Alternative Investment Opportunities Research Articles

The influence of financial conditions on optimal ordering and payment policies under progressive interest schemes

In many business-to-business transactions, the buyer is not required to pay immediately after the receipt of an order, but is instead allowed to postpone the payment to its suppliers for a certain period. In such a situation, the buyer can either settle the account at the end of the credit period or authorize the payment later, usually at the expense of interest that is charged by the supplier on the outstanding balance. Some payment terms, which are often referred to as trade credit contracts, contain progressive interest charges. In such cases, the supplier offers a sequence of credit periods, where the interest rate that is charged on the outstanding balance usually increases from period to period. If a buyer faces a progressive trade credit scheme, various options for settling the unpaid balance exist, where the financial impact of each option depends on the current credit interest structure and the alternative investment conditions. This paper studies the influence of different financial conditions in terms of alternative investment opportunities and credit interest structure on the optimal ordering and payment policies of a buyer on the condition that the supplier provides a progressive interest scheme. For this purpose, mathematical models are developed and analyzed.

Features and Determinants of Risk in Investment Choices by Private Equity Funds

In this paper we propose a measure of riskiness of PE assets alternative to the CAPM derived beta coefficient usually suggested in the literature on performance of PE Funds. We assumption that at any given point in time there exist alternative investment opportunities that can be classified into a limited number of types, and that Funds manage their Portfolio “optimally”, within the range of investments allowed by their Placement Memorandum. We first estimate a discrete choice model of the Fund Managers’ investment decisions by type of PE investment, as a function of the observed characteristics of the Fund, of the Deal and of the Portfolio Company, as well as of the year when the deal is closed. Given the chosen type of investment, we then estimate the probability of negative returns of each deal in each investment class. These predicted probabilities together with the historical expected shortfalls by investment type, yield the Expected Loss by deal, the measure of pure risk we propose in this paper. We find that it is possible to identify the idiosyncratic features of each investment type and that the patterns and degrees of riskiness differ quite significantly among them.

Diversification of risk exposure through country mutual funds under alternative investment opportunities

Abstract This paper examines the behavior of time variation in the risk exposure of country mutual funds to the movements of the US and benchmark foreign markets. It uses weekly data on 15 closed end funds and 19 exchange traded funds for the sample period between January, 2001 and December, 2012. Conditional factor models are employed to uncover the time variation in the estimated betas through short window regressions. The findings of the paper indicate considerable time variation in risk exposure of country mutual funds to the US market and foreign market risk factors. The US market betas exhibit greater variation over the sample period than the target foreign market betas. The overall fluctuation in betas for the closed end funds is found to be higher than that for the exchange traded funds, and emerging market funds experience more oscillation in the risk exposure than their developed market counterparts. We also find that a combination of the US macroeconomic state variables and investors’ sentiment significantly predicts future betas.

Balancing act: weighing the factors affecting the taxation of capital income in a small open economy

Alternative economic theories yield dramatically different prescriptions for optimal capital taxation in small open economies. On the one hand, foreign firms, including those with investments that yield firm-specific above-normal returns, have a large number of alternative investment opportunities; this suggests that the supply of foreign direct investment is highly elastic, which implies that small open economies should avoid imposing any source-based taxes on capital income. On the other hand, governments invariably want to tax any above-normal returns earned by location-specific capital, especially if the returns accrue to foreigners, and to take full advantage of the potential revenue increase from any “treasury transfer” effect that arises due to residence-based tax systems with foreign tax credits, such as that utilized by the USA. These factors suggest that investment is highly inelastic with respect to capital taxation, so that source-based capital income taxation is desirable; indeed, in one special case, the capital income tax rate for a small open economy should equal the relatively high US tax rate. Moreover, this difficult trade-off is in practice complicated by numerous additional factors: deferral of unrepatriated profits and cross-crediting of foreign tax credits for the US multinationals, foreign direct investment from firms from countries that, unlike the USA, operate territorial systems, and the existence of opportunities for both international capital income shifting and labor income shifting. In this paper, we analyze optimal capital income taxation in a small open economy model that attempts to balance these conflicting factors.

