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AbstractThis study evaluates the dual role of hedging pressure (HP) in oil futures markets and analyses its effects on weekly oil volatility. We find that HP driven by hedgers' insurance demands is negatively related to volatility, while HP driven by speculators' short‐term liquidity demands is positively related to volatility. Oil volatility tends to be more responsive to speculators' short‐term liquidity demands than variations induced by hedgers' insurance demands. These channels are also significant determinants of volatility in inverted and normal markets, with the effects being more pronounced in inverted markets. Under low financial and business‐cycle risk environments, the two HP channels typically have a measurable impact on volatility. These opposing effects of HP on weekly volatility provide empirical support on the significance of the dual role of hedgers in oil markets, as price insurance seekers and as short‐term liquidity providers.

ABSTRACTIn statistics, samples are drawn from a population in a data‐generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence‐generating process (EGP). We claim that EGP variation across researchers adds uncertainty—nonstandard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for more reproducible or higher rated research. Adding peer‐review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants.

AbstractThis study evaluates the dual role of hedging pressure (HP) in oil futures markets and analyses its effects on weekly oil volatility. We find that HP driven by hedgers' insurance demands is negatively related to volatility, while HP driven by speculators' short‐term liquidity demands is positively related to volatility. Oil volatility tends to be more responsive to speculators' short‐term liquidity demands than variations induced by hedgers' insurance demands. These channels are also significant determinants of volatility in inverted and normal markets, with the effects being more pronounced in inverted markets. Under low financial and business‐cycle risk environments, the two HP channels typically have a measurable impact on volatility. These opposing effects of HP on weekly volatility provide empirical support on the significance of the dual role of hedgers in oil markets, as price insurance seekers and as short‐term liquidity providers.

We compare two channels for global impact on local volatility: the direct channel in which global variables affect the expected value of local volatility, and a new channel in which they affect local volatility persistence. Using 21 equity indices in 17 developed economies, we show that (1) global variables are the main determinants of local volatility persistence; (2) the volatility-persistence channel contributes far more to local volatility variations than the direct channel; and (3) global average return contributes far more to local volatility variations than global average volatility. The global impact on local volatility persistence help explain the commonality in global volatility dynamics.

AbstractIn this paper, we quantify the economic gain from accounting for departures from normality for the mean-variance (MV) investor. We provide two models that account for the key empirical regularities of financial returns: stochastic volatility, asymmetric returns, heavy tails and tail dependence. We show that accounting for departures from normality leads to significant gains in expected utility commensurate with or exceeding typical active management fees. The majority of the uplift in expected utility derives from accounting for stochastic volatility.

We extend an equilibrium business cycle/asset pricing model of production and capital accumulation by introducing wealth-dependent time preferences. First, we find that the aggregate consumption is no longer proportional to the output and the consumption volatility is always lower than the volatility of output. Second, the expected real growth rate is increasing in the capital stock, which leads to a twin-peak shape of the world wealth distribution as shown in the data. With respect to financial markets, we show that the equity risk premium is reduced by the endogenous discounting and exhibits a cyclical pattern, which depends on the capital stock. Finally, time-varying discount rate leads to welfare improvement and the welfare gain is decreasing in the capital stock.

We formulate a continuous-time model of a deposit taking bank, operating subject to capital adequacy regulation, and where the bank's loans are exposed to default risk. The bank maximises its market value of equity by appropriately controlling loan and equity issuance, dividend payments, and endogenous closure. Of interest to regulators, we show how the bank responds to the span of capital adequacy requirements and to changes in default variance. We find a nonmonotonic response of bank lending to increased capital requirements (initially increasing and then decreasing). We also find that the probability of early closure (through either insolvency or endogenous closure) can be minimised for a well-chosen capital adequacy ratio. Moreover, the level of capital requirement that minimises the probability of early closure and maximises lending is fairly robust to changes in the bank's default variance/risk; contributing to the ongoing discussion on optimal bank capital.

We formulate a continuous-time model of a deposit taking bank, operating subject to capital adequacy regulation, and where the bank's loans are exposed to default risk. The bank maximises its market value of equity by appropriately controlling loan and equity issuance, dividend payments, and endogenous closure. Of interest to regulators, we show how the bank responds to the span of capital adequacy requirements and to changes in default variance. We find a nonmonotonic response of bank lending to increased capital requirements (initially increasing and then decreasing). We also find that the probability of early closure (through either insolvency or endogenous closure) can be minimised for a well-chosen capital adequacy ratio. Moreover, the level of capital requirement that minimises the probability of early closure and maximises lending is fairly robust to changes in the bank's default variance/risk; contributing to the ongoing discussion on optimal bank capital.

