Transaction Cost Considerations Research Articles

The Predictive Ability and Profitability of Moving Average Rules in the Saudi Stock Market

Abstract Following the implementation of capital market reforms, Saudi Arabia has opened up its stock market to international investors. This liberalisation has led to the inclusion of the stock exchange into leading global indices, which is expected to lead to an influx of foreign investment. Thus, it is important and timely to examine the efficiency of the Saudi stock market. To that end, this paper conducts a comprehensive investigation of the predictive ability and profitability of a popular trading rule, the moving average rule, using firm-level data for the Saudi stock market over the period 1st January 2008 to 31st December 2017. The results show that the moving average rule has predictive ability; the active rules for a majority of the sample companies outperformed the corresponding passive strategy. Furthermore, the results were economically significant as the rules were profitable even after the consideration of transaction costs. The results also showed that the most profitable moving average rules were those with short-moving average lengths, and that the introduction of a bandwidth, which serves to eliminate weak trading signals, had a positive impact on rule profitability. Importantly, the analysis showed that the most profitable component of the rule related to short selling as these trades resulted in higher profits than the long positions. A disaggregated analysis of sectors showed that the trading rules outperformed the buy-and-hold strategy in all seven industries considered, while the analysis of covariance revealed the importance of careful selection of filter size. Overall, the analysis documents significant inefficiencies in the Saudi stock market and suggests that the employment of a simple trading rule, based on past price data, can yield substantial profits across companies and sectors even in a costly trading environment. These findings suggest that the recent reforms that were implemented to improve the efficiency of the Saudi stock market have been suboptimal, and that further regulatory reform is required.

Supply and demand behaviors in the Chinese emission allowances pledge credit market under different value type: An evolutionary game analysis

Chinese Emission Allowances (CEAs) pledge credit provides a new way for banks to reduce green credit risks and for low-carbon enterprises to improve the credit availability. However, insufficient supply and demand is the main dilemma of CEAs pledge credit in China. One of the reasons for this dilemma may be the neglect of the forward value of CEAs in value assessment. This research explores the decision-making behavior of the supply and demand subjects in the CEAs pledge credit market under different value types of CEAs. First, the improved B–S options pricing model with consideration of transaction costs is used in the construction of the payoff matrix to measure the option value of CEAs. The new matrix aims to place both the option value (corresponding to forward value) and the market value (corresponding to spot value) in the CEAs pledge value evaluation framework. Then, based on the new matrix, an evolutionary game model between key emission enterprises (KEEs) and commercial banks (CBs) is built to dynamically analyze the equilibrium state of supply and demand as well as the strategic interaction of participants in CEAs pledge credit market. Finally, numerical simulations demonstrate the driving factors of supply and demand for CEAs pledge credit. The research results show that compared to market value, the option value of CEAs is more conducive to stimulating the supply and demand of CEA pledge credit; and the shorter the remaining valid period of CEAs, the higher the participation enthusiasm of supply and demand parties. Furthermore, reducing low-carbon technology risks and increasing the carbon emissions trading prices at the end of pledge period can significantly improve the supply and demand of CEAs pledge credit, but the loan and deposit interest rates of CEAs pledge credit are ineffective.

What drives developers? Understanding vertical (dis)integration strategies in the land development process

Real estate developers play a crucial role in the production of our cities. Yet, the knowledge about how they operate is limited. They are often portrayed as a homogeneous group, while in practice we see a large variety of different types of developers and of their strategies. Particularly striking are the differences in the extent to which real estate developers cover the land development process. Some limit themselves to development, while others incorporate strategic land acquisition, construction, and/or long-term investment. With the help of theories from organisational economics, we explore different vertical integration strategies and the motives behind them. We apply these insights to cases from the Dutch homebuilding industry. Our analysis leads to a conceptualisation and categorisation of real estate developers according to their vertical integration strategy and we identify different motives behind those strategies. We find that vertical (dis)integration strategies are informed by strategic considerations, such as land assembly in order to secure future workload in construction, by price advantages, and by transaction-cost considerations that are related to the highly specific nature of some activities in the land development process.

