Investors\u27 responses to macroeconomic news: the role of mandatory derivatives and hedging activities disclosure

Purpose: The purpose of this study is to investigate how changes in the firm\u27s information disclosure practices impact the way investors process macroeconomic news. Specifically, the authors examine the role of derivative instruments and hedging activities disclosure, as required by SFAS 133, in shaping invertors response to good and bad interest rate news. In addition, the authors examine whether the effect of SFAS 133 on investors\u27 response to good and bad interest rate news varies between firms with higher and lower earnings volatility. Design/methodology/approach: This study uses data on all US public firms over the period from 1990 to 2019. The authors mainly apply multivariate regression and a difference-in-difference approach to test their hypotheses. Findings: The results show a significant decrease in the asymmetry of responses to good and bad interest rate news for users of interest rate derivatives following the adoption of SFAS 133. However, in contrast to this finding, the authors also find that the adoption of SFAS 133 has no impact on the asymmetry of responses to good and bad interest rate news for nonusers of interest rate derivatives. Consistent with the ambiguity theory, the finding suggests that SFAS 133 indeed decreases investors’ uncertainty (ambiguity) about the cash flow implications of changes in the interest rate. The authors also find that the decrease in the asymmetry of response to good and bad interest rate news after the adoption of SFAS 133 is greater for users of interest rate derivatives with higher than lower earnings volatility. This implies that derivatives and hedging activities disclosure, as required by SFAS 133, are more important for firms with higher than lower earnings volatility. The finding is consistent with the idea that investors demand more accounting information when underlying earnings volatility is higher. In a set of additional analyses, the authors find that the effect of SFAS 133 on investors\u27 response to good and bad interest rate news varies depending on the level of analyst coverage and interest rate exposure. Specifically, the authors find that the decrease in the asymmetry of response to good and bad interest rate news after the adoption of SFAS 133 is greater for users of interest rate derivatives with higher interest rate exposure and lower analyst coverage. Practical implications: The findings of this study help market participants including regulators and standard setters to understand the impact of mandatory disclosure practices on investors\u27 reaction to macroeconomic news. Moreover, the findings of the study help managers to understand the influence firm-specific characteristics (e.g. earnings volatility, analyst coverage and interest rates exposure) on the effectiveness of mandatory derivative instruments and hedging activities disclosure. Originality/value: To the best of the authors\u27 knowledge, this is the first paper to explore how firm-specific information environment affects the way investors process macroeconomic news. This study contributes to the literature by providing the empirical evidence that derivatives instruments and hedging activities, as required by SFAS 133, affect investors\u27 response to good and bad interest rate news. In doing so, the results provide insights about how firm-specific information environment affects the way investors process macroeconomic news. This study shows that the cross-sectional variation in earnings volatility, analysts’ coverage and interest rate exposure affects the impact of SFAS 133 on investors\u27 response to good and bad interest rate news. The findings are not only the notable addition to the existing literature on the topic but also can aid to market participants including policy makers, regulators, standard setters and managers to understand the influence of firm-specific characteristics on the effectiveness of mandatory derivative instruments and hedging activities disclosure. Finally, the findings contribute to the general debate about the effectiveness of SFAS 133 by showing that the adoption of SFAS 133 indeed decreases information ambiguity

The perfect bail‐in: Financing without banks using peer‐to‐peer lending

We explore the potential outcomes for financial stability when using peer‐to‐peer lenders to finance economic activity. Combining Random Regression Forests, a machine‐learning process, with an agent‐based model, we perform simulations on artificial economies with various degrees of adoption of peer‐to‐peer lending. We find that as peer‐to‐peer lenders proliferate, there is increased financial instability, lower GDP and higher unemployment. On the other hand, peer‐to‐peer lending increases the total volume of loans given out but demonstrates a preference towards consumer loans (over corporate loans), which has a negative effect in the long run. Finally, introducing peer‐to‐peer lenders increases the access of the unbanked to services which conventional banking is not able to offer within the extant regulatory framework. Our results can help policymakers as they address the issue of regulation in the peer‐to‐peer finance industry

Investment Behaviour of Institutional Investors

This study examines the portfolio choice anomalies and trading strategies of two types of institutional investors, Dutch pension funds (PFs) and US mutual funds (MFs), and presents some explanation for the unexpected behaviour in their trading. Particularly we focus on the determinants o

Liquidity Connectedness of Cryptocurrencies and Stock Markets during COVID-19: A Wavelet Coherence Approach

Using wavelet coherence framework on five major cryptocurrencies and three major stock market indices over the COVID-19 period from January 1st, 2020 to February 8th, 2021, our study concludes that SSEC index liquidity co-moves with liquidity of all the cryptocurrencies, while liquidities of Nikkei 225 and NYSE indices very weakly or not at all co-move with the sampled cryptocurrencies over most of our sample period. Our findings show that SSEC index liquidity positively co-moves with liquidities of all sampled crypto currencies over a limited time span and generally at short-term frequency band of 0-8 days; however, Ripple liquidity positively co-moves with liquidity of SSEC index at both shorter-horizon and long-term. Overall, our study provides useful insights that the choice of the crypto currency can play a significant role in portfolio liquidity diversification for investors investing in Nikkei 225 or NYSE index

