Short-term Securities Research Articles

Tunisian bank asset-liability management: A canonical correlation analysis

The aim of this paper is to analyze asset-liability management behaviour in Tunisian banks between 2000 and 2014. The liberalization process in the Tunisian economy coupled with global developments exposed banks for various kinds of risks (interest rate risk, liquidity risk, exchange risk, operational risk etc...) which have a direct impact on their profitability and efficiency. Then asset liability management is one of a most important tool for decision making that sets out to maximize stakeholder value and an instrument to measure the sustainability of the financial sector in a country. A sample consisting of public, private, and foreign banks operating in the Tunisian territory was considered and the multivariate statistical technique, canonical correlation analysis has been used to capture the nature and strength of the relationship between the assets and liabilities in these banks. Assets analyzed were subdivided into fixed assets, liquid assets, short-term loans, long-term loans, short-term securities and long-term securities; and liabilities into net worth, borrowings, short-term deposits and long-term deposits. From the analysis, different degrees of the association have been found among various constituents of assets and liabilities and among banks. In most cases, there has been a poor and judicious matching of assets and liabilities in terms of their explicit cost and revenue as well as their maturity and liquidity. It is further observed that most Tunisian banks were asset-managed: these banks were actively managing assets and liabilities and were dependent on how well the assets are managed.

Investor Horizons and the Reaction to Earnings Announcements

I study how investor horizons affect the price reaction of the stocks to earnings announcements. In the theory, short-run investors trade frequently, while long-run traders hold and trade on fundamentals. The model predicts that the reaction to an earnings announcement is shifted downward for stocks held short-term relative to those held long-term: a positive earnings surprise is less of a positive; a negative surprise is a larger negative. I test this prediction. I find that the reaction to earnings for ``short-term securities'' is dominated by the corresponding reaction for 'long-term securities.' The discrepancy persists over 75 days. These results are independent of security characteristics; they are robust to controls that capture various aspects of growth or value stocks.

Stewardship and collateral

Recent case law has confirmed that, under English law, investors in indirectly held securities are not holders of the underlying shares or bonds, and accordingly cannot enforce the rights of shareholders or bondholders against the issuer. This disenfranchisement of investors is a problem that has attracted an active debate amongst distinguished commentators.1 Both legal and operational solutions are being sought and offered. This discussion turns to another dimension of the problem, namely the commercial pressures that tend to separate investors from their entitlements. These pressures are associated with the ascendant phenomenon of securities finance, whereby the purpose of more and more long securities positions is not investment, but collateral. The interests of investors and those of collateral takers differ and sometimes conflict. Investors want stable and certain relations with issuers. But the operational changes that have separated investors from entitlements have served the interests of collateral takers in the short-term securities finance markets, in which client securities are used and reused, by promoting liquidity and certain enforcement rights for the collateral taker. This in turn secures the supply of cheap credit.

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank’s three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This "collateral trade" effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the observed yield curve steepening.

Financial implications of transitioning to the Wall Street Reform and Consumer Protection Act of 2010 and Basel III

The Wall Street Reform and Consumer Protection Act of 2010 and Basel III have spawned many new regulatory rules related to capital, risk management and liquidity. Although the two regulatory initiatives are not fully aligned, they clearly require systemically important banks to increase funding by equity capital, commit more resources to short-term marketable securities (and long-term debt for Basel III) and enhance risk management procedures. This article empirically addresses how large US banks with assets exceeding US$50 billion changed asset/liability management between 2010 when the Act was enacted and 2014 when more restrictive rules emanating from the law and international regulation are phased in. The analysis also evaluates how portfolio shifts positively and negatively impact share value, return on equity and return on assets.

