Security Prices Research Articles

On asset pricing in a binomial model with fixed and proportional transaction costs, portfolio constraints and dividends

AbstractWe extend the classical binomial model proposed by Cox, Ross, and Rubinstein for derivative security pricing to encompass both fixed and proportional transaction costs, portfolio constraints including margin requirements, and dividend-paying assets. Our focus is on studying option hedging within this enriched framework. Initially, we establish the existence of a hedging strategy in this context. Subsequently, we determine the optimal hedging strategy and its associated initial cost by decomposing the problem into a sequence of hedging problems. To illustrate our approach, we present a numerical example within a 3-period binomial model.

Investigating the market tightness of selected stocks in the Johannesburg Stock Exchange

The market tightness of equity securities is an integral component of financial market because it supports smooth trading and absorb market shocks. However, the contention has always been to effectively determine the level of tightness in equity securities with the application of proper methodology in order to make informed decisions. Therefore, aim of this study was to examine the level of market tightness in selected stocks in the Johannesburg stock exchange. Using a variance ratio model, the findings of this study indicates that most securities trading on the exchange lack market tightness. This was evident in the difference between the one, two and three months variances that were not equal to 1 . Therefore, a specialist system should be introduced in order to facilitate the execution of trades without significantly moving the prices of equity securities. This study improves the frontier of knowledge regarding liquidity management, by empirically investigating the market tightness of equity securities.

Dynamic Asset Pricing in a Unified Bachelier–Black–Scholes–Merton Model

We present a unified, market-complete model that integrates both Bachelier and Black–Scholes–Merton frameworks for asset pricing. The model allows for the study, within a unified framework, of asset pricing in a natural world that experiences the possibility of negative security prices or riskless rates. Unlike the classical Black–Scholes–Merton, we show that option pricing in the unified model differs depending on whether the replicating, self-financing portfolio uses riskless bonds or a single riskless bank account. We derive option price formulas and extend our analysis to the term structure of interest rates by deriving the pricing of zero-coupon bonds, forward contracts, and futures contracts. We identify a necessary condition for the unified model to support a perpetual derivative. Discrete binomial pricing under the unified model is also developed. In every scenario analyzed, we show that the unified model simplifies to the standard Black–Scholes–Merton pricing under specific limits and provides pricing in the Bachelier model limit. We note that the Bachelier limit within the unified model allows for positive riskless rates. The unified model prompts us to speculate on the possibility of a mixed multiplicative and additive deflator model for risk-neutral option pricing.

Substitutive effects of accounting transparency and corporate governance on firm value

Recently, there has been increasing emphasis on the importance of accounting transparency and corporate governance. While previous studies have individually examined their impact on firm values, this paper investigates their combined effects. Using data from the Compustat and Center for Research in Security Prices databases obtained through Wharton Research Data Services, we measure accounting transparency and company value, and we employ the E-index as a measure of corporate governance. This study conducts firm, year, and industry fixed effects regressions on a large panel dataset comprising 21,476 firm-year observations. According to our research, both accounting transparency and good corporate governance have negative effects on the value of a company. This means that spending money to improve both may end up costing more than it benefits, which could lower the value of the company. These results support the notion that investors may see that maintaining high levels of accounting transparency and corporate governance can be excessively costly, while an overemphasis on these two metrics could potentially limit the flexibility and creativity of management. These findings have implications for managers tasked with achieving a balance between robust corporate governance, enhanced accounting transparency, and corporate value considerations.

Pricing of insurance-linked securities: a multi-peril approach

In this paper we build a methodology for pricing of insurance-linked securities which are tied to multiple natural catastrophe perils. As a representative example, we construct a multi-peril catastrophe (CAT) bond which can be linked to the industry loss indices or actual losses incurred by an insurer. We provide pricing formulas for such CAT bonds. We illustrate the introduced methodology on the US natural catastrophe data obtained from Property Claim Services (PCS). Within this dataset, we specifically examine two types of risks: losses associated with wind and thunderstorm events, and those linked to winter storm events. Then, we fit and validate the underlying compound non-homogeneous Poisson processes taking into account the fact that the data are left-truncated. The best fitted loss distributions appear to be Burr and Generalised Extreme Value and for the first peril and log-normal for the second. Finally, we visualise the zero-coupon CAT bond prices for the selected best-fitted models.