Dynamic asset allocation strategy using a state-dependent Markov model: Applications to international equity markets

This paper investigates the performance of an asset allocation strategy that relies on the state-dependent correlation between emerging and developed markets. We utilize a state-dependent Markov Model that employs a time-varying transition probability and uses the U.S. term spread differential as a market phase identifier. We show that by relying on the spillover effect of U.S. monetary policies on international equity markets, international investors can optimize returns on their investments by using a state-dependent model when diversifying their portfolios towards less volatile markets. Two states and optimal tangency portfolios reveal superior performance even after consideration of transaction costs. The effect of the U.S. term spread on equity returns is more apparent after the Global Financial Crisis; when positive (negative) term spread differentials are associated with an increased likelihood of being in a bull (bear) market.

Organising and Governing for Collective Social Good

In recent times, there is a growing demand for firms to develop their innovations in a way that could support UN’s SDGs or societal Grand Challenges. The governance of firms’ corporate social activities, such as financial donations vs playing an active role, has been often explained as dependent on the type of firm resources used (generic vs specific) and how these activities can enhance a firm's performance. There is a lack of attention towards if, and how, the nature and type of social project can influence the extent of firm's engagement and its governance choices. Building on the governance literature, which accounts for both the capability and transaction costs considerations of firms, we conceptualize firms’ governance decision of social good as dependent on the structure of the social project addressing a social problem as well as firm’s resources required to support that problem. Empirically, we explore this issue through an in-depth qualitative case study of an incumbent firm and examining the relationship dynamics with six of its key social projects. Our findings highlight that the structure of the social project allows for a firm to decide ex-ante its potential role and extent of involvement, and the costs and capabilities associated with the involvement guides the governance choices associated with the potential role a firm can play within a social project. In doing so, we highlight the contexts where a firm may foster collective participation of their value-chain partners in the design and provision of social good.

Exploring key risks of energy retrofit of residential buildings in China with transaction cost considerations

Energy retrofit of residential buildings is an approach to reduce worldwide energy consumption. Residential energy retrofitting in China mostly focuses on multi-owner residential buildings with composite ownership that dozens of private homeowners own their apartment and jointly own the common parts of a building. The implementation of residential energy retrofit faces many risks, causing the slow retrofit process in the hot summer and cold winter (HSCW) zone of China. Transaction cost theory (TCT) is conducive to enrich an in-depth understanding of risk inventories in the energy retrofitting context. This paper aims to explore the key risks in retrofit projects of residential buildings in the HSCW zone with transaction costs (TCs) considerations, in order to provide the direction for effective risk management. First, based on the theoretical risks with TCs considerations, interviews were conducted to adjust the risk list and to connect these risks with stakeholders and stages. Second, a questionnaire survey was made based on two parameters of risk probability and severity, and then ten top risks were chosen as key risks through both a risk matrix and Borda count. The results show that most of the key risks are associated with homeowners and contractors, involving retrofit awareness, cooperation performance, opportunism, professional expertise, construction management, safety management, and maintenance, of which most occur at the stage of on-site construction. Information cost is the largest source of TCs relevant to these key risks and is mainly borne by the government and homeowners. TCs can also provide a lens for the retrofitting in other countries to understand risks, and the decrease in information costs contributes to effective risk management both in China and in the international context.