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks. Using a unique security-level data set, we find that the European Central Bank’s three-year Long-Term Refinancing Operation incentivized Portuguese banks to purchase short-term domestic government bonds that could be pledged to obtain central bank liquidity. This “collateral trade” effect is large, as banks purchased short-term bonds equivalent to 8.4% of amount outstanding. The resumption of public debt issuance is consistent with a strategic reaction of the debt agency to the observed yield curve steepening. JEL Classification: E58, G21, G28, H63

Medical Net Discount Rates: Updated and Re-examined

Abstract1 Schap, Guest and Kraynak (2013) examines time series properties of medical net discount rates (MNDRs) based on three different, short-term Treasury securities. The article finds attributes of stationarity in each of the series examined and notes greater support for total offset of interest rates and medical cost growth rates than does previously published research. The present study makes four adjustments to Schap, Guest and Kraynak (2013). First, the data set is updated by two years and four months. Second, the t-test applied in the original study and also used in earlier studies of total offset fails to account for autocorrelated error terms, so a substitute test is applied to both the original data set and the newly extended data set, with results reported. Third, Phillips-Perron testing is conducted in addition to Augmented Dickey-Fuller and Kwiatkowski-Phillips-Schmidt-Shin testing of stationarity of the various series analyzed, with results reported. Finally, Zivot-Andrews testing is applied diagnostically, to identify stationary sub-series of MNDRs, similar to an approach used successfully to identify stationary sub-series of wage net discount rates (Schap, Baumann and Guest, 2014). The data analysis suggests two options available to practicing forensic economists who endorse the use of Treasury securities of short duration in formulating MNDRs. One option is to use total offset (i.e., a zero MNDR), based on modestly favorable empirical support in the period 1981:01 to 2014:10. The alternative option would be to rely on a body of evidence amassed over a shorter time frame, from 2001:01 to 2014:10, but which has remarkably strong stationarity properties and yields MNDRs between minus 1.5 and minus 2.0% (i.e., an implicit forecast of medical cost growth exceeding the discount factor).

Explaining Foreign Holdings of Asia's Debt Securities: The Feldstein-Horioka Paradox Revisited

In this paper, we find that home bias is still present in all economies and regions, especially in the case of short-term debt securities, but that there are substantial variations among economies and regions in the strength of home bias, with the Eurozone economies, the US, and developing Asia showing relatively weak home bias and advanced Asia, especially Japan, showing relatively strong home bias. We then examine trends over time in foreign holdings of debt securities and find that capital has been flowing from the US and the Eurozone economies to both advanced Asia (especially Japan) and developing Asia and that foreign holdings of debt securities have been increasing in advanced as well as developing Asia but for different reasons. The main reason in the case of advanced Asia (especially Japan) appears to be higher risk-adjusted returns, whereas the main reason in the case of developing Asia appears to be the growth of debt securities markets combined with relatively weak home bias and (in the case of short-term securities) lower exchange rate volatility. Finally, we find that since the Global Financial Crisis, foreign holdings of debt securities have declined (i.e., that home bias has strengthened) in all economies and regions except developing Asia, where they have increased (except for a temporary decline in 2008) but where their share is still much lower than the optimal share warranted by the capital asset pricing market model.