Lessons from the Collapse of Silicon Valley Bank

The Federal Reserve's consecutive interest rate hikes led to a decline in the prices of US Treasuries and mortgage-backed securities (MBS), which comprised a significant portion of Silicon Valley Bank (SVB)'s asset portfolio. As a result, SVB experienced substantial floating losses, exceeding its owner's equity, creating immense pressure on its assets and liabilities. The analysis also highlights the simple deposit and asset structures of SVB, with a high proportion of demand deposits and a significant allocation to bonds. The aggressive interest rate hikes by the Federal Reserve, coupled with financing difficulties for startups, accelerated deposit consumption and intensified debt pressure for SVB. Furthermore, the article reveals the low coverage rate of deposit insurance, particularly at SVB, where only 7% of deposits are insured. This adds to the vulnerability of SVB and its depositors. In conclusion, this article examines SVB's balance sheet and interest rate risk exposure, identifies shortcomings in the management supervision system, and provides three reflections on the financial event.

The quest for delightful experiences and profitable enterprises: how customer delight impacts financial performance

PurposeThe present research sought to analyze the effects of customer delight on both internal and external financial structures of publicly traded, service firms.Design/methodology/approachPrimary (i.e. survey) and secondary (i.e. financial records) data sources were gathered. A total of 685 participants responded to one questionnaire focusing on hotels and another one focused on restaurants, both of which measured levels of customer delight and satisfaction. Financial data were gathered from Center for Research in Security Prices, CRSP/COMPUSTAT.FindingsResults of MANOVA revealed that there was a significant difference in the net profit margin (NPM) based on customer delight. Canonical correlation results exposed a significant correlation between satisfaction and delight combined and the financial performance measures (net profit margin, cash flow margin, return on assets and b-beta) combined.Practical implicationsBy delighting their customers, managers will achieve higher profit margins. However, these are not likely to result in improved cash flow margin or return on assets. The effects of COVID-19 can alter yearly returns; thus, longitudinal research is needed to continue testing for the effects on delight on financial performance.Originality/valueThe relationship between delight and financial measures had not been previously determined (notwithstanding a few studies using substitute measures for financial performance). The present study uses actual data from the financial filings to empirically test their relationship to customer delight.

The Price of Active Security in Cryptographic Protocols

We construct the first actively-secure Multi-Party Computation (MPC) protocols with an arbitrary number of parties in the dishonest majority setting, for an arbitrary field F\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$${\\mathbb {F}}$$\\end{document} with constant communication overhead over the “passive-GMW” protocol (Goldreich, Micali and Wigderson, STOC ‘87). Our protocols rely on passive implementations of Oblivious Transfer (OT) in the Boolean setting and Oblivious Linear function Evaluation (OLE) in the arithmetic setting. Previously, such protocols were only known over sufficiently large fields (Genkin et al. STOC ‘14) or a constant number of parties (Ishai et al. CRYPTO ‘08). Conceptually, our protocols are obtained via a new compiler from a passively-secure protocol for a distributed multiplication functionality FMULT\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$${{{\\mathcal {F}}}}_{\\scriptscriptstyle \ extrm{MULT}}$$\\end{document}, to an actively-secure protocol for general functionalities. Roughly, FMULT\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$${{{\\mathcal {F}}}}_{\\scriptscriptstyle \ extrm{MULT}}$$\\end{document} is parameterized by a linear-secret sharing scheme S\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$${{{\\mathcal {S}}}}$$\\end{document}, where it takes S\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$${{{\\mathcal {S}}}}$$\\end{document}-shares of two secrets and returns S\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$${{{\\mathcal {S}}}}$$\\end{document}-shares of their product. We show that our compilation is concretely efficient for sufficiently large fields, resulting in an overhead of 2 when securely computing natural circuits. Our compiler has two additional benefits: (1) It can rely on any passive implementation of FMULT\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$${{{\\mathcal {F}}}}_{\\scriptscriptstyle \ extrm{MULT}}$$\\end{document}, which, besides the standard implementation based on OT (for Boolean) and OLE (for arithmetic), allows us to rely on implementations based on threshold cryptosystems (Cramer et al. Eurocrypt ‘01), and (2) it can rely on weaker-than-passive (i.e., imperfect/leaky) implementations, which in some parameter regimes yield actively-secure protocols with overhead less than 2. Instantiating this compiler with an “honest-majority” implementation of FMULT\\documentclass[12pt]{minimal} \\usepackage{amsmath} \\usepackage{wasysym} \\usepackage{amsfonts} \\usepackage{amssymb} \\usepackage{amsbsy} \\usepackage{mathrsfs} \\usepackage{upgreek} \\setlength{\\oddsidemargin}{-69pt} \\begin{document}$${{{\\mathcal {F}}}}_{\\scriptscriptstyle \ extrm{MULT}}$$\\end{document}, we obtain the first honest-majority protocol (with up to one-third corruptions) for Boolean circuits with constant communication overhead over the best passive protocol (Damgård and Nielsen, CRYPTO ‘07).