An R&D-based real business cycle model

The New Keynesian Real Business Cycle model with staggered price adjustment is augmented with an R&D producing sector. Two sources of economic shocks are considered, namely random participation (perturbances to the value of alternative investment opportunities in another sector) and financial intermediation (shocks to the cost of raising capital in the financial intermediation market). We find that, when compared to the baseline model, both models can explain procyclical R&D spending. Additionally, the investment oversensitivity problem is corrected. However, only the financial intermediation model is consistent with the observed finding that the volatility of R&D is larger than those of investment and output.

Government-led critical success factors in PPP infrastructure development

Purpose – The purpose of this paper is to identify 30 government-led critical success factors (CSFs) from both the meso and micro levels in public-private partnership (PPP) infrastructure development, measured the importance of these factors, and evaluated the government performance within the Indonesian context. Design/methodology/approach – The authors used weighted gap analysis, the Mann-Whitney test, and the Holland and Copenhaver procedure to support the analysis. Findings – The agreement-adjusted mean scores suggest that the identified CSFs are essential, but that these CSFs underperform in Indonesia. The tests indicated that the gap between performance and importance was significant on both the individual and aggregate level, and no respondent-background bias was observed in the data sets. Practical implications – This paper provides valuable information for prospective international investors who might be interested in alternative PPP investment opportunities in Indonesia. Originality/value – This paper enriches the existing body of knowledge on Indonesia’s PPP activities. This is important as, despite the fact that Indonesia offers one of the largest opportunities in Asia for investment in the national infrastructure sector, studies on Indonesia’s PPPs are rarely reported in the literature. This paper also offers a simple, practical, and replicable approach with a sound theoretical basis that can assist governments in identifying and evaluating PPP-specific determinant factors under their control, as well as in measuring their performance on these factors.

Sustainable investment in Korea does not catch a cold when the United States sneezes

We analyse the socially responsible investment (SRI) performance in Korea over the period January 2006 to April 2014. Our analysis shows that sustainable investment portfolio, represented by Dow Jones Sustainability Index Korea, is ranked higher than most of the conventional portfolios in Korea. We also find that there is no significant effect of the 2008 global financial crisis on the sustainable investment return and volatility and US policy uncertainty does not affect the return as well. Generally, we find relative stability during crisis and non-crisis periods. We may also conclude that by decoupling sustainable investment in Korea from US market system, “Korea does not catch a cold when the United States sneezes”. In other words, SRI in Korea can be an alternative investment opportunity for investors to consider for international diversification purpose.

Регулирование процентных ставок по вкладам населения в Гонконге

In 1960s, the regulation of deposit interest rate was introduced to maintain stability of the banking system in Hong Kong. Local regulatory mechanism was characterized by direct involvement of banks into determination of the maximum level of interest rates. As deposit rates might be fixed at below market equilibrium level, banks were unbounded to earn rents at the expense of undrawn interest payments to depositors. Unlike to people in other countries, the depositors in Hong Kong had limited access to alternative investment opportunities like mutual funds or deposit institutions. As long as retail deposits were accounted for a significant share of borrowed funds, Hong Kong Association of Banks developed some incentives to discipline banks: in particular, if bank offered deposits with above the maximum permissible rate, it could be excluded from the national clearing and settlement infrastructure. The binding level of rates led to the emergence of new financial products (swap-deposits and NOW accounts) because banks tried to retain dissatisfied customers. To avoid the negative consequences of rate regulation on industry competition and allocation of financial resources within the economy, Hong Kong Monetary Authority took decision to liberalize deposit rates using gradual reform approach in the mid-1990s – early 2000s. The deregulation caused the significant reduction of gap between deposit and market rates and that evidence gave support to the idea of restrictive nature of regulation regime in Hong Kong. At the time of increasing competition in the deposit market, banks were able to increase operating efficiency and maintain profitability. The main benefits were obtained by banks with risky business model that attracted retail deposits to increase the scope of activity. Deposit rate liberalization helped to improve the efficiency of the transmission mechanism of monetary policy. As banks more actively responded to the market situation by adjusting interest rates, the monetary policy actions increased influence on the investment and savings behavior of economic agents. Finally, intensified interest rate competition among banks resulted into the growth of depositors’ welfare, contributing to the sustainable socio-economic development of Hong Kong.