Long Term Passive Investment Strategies as a Part of Pension Systems

(ProQuest: ... denotes formulae omitted.)IntroductionThe effectiveness of long term investing has been a main topic of various theoretical as well as practical studies. A lot of academicians and financial professionals are supporters of passive investment strategies such as buy & hold or indexing. On other hand there are some studies that show that there are some active investment strategies based on stock picking or market timing, that are able to record superior results.Malkiel (2012) and Bogle (2010) came to conclusion that index investing is as effective as active managed funds in long term. It was proven that on a 16-year time horizon, index funds achieve same results as actively managed funds. These findings have been supported also by other publications. For example Siegel (2014) analysed whole history of U.S. share market and he came to conclusion that passive investment strategies are efficient despite some market collapses, but a long time horizon is needed. A similar conclusion was reached by Graham (2007, 2008).Most of authors support buy & hold strategy, although many of them claim that it should be supported by cost averaging effect. The cost averaging effect limits negative effects of market crashes. The investor buys stocks on a regular basis, regardless market development. If stock market collapses, investor buys stocks at lower prices which results in a lower average purchase cost. Positive results of long term investing using cost averaging effect were presented also by study of Edelson (2007).A detailed analysis of selected long term stock market investment strategies as well as comparison of passive and active investment strategies was conducted also by other authors. For example Pastor and Stambaugh (2012) focused on declining effectiveness of actively managed investment funds. French (2008) came to conclusion that the typical investor would increase his average annual return by 67 basis points over 1980-2006 period if he switched to a passive market Lye (2012) analysed differences between growth and value stocks. Cambell, Polk and Vuolteenaho (2010) analysed systematic risks of stock investing.One of newest contributions to discussion was presented by Fabozzi (2015) who analysed current state of U.S. Pension Benefit Guaranty Corporation (PBGC). He concluded that some changes in investment strategies of funds should be made. He also advises that PBGC should introduce a benchmark for pension fund investments.Some arguments in favour of passive investment strategies were presented by Wingenfeld (2013) who talks about five specific qualitative arguments that are eligible to be a theoretical proponent for passive portfolio management. This topic is in centre of attention of some of Chinese economists as well. For example Wang, Beland and Zhang (2014, 2014) warn that there is a pension system missing in China. It could become a huge problem due to rapidly aging Chinese population.1. MethodologyIn this paper, effects of long term investing over a 30-year time period are analysed. This time horizon enables inclusion of one of European share markets into analysis, as European share indices didn't exist before 80's. The 30-year time horizon is also a usual time of involvement of an individual in a pension scheme.The effects of long term saving and investing on time horizon of last 30 years are examined. The American S&P 500 stock index is used, as American stock market is most liquid one, with a well-documented history. It consists of various share companies across all of sectors of U.S. economy. It also reflects relation between U.S. share market and U.S. economy very well. It is very close to theoretical concept of optimal portfolio. The long term investing in S&P 500 will be compared to long term investing of risk-free short-term securities. …

More Debt Is Not the Answer

By financing the bulk of its debt with short-term securities, the U.S. Treasury has fully exploited the recent low interest rate regime. However, in so doing it has vastly increased the risk associated with refinancing costs. That refinancing risk and continuing deficits have raised concerns about the credit rating for Treasuries—see the S&P downgrade of U.S. Treasuries from AAA to AA+ on August 2, 2011. Private firms issue equity when financing with more debt would impair their credit. This article explores one such option for the Treasury: that is, selling, in a securitized form, a percentage of the gross domestic product for a fixed term. In effect, the Treasury raises capital, buys a financial hedge, and sells a consumption hedge to investors by using a selfamortizing security. However, the U.S. Treasury is not an innovative institution because it has no way to deal with failures. We suggest a method for coping with losses and note that the potential damage to the taxpayer from the coming rise in interest rates should be sufficient motivation for the Treasury to take steps now to make itself more proactive by designing and offering products with more value added for both the buyer and seller.

The Future of Banking System and Economic Development in Nigeria

This study examined the future of banking system and economic development in Nigeria in the context of the demand following hypothesis. Although, the Nigerian economy has witnessed steady growth, the productive base of the economy is narrow. This therefore requires that banks must engage in an effective financial intermediation process to aid the transformation of the real sector as an engine of growth. However, while the deposits mobilized and assets base of the commercial banks has increased in leap and bounds, the real sector access to credit is on the decline. Rather, the bulk of the funds are invested on government short term securities given their risk free characteristics which reflect the lazy bank syndrome. Prohibitively high cost of credit and existence of hidden charges also inhibit real sector access to commercial banks loan. Hence, to reconnect the banking system with the real sector, there is a need to discourage armchair banking business model and encourage supportive banking business model, lending and secure appropriate maturity profile of loans to the real sectors, promote modified collateral bank lending model, and encourage specialization of bank branches. These are expected to aid the growth of the real sector and fast track the process of economic development in Nigeria.