THE IMPACT OF THE INSTITUTIONAL FRAMEWORK QUALITY ON THE OWNERSHIP STRATEGY. EVIDENCE FROM EU FOREIGN DIRECT INVESTMENTS IN SOUTH AND CENTRAL EASTERN EUROPE

Foreign Direct Investment (FDI) is considered by scholars as a critical factor for economic growth and development. The recent economic crisis in the European Union (EU) has brought up again the discussion of the key drivers specific to the attraction of FDI. In addition to strict economic factor, the literature emphasises the role of institutions in a country as determinants in attracting FDI inflows. This study is one of the first to address the ownership strategy of multinational enterprises from the EU region undertaking FDI in former transitional economies in South (SEE) and Central Eastern Europe (CEE) using the concept of the quality of institutions. An analysis of the impact that the quality of market supporting institutions in determining ownership structure has of foreign affiliates in former transitional economies is attempted using an econometric model on institutional, regulatory, country specific and company level data based on a sample of 285 EU companies undertook FDI in 4 South and Central Eastern European countries during 1995-2015. We apply and advance the institution-based view of strategy by integrating it with resource-based and transaction cost considerations, incorporating three of the most important theoretical paradigms of international business studies.

Incentive mechanism design for promoting high-level green buildings

Green building (GB) incentives help address the barriers in GB development. After years of practice, the GB market is becoming mature; thus, these incentives should be adjusted to adapt to the market transformation. However, adjusting incentives can affect stakeholders' motives and concerns, which in turn influence stakeholders' attitudes towards green buildings. Therefore, going back to the basics and understanding how an incentive scheme works before implementing any adjustment are important for policymakers. This study aims to reveal how incentive mechanism design affects stakeholders’ choices of GB levels in tangible and intangible ways. The Gross Floor Area Concession Scheme implemented in Hong Kong is selected as a case study. Cost–benefit analysis, particularly transaction cost, and the analytical hierarchy process method are used to evaluate the costs and benefits in terms of monetary value and importance. Then, a causal loop diagram is constructed to explain the incentive mechanism. Results show that although actual costs and benefits are more important than hidden ones, transaction cost can be a decisive factor for selecting GB levels. Cost–benefit analysis with transaction cost considerations should be conducted to improve GB incentives. In addition, fast sales of high levels of GB can be a critical compensation for extra costs. Alternatives for improving incentives are also provided based on the findings. This study helps enrich the incentive mechanism for promoting high levels of GB. It provides empirical evidence on the magnitude of transaction cost and proves the soundness of conducting a holistic cost–benefit analysis by incorporating transaction cost.

Optimizing Pension Outcomes Using Target‐Driven Investment Strategies: Evidence from Three Asian Countries with the Highest Old‐Age Dependency Ratio*

AbstractAs a response to unforeseeable market turbulence—such as the 2008 financial crisis and the most recent market drawdown triggered by the COVID‐19 pandemic—we propose a new pension investment strategy that could better protect a long‐term pension plan in volatile market conditions. Over a hypothetical 20‐year pension scheme and various target volatility scenarios, we show that our newly proposed strategy, which attaches a target volatility mechanism to a lifecycle strategy, could provide more effective capital protection and risk control for pension investment vehicles. Our results are robust with a consideration of transaction costs.

Stakeholders’ Risk Perception: A Perspective for Proactive Risk Management in Residential Building Energy Retrofits in China

The implementation of energy retrofit of residential buildings faces many risks around the world, especially in China, leading to low retrofit progress. Stakeholders’ proactive risk management is the key to the smooth implementation of retrofit projects but is normally affected by risk perception. Perceived risks instead of real risks are the motivators of their proactive behaviours. This paper aims to understand and address the present risk perception of stakeholders in order to drive effective proactive risk mitigation practices. Based on a risk list identified through a literature review and interviews, a questionnaire survey was then made to analyse and compare different stakeholders’ perceptions of each risk by measuring the levels of their concern about risks. It is validated that all the stakeholder groups tend to mitigate risks perceived highly proactively. Proactive risk management of risk-source-related stakeholders deserves more attention and responsibility-sharing with transaction costs (TCs) considerations contribute to the enhancement of risk perception. More responsibilities of construction quality and maintenance is taken by the government and contractors should be clarified, and the government should also be responsible for assisting design work. Effective information is beneficial to the decrease in homeowners’ risk perception that can motivate their initiative of cooperation.