We investigate the causal relationship between investor attention to prevailing narratives and the returns of narrative-related coins. We find that when a particular narrative gains prevalence, the returns of coins related to that narrative increase significantly. In turn, the higher price growth of coins attracts more investor attention and increases the search queries for the corresponding narrative. Our empirical results suggest that investors can use information on narrative attention to make investment decisions for narrative-related coins. Our research also helps to explain the recent rapid price growth of artificial intelligence-related cryptocurrencies, which is driven by the AI narrative, propelled by the success of ChatGPT.

Is climate transition risk factored into sovereign bond markets? We find that carbon dioxide emissions, natural resources rents, and renewable energy consumption—as measures of transition risk—significantly affect yields and spreads. Countries with lower carbon emissions incur lower borrowing costs. Advanced countries with reduced earnings from natural resources rents and increased renewable energy consumption are associated with lower borrowing costs, which differ from the effects in developing countries. Given the threat that climate change poses to the global economy and the fast materialization of transition risk, we advocate an increase in the significance of climate transition risk factors as determinants in sovereign bond markets.

This study investigates the impact of broadband infrastructure development on local firms’ stock price crash risk, using the Broadband China strategic implementation plan (BCS) as a quasi-natural experiment. We show that the BCS constrains management's negative news withholding by mitigating information asymmetry between investors and firms, thereby reducing stock price crash risk. The BCS's impact on crash risk is more pronounced in highly monopolized industries and regions with lower marketization levels. The positive effect of the BCS is also more evident among non-state-owned enterprises and firms with fewer political ties, greater financial constraints, lower institutional ownership, and management possessing financial and academic expertise. Overall, our findings offer new insights into the benefits of broadband infrastructure development for stock market stability and enhancement, supporting continued promotion of national broadband infrastructure development.

AbstractTerrorism and climate change debates are often characterized by worst‐case thinking, cost neglect, probability neglect, and avoidance of the notion of acceptable risk. This is not unexpected when dealing with extreme events. However, it can result in a frightened public, costly policy outcomes, and wasteful expenditures. The paper will describe how risk‐based approaches are well suited to infrastructure decision‐making for extreme events. Risk management concepts will be illustrated with current research of risk‐based assessment of climate adaptation engineering strategies including designing new houses in Australia subject to cyclones and extreme wind events. It will be shown that small improvements to house designs at a one‐off cost of several thousand dollars per house can reduce damage risks by 70%–80% and achieve billions of dollars of net benefit for community resilience—this helps offset some the predicted adverse effects of climate change for a modest cost. The effect of risk perceptions, insurance, and economic incentives is explored for another climate adaption measure. The paper will also highlight that there is much to be optimistic about the future, and in the ability of risk‐based thinking to meet many challenges.

We investigate the causal relationship between investor attention to prevailing narratives and the returns of narrative-related coins. We find that when a particular narrative gains prevalence, the returns of coins related to that narrative increase significantly. In turn, the higher price growth of coins attracts more investor attention and increases the search queries for the corresponding narrative. Our empirical results suggest that investors can use information on narrative attention to make investment decisions for narrative-related coins. Our research also helps to explain the recent rapid price growth of artificial intelligence-related cryptocurrencies, which is driven by the AI narrative, propelled by the success of ChatGPT.

Decentralized Finance (DeFi) is built on a fundamentally different paradigm. Rather than trusting individuals and institutions, DeFi participants, in principle, only need to trust computer code enforced by a decentralized network of computers. We examine a natural experiment that exogenously stress-tests this alternative paradigm by revealing the identities of individuals (including a convicted criminal) associated with the Abracadabra lending protocol. The revelation seriously damaged the protocol, indicating that, in practice, DeFi does not (yet) entirely remove the need for trust in individuals. Our findings suggest that smart contracts are incomplete and are subject to protocol-run risk. Thus, individuals’ character and trust remain relevant in this alternative financial system.

This study investigates the effect of financial technology (FinTech) development on stock price crash risk. We show that the development of FinTech can inhibit management from deliberately hiding bad news and alleviate information asymmetry, thereby reducing stock price crash risk. This effect is more pronounced among non-state-owned enterprises, firms with poor information environments and low-quality internal controls, and those in competitive industries and regions with high marketization. Overall, these findings suggest that FinTech development can mitigate the deliberate concealment of bad news by management and improve the timeliness of disclosure, leading to lower risks faced by investors.