Trends in Common Ownership among Insurers in Medicare Part D.

Recent studies document the rising prevalence of common ownership by institutional investors in specific industries. Those investors offer products, such as mutual and index funds, to trade securities on behalf of others and often own shares of multiple firms in the same industry to diversify portfolios. However, at present, few studies focus on common ownership trends in health care. This paper examines institutional investors' common ownership in the major insurers offering plans in the Medicare Part D stand-alone prescription drug plan (PDP) market between 2013 and 2020. Using data from the Securities and Exchange Commission (SEC) database and the Center for Research in Securities Prices, we compute the percentages of outstanding shares of each insurer owned by institutional investors. Data visualization and network analysis are employed to assess the trends in common ownership among major insurers. We document a high prevalence of and substantial increase in shared institutional investors in the PDP market. From 2013 to 2020, the degree of common ownership increased by 7% on average, and the common ownership network became more connected. Common ownership also varies across the 34 PDP regions depending on their reliance on listed insurers, that are traded in the stock exchange, offering stand-alone PDPs. High and rising common ownership in the Medicare Part D PDP market raises policy questions about potential effects on plan offerings, premiums, and quality for consumers.

Assessing proxies for market prices of thinly traded assets with scheduled cash flows

Pseudo-market prices of infrequently traded assets with scheduled cash flows – commercial real estate appraisals and matrix prices of commercial mortgage backed securities – are compared against a VAR model to assess the extent to which these widely-used proxies are grounded in economic fundamentals. Property appraisals fail to fully incorporate the economic fundamentals underlying commercial real estate transactions. During the financial crisis, CMBS matrix prices captured underlying economic fundamentals and exhibited little pricing bias. However, matrix prices no longer exhibited such economic discipline after the financial crisis. Incorporating VAR forecasts considerably improves the predictive ability of appraisals and matrix prices.

Impact Of Corporate Announcements On Security Prices

Impact Of Corporate Announcements On Security Prices

Valuation and pricing of equity securities: A test of CAPM in a developing market economy

The study is on valuation and pricing of equity securities. A test of CAPM in a developing market economy (2006-2020) The major aim of the study is to investigate the capability and relevance of CAPMt to equity prices in Nigeria stock market from 2006-2020 and show if the model empirical findings are in line with results obtained from the developed markets. The model concerned in the study is Capital asset pricing model (CAPM) by Sharp 1962. from (2006-2020) Using a sample of 62 companies derived from the eleven major sectors of the Nigeria economy and Using panel data analysis and valuation status analysis results showed that, CAPM demonstrated positive and in significant impact on stock return(RI) of the Nigeria stock market. These variables do not play role on explaining the movement in the value of stock return of the selected firms within the period, The result of the relationship between actual stock return (RI) and models calculated return obtained is dominated by under valuations and over valuations with few appropriately valued stocks which are insignificant in nature, again the r2 and coefficient of determination < 1 or even negative in some cases .p value >0.05, and the result obtained in Nigeria is not the same with that of the developed economy. It is therefore recommended that, portfolio managers and other financial analysts should not adopt CAPM, as a tool to examine, explain. predict or assess accurately return of stocks traded in the Nigeria stock market.

