Put-call parities and the value of early exercise for put options on a performance index

Futures Markets;finance

An empirical investigation of the factors that determine the pricing of Dutch index warrants

This paper investigates the pricing of Dutch index warrants. It is found that when using the historical standard deviation as an estimate for the volatility, the Black and Scholes model underprices all put warrants and call warrants on the FT-SE 100 and the CAC 40, while it overprices the warrants on the DAX. When the implied volatility of the previous day is used the model prices the index warrants fairly well. When the historical standard deviation is used the mispricing of the call and the put warrants depends in a strong way on the mispricing of the previous trading day, and on the moneyness (in a nonlinear way), the volatility and the dividend yield. When the implied standard deviation of the previous trading day is used the mispricing of the call warrants is only related to the moneyness and to the estimated volatility, while the mispricing of put index warrants depends in a strong way on the moneyness, the volatility, the dividend yield and the remaining time to maturity.Pricing;Financial Markets;finance

Announcement effects of convertible bond loans versus warrant-bond loans: An empirical analysis for the Dutch market

This study investigates the announcement effects of offerings of convertible bond loans and warrant-bond loans using data for the Dutch market. Using standard event study methodology it is found that on average stock prices show a positive but insignificant abnormal return for the announcement of a convertible bond loan and a significant positive abnormal return for the announcement of a warrant-bond loan. These findings contrast with studies for the United States which generally find significant negative abnormal returns for convertible bond loans and negative but no significant abnormal returns for warrant-bond loans. This can be explained by the fact that Dutch companies generally package these announcements with other (good) firm specific news. Using regression analysis, in which the amount of new equity and new debt involved in the issue are taken into account, it is found that shareholders react more positively to the announcement of warrant-bond loans than to the announcement of convertible bond loans.Bond Markets;Convertible Bonds;finance

Time Varying Market Integration and Expected Rteurns in Emerging Markets

We use a simple model in which the expected returns in emerging markets depend on their systematic risk as measured by their beta relative to the world portfolio as well as on the level of integration in that market.The level of integration is a time-varying variable that depends on the market value of the assets that can be held by domestic investors only versus the market value of the assets that can be traded freely.Our empirical analysis for 30 emerging markets shows that there are strong effects of the level of integration or segmentation on the expected returns in emerging markets.The expected returns depend both on the level of segmentation of the emerging market itself and on the regional segmentation level.We also find that there is significant time-variation in the betas relative to the world portfolio because of the level of segmentation.For the composite index of the emerging markets we find an annual increase in beta of 0.09 due to decreased segmentation of the emerging markets in our sample period.In terms of expected returns the total effect on the composite index translates into an average decrease of 4.5 percent per annum.As predicted by our model, the noninvestable assets are more sensitive to the local and less to the regional level of segmentation than the investable assets.These conclusions do not change when using additional control variables. We do not find a clear pattern between volatility and segmentation, however.return on investment;economic integration;international financial markets;capital markets

Currency Hedging for International Stock Portfolios: A General Approach

This paper tests whether hedging currency risk improves the performance of international stock portfolios. We use a generalized performance measure which allows for investor-dependencies such as different utility functions and the presence of nontraded risks. In addition we show that an auxiliary regression, similar to the Jensen regression, provides a wealth of information about the optimal portfolio holdings for investors for the non mean-variance case. This is analogous to the information provided by the Jensen regression about optimal portfolio holdings for the mean-variance case. Our empirical results show that static hedging with currency forwards does not lead to improvements in portfolio performance for a US investor that holds a stock portfolio from the G5 countries. On the other hand, hedges that are conditional on the current interest rate spread do lead to significant performance improvements. Also, when an investor has a substantial exogenous exposure to one of the currencies, currency hedging clearly improves his portfolio performance. While these results hold for investors with power utility as well as with mean-variance utility functions, the optimal hedge ratios for these investors are different.

Testing for Spanning with Futrures Contracts and Nontraded Assets: A General Approach

This paper generalizes the notion of mean-variance spanning as de- ned in the seminal paper of Huberman & Kandel (1987) in three di- mensions.It is shown how regression techniques can be used to test for spanning for more general classes of utility functions, in case some as- sets are nontraded, and in case some of the assets are zero-investment securities such as futures contracts.We then implement these tech- niques to test whether a basic set of three international stock indices, the S&P 500, the FAZ (Germany), and the FTSE (UK), span a set of commodity and currency futures contracts.Depending on whether mean-variance, logarithmic, or power utility functions are considered, the hypothesis of spanning can be rejected for most futures contracts considered.If an investor has a position in a nontraded commodity, then the hypothesis of spanning can almost always be rejected for fu- tures contracts on that commodity for all utility functions considered.For currency futures this is only the case for a power utility function that re ects a preference for skewness.Finally, if we explicitly take into account net futures positions of large traders that are known to have predictive power for futures returns, the hypothesis of spanning can be rejected for most futures contracts.regression analysis;futures

Testing for mean-variance spanning with short sales constraints and transaction costs: The case of emerging markets

portfolio investment;transaction costs;regression analysis;variance

Asset Allocation in the Euro-Zone: Industry or Country Based?

We investigate the relative importance of country and industry factors as determinants of international equity returns in the Euro-zone over the period 1990 to 2003.We conduct our analysis from a portfolio performance perspective, using mean-variance spanning and efficiency tests as well as style analysis, and show how to adjust the tests for time varying market wide volatility.Although unconditional analysis over the full sample suggests that country-based or industry-based EMU-wide portfolios provide similar risk-return trade-offs, a rolling window analysis indicates a striking change in the structure of equity returns in the Euro-zone over the last decade.From 1992 to 1998 country-based strategies outperform industry-based strategies: country based strategies offer higher Sharpe ratios and higher diversification potential as indicated by both spanning tests and style analysis.In the preconvergence period, equity returns in the EMU-zone clearly had a country structure.In contrast, after the introduction of the Euro the country outperformance has disappeared, both in terms of mean-variance efficiency and in terms of mimicking abilities.Industry factors and country factors are now equally important.Our findings suggest that following the adoption of the single currency, Euro-zone sector-based strategies, while not dominating country-based strategies, offer similar risk return trade-offs and diversification benefits.International financial markets;Mean-variance efficiency;Style analysis;EMU