Applying and advancing internalization theory: The multinational enterprise in the twenty-first century

Internalization theory has provided a resilient analytical framework that explicitly or implicitly underlines much of International Business scholarship. Internalization theory is not a monolithic body of knowledge; instead, it has devolved into several ‘streams’, each of which focuses on the interests of particular epistemic communities, while also acting as a more generic organizing framework for those more broadly interested in its application to real-world challenges. Following a review of the various streams, we trace the frontiers of current research of the broader internalization framework and identify emerging themes raised by the papers in the special issue. These include transaction cost considerations in the bundling and recombination of assets across diverse contexts, the growing relevance of quasi-internalization, the theoretical challenges of (bounded) rationality for internalization theory, and the increasing disconnect between ownership, control and responsibility. These developments point to new research frontiers for scholars looking to apply or advance internalization theory.

An Empirical Study of Machine Learning Algorithms for Stock Daily Trading Strategy

According to the forecast of stock price trends, investors trade stocks. In recent years, many researchers focus on adopting machine learning (ML) algorithms to predict stock price trends. However, their studies were carried out on small stock datasets with limited features, short backtesting period, and no consideration of transaction cost. And their experimental results lack statistical significance test. In this paper, on large‐scale stock datasets, we synthetically evaluate various ML algorithms and observe the daily trading performance of stocks under transaction cost and no transaction cost. Particularly, we use two large datasets of 424 S&P 500 index component stocks (SPICS) and 185 CSI 300 index component stocks (CSICS) from 2010 to 2017 and compare six traditional ML algorithms and six advanced deep neural network (DNN) models on these two datasets, respectively. The experimental results demonstrate that traditional ML algorithms have a better performance in most of the directional evaluation indicators. Unexpectedly, the performance of some traditional ML algorithms is not much worse than that of the best DNN models without considering the transaction cost. Moreover, the trading performance of all ML algorithms is sensitive to the changes of transaction cost. Compared with the traditional ML algorithms, DNN models have better performance considering transaction cost. Meanwhile, the impact of transparent transaction cost and implicit transaction cost on trading performance are different. Our conclusions are significant to choose the best algorithm for stock trading in different markets.

Stock Trading via Feedback Control: Stochastic Model Predictive or Genetic?

We seek a discussion about the most suitable feedback control structure for stock trading under the consideration of proportional transaction costs. Suitability refers to robustness and performance capability. Both are tested by considering different one-step ahead prediction qualities, including the ideal case, correct prediction of the direction of change in daily stock prices and the worst-case. Feedback control structures are partitioned into two general classes: stochastic model predictive control (SMPC) and genetic. For the former class three controllers are discussed, whereby it is distinguished between two Markowitz- and one dynamic hedging-inspired SMPC formulation. For the latter class five trading algorithms are disucssed, whereby it is distinguished between two different moving average (MA) based, two trading range (TR) based, and one strategy based on historical optimal (HistOpt) trajectories. This paper also gives a preliminary discussion about how modified dynamic hedging-inspired SMPC formulations may serve as alternatives to Markowitz portfolio optimization. The combinations of all of the eight controllers with five different one-step ahead prediction methods are backtested for daily trading of the 30 components of the German stock market index DAX for the time period between November 27, 2015 and November 25, 2016.