Cyclicality of Capital Adequacy Ratios in Heterogeneous Environment: a Non-linear Panel Smooth Transition Regression Explanation

This study aims to investigate the cyclicality of capital adequacy ratios (CARs) in US bank holding companies using a new business cycle index and a non-linear panel smooth transition regression model. The suggested index can predict US business activity with a higher accuracy than existing proxies, while the regression methodology deals with the heterogeneity bias of linear models and can capture asymmetric effects, thus improving forecasting efficiency. Our results show that the equity capital to assets ratio is countercyclical, while the risk-based capital adequacy ratios are procyclical. In addition, the response of capital adequacy ratios to changes in economic activity is asymmetric across recessions and expansions. The findings of this study can assist policymakers and bank regulators as the estimation of capital adequacy ratios using the non-linear method and new proxy of BC can improve both the time-lag and accuracy issues in the regulators’ decision making and results in improved compliance behavior of the banks

Metal Investments: Distrust Killer or Inflation Hedging?

This study investigates long run metals properties using the extended version of Mccown and Zimmerman (2006) multifactor CAPM-model. By adding extra explanatory variables we improve the explanation power of the existing model in terms of R-squared. Taking German invertors\u27 perspective and using prices of gold, silver and platinum over the period 1985-2010, our findings show that metals are true zero market beta assets. We further show that the determinants of metal prices are dependent on market conditions reflected by different betas for stable and crisis periods. The inclusion of a new variable, economic sentiment index in the models shows explanation power for gold. Its significant negative effect reveals gold position as a safe haven in times of distrust. Our results show that gold is the only metal co-integrated with the consumer price index (CPI) of Germany, thus the only metal providing inflation hedging to the German investor in the long run. Our results are consistent with the theories that metals provide long term hedge against unemployment

Herd Behaviour and Trading Among Dutch Pension Funds

In this paper we provide evidence that repudiates the popular belief that Dutch pension funds are long-term passive institutional traders; rather like active traders they trade about eight and half percent of their portfolio on monthly basis. Using a unique data sample, our results affirm significant feedback trading strategies, both momentum and contrarian, and robust herding behaviour in investments of Dutch PFs. Our findings contradict with some previous evidence and advance the suggestions that both the institutional lagged demand for a stock and performance triggers contrarian investments in Dutch PFs; and their trading behaviour substantially varies across asset classes. Furthermore, the recent financial turmoil has a positive impact on both turnover and herding while it negatively affects the feedback trading

COVID-19, Lockdowns and Herding Towards Cryptocurrency Market Specific Implied Volatility Index

This study investigates herds effect in more than 100 cryptocurrencies during the period from January 2015 to June 2020. The results document a significant evidence of herding behavior in the cryptocurrency market. My findings show that herding asymmetry is present during bullish and bearish regimes of cryptocurrency market, where the herds investing is dominantly visible during extremely bullish percentile regimes of cryptocurrency market. Although the study finds no evidence of correlated trading when cryptocurrency specific fear prevails in the market, yet crypto investors mimic trading decisions of others during the times of COVID-19 except for the period of lockdowns

Are ESG Stocks Safe-Haven during COVID-19?

This study contributes to the debate on safe-haven characteristics of environmental, social, and governance (ESG) stocks during COVID-19 pandemic. Using wavelet coherence framework on four major ESG stock indices from global and emerging stock markets, and two proxies of COVID-19 fear over the period from February 5th, 2020, to March 18th, 2021, we find a strong and positive co-movement between health fear index of COVID-19 and returns on ESG stocks suggesting the existence of safe-haven properties in ESG stocks. However, we also observe a negative co-movement between stock market base proxy of COVID-19 and returns on ESG indices, suggesting that safe-haven properties of ESG stocks are contingent upon the proxy of COVID-19 pandemic. Our findings are of particular interest for the investors and asset managers who may use ESG stocks to diversify their portfolios during health crisis due to COVID-19 pandemic

Are Cryptos Safe-Haven Assets during COVID-19? Evidence from Wavelet Coherence Analysis

We use wavelet coherence analysis on global COVID-19 fear index, cryptocurrency market specific implied volatility index (VCRIX) and cryptocurrency returns to investigate safe-haven properties of cryptocurrencies during COVID-19 pandemic. The findings of our paper show that a non-financial market-based proxy of market stress that represents fear of households and retail investors reveals cryptocurrencies as safe-haven assets; however, a financial market-based proxy of the market turbulence exposes that cryptocurrencies behave like traditional assets during the times of COVID-19 pandemic. Our findings support that long-term investors can invest in the cryptocurrency market to hedge the risks during the COVID-19 pandemic