Analysis of Output Growth, Inflation and Interest Rates on Stock Market Return in Nigeria

This paper investigates the impact of output growth, interest rate and inflation rate on stock market returns both in the short run and long run using time series data for Nigeria for the period from 1986 to 2012. Using ordinary least squares (OLS), cointegration test and granger causality, the study findings suggest that NSE-All share index, inflation rate, interest rate and real GDP move together in the long run. Also, we found that interest rate and output growth have significant role on stock market return and performance. This suggests that interest rate represents alternative investment opportunities. Finally, we infer from the causality test that NSE-All Share Index has a feed-back effect on the rate of inflation and real gross domestic product and found a support for fisher effect for Nigeria.

An Application of Hedonic Regression to Evaluate Prices of Polish Paintings

As the global financial crisis hit the world-wide stock markets, investors looked for alternative investments to diversify their portfolios. One of the more attractive alternate investment opportunities has been investment in art. However, in order to consider artworks as investment assets, the performance of the artworks must be evaluated in order to compare it to other financial instruments. Therefore, hedonic art price indexes are constructed for different art markets. The art market in Poland is characterized by a limited scale since it has only been developing since 1989. The aim of our research is evaluation of the hedonic art price indexes for Polish paintings. Hedonic regression models are estimated using data from auctions of paintings that took place in Poland in the years 2007–2010.

Contribution of Financial Markets to Industrial Output in New Zealand

Capital markets are the markets in which firms and governments raise capital, and where securities that represent claims to capital – such as shares and bonds – are traded (Stulz, 2008). This paper looks at what is known about the links between capital market development and economic growth, and shows why the development of New Zealand’s capital markets matters. Capital markets are valuable because they mobilise and then pool savings from the public and efficiently channel them into business investment. They also help companies and individuals to manage risk and, properly structured, they provide incentives for companies to raise their performance. Capital markets complement other sectors of New Zealand’s financial system, such as its banks. For firms, capital markets expand the range of funding sources - including public equity markets, private equity, and the issuance of debt securities such as bonds. For savers, they provide alternative investment opportunities and risk-adjusted returns. There is a significant body of international evidence that shows capital market development leads to more investment, higher labour productivity, and faster economic growth. Although globalisation has given New Zealand investors and companies access to world capital markets, New Zealand’s own markets, infrastructure and institutions will remain important to its economic success.

Inevitability of Cross-Section Stock Returns: Evidence from Equity Markets of Pakistan

In recent economic recession, portfolio theory progressively motivated banks to strategically concentrate on shareholders' investment returns. The analysis of the determinants of bank performance and their association with investment returns has become increasingly important. In presence of alternative investment opportunities of competitive market returns, bank stock performance is explored under depressed investment environment. For this research study, a sample of 16 banks listed at Karachi Stock Exchange was extracted on random basis. To calculate monthly stock returns, daily stock prices were used for a period of 2003-2010. Capital Asset Pricing Model (CAPM) was used to compute the expected bank stock returns. Results of performance metrics demonstrated insignificant correlation in movements of bank stock returns. Findings of this study suggested that in reflection of better market returns, banks tend to outperform for improvement of their shareholders' investment returns and value maximization.

Valuing “Raise Your Rate” certificates of deposit

Purpose – The “raise your rate” (RYR) certificate of deposit (CD) allows investors to raise the rate on their CD to the current market rate over the life of the CD. The purpose of this paper is to present a binomial option pricing model to value this option to raise the rate. The model also demonstrates conditions under which the investor should choose to exercise their option and raise their rate prior to maturity. Understanding the value of this option is useful to both banks setting rates, and investors comparing alternative investment opportunities. The results of this model suggest that, for CDs with short maturities and low yields, the value of the option is relatively small, roughly one to four basis points, however, for CDs with longer maturities and higher yields the value of the option can be as much as 50-80 basis points. Design/methodology/approach – This paper demonstrates how to value raise your rate CDs by applying a binomial option pricing model and provides the value of this option over a range of current CD yields and over a range of CD maturities. Findings – When CD rates are low and maturities are short the value of the option is small (one to four basis points), however, when CD rates are high with longer maturities, the value of this option can be significant (50-80 basis points). Research limitations/implications – The research implication is that the rate discount that the institution offers and the investor accepts should reflect the value of the option to raise the rate. The benefit to the institution and the cost to the investor reflected in the rate discount can be determined by the procedures presented in this paper regarding the valuation of the option to raise the rate. Practical implications – The purpose of this paper is to demonstrate how to apply a binomial option pricing model to value the option that is attached to a raise your rate CD. Knowing the value of this option should be useful both to banks, in determining the discounted rate they should offer on these CDs, and to investors choosing among alternative investment opportunities. An additional benefit of applying a binomial model to value the option is that the model can be used by investors to determine the optimal point at which to exercise their option and lock in the current higher rate. Social implications – Given the recent financial turmoil, pressure has been placed on banks to increase their liquidity and deposit base. CDs are crucial to this. Understanding the value of the RYR option is useful to both banks setting rates and investors comparing alternative investment opportunities. Originality/value – Given the current economic climate, deciding which strategic investment options to pursue is of paramount importance. To the best of the knowledge this is the first study that applies binomial option pricing to certificates of deposit to help investors make these decisions.