Why US Monetary Policy Has Not Been Working

After the onset of the Great Recession in 2008 the Federal Reserve engaged in very expansionary monetary policy, which resulted in near zero interest rates on short-term securities. This policy, together with record fiscal deficits, failed to restore full employment as historic experiences would have predicted it should. Explanations for this phenomenon are presented and evaluated in this paper: inadequate fiscal deficits; time consuming deleveraging of balance sheets; collapse of the inter-bank market; policies of banks creating specific debt to equity ratios as mandated by the Dodd Frank Act and Basel Rules; and lack of risk-adjusted profitable investment opportunities and general policy uncertainty leading to bank borrowing. The latter has been caused by the cost and uncertainty created by record levels of regulation, anti-business rhetoric of the Obama administration and the public’s concern about the uncertain effects of future inflation and large fiscal deficits. The best explanations are argued to be deleveraging policies and the shortage of profitable investments due to regulation and public concerns over inflation, deficits, higher taxes and the criminal and civil prosecution of business.

Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks

Until 1935, Federal Reserve Banks from time to time purchased short-term securities directly from the United States Treasury to facilitate Treasury cash management operations. The authority to undertake such purchases provided a robust safety net that ensured Treasury could meet its obligations even in the event of an unforeseen depletion of its cash balances. Congress prohibited direct purchases in 1935, but subsequently provided a limited wartime exemption in 1942. The exemption was renewed from time to time following the conclusion of the war but ultimately was allowed to expire in 1981. This paper addresses three questions: 1) Why did Congress prohibit direct purchases in 1935 after they had been utilized without incident for eighteen years, 2) why did Congress provide a limited exemption in 1942 instead of simply removing the prohibition, and 3) why did Congress allow the exemption to expire in 1981?

Why Has Japan’s Massive Government Debt Not Wreaked Havoc (Yet)?

:In this paper, we present data on trends over time in government debt financing in Japan since 2000 with emphasis on the importance of foreign holders and speculate about the determinants of those trends. We find that Japanese government securities were held primarily by domestic holders until recently because robust domestic saving, especially household saving, (combined with strong home bias) made it possible for domestic investors to absorb most of the government debt but that foreign holdings of Japanese government securities have increased sharply in recent years, especially in the case of short-term government securities. We show that trends in foreign holdings of Japanese government securities can be explained by conventional economic factors such as returns and risks and that the recent surge in foreign holdings of short-term Japanese government securities is attributable to foreign investors in search of a safe haven for their funds in the face of the Global Financial Crisis of 2008–09 precipitated by the Lehman crisis. Our analysis suggests that the surge in foreign holdings of Japanese government securities will subside (in fact, it already has), and this, combined with the projected decline in domestic saving (especially household saving) caused by population aging, will make it necessary for Japan to reduce its government debtto-GDP ratio. Thus, Japan’s massive government debt has not wreaked havoc in the past because of robust domestic saving and a temporary inflow of foreign capital caused by the Global Financial Crisis, but it may wreak havoc in the future as both of these factors become less applicable unless the government debt-to-GDP ratio can be brought under control.

A Financial Econometric Analysis of the Determinants of Interest Rate Risk in the US

