We hypothesise bi-directional causality between gender diversity on boards and corporate social i... more We hypothesise bi-directional causality between gender diversity on boards and corporate social irresponsibility (CSI). Firms exposed to CSI incidents are likely to increase their board gender diversity for reputational purposes. Simultaneously, gender diversity adds skills and networks to boards which supports their monitoring function and should reduce CSI incidents. Econometrically, this relationship is plagued with reverse causality. Consequently, we propose a Granger-style reverse causality minimisation procedure. Our procedure involves three steps. Firstly, we regress board diversity (BD) on lagged CSI to separate diversity into two components, one driven by CSI (BDDCS) and another unrelated to CSI (BDUCS), with the latter being the sum of the intercept and the disturbance term. Secondly, we confirm that BDUCS experiences a near-zero correlation to CSI and that a Granger causality F-test for CSI affecting BDUCS is clearly insignificant. Thirdly, we regress CSI on lagged BDUCS, lagged CSI and its interaction term. Applying our procedure to 2,880 US firms between 2007 and 2016, we find that boards with higher diversity, for reasons other than CSI, were significantly better than their lower diversity counterparts in reducing CSI incidents once encountering them. This effect is economically stronger for diversity unrelated to CSI than for overall diversity.
Blockchain, based on the distributed ledger technology, provides immediate settlement of transact... more Blockchain, based on the distributed ledger technology, provides immediate settlement of transactions of digital assets and direct ownership. Since settlement of transactions is immediate, the blockchain system requires an ultra short tenor interest rate curve that is always up-to-date. Today, many market-quoted rates are still accrued at the end of each trading day, typically with one day as the shortest tenor available. This paper develops an interbank money market model for the equilibrium interest rate of ultra short tenor and updated at an intraday level with automated adjustment for the event of a flash crash. Apart from facilitating trades settlement on blockchain, our research findings are vital for central banks' efforts in stabilizing the currencies during flash crashes. We show that during the flash crash on 15 January 2015 when the Swiss National Bank (SNB) dropped the floor of CHF 1.2 per EUR, the ultra short CHF interest rates should have been highly negative to incentivize market makers to provide liquidity during the sharp CHF appreciation and to neutralize the arbitrage activities that aggravated the crash.
In this paper, we explore the extent to which term structure of individual CDS spreads can be exp... more In this paper, we explore the extent to which term structure of individual CDS spreads can be explained by the firm's rating. Using the Nelson-Siegel model, we construct, for each day, CDS curves from a cross section of CDS spreads for each rating class. We find that the fitted CDS curves contain meaningful information in the sense that 76% of their time-series variations can be explained by the typical credit and liquidity factors that are known to drive CDS spreads. The residuals, on the other hand, contain mostly transient liquidity information. Moreover, deviations from the curve tend to disappear and CDS spreads converge towards the fitted curves over time; the larger is the deviation, the more likely is the convergence. Trading strategies exploiting the convergence of deviations could potentially generate an average return of 3.6% (5 days holding period) and 9% (20 days holding period). Our findings suggest that our CDS curves contain the core credit and liquidity information, which could be used to price other CDSs of the same rating class. This is important in credit risk management where the CDS spreads of a wide spectrum of ratings and term structure are needed for evaluating counterparty risk.
* Ser-Huang Poon started this project when she was at Lancaster University. She wants to thank th... more * Ser-Huang Poon started this project when she was at Lancaster University. She wants to thank the Unversity Research Committee for financial support. Rockinger, who is also at FAME and CEPR, acknowledges financial support from TMR (grant on Financial market's efficiency) and the Swiss National Science Foundation through NCCR (Financial Valuation and Risk Management). We would like to thank
Abstract: In early 1997, the Malaysian stock market index began a downward spiral together with s... more Abstract: In early 1997, the Malaysian stock market index began a downward spiral together with stock markets of several ASEAN countries. On 14 July 1997, Bank Negara of Malaysia gave up the defence of the Malaysian ringgit after jacking up the short rate to 50% and spending US $10 billions on unsuccessful monetary operations. Two years on, much has happened and the Asian crisis appears to be history. However, in many respects, the Asian crisis has had a much greater and more averse impact on Malaysia than the world market ...
This paper models the e¤ect of transaction costs and taxes on asset pricing in a multi-period set... more This paper models the e¤ect of transaction costs and taxes on asset pricing in a multi-period setting. It extends the study by Dermody and Rockafellar (DR)(1991), where it was shown that term structure valuation is agent-speci…c owing to agents' di¤erent tax classes, and that a multiplicity of valuation operators exists owing to di¤erent costs associated with long and short trades. Unlike DR who focus solely on the riskless bond, this paper analyses both risky and riskless security pricing in a more general framework of taxation. Similar to DR, the tightest no arbitrage present value range for a claim is derived here without the knowledge of investor preferences. The Jouini and Kallal (1995) analysis of short sales in a tax free economy is a special case of our model. We also establish the existence of a set of pseudo risk neutral probability measures, under which the discounted long price is a supermartingale and the discounted short price is a submartingale, is the necessary and su¢cient condition for no arbitrage.
ABSTRACT This paper provides a short update of volatility research surveyed in Poon and Granger (... more ABSTRACT This paper provides a short update of volatility research surveyed in Poon and Granger (2003). While the last few years saw major advancement in the theoretical and empirical studies of realised volatility and the dynamic relationship between stock price, volatility and jumps, the biggest innovation is the range of volatility derivatives created by the industry. Volatility is now an asset class and volatility derivatives have vastly expanded the scope for hedging and trading. Since there is no actively traded option in Singapore, this paper suggests a way in which a vol surface may be constructed which can then be used as a starting point for many volatility related activities in Singapore.