Valuing 'Raise Your Rate' Certificates of Deposit

The “Raise Your Rate” certificate of deposit (CD) allows investors to raise the rate on their CD to the current market rate over the life of the CD. This paper presents a binomial option pricing model to value this option to raise your rate. The model also demonstrates the conditions under which the investor should choose to exercise their option and raise their rate prior to maturity. Knowing the value of this option is useful to both the bank in setting rates and investors when comparing alternative investment opportunities. The results of this model suggest that, for CDs with short maturities and low yields, the value of the option is relatively small, roughly one to four basis points, however, for CDs with longer maturities and high yields the value of the option can be as much as 30 to 70 basis points.

A 'Coalition Proof' Equilibrium for a Private Information Credit Economy

This paper examines an economy in which agents with private information about their own productive capabilities seek to raise capital to fund their investment projects. We employ an equilibrium concept which is closely related to Coalition Proof Nash Equilibrium. In equilibrium, all agents who succeed in raising capital (entrepreneurs) are pooled; they all receive the same contract or consumption schedule. Entrepreneurs, however, are separated from those who fail to raise capital. This separation results in productive efficiency for the economy. If the economy has no viable alternative investment opportunity (other than agents' projects) then equilibrium allocations can be supported by a (non-intermediated) securities market. If there is a viable alternative, the equilibrium allocations can only be supported through the formation of a form of financial intermediary coalition.

Preferred-Habitat and Demand Factors in the Term Structure: Evidence from the Chinese Bond Market

Recent empirical studies suggest that demand and supply factors have important eects on bond yields. Both market segmentation and preferred habitat hypothesis are used to explain these demand and supply eects. In this paper, we use an ane preferred-habitat term structure model and the unique Chinese bond market data to study these two hypotheses. Chinese bond market is unique because there exists an ocial term structure of lending rates, set exogenously by the government, on preferred habitat investors’ alternative investments of loans. We show that demands of both the preferred-habitat investors and the arbitrageurs aect bond yields and returns. Moreover, we also nd that the preferred-habitat investors’ alternative investment opportunities have expected eect on bond yields and returns. We further show that

Open-Ended Funds in Romania. Their Performance in an Economically Difficult Environment