We extend an equilibrium business cycle/asset pricing model of production and capital accumulation by introducing wealth-dependent time preferences. First, we find that the aggregate consumption is no longer proportional to the output and the consumption volatility is always lower than the volatility of output. Second, the expected real growth rate is increasing in the capital stock, which leads to a twin-peak shape of the world wealth distribution as shown in the data. With respect to financial markets, we show that the equity risk premium is reduced by the endogenous discounting and exhibits a cyclical pattern, which depends on the capital stock. Finally, time-varying discount rate leads to welfare improvement and the welfare gain is decreasing in the capital stock.

We find that when a U S domestic firm becomes a multinational MNC its returns comove more with those of existing multinational firms and less with those of purely domestic firms in the following year This result is robust to a propensity score matching method and an exogenous shock Turnover comovement and changes in mutual funds holdings of these MNC initiators further indicate that investors prefer multinationals as a style investment Moreover MNC initiators with larger foreign sales experience larger shifts in return comovement Finally the effect of MNC initiation on return comovement is relatively weaker for 2000 2016 than for 1979 1997 2022 Elsevier Inc

We find that when a U S domestic firm becomes a multinational MNC its returns comove more with those of existing multinational firms and less with those of purely domestic firms in the following year This result is robust to a propensity score matching method and an exogenous shock Turnover comovement and changes in mutual funds holdings of these MNC initiators further indicate that investors prefer multinationals as a style investment Moreover MNC initiators with larger foreign sales experience larger shifts in return comovement Finally the effect of MNC initiation on return comovement is relatively weaker for 2000 2016 than for 1979 1997 2022 Elsevier Inc

We introduce choices on corporate social responsibility to financially constrained firms facing uncertainty from different time horizons. Implementing corporate goodness incurs monetary costs in exchange for long-run non-pecuniary benefits, such as higher secular growth and implicit insurance for being trustworthy. Generally, cash reserve positively predicts corporate virtue; in turn, higher corporate goodness strengthens the precautionary-saving motive for external financing and payout decisions. Less-constrained firms benefit from conducting corporate goodness, while their more-constrained peers enhance firm value by optimally prioritizing the short-term benefits instead since inefficient liquidation generates acute “fight or flight” syndrome. Moreover, we investigate various decisive factors behind corporate goodness optimality, such as the firm's prospects, financing costs, and transparency. Finally, it turns out that liquidity plays a vital role in the interaction between goodness-induced insurance and derivative hedging.

We introduce choices on corporate social responsibility to financially constrained firms facing uncertainty from different time horizons. Implementing corporate goodness incurs monetary costs in exchange for long-run non-pecuniary benefits, such as higher secular growth and implicit insurance for being trustworthy. Generally, cash reserve positively predicts corporate virtue; in turn, higher corporate goodness strengthens the precautionary-saving motive for external financing and payout decisions. Less-constrained firms benefit from conducting corporate goodness, while their more-constrained peers enhance firm value by optimally prioritizing the short-term benefits instead since inefficient liquidation generates acute “fight or flight” syndrome. Moreover, we investigate various decisive factors behind corporate goodness optimality, such as the firm's prospects, financing costs, and transparency. Finally, it turns out that liquidity plays a vital role in the interaction between goodness-induced insurance and derivative hedging.

Leverage initiating stocks experience an increase in return comovement with leveraged stocks and a decrease in return comovement with zero leverage stocks in the year after the leverage initiation event Conversely stocks that fully deleverage comove more with their new peers of zero leverage stocks and less with their old peers of leveraged stocks These findings are robust after controlling for common factors and firm characteristics and using various time series and events as exogenous shocks to corporate leverage decisions Our findings can be explained by investor clienteles for financial leverage and are not driven by omitted variables and other characteristic induced comovements 2021 Elsevier B V

We present a new Hawkes-Contact model that combines a Hawkes process and a finite-range contact process to model the stock price movements, especially under the impact of news and other information flows that could lead to contagious effects. To fully capture the underlying price process, we take the Hawkes process to track the full pathway of historical prices on their future movements and the contact process to capture the impact from news/investment sentiment. We compare this full model to a univariate Hawkes process that works as a benchmark model through analyzing their statistical properties using both simulated returns and the real 5-min returns of the crude oil index (Wind CZCE-TA). The statistical properties include probability density function, complementary cumulative distribution function, and Lempel-Ziv Complex. Our results show that the real returns' distribution is often far from normal, but the simulated returns through the Hawkes or Hawke-Contact model can achieve close fit to the real returns and exhibit similar statistical properties. More importantly, the Hawkes-Contact model performs better than the simple Hawkes model in capturing characteristics in the return movements, which indicates that the price evolution is also driven by the news sentiment created after them.

