Unrelated Assets Research Articles

A multifractal model of asset (in)variances

This study extends Mandelbrot’s (2008) multifractal model of asset returns to model realized variances across different time frequencies. In a comparative manner, various degrees of time deformations are explored for implementation of the multiplicative cascade. In doing so, this study focuses on two effects: discontinuity measured by the specific power-law exponent and dependency measured by the Hurst exponent. This study shows that the benchmark model, for which Mandelbrot’s (2008) “cartoon” is the foundation, has some remarkable properties as it is capable of explaining the realized variances for the GBP/USD exchange rate and Bitcoin. Notably, the realized variances for crude oil and the S&P 500 require a more extreme time deformation. The invariance hypothesis is confirmed for all realized variances because the power-law exponents for weekly and monthly data coincide with predictions of the multifractal model. Overall, the novel results derived from the proposed multifractal models suggest that some realized variances of otherwise unrelated asset markets are driven by the same underlying “driving force”—a common multifractal cascade.

ASSET INVESTMENT DIVERSIFICATION, BANKRUPTCY RISK AND THE MEDIATING ROLE OF BUSINESS DIVERSIFICATION

This paper explores the structural relationship among asset investment diversification, business diversification and the bankruptcy risk of firms. Asset investment diversification is divided into two components, namely related and unrelated asset investment diversification, while business diversification includes related and unrelated business diversification. In the hypothetical relationship, business diversification is proposed to play a mediating role to explain the effect of asset investment diversification on bankruptcy risk. Specifically, related and unrelated asset investment diversification affect bankruptcy risk through two mediators, namely related and unrelated business diversification. Hence, it is vital to employ the general linear structural model (GSEM) with panel data on 470 businesses publicly listed in Vietnam from 2008 to 2017. Surprisingly, the empirical results show that both related and unrelated asset diversification have positive impacts on bankruptcy risk. Nevertheless, only related business diversification plays a mediating role between related asset diversification and bankruptcy risk, while unrelated business diversification has an insignificant mediating effect on the relationship between unrelated asset diversification and bankruptcy risk.

A Study on the Relationship Between Diversification and Firm Performance Using the GSEM Method

ABSTRACT This study adds another perspective on corporate diversification and asset investment diversification, including related and unrelated asset investment diversification, and examines the relationship between this diversification, business diversification, and performance. Because business diversification includes related business and unrelated business diversification, we developed a hypothesis that related business acts as a mediating factor between related asset investment diversification and performance. Similarly, unrelated business plays a mediating role in the relationship between asset diversification and performance. We applied a general linear structural model (GSEM) to panel data on 470 firms listed on the Vietnamese stock exchange from 2008 to 2015. The empirical evidence demonstrates that related assets increase their performance through the mediating effects of related business. By contrast, unrelated assets show an insignificant impact on performance, and unrelated business does not play a mediating role between asset diversification and performance.

Selling to Buy: Asset Sales and Merger Waves

This study provides evidence that merger waves occur as part of asset restructuring, in which asset sale proceeds are associated with increased acquisition probability. Economically, asset sale waves increase the probability of merger waves by 14.80%. Our results are consistent with the notion that asset sales enhance firm- and/or industry-specific capital liquidity, and that cash proceeds from asset sales can be used as a funding source for acquisitions. They are also in line with the “modified” neoclassical theory which suggests that an increase in capital liquidity is associated with higher likelihood of merger waves. Finally, we show that firms conducting acquisitions after sales of unrelated assets are more likely to experience improvement in long run operating efficiency, and are more likely to use cash to finance the deal.

On the Univariate Representation of BEKK Models with Common Factors

AbstractSimple low order multivariate GARCH models imply marginal processes with a lot of persistence in the form of high order lags. This is not what we find in many situations however, where parsimonious univariate GARCH(1,1) models for instance describe quite well the conditional volatility of some asset returns. In order to explain this paradox, we show that in the presence of common GARCH factors, parsimonious univariate representations can result from large multivariate models generating the conditional variances and conditional covariances/correlations. The diagonal model without any contagion effects in conditional volatilities gives rise to similar conclusions though. Consequently, after having extracted a block of assets representing some form of parsimony, remains the task of determining if we have a set of independent assets or instead a highly dependent system generated with a few factors. To investigate this issue, we first evaluate a reduced rank regressions approach for squared returns that we extend to cross-returns. Second we investigate a likelihood ratio approach, where under the null the matrix parameters have a reduced rank structure. It emerged that the latter approach has quite good properties enabling us to discriminate between a system with seemingly unrelated assets (e.g. a diagonal model) and a model with few common sources of volatility.

Price Contagion through Balance Sheet Linkages

We study price linkages between assets held by financial institutions that maintain fixed capital structures over time. Firms in the banking sector manage their leverage ratios to conform to prespecified levels. Our analysis suggests that regulatory policies aimed at stabilizing the system by imposing capital constraints on banks may have unintended consequences: banks’ deleveraging activities may amplify asset return shocks and lead to large fluctuations in realized returns. The same mechanism can cause spillover effects, where assets held by leverage targeting banks can experience hikes or drops caused by shocks to otherwise unrelated assets held by the same banks.

Commodity price excess co-movement from a historical perspective: 1900–2010

Pindyck and Rotemberg (1990)'s excess co-movement hypothesis states that commodity prices move together beyond what fundamentals can explain, reflecting possibly traders' herding or liquidity constraints. We test for price excess co-movement in 12 commodities — 11 non-energy ones and oil — spanning over a hundred years: 1900–2010. To this end, we approximate commodity demand/supply factors by their apparent consumption. We carry out several tests and find some evidence in favor of excess co-movement, but its nature appears to be time-dependent. In particular, we conclude that excess co-movement with oil is generally present, particularly in the industrial metal class. We also explore the interdependence between portfolio investment decisions and excess co-movement for three unrelated assets: cotton, copper, and petroleum. Based on Conditional Value-at-Risk (CVaR) optimization, we found some correlations between the two, when short sales are excluded, during 1971, 1999–2004, and 2008.

