hedging currency risk are integral parts of this problem. The paper develops a stochastic programming optimization model for integrating these decisions in a common framework. Monte Carlo simulation procedures, calibrated using historical observations of volatility and correlation data, generate jointly scenarios of interest and exchange rates. The decision maker's risk tolerance is incorporated through a utility function, and additional views on market outlook can also be incorporated in the form of user specified scenarios. The model prescribes optimal asset allocation among the different markets and determines bond-picking decisions and appropriate hedging ratios. Therefore several interrelated decisions are cast in a common framework, while in the past these issues were addressed separately. Empirical results illustrate the efficacy of the simulation models in capturing the uncertainties of the Salomon Brothers international bond market index.

Stock Prices in a Speculative Market: The Chinese Split-Share Reform

In 2005-2006 China reformed its stock market by eliminating non-tradable shares. The regulator set general guidelines and then assigned responsibility for implementation to each company. We derive relations that should have been followed by the prices of stocks and exploit a company-level data set to compare the actual and the theoretical price reactions. We find evidence for abnormal returns both before the beginning of the reform and during the reform. Cross-sectionally, abnormal returns are associated mainly with turnover and compensation. This shows that in a speculative market, investors do not properly react to unambiguous corporate actions.Speculation, Chinese Stock Market, Market segmentation, Event study, Market Efficiency

The stock market reaction to the 2005 non-tradable share reform in China

During 2005-2006, the Chinese government implemented a reform aimed at eliminating the so-called non-tradable shares (NTS), shares typically held by the State or by politically connected institutional investors that were issued at the early stage of financial market development. Our analysis, based on the time series of risk factors and on the cross section of abnormal returns, confirms that the NTS reform affected stock prices, particularly benefiting small stocks, stocks characterized by historically poor returns, stocks issued by companies with less transparent accounts and poorer governance, and less liquid stocks Historically neglected stocks also witnessed an increase in the volume of trading and market prices. JEL Classification: G14, G28, G32Chinese stock market, Corporate governance, Financial reform, Neglected stocks, Ownership structure, Privatization