Leverage initiating stocks experience an increase in return comovement with leveraged stocks and a decrease in return comovement with zero leverage stocks in the year after the leverage initiation event Conversely stocks that fully deleverage comove more with their new peers of zero leverage stocks and less with their old peers of leveraged stocks These findings are robust after controlling for common factors and firm characteristics and using various time series and events as exogenous shocks to corporate leverage decisions Our findings can be explained by investor clienteles for financial leverage and are not driven by omitted variables and other characteristic induced comovements 2021 Elsevier B V

The information obfuscation hypothesis states that managers use corporate green practices intentionally to obfuscate or disguise negative information and environmental misbehaviour to extract rents for personal career concerns. In contrast, signalling theory suggests that green-oriented firms deliver a positive signal to the market, favouring “green” investors. Such pro-environmental signals ultimately translate into enhanced financial performance and reduced risk of a price crash. Using Chinese listed firms as the research setting, we further investigate the relationship between corporate green commitment and stock price crash risk. The results show that solid green commitment significantly reduces stock price crash risk. The effect is more pronounced in non-state-owned firms and when the stock market is in a downturn. We also find mediating effects of external governance by institutional investors and media that transmit the impact of green commitment onto price crash risk. Our findings have important implications for corporate resilience against unexpected crises.

AbstractEvidence from many developed markets suggests that fundamental indices outperform capitalisation-weighted indices. Existing studies suspect a story of market mispricing, yet a mechanism has not been identified. Using Australian data, we study the relation between analyst forecast errors and the performance of various fundamental indices. We find that fundamental indices contain a relatively higher exposure to stocks with low analyst long-term growth forecasts. Valuations for these stocks are ex ante overly pessimistic and drive the statistical significance of alphas produced by fundamental indexation. We show how hedging against analyst forecast errors can generate additional alpha for investors using fundamental indexation.

AbstractEvidence from many developed markets suggests that fundamental indices outperform capitalisation-weighted indices. Existing studies suspect a story of market mispricing, yet a mechanism has not been identified. Using Australian data, we study the relation between analyst forecast errors and the performance of various fundamental indices. We find that fundamental indices contain a relatively higher exposure to stocks with low analyst long-term growth forecasts. Valuations for these stocks are ex ante overly pessimistic and drive the statistical significance of alphas produced by fundamental indexation. We show how hedging against analyst forecast errors can generate additional alpha for investors using fundamental indexation.

We develop two models for index futures arbitrage that take the financing constraints faced by real-world arbitrageurs into account. Our models predict that the price of an index futures contract and the value of its underlying index should deviate further from their theoretical cost-of-carry relationship when (a) the contract has a long time to go before expiry, and (b) volatility is high. The fact that these predictions enjoy considerable empirical support highlights the importance of financing constraints for explaining index futures mispricing.

We develop two models for index futures arbitrage that take the financing constraints faced by real-world arbitrageurs into account. Our models predict that the price of an index futures contract and the value of its underlying index should deviate further from their theoretical cost-of-carry relationship when (a) the contract has a long time to go before expiry, and (b) volatility is high. The fact that these predictions enjoy considerable empirical support highlights the importance of financing constraints for explaining index futures mispricing.

We examine whether the age of CEOs and independent directors impacts the likelihood of receiving a successful takeover offer. First, we replicate and confirm the results of Jenter and Lewellen and find that retirement age CEOs (age 64–66) are more likely to receive successful takeover offers. Second, we extend their study by investigating the retirement preferences of independent directors. We find that the likelihood of receiving a successful takeover offer increases when a higher proportion of independent directors are at retirement age. This finding suggests that independent directors have similar retirement preferences to CEOs.

Purpose: The literature on financial statement analysis attempts to improve fundamental analysis and to identify market inefficiencies with respect to financial statement information. Design/methodology/approach: In this paper, the author reviews the extant research on financial statement analysis. Findings: The author then provides some preliminary evidence using Chinese data and offer suggestions for future research, with a focus on utilising unique features of the Chinese business environment as motivation. Originality/value: The author notes that there has been no work that the author could locate specifically on Chinese FSA research. The unique business environment in China, relative to the US where the vast majority of this work has been conducted, should motivate any studies, especially given the author documents the robust finding in terms of the mean reversion in profitability.

There is a significant potential demand around the world for a flexible product to manage individual longevity risk. However, annuity markets remain thin, driven by factors including lack of pricing transparency, high product loadings, bequest motives, loss aversion, and the difficulty to hedge the risk. This paper proposes an individual retirement product to allow flexible management of longevity risk. The product combines a lifetime income with a flexible death benefit to meet individual bequest needs. It also benefits the issuers by lower mortality risk due to the natural hedging, and thus lower capital cost as a risk margin. We apply actuarial models that provide transparent pricing for interest rate and mortality risk, the construction of immunized bond portfolios, and the determination of a loading and solvency margin for systematic longevity risk. We also quantify the natural hedging benefits arising from the flexible inclusion of both survival benefits and death benefits.

