Do Global Risk Factors Matter for International Cost of Capital Computations?

International financial markets are becoming integrated. Hence, globalrisk factor are increasingly important for portfolio selection andasset pricing. The recent empirical finance literature has confirmedthat both the global market portfolio and exchange rate risk factorsconstitute important determinants of asset returns. We show, however,that global risk factors do not importantly affect estimates of thecost of equity capital for a remarkably wide variety of companies. Weanalyze almost 3,300 stocks from nine industrialized countries overthe period 1980-1999. Incorporating global factors into cost ofcapital estimations leads to an adjustment of roughly 50 basis pointsper annum on average for the U.S. and 70 to 100 basis points for theother countries. Adjustments of this magnitude easily fall inside themargin of error associated with actual cost of capital computations.Specifically for U.S. companies, the amendment of the cost of capitalestimate is generally very small. This suggests that global riskfactors do not really matter for computing the cost of capital of U.S.firms.capital budgeting;cost of equity capital;exchange rate risk;valuation

Corporate Real Estate and Corporate Takeovers: International Evidence

We investigate whether corporate real estate ownership is a trigger for takeovers. The empirical analysis is based on a sample covering 225 takeovers in France, Germany, the Netherlands, and the United Kingdom between 1992 and 2003. Using a multivariate probit model in which we control for various financial firm characteristics we find that the role of corporate real estate in takeovers depends on the nature of the takeover, the industry, the period, and the country. The presence of corporate real estate is a significantly positive predictor for takeovers within the same industry. Companies that have been taken over appear to have been reducing their real estate holdings prior to the takeover, which would suggest a financial distress situation.

Dividing the Pie

We examine the consequences of transparency in an experimentalmultiple-dealer market with asymmetrically informed dealers. Fiveprofessional securities traders make a market for a single security.In each trading round, one of the dealers (the "insider") is told thesecurity's true value. We vary both pre-trade and post-tradetransparency by changing the way quote and trade information ispublished. The insider's profits are greatest when price efficiency islowest. Price efficiency, in turn, is reduced by pre-tradetransparency and increased by posttrade transparency. Marketliquidity, measured by dealers' bid-ask spreads, is improved bypre-trade transparency and reduced by post-trade transparency.financial markets;information asymmetry;market microstructure;experimental economics

Inflation risk and international asset returns

We show that inflation risk is priced in international asset returns. We analyze inflation risk in a framework that encompasses the International Capital Asset Pricing Model (ICAPM) of Adler and Dumas (1983). In contrast to the extant empirical literature on the ICAPM, we relax the assumption that inflation rates are constant. We estimate and test a conditional version of the model for the G5 countries (France, Germany, Japan, the U.K., and the U.S.) over the period 1975-1998 and find evidence of statistically and economically significant prices of inflation risk (in addition to priced nominal exchange rate risk). Our results imply a rejection of the restrictions imposed by the ICAPM. In an extension of our analysis to 2003, we show that even after the termination of nominal exchange rate fluctuations in the euro area in 1999, differences in inflation rates across countries entail non-trivial real exchange rate risk premia

The Cost of Capital of Cross-Listed Firms

This paper analyzes the cost of capital of firms with foreign equity listings. Our purpose is to shed light on the question whether international and domestic asset pricing models yield a different estimate of the cost of capital for cross-listed stocks. We distinguish between (i) the multifactor ICAPM of Solnik (1983) and Sercu (1980) including both the global market portfolio and exchange rate risk premia, and (ii) the single factor domestic CAPM. We test for the significance of the cost of capital differential in a sample of 336 cross-listed stocks from nine countries in the period 1980-1999. Our hypothesis is that the cost of capital differential is

Nonlinear optical studies of single gold nanoparticles

Gold nanoparticles are spherical clusters of gold atoms, with diameters typically between 1 and 100 nanometers. The applications of these particles are rather diverse, from optical labels for biological experiments to data carrier for optical data storage. The goal of my project was to develop new methods to study the physical properties of single gold nanoparticles on ultra-short timescales. Exciation with a short laser pulse brings a nanoparticle out of equilibrium, which makes it vibrate with a period that depends on the particle diameter and the speed of sound in gold. The vibrational period of a gold nanoparticle with a diameter of 60 nanometer is 20 picoseconds. This acoustic vibration has been detected by us for the first time for single particles. The main advantage of single-particle studies over bulk detection of these particles lies in the fact that all particles in an ensemble vibrate at slightly different frequencies, which causes increased damping due to dephasing. The damping of the vibrations of single particles only depends on the elastic coupling between the particle and its environment, which offers the possibility of using these particles as mechanical nanosensors.LEI Universiteit LeidenBiological and Molecular Physic

Conditional Volatility Targeting

In analyzing the performance of volatility-targeting strategies, we found that conventional volatility targeting fails to consistently improve performance in global equity markets and can lead to markedly greater drawdowns. Motivated by return patterns in various volatility states, we propose a strategy of conditional volatility targeting that adjusts risk exposures only in the extremes during high- and low-volatility states. This strategy consistently enhances Sharpe ratios and reduces drawdowns and tail risks, with low turnover and leverage, when used in the major equity markets and for momentum factors across regions. Conditional volatility management can also be applied to tactical allocations among multiple assets or risk factors

Why Panel Tests of Purchasing Power Parity Should Allow for Heterogeneous Mean Reversion

Abstract Recent studies of purchasing power parity (PPP) use panel tests that fail to take into account heterogeneity in the speed of me

Purchasing Power Parity and Heterogeneous Mean Reversion

This paper analyzes the properties of multivariate tests of purchasing power parity (PPP) that fail to take heterogeneity in the speed of mean reversion across real exchange rates into account. We compare the performance of homogeneous and heterogeneous unit root testing methodologies. The recent literature has successfully contested several severe restrictions on the structure of the model, but the assumption of homogeneous mean reversion is still widely used and its consequences are virtually unexplored. Using Monte Carlo simulation, we uncover important adverse properties of the methodology that relies on homogeneous estimation and testing. More specifically, power functions are low and assume irregular shapes. Furthermore, homogeneous estimates of the mean reversion parameters exhibit potentially large biases. This can have a dramatic impact on inferences made on the validity of the PPP hypothesis. Our findings highlight the importance of allowing for heterogeneous estimation when testing for a unit root in panels of real exchange rates

Dividing the Pie

We examine the consequences of transparency in an experimental multiple-dealer market with asymmetrically informed dealers. Five professional securities traders make a market for a single security. In each trading round, one of the dealers (the "insider") is told the security's true value. We vary both pre-trade and post-trade transparency by changing the way quote and trade information is published. The insider's profits are greatest when price efficiency is lowest. Price efficiency, in turn, is reduced by pre-trade transparency and increased by posttrade transparency. Market liquidity, measured by dealers' bid-ask spreads, is improved by pre-trade transparency and reduced by post-trade transparency