Tying Arrangements and Lawful Alternatives: Transaction Costs Considerations

Tying arrangements often increase welfare by promoting product quality and protecting the supplier's goodwill in the tying product. When the tying product works effectively only with ancillary materials or accessories or services of a particular kind or quality, its supplier can assure the requisite quality of the ancillary product only by supplying that product itself. The cost savings defense and the defenses of quality control or good will are the most widely recognized and accepted tying defenses.One characteristic of manufactured products is differentiation among the offerings of various brands. This in turn produces a need for more specialized provision of such things as supplies, aftermarket parts, and service, thus requiring firms to dedicate their production or distribution to particular product designs. As a consequence firms must also dedicate their production and organization to ongoing relationships with a narrow range of other firms. Franchising is an one example, but there are others. What virtually all of these situations have in common is that they occur in markets that involve differentiated, typically branded products and fairly specialized aftermarket products or services. Or alternatively, a manufacturer of a complex or delicate machine may require users to have the machine serviced by the manufacturer's own employees or agents. A tie might be used in such cases by a firm with no power in the tying market and with no purpose or effect of gaining power in the tied market or even of exploiting customers.This paper considers transaction cost rationales for tying in the context of the types of asset specificity that are common in modern relational contracts, looking particularly at protection of goodwill, manufacturer-supplied specifications or standards as an alternative to tying, and the use of tying to protect a supplier’s trade secrets.Problematically, many of the litigated ties have involved foreclosure of only a minuscule portion of the tied market. Requiring a significant foreclosure before finding prima facie illegality would often obviate the many vexing questions concerning either cost savings or quality control. Asset specificity is ubiquitous, and serves to explain ties in many competitive markets, including franchising, office equipment, and medical services to name a few. A non-foreclosing tie ordinarily has no anticompetitive effects. Under a rule of reason treatment no justification would be required for legality, but even under harsher treatment provable quality protection should defend the tie.

Tendering design when price and quality is uncertain

PurposeThe purpose of this paper is to analyze how local and central authorities choose between lowest price and more complex scoring rules when they design supplier-selection mechanisms for public procurements. Five hypotheses are tested: a high level of cost uncertainty and highly non-verifiable quality makes the use of the lowest-price supplier-selection method less likely. Organizational habits and transaction-cost considerations influence the choice of mechanism. Strong quality concerns make complex rules more likely.Design/methodology/approachThe analysis departures from normative theory (rational choice) and is based on the regression analysis and survey data comprising a gross sample of 40 contracting authorities and detailed information about 651 procurements.FindingsMore complex scoring rules are used more often when the authority is uncertain about costs and about delivered quality. Authority effects are also found to directly and indirectly influence the choice of supplier-selection method, suggesting that tendering design is partly driven by local habits and institutional inertia.Practical implicationsThe authors argue that, from a normative point of view, lowest price is an adequate method when the degree of uncertainty is low, for example, because the procured products are standardized and since quality can be verified. When there is significant cost uncertainty, it is better to use the so-called economically most advantageous tender (EMAT) method. (Preferably this should be done by assigning monetary values to different quality levels.) If there is significant uncertainty concerning delivered quality, the contracting authority should retain a degree of discretion, so as to be able to reward good-quality performance in observable but non-verifiable quality dimensions; options to extend the contract and subjective assessments of quality are two possibilities. The main findings are that EMAT and more complex scoring rules are used more often when the contracting authorities report that they experience substantial uncertainty concerning delivered quality and actual costs and that these factors tend to decrease the weight given to price, in line with the predictions. However, the authors also find that this result is mainly driven by variations between authorities, rather than by between-products variation for the same authority. This is from a training of professionals and regulation perspective of policy relevance.Social implicationsContract allocation based on habits rather than rational ground could implicate the waste of resources (tax payers money) as it adventures the matching of the preferences of the public sector (the objective, subject matter, of the procurement) and what the potential supplier offers in its tender.Originality/valueAlthough the principles for supplier selection are regulated by law they give the contracting authority substantial freedom in designing the scoring rule and in choosing what quality criteria to use. The tension between different objectives and the more general question whether the choices made by authorities reflect rational decision making or institutional inertia together motivate the current study. While the design of the supplier-selection mechanism is an important consideration in procurement practice, it has attracted relatively little attention from the academic community.