1. Introduction Capital in a market-oriented economy is allocated through the price system. The interest rate is the price of capital paid to borrow debt capital. The factors that affect supply of and demand for capital (funds) determine the cost of capital, too. The risk of capital losses to which suppliers and demanders of capital are exposed because of unanticipated changes of interest rates is called as the interest rate risk (Thalassinos et al., 2010). This risk is measured by a component, added on the base rate (the real risk-free rate of interest), which is called the risk premium. The risk increases the risk premia on interest rates and it is reallocated among people in our economy, from the riskiest to the less risky ones. All agents of an economy, suppliers or demanders of funds, are exposed to interest rate risk. Everyone is sensitive to interest rate movements and this volatility has increased significantly. Since it is difficult to predict the direction and magnitude of interest rate changes, borrowers and lenders (especially shorter-maturity and variable-rate debts) face an interest rate exposure. There is a type of interest rate risk that affects every participant in the financial markets, the basis risk, which is the mismatching of interest rate bases for associated assets and liabilities. A second type of risk is the gap risk (more typical of a nonfinancial firm) which arises from mismatched timing in repricing interest-rate-sensitive assets and liabilities. For financial institutions, portfolio managers, and investment on securities, there are also a price risk and a reinvestment risk. Another risk is due to the average expected inflation rate over the life of a loan. Inflation erodes the purchasing power of the dollar and causes capital losses (lowers the real rate of return). In addition, there is a risk that the borrower could default on a loan. Besides, a liquidity risk exists because the financial assets cannot be converted to cash quickly and at a fair market value. Moreover, a maturity risk occurs due to high price sensitivity of long-term securities whenever interest rates rise. On the other hand, the reinvestment risk is the risk that affects more the short-term securities because a decline in interest rates will lead to lower income when financial instrument matures and funds are reinvested. Further, a foreign exchange risk (unexpected changes in exchange rates) can cause capital losses by altering the home currency value of foreign currency receipts or payments (Thalassinos, 2007). Likewise, a political risk may exist due to the possibility that political events in a particular country will cause some capital losses from expecting capital outflows from that country. Given the interest rate risks, every participant in the financial market requires a compensation for undertaking these risks. This remuneration is called the interest rate risk premium. We are interested to determine the factors that affect the different components of risk premier. The intelligent supplier or demander of capital must have knowledge of these factors affecting risk premium (and then interest rate) and be able to anticipate possible future changes in those factors. We are defining as risk premium the difference between a market rate of interest and the real risk-free rate of interest. [IRRP.sub.t] [congruent to] [RP.sub.t] = [i.sub.t] - [r.sub.t.sup.*] (1) where, IRRPt = interest rate risk premium, RPt = risk premium, it = a nominal market rate of interest and [rt.sup.*] = the real risk-free rate of interest (3-month T-bill rate minus the expected inflation rate). Consequently, risk premia are the prices of risk (components of the rate of return) built in financial assets priced (return) against the uncertainties related to the relevant state variables in our inherited risky economic system. As the uncertainties of the state variables (expected macro- variables) change over time, the risk related to the state macro-variables and hence the risk premia on interest rates vary over time. …

CURRENT ASSETS STRUCTURE AND EXPLORATION OF BUSINESS IN LATVIA

In order to ensure the financial sustainability of companies under current economic conditions successful management of current assets is crucial. In practice it is quite often observed that the decisions of current assets management in companies are made in the short-term aspects not making analysis. The aim of the article is to explore and analyse the structure of current assets and their indicators in business in Latvia. In order to reach the aim the author solves the following tasks in the research: to explore and analyse the structure of current assets, its changes and trends in the companies of Latvia; to perform calculations and analysis of the indicators characterizing the effectiveness of current assets; basing on the analysis to evaluate the development tendencies of the structure and indicators of current assets at various stages of economic development and to determine the correlations between these indicators. The research is based on the data obtained by the Central Statistics Bureau. The research covers the period of 1995–2010. The research is based on the analysis and evaluation of special literature and scientific publications about current assets management; research involves the use of generally accepted economic and statistical analysis methods, logically-constructive method of qualitative research methods: monographic method, Latvian and foreign industry literature, legislation content analysis, quantitative research methods: economic statistics and financial analysis techniques using Microsoft Excel software, data graphical display techniques. The article is focused on the exploration and analysis of the Latvian statistical data describing the amount, structure of current assets in business and its changes at various stages of economic development. Performing the analysis of current assets in the national economy of Latvia in general there are calculated and analysed various indicators, for example, liquidity, turnover of current assets, working capital. The research does not deal with the analysis of current assets in the aspect of branches. The calculations let estimate the changes of these indicators and their correlations as well as trends in the companies of Latvia. The current assets of companies in Latvia, their structure and indicators to a large extent are influenced by the economic situation in Latvia. Under conditions of a stable and flourishing economic situation companies have stable development indicating balanced increase of financial indicators. Upon increase of net turnover the amount of current assets also increases. When the national economy and business indicators improve, the proportion of assets flexibly reacts by increasing the proportion of current assets in the total structure of assets. However, when business activity decreases, the proportion of assets in the total structure of assets reduces. As a result of analysis there can be observed a correlation that the amount of stock and debts of debtors are interrelated with the net turnover of companies. The dynamics of cash and short-term securities shows that in the economic recession period it even increases. The economic situation in the state does not change very significantly the indicators of the current assets structure. Slight changes in the proportion of stock and cash prove that under condition of recession the managerial staff of Latvian companies pays attention to introduction of effective current assets management. The changes of current assets and their decrease in the recession period indicate that economic processes influence this indicator. The analysis of liquidity indicators did not reflect significant correlation between economy and changes of these indicators; however, the companies of Latvia typically do not have high liquidity indicators which shows some problems, but which cannot be identified not knowing certain conditions. The analysis of the structure and indicators of current assets using a maximally longer period of time enables to make timely and effective managerial decisions. DOI: http://dx.doi.org/10.5755/j01.eis.0.6.1518

