The value effects of changes in leverage: Evidence from the Travel and Leisure sector

It is well documented that the Travel and Leisure sector is capital intensive when compared to other sectors due to the high level of capital required for fixed assets. Given this, this paper examines the relation between changes in leverage and stock returns of firms in this sector, in addition to examining whether changes in leverage have any significant effect on a sector basis. Using a final sample of 173 firms over the period between 1993 and 2012, we find that leverage only acts as a significant determinant of returns in the case of highly levered firms, as would be the case in the Travel and Leisure sector

The impact of conditional higher moments on risk management: The case of the tanker freight market

Tanker shipping provides the primary means of transportation for almost types of petroleum product traded globally. It is therefore essential to the energy supply chain to be able to correctly evaluate the structure and risk associated with freight rates in this market. This paper examines the concepts of conditional skewness and kurtosis in tanker freight rate. This is because, although the departure from normality of asset returns has been well documented, the relatively recent introduction of the concepts of conditional skewness and conditional kurtosis into the financial market literature, together with the unique shape of the supply curve in shipping markets, means that this has not been fully examined in the shipping literature. This is crucial given that a failure to take these structural characteristics into account could lead to market participants underestimating the probability of extreme and unfavourable events and therefore the consequent risk associated with market operations. Examining a sample of three types of tanker freight rate returns, we find that tanker freight rate returns exhibit conditional higher moments and that models that incorporate conditional skewness and kurtosis provide a more accurate value-at-risk measure and therefore a more accurate measure of the true risk faced by market participants

Modelling and forecasting international interest rate spreads: UK, Germany, Japan and the US

The interest rate spread is of importance to policy-makers and finance professionals in asset allocation and is a common measure of financial market stress. In this paper, we model and forecast the interest rate spreads for a number of countries using two well-known continuous time models and discrete time ARMA and ARFIMA models. We use monthly and weekly data which cover the recent global financial market crisis of 2007-2009 for Germany, Japan, UK and the USA. We find that the Merton's continuous-time model outperforms all other model specifications in terms of the mean of the forecast errors, MAPE and RMSE

A regime switching approach for hedging tanker shipping freight rates

Tanker shipping is the primary means for the transportation of petroleum and petroleum products around the world and thus plays a crucial role in the energy supply chain. However, the high volatility of tanker freight rates has been a major concern for market participants and led to the development of the tanker freight derivatives in the form of forward freight agreements (FFAs). The aim of this paper is to investigate the performance of these instruments in managing tanker freight rate risk. Using a data set for six major tanker routes covering the period between 2005 and 2013, we examine the effectiveness of alternative hedging methods, including a bivariate Markov Regime Switching GARCH model, in hedging tanker freight rates. The regime switching GARCH specification links the concept of equilibrium freight rate determination underlying different market conditions and the dynamics of the conditional second moments across high and low volatility regimes. Overall, we find evidence supporting the argument that the tanker freight market is characterized by different regimes. However, while the use of a regime switching model allows for a significant improvement in the performance of the hedge in-sample, out-of-sample results are mixed

The Effects of Mergers and Acquisitions on Acquiring Banks’ Contribution to Systemic Risk

This paper is the first to examine the effects of international bank mergers and acquisitions on acquirers' contribution to systemic risk covering the period from 1998 to 2015. Our sample consists of 608 international bank mergers, involved domestic and cross-border deals as well as conglomerate and non-conglomerate mergers. Using the Marginal Expected Shortfall (as in Acharya et al., 2017) as well as Conditional Value-at-Risk (as in Adrian and Brunnermeier, 2016) as systemic risk measurements, we find that on average, mergers do not impact on the acquiring banks’ contribution to systemic risk regardless of the increased potential for risk diversification exhibited by cross-border and cross-industry bank mergers. Determinants that contributes to the decrease in acquirers’ systemic risk include product diversifying deals, deals conducted in a more concentrated banking system and a stable political environment. Whereas, for deals financed by cash only and much smaller compared to acquirers as well as involved private targets, acquirers' contribution to systemic risk increase after the merger