Debt-stabilizing properties of GDP-linked securities: A macro-finance perspective

We study the debt-stabilizing properties of indexing debt to GDP using a consumption-based macro-finance model. To this end, we derive quasi-analytical pricing formulas for any type of bond/equity by exploiting the discretization of the state-space, making large-scale simulations tractable. We find that GDP-linked security prices would embed time-varying risk premiums of about 40 basis points. For a fixed budget surplus, issuing GDP-linked securities does not imply more beneficial debt-to-GDP ratios in the long-run, while the debt-stabilizing budget surplus is more predictable at the expense of being higher. Our findings call into question the view that such securities tame debt.

Disclosure regime for climate change: proposal and prospects for India Inc

ABSTRACT Climate change is a financial risk to companies, and those that disregard this will have to deal with losses due to extreme weather events, new regulations, or the disruption of the supply chain. Companies must disclose climate-related financial implications to enable informed decision-making by investors and other stakeholders. Any indifference or disregard for climate-related disclosures will harm the investors who may trade based on insufficient information and prices of securities that do not account for climate risks. In India, disclosures are mandated for companies under the Companies Act 2013 and various Securities and Exchange Board of India Regulations. This paper will explore the adequacy of the current disclosure regime concerning climate change and argue that, although information regarding climate risks falls within the ambit of the current set of mandated disclosures, it is insufficient. The paper concludes by making a case for mandatory climate disclosures under the Companies Act.

Predicting Healthcare Mutual Fund Performance Using Deep Learning and Linear Regression

Following the COVID-19 pandemic, the healthcare sector has emerged as a resilient and profitable domain amidst market fluctuations. Consequently, investing in healthcare securities, particularly through mutual funds, has gained traction. Existing research on predicting future prices of healthcare securities has been predominantly reliant on historical trading data, limiting predictive accuracy and scope. This study aims to overcome these constraints by integrating a diverse set of twelve external factors spanning economic, industrial, and company-specific domains to enhance predictive models. Employing Long Short-Term Memory (LSTM) and Multiple Linear Regression (MLR) techniques, the study evaluates the effectiveness of this multifaceted approach. Results indicate that incorporating various influencing factors beyond historical data significantly improves price prediction accuracy. Moreover, the utilization of LSTM alongside this comprehensive dataset yields comparable predictive outcomes to those obtained solely from historical data. Thus, this study highlights the potential of leveraging diverse external factors for more robust forecasting of mutual fund prices within the healthcare sector.

Intermediary frictions and convertible bond pricing

Buy-and-hedge intermediaries are important investors in the convertible bond market as they intermediate between firms that require capital quickly and investors requiring time to assess the security. Their strategy requires them to manage the trade-offs involved with the costs and benefits of hedging. We find that prices of convertible securities reflect the costs that intermediaries incur when managing their positions. Especially cross-sectional and within-bond variation of intermediaries’ loan costs helps explain variation in convertible bond underpricing.

Non-monotonicity of risk-expected return trade-off in pricing of equity securities: the case of premium board of Nigerian Stock Exchange

PurposeA stylized fact in finance literature is the belief in positive relationship between ex ante return and risk. Hence, a rational investor, by utility preference axiom can only consider committing fund in asset which promises commensurate higher return for higher risk. Questions have been asked as to whether this holds true across securities, sectors and markets. Empirical evidence appears less convincing, especially in developing markets. Accordingly, the author investigates the nature of reward for taking risk in the Nigerian Capital Market within the context of individual assets and markets.Design/methodology/approachThe author employed ex post design to collect weekly stock prices of firms listed on the Premium Board of Nigerian Stock Exchange for period 2014–2022 to attempt to answer research questions. Data were analyzed using a unique M Vec TGarch-in-Mean model considered to be robust in handling many assets, and hence portfolio management.FindingsThe study found that idea of risk-expected return trade-off is perhaps more general than as depicted by traditional finance literature. The regression revealed that conditional variance and covariance risks reveal minimal or no differences in sign and sizes of coefficients. However, standard errors were also found to be large suggesting somewhat inconclusive evidence of existence of defined incentive structure for taking additional risk in the market.Originality/valueIn terms of choice of methodology and outcomes, this research adds substantial value to body of knowledge. The adapted multivariate model used in this paper is a rare approach especially for management of portfolios in developing markets. Remarkably, the research found empirical evidence that positive risk-expected return trade-off, as known in mainstream literature, is not supported especially using a typical developing country data.

