Equity Beta Research Articles

Changing Tax Policy Impacts on the Risk Level of Viet Nam Wholesale and Retail Firms

Many financial markets including but not limit to, the emerging stock market in Viet Nam, have been affected by the financial crisis 2007-2009. This study analyzes the impacts of tax policy on market risk for the listed firms in the wholesale and retail industry during this period as it becomes necessary. First, by using quantitative and analytical methods to estimate asset and equity beta of total 9 listed companies in Viet Nam wholesale and retail industry with a proper traditional model, we found out that the beta values, in general, for many companies are acceptable. Second, under 3 different scenarios of changing tax rates (20%, 25% and 28%), we recognized that there is not large disperse in equity beta values, estimated at 0,646, 0,653 and 0,657.These values are much lower than those of the listed VN construction firms. Third, by changing tax rates in 3 scenarios (25%, 20% and 28%), we recognized both equity and asset beta mean values have positive relationship with the increasing levels of tax rate. Finally, this paper provides some outcomes that could provide companies and government more evidence in establishing their policies in governance.

Changing Tax Policy Impacts on the Risk Level of Viet Nam Wholesale and Retail Firms after the Global Crisis 2007-2011

Many financial markets including but not limit to, the emerging stock market in Viet Nam, have been affected by the financial crisis 2007-2011. This study analyzes the impacts of tax policy on market risk for the listed firms in the wholesale and retail industry during this period as it becomes necessary. First, by using quantitative and analytical methods to estimate asset and equity beta of total 9 listed companies in Viet Nam wholesale and retail industry with a proper traditional model, we found out that the beta values, in general, for many companies are acceptable.Second, under 3 different scenarios of changing tax rates (20%, 25% and 28%), we recognized that there is not large disperse in equity beta values, estimated at 0,646, 0,653 and 0,657.These values are much lower than those of the listed VN construction firms.Third, by changing tax rates in 3 scenarios (25%, 20% and 28%), we recognized both equity and asset beta mean values have positive relationship with the increasing levels of tax rate.Finally, this paper provides some outcomes that could provide companies and government more evidence in establishing their policies in governance.

The Risk Level of Viet Nam Real Estate Industry Under Financial Leverage During and after the Global Crisis 2009-2011

This paperwork evaluates the impacts of external financing on market risk for the listed firms in the Viet nam real estate industry, esp. during and after the financial crisis 2009-2011.First of all, by using quantitative and analytical methods to estimate asset and equity beta of total 45 listed companies in Viet Nam real estate industry with a proper traditional model, we found out that the beta values, in general, for many institutions are acceptable.Second, under 3 different scenarios of changing leverage (in 2011 financial reports, 30% up and 20% down), we recognized that the risk level, measured by equity and asset beta mean, decreases when leverage increases to 30% but increases more if leverage decreases down to 20%.Third, by changing leverage in 3 scenarios, we recognized the dispersion of risk level, measured by equity beta var, increases from 0,219 to 0,316 if the leverage increases to 30% whereas decreases to 0,166 if leverage decreases to 20%. But the dispersion measured by asset beta var decreases to 0,082 (leverage down 20%), showing leverage impact.Finally, this paper provides some outcomes that could provide companies and government more evidence in establishing their policies in governance. Keywords: equity beta, financial structure, financial crisis, risk, external financing, real estate industry JEL CLASSIFICATION : G010, G100 , G390

Risk Level of Viet Nam Medicine Industry under Financial Leverage During and After the Global Crisis 2009-2011

This paperwork evaluates the impacts of external financing on market risk for the listed firms in the Viet nam medicine industry, esp. during and after the financial crisis 2009-2011. First of all, by using quantitative and analytical methods to estimate asset and equity beta of total 6 listed companies in Viet Nam medicine industry with a proper traditional model, we found out that the beta values, in general, for many institutions are acceptable. Second, under 3 different scenarios of changing leverage (in 2011 financial reports, 30% up and 20% down), we recognized that the risk level, measured by equity and asset beta mean, decreases when leverage increases to 30% but increases more if leverage decreases down to 20%. Third, by changing leverage in 3 scenarios, we recognized the dispersion of risk level, measured by equity beta var, keeping the same value of 0,711 if the leverage increases to 30% or if leverage decreases to 20%. But the dispersion measured by asset beta var increases to 0,200 (leverage down 20%), showing leverage impact. Finally, this paper provides some outcomes that could provide companies and government more evidence in establishing their policies in governance.