We hypothesise bi-directional causality between gender diversity on boards and corporate social i... more We hypothesise bi-directional causality between gender diversity on boards and corporate social irresponsibility (CSI). Firms exposed to CSI incidents are likely to increase their board gender diversity for reputational purposes. Simultaneously, gender diversity adds skills and networks to boards which supports their monitoring function and should reduce CSI incidents. Econometrically, this relationship is plagued with reverse causality. Consequently, we propose a Granger-style reverse causality minimisation procedure. Our procedure involves three steps. Firstly, we regress board diversity (BD) on lagged CSI to separate diversity into two components, one driven by CSI (BDDCS) and another unrelated to CSI (BDUCS), with the latter being the sum of the intercept and the disturbance term. Secondly, we confirm that BDUCS experiences a near-zero correlation to CSI and that a Granger causality F-test for CSI affecting BDUCS is clearly insignificant. Thirdly, we regress CSI on lagged BDUCS, lagged CSI and its interaction term. Applying our procedure to 2,880 US firms between 2007 and 2016, we find that boards with higher diversity, for reasons other than CSI, were significantly better than their lower diversity counterparts in reducing CSI incidents once encountering them. This effect is economically stronger for diversity unrelated to CSI than for overall diversity.
Blockchain, based on the distributed ledger technology, provides immediate settlement of transact... more Blockchain, based on the distributed ledger technology, provides immediate settlement of transactions of digital assets and direct ownership. Since settlement of transactions is immediate, the blockchain system requires an ultra short tenor interest rate curve that is always up-to-date. Today, many market-quoted rates are still accrued at the end of each trading day, typically with one day as the shortest tenor available. This paper develops an interbank money market model for the equilibrium interest rate of ultra short tenor and updated at an intraday level with automated adjustment for the event of a flash crash. Apart from facilitating trades settlement on blockchain, our research findings are vital for central banks' efforts in stabilizing the currencies during flash crashes. We show that during the flash crash on 15 January 2015 when the Swiss National Bank (SNB) dropped the floor of CHF 1.2 per EUR, the ultra short CHF interest rates should have been highly negative to incentivize market makers to provide liquidity during the sharp CHF appreciation and to neutralize the arbitrage activities that aggravated the crash.
In this paper, we explore the extent to which term structure of individual CDS spreads can be exp... more In this paper, we explore the extent to which term structure of individual CDS spreads can be explained by the firm's rating. Using the Nelson-Siegel model, we construct, for each day, CDS curves from a cross section of CDS spreads for each rating class. We find that the fitted CDS curves contain meaningful information in the sense that 76% of their time-series variations can be explained by the typical credit and liquidity factors that are known to drive CDS spreads. The residuals, on the other hand, contain mostly transient liquidity information. Moreover, deviations from the curve tend to disappear and CDS spreads converge towards the fitted curves over time; the larger is the deviation, the more likely is the convergence. Trading strategies exploiting the convergence of deviations could potentially generate an average return of 3.6% (5 days holding period) and 9% (20 days holding period). Our findings suggest that our CDS curves contain the core credit and liquidity information, which could be used to price other CDSs of the same rating class. This is important in credit risk management where the CDS spreads of a wide spectrum of ratings and term structure are needed for evaluating counterparty risk.
* Ser-Huang Poon started this project when she was at Lancaster University. She wants to thank th... more * Ser-Huang Poon started this project when she was at Lancaster University. She wants to thank the Unversity Research Committee for financial support. Rockinger, who is also at FAME and CEPR, acknowledges financial support from TMR (grant on Financial market's efficiency) and the Swiss National Science Foundation through NCCR (Financial Valuation and Risk Management). We would like to thank
Abstract: In early 1997, the Malaysian stock market index began a downward spiral together with s... more Abstract: In early 1997, the Malaysian stock market index began a downward spiral together with stock markets of several ASEAN countries. On 14 July 1997, Bank Negara of Malaysia gave up the defence of the Malaysian ringgit after jacking up the short rate to 50% and spending US $10 billions on unsuccessful monetary operations. Two years on, much has happened and the Asian crisis appears to be history. However, in many respects, the Asian crisis has had a much greater and more averse impact on Malaysia than the world market ...
This paper models the e¤ect of transaction costs and taxes on asset pricing in a multi-period set... more This paper models the e¤ect of transaction costs and taxes on asset pricing in a multi-period setting. It extends the study by Dermody and Rockafellar (DR)(1991), where it was shown that term structure valuation is agent-speci…c owing to agents' di¤erent tax classes, and that a multiplicity of valuation operators exists owing to di¤erent costs associated with long and short trades. Unlike DR who focus solely on the riskless bond, this paper analyses both risky and riskless security pricing in a more general framework of taxation. Similar to DR, the tightest no arbitrage present value range for a claim is derived here without the knowledge of investor preferences. The Jouini and Kallal (1995) analysis of short sales in a tax free economy is a special case of our model. We also establish the existence of a set of pseudo risk neutral probability measures, under which the discounted long price is a supermartingale and the discounted short price is a submartingale, is the necessary and su¢cient condition for no arbitrage.
ABSTRACT This paper provides a short update of volatility research surveyed in Poon and Granger (... more ABSTRACT This paper provides a short update of volatility research surveyed in Poon and Granger (2003). While the last few years saw major advancement in the theoretical and empirical studies of realised volatility and the dynamic relationship between stock price, volatility and jumps, the biggest innovation is the range of volatility derivatives created by the industry. Volatility is now an asset class and volatility derivatives have vastly expanded the scope for hedging and trading. Since there is no actively traded option in Singapore, this paper suggests a way in which a vol surface may be constructed which can then be used as a starting point for many volatility related activities in Singapore.
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