COVID-19, Economic Package and Indian Stock Market: An Event Analysis

The present study is an attempt to analyse the behaviour of securities around the outbreak of the COVID-19 pandemic and the declaration of an economic package by the government of India. In this study, daily prices of securities constituting the BSE 100 index are considered as these securities are highly traded and their trading impact would immediately reflect on the index. To present a sector-specific analysis, the securities are further classified based on sectors and are analysed using the event study methodology. Average abnormal returns (AARs) and cumulative average abnormal returns (CAARs) for overall market and for each sector have been calculated and their significance have been tested using parametric T-statistics, standardised cross-sectional test and non-parametric sign test. Based on the analysis, the study concluded that it was not the pandemic but the actions towards controlling the pandemic that caused a negative impact on the Indian stock market. The economic package declared by the government of India to boost the economy also turned out to be futile and failed in achieving its objectives. Among the sectors, only the technology sector has been positively impacted by the pandemic. The outcome of the study would be beneficial to the trading community in identifying the sectors/securities that would act as hedging in the pandemic situations. JEL Codes: E44, G1, G14, G18

Causal relation and volatility spillover between commodity market and equity market of India using VAR Granger Causality and BEKK-GARCH Model

The financial markets play a discerning role in accentuating the growth of industry and commerce whereas, a volatile market has whopping reverberations on economic and financial stability of a country. The interconnectedness and reciprocity among the financial markets in economies are veraciously liable for the pricing of securities and provide investors, hedgers and speculators with copious opportunities for portfolio diversification. In this context, the study has been taken up to explore the relationship between the commodity and stock markets of India. The study has used the daily closing prices of MCX iComdex composite index, BSE Sensex and NSE Nifty 50 index from 1st January 2016 to 31st December 2022. The Johansen’s cointegration test estimates the absence of cointegration between the indices under study. The results of VAR Granger Causality Tests substantiate a bi-directional causality between the equity and commodity market of India. Whereas, it refutes any causal relationship between the Sensex and Nifty index. The estimates of BEKK-GARCH model confirm a significant volatility spillover between the two markets. The empirical outcomes of the study have poignant implications for all the stakeholders such as individual and institutional investors, policymakers, government agencies, traders, hedgers and other participants in the financial markets.

Financial analysts’ coverage, forecast accuracy, and climate change vulnerability

The effects of climate change are real. The understanding of how these effects manifest in business operations is still nascent, but even more so, how they affect users of company information. This study sought to determine whether and how climate change vulnerability relates to an important business stakeholder, the financial analyst. We hypothesize that climate change vulnerabilities reduce both analysts’ following and analysts’ forecast accuracy. Using data from the Center for Research in Security Prices (CRSP), Compustat, Audit Analytics, Institutional Shareholder Services (ISS), and London Stock Exchange Group (LSEG), we construct a sample of 3,754 firm-year observations comprising 1,269 unique firms for the years 2019–2022. Our proxy for climate change vulnerability is the environmental, social, and governance (ESG) controversies score. We estimate cross-sectional regression models to test our hypotheses. We find support for our hypotheses. Also, we find that firms with high climate change vulnerability have significantly lower analyst coverage than those with low vulnerability. We also find that financial analyst forecasts are significantly less accurate for firms with higher vulnerability. However, this effect is only observable in industries classified as more exposed to the effects of climate change. We recognize the noisy nature of our proxy for vulnerability to climate change. Cognizant of this, we conduct further analysis to allay concerns of bias in our findings. We make important contributions to the existing literature by not only showing that ESG controversies score is an appropriate proxy for climate change vulnerability but also by adducing empirical evidence that climate change vulnerability affects how analysts react to and use company financial information. We discuss the significance and limitations of our results and make recommendations for further research.