Decision-makers overreact to noisy signals and underestimate base rates when predicting regime shift due to system neglect. Based on Construal Level (CL) Theory, I posit that a high CL reduces overreactions in stable and high-noise environments but exacerbates underreactions in unstable and low-noise environments relative to individuals with low CLs. My experimental results support this hypothesis, demonstrating that the interaction between individuals’ mindsets and signals’ properties systematically impact over and underreactions when detecting regime shifts.

The paper examines the extent and potential reasons for non-exercise of ‘in the money’ stock options, drawing on employee-level data from the UK Save-As-You-Earn stock option plan. 14 per cent of participants choose not to exercise, and failure to exercise in these circumstances can be costly in terms of foregone increases in wealth. Lesser experience of the option plan, perceived lack of financial knowledge, and greater reliance on friends for advice is associated with failure to exercise. These findings offer challenges to the use of sophisticated reward and benefit schemes by companies when potential participants lack financial capabilities, and add to the literature by showing that financial literacy can remain problematic even when employees have surmounted initial obstacles to joining plans.

This paper identifies factors contributing to the auditor’s propensity to issue going-concern modified audit opinions (hereafter, GCOs) for charities and examines their association with subsequent revocation of their charitable status. We find that about 4 percent of charities receive GCOs and these are more likely for those which are smaller, in greater financial distress, received a prior year GCO, and are also affected by dependence on the various types of funding received. After controlling for these factors, Big 4 auditors are less likely to issue GCOs than other audit firms, but there are no differences in their association with subsequent revocation.

Although the ruin probability in a renewal insurance risk model with credit interest may be viewed as a classical research problem, exact solutions are only available in the literature in very special cases when both the claim amounts and the interclaim times follow distributions such as the exponential. This is a long standing problem especially from a computational point of view, and the difficulty lies in the fact that the ruin probability usually satisfies a higher order integro-differential equation and/or an ordinary differential equation with non-constant coefficients. In this paper, for a large class of interclaim time distributions (including a combination of exponentials), we shall develop an approximation for the ruin probability using Laguerre series expansion as a function of the initial surplus level. It is shown that the (approximated) Laguerre coefficients can be solved from a system of linear equations, a procedure that is very easy to implement. A main advantage of our approach is that no specific distributional assumption on the claim amounts is required, apart from some mild differentiability and integrability conditions that can be verified. Numerical examples are provided to illustrate the very good performance of our approximation including both light-tailed and heavy-tailed claims.

This study examines whether chief executive officers’ (CEOs’) external labour market competitions affect their firms’ stock price crash risks. Using CEOs’ exposure to the prestigious media-award-winning events of competitor CEOs, we document a significant increase in stock crash risk for firms with award-exposed CEOs, compared with firms without such CEOs, and this treatment effect is attenuated by strong external monitoring and a high-quality information environment, yet exacerbated by CEOs’ similarity with award winners and likelihood of winning the award. We further find that withholding bad news, risk taking and financial misreporting are the possible channels through which competitor CEOs’ award events affect stock price crash risk. Our study sheds new light on the formerly under-researched adverse effects of CEO awards by suggesting that external labour market competition associated with CEO awards plays an important role in influencing extreme downside risk in the equity market.

We examine the Kondor theoretical explanation of an enduring puzzle: trading volumes and stock return volatility peak after the release of public information. Using a comprehensive data set of institutional holdings and earnings announcements, we find supporting evidence that the proportion of short-term investors is positively associated with post-announcement spikes in trading volume and return volatility. This finding survives in the identification test based on the annual reconstitutions of the Russell 1000 and 2000 indices. We show our results largely withstand several alternative explanations related to the constitution of institutional investors, informed trading, and heterogeneous beliefs.

We identify the broker each corporate insider trades through, and find that analysts and mutual fund managers affiliated with such “inside brokers” have a substantial information advantage on the insider’s firm. Affiliated analysts issue more accurate earnings forecasts, and affiliated mutual funds trade the insider’s stock more profitably than their peers, following insider trades through their brokerage. Notably, this advantage persists well after these insider trades are publicly disclosed. Our results challenge the prevalent perception that information asymmetry arising from insider trading is acute only before trade disclosure, and suggest that brokers facilitating these trades are in a position to exploit this asymmetry.