The Choice between Project Financing and Corporate Financing: Evidence from the Corporate Syndicated Loan Market

This paper examines the pricing of project finance (PF) and non-project finance (non-PF) loans and examines the factors that influence the borrower’s choice between project financing and corporate financing. Using a sample of 210,273 syndicated loans closed between 2000 and 2014, we find that PF and Non-PF loans are influenced differently by common pricing characteristics and that PF loans in the U.S. and W.E. are priced in segmented markets. Borrowers choose PF when they seek long-term financing and funding cost reduction. We find that transaction cost considerations, the financial crisis and country risk affect the financing choice. Our results document that publicly traded sponsors who prefer project financing to corporate financing are larger, less profitable, more financially distressed and have a higher asset tangibility. Finally, privately held firms that choose off-balance sheet financing are smaller and less profitable and use PF to raise relatively larger amounts of debt.

Do socially (ir)responsible investments pay? New evidence from international ESG data

Using a new dataset of environmental, social and corporate governance (ESG) company ratings and state-of-the-art statistical methodology, this article analyses the performance of socially (ir)responsible investments in the Asia-Pacific region, the United States and Europe. By implementing a variety of portfolio screens on the industry level, our analysis provides the following insights. First, regardless of geographic region, industry or ESG criterion, active selection of high- or low-rated stocks does not provide superior risk-adjusted performance in comparison to passive stock market investments. Second, in the Asia-Pacific region and in the United States, investors concentrating on ethical utility derived from their portfolio choice can follow an ESG-based investment style and still obtain a performance similar to the broad market. However, depending on the industry focus and the ESG criterion that is used, investors in Europe tend to pay a price for socially responsible investing. Third, our results are robust along several dimensions, such as the employed portfolio cut-off rate, the time frame or the consideration of transaction costs.

When Retailing and Las Vegas Meet: Probabilistic Free Price Promotions

A number of retailers offer gambling- or lottery-type price promotions with a chance to receive one’s entire purchase for free. Although these retailers seem to share the intuition that probabilistic free price promotions are attractive to consumers, it is unclear how they compare to traditional sure price promotions of equal expected monetary value. We compared these two risky and sure price promotions for planned purchases across six experiments in the field and in the laboratory. Together, we found that consumers are not only more likely to purchase a product promoted with a probabilistic free discount over the same product promoted with a sure discount but that they are also likely to purchase more of it. This preference seems to be primarily due to a diminishing sensitivity to the prices. In addition, we find that the zero price effect, transaction cost, and novelty considerations are likely not implicated. This paper was accepted by Yuval Rottenstreich, judgment and decision making.

Using Twitter to Predict the Stock Market

Behavioral finance researchers have shown that the stock market can be driven by emotions of market participants. In a number of recent studies mood levels have been extracted from Social Media applications in order to predict stock returns. The paper tries to replicate these findings by measuring the mood states on Twitter. The sample consists of roughly 100 million tweets that were published in Germany between January, 2011 and November, 2013. In a first analysis, a significant relationship between aggregate Twitter mood states and the stock market is not found. However, further analyses also consider mood contagion by integrating the number of Twitter followers into the analysis. The results show that it is necessary to take into account the spread of mood states among Internet users. Based on the results in the training period, a trading strategy for the German stock market is created. The portfolio increases by up to 36 % within a six-month period after the consideration of transaction costs.

History of share prices and market efficiency of the Madrid general stock index

We apply Moving Average (MA), Relative Strength Indicator (RSI), Moving Average Convergence Divergence (MACD), and trading breakout (TBO) techniques to investigate the weak-form market efficiency of the Madrid General Stock Index, Índice General de la Bolsa de Madrid (IGBM), from 1/2/1975 to 12/31/2012. The empirical results not only strongly validate the predictive power of trading rules with robust statistical significance in all three sub-periods over the thirty-eight years, but also provide the possible strategies to outperform the buy-and-hold strategy with the consideration of transaction costs and risk. This supports the argument against weak-form market efficiency of the IGBM.