ABSTRACT.Romania is one of the emerging markets, where the investment funds market is less developed than in other European countries, but developing fast. The number of open-ended funds increased in the 20 years of existence of the investment market, reaching 60 in 2012. The paper looks at the open-ended funds' evolution (measured through the yearly changes in value of the fund unit), in the period 2010-2012. The main objective is to analyze the performance of the different types of mutual funds in a comparative manner and to assess them against the industry benchmark. The analysis takes place in a period of economic turmoil and based on the findings, the paper attempts to point out advices on what would be good placements for investors during economically difficult periods.JEL Classification :G23, G11, D53, E22Keywords: open ended funds, Romania, investment funds' performanceIntroductionInvestment funds represent an alternative investment opportunity to bank deposits or to direct investments on the Stock Exchange. They contribute to the development of financial markets, as new possibilities of investment for those who have available resources. Among those, open ended funds are seen as a primary instrument of investment for most individuals and households (Lenard et al., 2003). In the last decades, the role of mutual funds increased in the financial markets, as in 2007 the world mutual funds industry administered financial assets of 26 trillion USD compared to 1996 when there were administered 6 trillion USD assets (Ferreira et al., 2010).The investment funds industry in Romania is a young industry, as it has only 20 years of existence. Its youth places it as an underdeveloped market, by comparison to the U.K, Germany and France from Europe or United States from America. The industry had an initial difficult start at the beginning of 1990's, when due to the lack of regulating rules, investors lost a lot of money and registered high failures on the investment funds market. Once the market started to be better regulated, allowing for higher control and less risk of failure for investors (due to un-appropriate calculation methods), it also started to develop.The main objective of this paper is to compare the evolution of different types of open ended funds of Romania and their performances in the last years in order to identify which categories of funds performed better in the context of the present economic crisis. The evolution is measured through the funds' yearly changes in value of the fund unit.Investment funds and their performance - a literature reviewInvestment funds are organizations that gather funds from individuals and invest these funds in securities traded on the stock exchange, in money market instruments and in municipal or corporate bonds. They represent an alternative investment option to deposits in commercial banks and to direct investments on the Stock Exchange (Prisacariu et al., 2008; Bodie et al., 2009). Investment funds are classified according to different criteria: method of management, goals, the composition of the fund's portfolio, markets and investment strategy. The method of management is seen as the most important criterion to classify investment funds and according to it, there are three types of investment funds: a) unit investment trusts, b) open-ended funds and c) closed-end funds. The unit investment trusts administer a fixed portfolio that is seen as being unmanaged (Bodie et al., 2009), as compared to the other two types of investment funds (open- ended and closed-ended funds) that hold portfolios that are continuously bought and sold, therefore being managed. The open-ended funds issue permanently investment assets, allowing some investors to subscribe permanently and simultaneously allowing others to totally drop out. On the other hand, the closed-ended funds do not issue permanently and they address only to a limited number of investors, who purchase the shares when the fund is launched and redeem them when the fund closes. …

Estimation of Discount Rates for Assessing the Efficiency of Investment Projects in the Framework of Optimal Financial Asset Management

Singled out for this study is a model of optimal asset management for a firm in a deterministic situation (i.e., given full information) that would allow to refine and modify a traditional definitions of discount rate as the highest rate of return on alternative investment opportunities. It is shown that, in general, the discount rate (determined as the rate of decline in the shadow price value of money in the optimal plan) is time-variable and depends not only on the general situation in the market, but also on the financial position of the planning firm. The constructed model provides opportunities for formulating the precise conditions for the financial feasibility of a project and justifying the structure of its efficiency criterion. It appears that the criterion of efficiency in question differs from the net present value (NPV) -- in addition to the discounted sum of cash flows from the project, it must take into account the market value of fixed assets created under the project. We also consider the accounting issues of inflation, uncertainty and risk in evaluating the effectiveness of the project and setting the discount rate.

The relevance of emerging markets in portfolio diversification: Analysis in a downside risk framework

During the global financial crisis of 2008, emerging markets declined almost to the same extent as developed markets, casting doubts on their ability to provide diversification benefits. This article aims to assess the benefit of adding the volatility index, as an asset class, instead of emerging markets to the domestic portfolios of US and UK investors. The results show that for both US and UK investors, portfolios comprising volatility-based contracts outperform emerging markets portfolios on the basis of portfolio performance metrics, such as the Sortino ratio, the Adjusted Sharpe ratio and the Stutzer index. The results imply that US investors seeking risk reduction have an alternative investment opportunity in volatility-based contracts rather than investing in emerging markets. Investing in emerging markets is fraught with political and exchange rate risks, whereas investing in the VIX is free of these risks. Currently, there are no exchange-traded products on the FTSE 100 VIX. This study makes a case for introducing them.

Are Emerging Markets Relevant for Portfolio Diversification?

In the recent financial meltdown, along with the slump in developed markets, emerging markets also declined sharply, bringing into doubt their ability to provide diversification benefits. One of the stylised facts of volatility is its negative correlation with the equity market, which in conjunction with the launching of securities for trading volatility, leads to the emergence of a new asset class for portfolio diversification. From the perspective of investors in the US, this study investigates whether a domestic portfolio along with exposure to an alternative asset class like volatility index (VIX) fares better than investing in emerging markets. The results show that for the minimum variance portfolios, there is a significant increase in Sharpe ratio when VIX is included, instead of the emerging markets to the domestic portfolio. Adding VIX is bene-ficial, as the magnitude and direction of its correlation is not only predictable but also stable. While the emerging markets correlations with developed markets are positive and increasing thereby diminish-ing the diversification benefits. Hence, US investors in pursuit of risk reduction have an alternative investment opportunity in volatility-based contracts.