Cost of Capital Estimation for Highway Concessionaires in Chile

In this paper, we present the cost of capital estimation for highway concessionaires in Chile. We estimated the cost of equity and the cost of debt and determined the capital structure for each one of twenty-four concessionaires that operate highways. We based our estimations on the developments of Sharpe (1964), Modigliani and Miller (1958), and Maquieira (2009), which were also compared with the Brusov et al. (2015) developments. We collected stock prices for different highway concessionaires around the world from Google Finance and Reuters’ websites in order to determine the Beta of equity using a representative company. After that, we estimated the cost of equity considering Hamada (1969) and a Capital Asset Pricing Model. Then, we estimated the cost of capital using the cost of debt and the capital structure of Chile’s highway concessionaires. With all above, we were able to determine the Weighted Average Cost of Capital (WACC) for highway concessions which ranges from 5.49 to 6.62%.

Measuring systemic risk in the European banking sector: a copula CoVaR approach

ABSTRACTWe propose a new methodology based on copula functions to estimate CoVaR, the Value-at-Risk (VaR) of the financial system conditional on an institution being under financial distress. Our Copula CoVaR approach provides simple, closed-form expressions for various definitions of CoVaR for a broad range of copula families and allows the CoVaR of an institution to have time-varying exposure to its VaR. We extend this approach to estimate other ‘co-risk’ measures such as Conditional Expected Shortfall (CoES). We focus on a portfolio of large European banks and examine the existence of common market factors triggering systemic risk episodes. Further, we analyse the extent to which bank-specific characteristics such as size, leverage, and equity beta are associated with institutions' contribution to systemic risk and highlight the importance of liquidity risk at the outset of the financial crisis in summer 2007. Finally, we investigate the link between macroeconomy and systemic risk and find that changes in major macroeconomic variables can contribute significantly to systemic risk.

Risk-shifting, equity risk, and the distress puzzle

Higher default probabilities are associated with lower future stock returns. The anomaly cannot be explained by strategic shareholder actions, traditional risk factors, characteristics, or mispricing, but, instead, is consistent with a risk-shifting hypothesis. Consistent with the risk-shifting hypothesis, we find that distressed firms tend to overinvest, destroy value, and exhaust their cash flows. Effects are concentrated in firms with wide credit spreads, firms with no convertible debt, and in cases where CEOs receive above-average equity-based compensation. As default risk rises, credit spreads rise, equity betas fall, and equity returns fall.

Distressed Stocks in Distressed Times

Financially distressed stocks do not underperform healthy stocks when the entire economy is in distress. The asset beta and financial leverage of distressed stocks rise significantly after market downturns, resulting in a dramatic increase in equity beta. Hence, a long/short healthy-minus-distressed trading strategy leads to significant losses when the market rebounds. Managing this risk mitigates the severe losses of financial-distress strategies and significantly improves their Sharpe ratios. Our results remain strongly significant controlling for the momentum effect and are robust to various estimation procedures.

The Determinants of Systematic Risk: A Firm Lifecycle Perspective

This paper investigates how of systematic risk varies over the lifecycle of the firm. If market equity beta is determined by firm characteristics as the literature on the determinants of systematic risk holds, and if those characteristics change over the lifecycle of the firm following a definite pattern as firm lifecycle theory suggests, then market equity beta should change over the lifecycle of the firm following a predictable pattern. Our findings indicate that, holding other determinants of beta constant, the coefficient of systematic risk tends to fall in magnitude following a nonlinear pattern as firm age increases. In addition, we find that the volatility of market equity beta also tends to fall over the lifecycle of the firm. We argue that our main variable of concern, i.e. firm age, proxies for variables that have hitherto been omitted in the literature on the determinants of systematic risk. In particular, we maintain that firm age may proxy for the positive reputation that firms acquire over time with shareholders. This research is useful for both practitioners and researchers in that it may suggest ways to adjust empirical estimates of systematic risk. In addition, our results are important for research on beta forecasting as they show that the length of the stationary interval of betas is shorter for young companies, so that beta forecasting may be less accurate for firms in the early stages of their lifecycle compared to beta forecasting for mature firms.