Redefining the Money Market

The money market has traditionally been defined as the market for marketable short-term securities. It has deep historical roots. Today, it is not an illuminating definition. The genesis of interest rates, which is the quintessence of monetary policy implementation, does not originate in market for marketable short-term securities. It is found in the non-marketable interbank debt market, and spreads out from there. Therefore, the logical starting point in defining the money market is that it embraces all short-term lending and borrowing, direct and indirect via the financial intermediaries. In addition, money creation, that is, new bank lending and its corollary bank deposit creation, is firmly in the province on the money market. Given these, we offer an alternative definition of the money market.

Pecking Order Theory and Trade-Off Theory of Capital Structure: Evidence from Indonesian Stock Exchange

Numerous empirical studies in the finance field have tested many theories for firms’ capital structure. The pecking order theory and the trade-off theory of capital structure is among the most influential theories of firms’ capital structure. The trade-off theory predicts optimal capital structure, while the pecking order theory does not predict an optimal capital structure. According to pecking order theory, the order of financial sources used is the source of internal funds from profits, short-term securities, debt, preferred stock and common stock last. The main objective of this study is to econometrically test whether the listed companies in Indonesian Stock Exchange follow the pecking order theory or the trade-off theory. Samples in this study are public companies listed during 2009-2010. The research questions are tested by running regression models. The empirical result of this study shows that the pecking order theory is not supported, while the trade-off theory is supported. This suggests that the capital structure of listed companies in Indonesian Stock Exchange is financed based on optimal capital structure, not by the order financial resources.

Liquidity Performance of Bharath Petroleum Corporation Limited

The Petroleum Industry involves the refining of crude petroleum and the processing of Natural Gas into a multitude of products, as well as the distribution and marketing of petroleum-derived products India has recently become the sixth largest consumer of oil and gas, with its oil consumption recording a compounded annual growth of 9.1 percent per annum. The objective of the present study is to analyze the Liquidity and Leverage performance of the Bharat Petroleum Corporation Limited and the Reliance Industries Limited. The present study attempts to analysis the performance of liquidity and leverage position of the BPCL and the RIL during the period 2006-07 and 2010-11.Liquidity is the company's ability to convert non cash assets into cash or to obtain cash in order to meet current liabilities. Liquidity applies to the short term, which is typically viewed as a time span of one year or less. The liquidity position of the BPCL can be further improved to increase the productivity with a view to meet the increased demand. The ability of the BPCL meet their financial obligations is more than standard norms. The management as the BPCL may take necessary steps to invest their funds in short term securities to strike a proper balance between high liquidity and low liquidity.

Financial Investment In The Republic Of Uzbekistan: Concept, Objectives, Accounting And Reporting

The concept of economic essence of financial investments has been defined. Recommendations on improving accounting of long-term and short-term securities have been worked out. Necessity of improving securities accounting, their reflection in the financial reporting, organization of accounting reporting in the part of financial investments accounting has been highlighted. Analytical accounting on the accounts of long-term investments accounting (0600) is conducted on the types of long-term investments and objects, in which these investments are made. Correspondingly compilation of analytical accounting must provide possibility of receiving data about long-term investments in the objects located in theterritoryofUzbekistanand outside it. Financial placements are accepted for accounting as the sum of actual costs for an investor.