Empirical analysis of the US swap curve

This paper provides an empirical analysis of the US swap rate curve using principal components analysis (PCA) to identify the factors which explain the variation in the data. We also investigate the forecasting performance of different econometric models for individual maturities across the curve using daily data over the period 1998 to 2011. The PCA analysis indicates that the first two factors explain approximately 99.76% of the cumulative variation in the sample. We also find that a continuous time modelling approach has a satisfactory performance across the curve based on the RMSE

US and Canadian term structures of interest rates: A forecasting comparison

This paper provides empirical evidence for the US and Canadian yield curves using a one- and two-factor Generalised Vasicek model, using a data set comprised of daily panel data over the period between 2003 and 2011, which includes the recent global financial crisis. The two-factor model is found to have a good fit for both the US and Canadian yield curves. We also compare the forecasting performance of the term structure model with those from ARIMA, ARFIMA and Nelson-Siegel models. We find that for Canada the Nelson-Siegel model dominates, while for the US the ARFIMA model has a satisfactory performance

An Examination into the Structure of Freight Rates in the Shipping Freight Markets

This thesis investigates three salient areas of interest in the structure of freight rates in the shipping market, with a particular focus on the tanker and dry-bulk sectors, using recent econometric and time series techniques. The questions asked are: 1) do spot freight rate levels follow a fractionally integrated process, as opposed to being stationary or non-stationary, as had previously been proposed; 2) does spot freight rate volatility also follow a fractionally integrated process; and 3) do freight rates exhibit conditional skewness and kurtosis? It then evaluates the impact that these factors have on the risk exposure of market participants. These concepts are further tested in terms of their respective forecasting performance, relative to other more standard econometric techniques. An ongoing issue in the shipping literature is whether spot freight rate levels follow a stationary or non-stationary process. This thesis provides another dimension to this discussion by arguing that spot freight rate levels follow a fractionally integrated process. The rationale behind this argument is the fact that the supply and demand dynamics in this market mean that although freight rates are mean-reverting overall, the process of mean-reversion occurs with a delay, which is exactly how one would expect a fractionally integrated process to behave. Although in-sample results were promising in that fractionally integrated models are found to outperform their stationary and non-stationary counterparts across sectors and vessel sizes, out-of-sample forecasts indicate that models that assumed stationarity or non-stationarity outperformed these models, depending on the sector and vessel size. Additionally, the thesis extends this debate to the volatility of these spot freight rate levels, where it is proposed that volatility also follows a fractionally integrated process. In-sample results from the estimation of Generalised Autoregressive Conditional Heteroscedasticity (GARCH), Integrated Generalised Autoregressive Conditional Heteroscedasticity (IGARCH) and Fractionally Integrated Generalised Autoregressive Conditional Heteroscedasticity (FIGARCH) models indicate that FIGARCH models outperformed the other two models across all sectors and vessel sizes, however, when calculating the respective out-of-sample Values-at-Risk for each 18 vessel type, non-parametric models are found, in most cases, to outperform their parametric counterparts across sectors and vessel sizes. This thesis finally examines whether freight rates exhibit conditional skewness and kurtosis, where the shape of the supply function in the shipping freight markets indicates that these would not be constant over time, as is assumed by other standard models. Results for the in-sample period indicate that the Generalised Autoregressive Conditional Heteroscedasticity with Skewness and Kurtosis (GARCHSK) models outperformed GARCH and FIGARCH models. This being said, when calculating the respective out-of-sample Values-at-Risk for each vessel type, non-parametric models are found, in most cases, to outperform their parametric counterparts across sectors and vessel sizes

Do financial distress and liquidity crises affect value and size premiums?

This study investigates the impact of liquidity crises on the relationship between stock (value and size) premiums and default risk in the US market. It first examines whether financial distress can explain value and size premiums, and then, subsequently, aims to determine whether liquidity crises increase the risk of value and size premium investment strategies. The study employs a time-varying approach and a sample of US stock returns for the period between January 1982 and March 2011, a period which includes the current liquidity crisis, so as to examine the relationship between default risk, liquidity crises and value and size premiums. The findings indicate that the default premium has explanatory power for value and size and premiums, which affect firms with different characteristics. We also find that liquidity crises may actually increase the risks related to size and value premium strategies

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