Strategic Default and Capital Structure Decision

This paper investigates whether overleverage identifies companies' strategic default incentives. The results show that overlevered firms have lower equity beta than their counterparts. The strategic default option becomes more valuable when the firms are overlevered. Firms are more likely to be overlevered when they have more strategic advantages over their debt holders (i.e. high liquidation costs, high shareholder's bargaining power, and low renegotiation frictions). In addition, for bankrupt firms, overleverage successfully identifies the high probability of filing for the reorganisation bankruptcy code and emerging from the reorganisation plan. Overall, these findings suggest that overleverage is the outcome of an endogenous capital structure decision, which implies a strategic incentive to default.

Estimación robusta de betas y el ratio de cobertura sobre futuros de índices bursátiles en el Mercado Integrado Latinoamericano (MILA)

This paper examines the effect exerted by outliers in the equity betas in the Integrated Latin American Market (MILA), estimated by two different methods: ordinary least squares (OLS) and robust estimation (RMM). To illustrate the empirical relevance of the estimated betas, we evaluate the hedging ratio using stock index futures. The results indicate that the estimates made by the RMM method provide a better fit and increase the efficiency of a hedging strategy when there are outliers in the estimation window of beta.

The equity-like behaviour of sovereign bonds

Using a rich dataset of high frequency historical information from 2004 to 2013 we study the determinants of European sovereign bond returns over calm and crisis periods. We find that the sign of the equity beta crucially depends on country risk. In low risk countries, government bonds represent a natural hedge against equity risk as the equity beta is negative regardless of market conditions. On the other hand, government bonds of high risk countries lose their “safe-asset” status and exhibit more equity-like behaviour during the sovereign debt crisis, with positive and strongly significant co-movements relative to the stock market. Our estimates indicate that the equity beta switches from negative to positive when a sovereign’s credit spread rises above 2%. We find that the decoupling of the government bond market between high risk and low risk countries implies that indiscriminate portfolio diversification does not pay. Instead, “prudent diversification” appears to offer superior risk adjusted returns in periods of sovereign stress and through the economic cycle.

Capital Change and the Cost of Equity: Evidence from Bulgarian Banks. Is there a Modigliani-Miller offset?

This paper studies the cost of equity and capital of three Bulgarian listed banks in the framework of the Modigliani-Miller (MM) theory of capital structure. It measures the impact of an increase in capital ratios on the equity risk (equity beta) of these banks. It finds that, historically, while more equity results in lower banks’ systematic risk no causal relationship can be found between an increase in capital ratios and the predicted by the theory decrease in banks’ systematic risk. MM irrelevance argument holds that a decrease in equity risk will lead to a decrease in the shareholders’ required (and expected) return on equity and thus offsetting the higher equity (capital) level. Thus, the results cannot find evidence in support of the so-called 'Modigliani-Miller' offset.

Practical Applications of Can the Whole Be More Than the Sum of the Parts? Bottom-Up versus Top-Down Multifactor Portfolio Construction

Jenn Bender and Taie Wang of State Street Global Advisors set out to answer a question their clients had been asking: What is the difference between investing in single-factor ETFs versus investing a single multifactor ETF containing the same factors? Bender, who is Managing Director and Director of Research for Global Equity Beta at SSGA, says “It was hard to definitively answer, given that the various single and multifactor portfolios are based on different methodologies.” The authors’ findings show that single-factor portfolio spersistently under perform. Although they expected to see some difference between the strategies, the level of out performance genuinely surprised them. The clue to the disparity is in how factors interact with each other.

Two Centuries of Price-Return Momentum

Having created a monthly dataset of US security prices between 1801 and 1926, we conduct out-of-sample tests of price-return momentum strategies that have been implemented in the post-1925 datasets. The additional time-series data strengthen the evidence that price momentum is dynamically exposed to market risk, conditional on the sign and duration of the trailing market state. On average, in the beginning of positive market states, momentum’s equity beta is opposite to the new market direction, which generates a negative contribution to momentum profits around market turning points. A dynamically hedged momentum strategy significantly outperforms the unhedged strategy.

