Pure contagion effects in international banking: The case of BCCI’s failure

We test for pure contagion effects in international banking arising from the failure of the Bank of Credit and Commerce International (BCCI), one of the largest bank failures in the world. We focused on large individual banks in three developed countries where BCCI had established operations, namely the UK, the US, and Canada. Using event study methodology, we tested for contagion effects using time windows surrounding several known BCCI-related announcements. Our analysis provides strong evidence of pure contagion effects in the UK, which have arisen prior to the official closure date. In contrast, there is no evidence of pure contagion effects in the US and Canada.bank failures, pure contagion effects, event study methodology, abnormal returns

Exchange rate economic exposure and hedging:the significance of currency options

This thesis focuses on the theoretical examination of the exchange rate economic (operating) exposure within the context of the theory of the firm, and proposes some hedging solutions using currency options. The examination of economic exposure is based on such parameters as firms' objectives, industry structure and production cost efficiency. In particular, it examines an hypothetical exporting firm with costs in domestic currency, which faces competition from foreign firms in overseas markets and has a market share expansion objective. Within this framework, the hypothesis is established that economic exposure, portrayed in a diagram connecting export prices and real exchange rates, is asymmetric (i.e. the negative effects depreciation are higher than the positive effects of a currency depreciation). In this case, export business can be seen as a real option, given by exporting firms to overseas customer. Different scenarios about the asymmetry hypothesis can be derived for different assumptions about the determinants of economic exposure. Having established the asymmetry hypothesis, the hedging against this exposure is analysed. The hypothesis is established, that a currency call option should be used in hedging against asymmetric economic exposure. Further, some advanced currency options stategies are discussed, and their use in hedging several scenarios of exposure is indicated, establishing the hypothesis that, the optimal options strategy is a function of the determinants of exposure. Some extensions on the theoretical analysis are examined. These include the hedging of multicurrency exposure using options, and the exposure of a purely domestic firm facing import competition. The empirical work addresses two issues: the empirical validity of the asymmetry hypothesis and the examination of the hedging effectiveness of currency options

Asymmetric Volatility Spillovers between Stock Market and Real Activity: Evidence from the UK and the US

This paper examines the short-run dynamic relationships between stock market and real activity, within a country, for the UK and the US. The Cross Correlation Function testing procedure is applied to test for causality in mean and in variance between the stock market and the real economic sector. Besides variance causation, volatility spillover effects are examined through the multivariate specification form of the Exponential GARCH model. There is evidence of significant reciprocal volatility spillovers between the two sectors within a country, implying stronger interdependencies in the UK rather than in the US and asymmetric behavior only in the case of the UK.Stock market, Real activity, Volatility spillovers, UK, US

Public policy and financial stability : The impact of PCA and TARP on U.S. bank non-performing loans

Peer reviewedPostprin

Hedge fund activism, voice, and value creation

We construct a novel hand-collected large data set of 205 U.S. hedge funds and 1031 activist events over the period 2005-2013, which records both the Schedule 13D filing date and the voicing date, and explore the role of voicing in value creation. We employ alternative inferential statistical approaches, including parametric, non-parametric, and heteroscedasticity-robust tests along with bootstrapping. We reveal that the voice date is important in creating short-term firm value, and provide strong evidence that voicing is associated with positive abnormal returns. These abnormal returns are approximately 1.11%, and are higher than the abnormal returns around the Schedule13D date by approximately 64%. There is also evidence of positive voice abnormal returns for voicing events which lead Schedule 13D events. The results are robust to models of abnormal returns allowing for leverage effects, and to alternative inferential statistical procedures. These findings suggest that voicing leads to information revelation, with implications for U.S. stock market arbitrage and the regulation for hedge fund activism information disclosure

Hedge fund activism, voice, and value creation

We construct a novel hand-collected large data set of 205 U.S. hedge funds and 1031 activist events over the period 2005-2013, which records both the Schedule 13D filing date and the voicing date, and explore the role of voicing in value creation. We employ alternative inferential statistical approaches, including parametric, non-parametric, and heteroscedasticity-robust tests along with bootstrapping. We reveal that the voice date is important in creating short-term firm value, and provide strong evidence that voicing is associated with positive abnormal returns. These abnormal returns are approximately 1.11%, and are higher than the abnormal returns around the Schedule13D date by approximately 64%. There is also evidence of positive voice abnormal returns for voicing events which lead Schedule 13D events. The results are robust to models of abnormal returns allowing for leverage effects, and to alternative inferential statistical procedures. These findings suggest that voicing leads to information revelation, with implications for U.S. stock market arbitrage and the regulation for hedge fund activism information disclosure

Idiosyncratic risk, risk-taking incentives and the relation between managerial ownership and firm value

In addition to its well-documented alignment effect, managerial ownership can also have value-destroying effects by shifting risk to managers and encouraging risk-substitution; that is, managers with relatively unhedged personal portfolios tend to pass up profitable projects with high idiosyncratic (firm-specific) risk in favor of less-profitable projects that have greater aggregate (market) risk. Using parametric and semi-parametric estimation methods, we examine how managerial ownership influences firm value in light of the trade-off between the alignment and the risk-substitution effects. We find that risk-substitution offsets the alignment effect of managerial ownership in firms that are exposed to severe risk-substitution problems, leading to a weak (or non-existent) association between managerial ownership and firm value. We identify a plausible channel for these effects by showing that firms exposed to risk-substitution exhibit more “conservative” investment and financing policies. We also show that the risk-substitution problem is partially mitigated by the inclusion of stock options in managerial compensation packages. Finally, our findings suggest that semi-parametric methods may prove useful for future studies aiming at capturing nonlinear features in the data