Revisiting Inflation and Individual Equities

This paper reexamines the inflation-hedging properties of individual equities. When determining inflation betas for individual equities we use multivariate regressions, which utilize all available data and account for equity market factor and reporting lags in inflation indices. We show how such an approach can even be used to create inflation-sensitive strategies for customized inflation indices. The facet of customization is necessary since different kinds of inflation impact different investors. For example, in retirement an investor is more concerned about medical expenses. We illustrate strategies for the US headline CPI, Forbes Cost of Living Extremely Well Index (CLEWI), and the US Medical Care Price Index. When constructing inflation-sensitive portfolios, besides using equally weighting scheme, we show how alternative weighting schemes can be used alongside the choice of inflation sensitive equities to accentuate inflation sensitivity, by using maximum beta optimization or to manage equity risk exposure — low volatility and equity beta as result of using minimum volatility optimization.

Default Option Exercise Over the Financial Crisis and Beyond

We document increased ruthlessness of mortgage default option exercise over the financial crisis and beyond. For a given level of negative equity, borrower propensity to default rose markedly over the 2007-2012 period and among hard-hit metropolitan areas. We show that elevated default option exercise was more salient to crisis-period defaults than were adverse shocks to home equity. Analysis of time-series and panel data indicates that proxies for the local business cycle, consumer sentiment, and federal foreclosure mitigation programs explain much of the rise in the negative equity beta. Difference-in-difference tests further corroborate unintended consequences of the Home Affordable Modification Program (HAMP) on borrower default option exercise.

The Equity-Like Features of Sovereign Bonds

Using a rich dataset of high frequency historical information from 2004 to 2013 we study the determinants of European sovereign bond returns over calm and crisis periods. We find that the sign of the equity beta crucially depends on country risk. In low risk countries, government bonds represent a natural hedge against equity risk as the equity beta is negative regardless of market conditions. On the other hand, government bonds of high risk countries lose their “safe-asset” status and exhibit more equity-like behaviour during the sovereign debt crisis, with positive and strongly significant co-movements relative to the stock market. Our estimates indicate that the equity beta switches from negative to positive when a sovereign’s credit spread rises above 2%. We find that the decoupling of the government bond market between high risk and low risk countries implies that indiscriminate portfolio diversification does not pay. Instead, “prudent diversification” appears to offer superior risk adjusted returns in periods of sovereign stress and through the economic cycle.

Leverage, Default Risk, and the Cross-Section of Equity and Firm Returns

I examine the two components of default risk and how they relate to stock returns, size, and book-to-market. High default risk firms do not necessarily have high levels of systematic asset risk. I show that the two components of default risk, asset volatility and leverage, are negatively related. I provide evidence that leverage differences across firms are not reflected in equity betas. Therefore, I construct firm returns using estimates of firm’s debt returns. The results indicate that a large part of the value premium and some of the size premium can be explained by differences in leverage across firms.

Tax Rates Effects on the Risk Level of Listed Viet Nam Wholesale and Retail Firms during Global Economic Crisis 2007-2009

The emerging stock market in Viet Nam has been developed since 2006 and was affected by the financial crisis 2007-2009. This study analyzes the impacts of tax policy on market risk for the listed firms in the wholesale and retail industry as it becomes necessary. First, by using quantitative and analytical methods to estimate asset and equity beta of total 9 listed companies in Viet Nam wholesale and retail industry with a proper traditional model, we found out that the beta values, in general, for many institutions are acceptable. Second, under 3 different scenarios of changing tax rates (20%, 25% and 28%), we recognized that there is not large disperse in equity beta values, estimated at 0,603, 0,609 and 0,613. Third, by changing tax rates in 3 scenarios (25%, 20% and 28%), we recognized that both equity and asset beta mean values have positive relationship with the increasing levels of tax rate. Finally, this paper provides some outcomes that could provide companies and government more evidence in establishing their policies in governance. Keywords : beta, capital structure, economic crisis, risk, tax rate, wholesale and retail industry