Long-Run Stock Performance and Its Determinants for Asset Buyers

This paper examines the long-term stock performance of asset purchasers and the determinants of cross-sectional differences in performance. Our findings show that buyers’ stocks, on average, underperform following purchases. Buy-and-hold abnormal returns of buyers acquiring related assets are significantly higher than those acquiring unrelated assets, consistent with the focus hypothesis. Asset buyers with superior prior stock performance experience poorer long-run performance than buyers with inferior prior stock performance, consistent with the prior performance hypothesis. Asset buyers that manage earnings upward, experience poorer long-term abnormal stock performance than acquirers with downward earnings management, consistent with the earnings management hypothesis. The long-term return evidence is to some degree consistent with the governance hypothesis but we find little support for the free cash flow hypothesis.

A Theory of Arbitrage Capital

We present a model of equilibrium allocation of capital for arbitrage. If asset prices may fall low enough, it is profitable to carry liquid capital to acquire assets in such states. Set against this, keeping capital in liquid form entails costs in terms of foregone profitable investments. This trade-off generates occasional fire sales and limited arbitrage capital as robust phenomena. With learning-by-doing effects, arbitrage capital moves in to acquire assets only if fire sales are steep. However, once arbitrage capital finds it profitable to acquire assets, it requires similar returns elsewhere, inducing contagious fire-sale prices even for unrelated assets. (JEL G21, G28, G38, E58, D62)

Divestitures and Firm Performance: The Moderating Role of Internal and External Experience

Drawing on organizational learning theory, this paper examines the moderating influences of different forms of internal and external sell-off experience on the relationship between firm sell-off activity and subsequent firm accounting performance. Results from a longitudinal analysis of sell-off activity by 281 companies over a 20-year period (1990-2009) are consistent with basic predictions from learning theory suggesting a positive moderating influence of a firm’s general sell-off experience on the relationship between firm sell-off activity and firm performance. This study, however, further argues and finds that the composition of a firm’s general sell-off experience matters greatly. Specifically, we find that learning benefits are greater for sell-offs involving related rather than unrelated assets, and that high levels of experience heterogeneity negatively affect the relationship between firm sell-off activity and subsequent firm performance. Further, external sell-off experience by advisors and by industry peers is found to positively influence the divestiture-firm performance linkage. Collectively, the findings on the importance of the “composition” of a firm’s general sell-off experience and the influence of external experience help resolve some of the equivocality in previous organizational learning research, and extend prior research on divestiture performance.

How and why corporate divestitures affect risk

We find that in general, parents experience an increase in risk following divestitures, although the specific increase is conditioned on the form of divestiture and the type of proxy used to measure risk. The increase in risk following divestitures is generally higher for carve-outs than for asset sell-offs. The increase in risk in response to all forms of divestitures is more pronounced when parents eliminate related assets than when they eliminate unrelated assets, and when parents increase their financial leverage. Overall, our findings suggest that the shift in parent risk is associated with the remaining asset and liability structure of the parent. This implies that the parents have much control over the degree to which the divestiture will change their risk, based on the types of assets divested (whether related to parent's remaining assets), and the liability structure of units divested (the amount of debt that the parent transfers to the unit).

The Leverage Cycle

The Leverage Cycle

Differences of Opinion and the Price Volume Relation

This paper solves a dynamic general equilibrium asset pricing model of disagreement that draws a direct link between asset prices and the financial volume of trade. The model exhibits two risk averse agents that hold heterogeneous beliefs about the conditional mean of the aggregate consumption growth. The differences in opinions is supported by the fact that agents interpret public information differently. The connecting link between prices and volume is an exogenously time varying disagreement intensity that determines the magnitude of disagreement about new information. The model is able to explain a number of seemingly unrelated asset pricing facts namely the positive correlation between price changes and volume, the contemporaneous relation between volume and return volatility, the excess volatility, the volatility persistence and the negative correlation between price levels and volatility.

Portfolio Constraints and Contagion in Emerging Markets

The objective of this paper is twofold: (1) to analyze an optimal portfolio rebalancing by a fund manager in response to a “volatility shock” in one of the asset markets, under sufficiently realistic assumptions about the fund manager’s performance criteria and portfolio restrictions; and (2) to analyze how the composition of the investor base determines the sensitivity of equilibrium asset prices to a shock originating in one of the fundamentally unrelated asset markets. The analysis confirms that certain combinations of portfolio constraints (notably short-sale constraints and benchmark-based performance criteria) can create an additional transmission mechanism for propagating shocks across fundamentally unrelated asset markets. The paper also discusses potential implications of recent and ongoing changes in the investor base for asset price volatility in emerging markets.

Investment Restrictions and Contagion in Emerging Markets

The objectives of this paper are: (1) to analyze an optimal portfolio rebalancing by a fund manager in response to a volatility shock in one of the asset markets, under sufficiently realistic assumptions about the fund manager's performance criteria and investment restrictions; and (2) to analyze the sensitivity of the equilibrium price of an asset to shocks originating in other fundamentally unrelated asset markets for a given mix of common investors. The analysis confirms that certain combinations of investment restrictions (notably short-sale constraints and benchmark-based performance criteria) can create additional transmission mechanisms for propagating shocks across fundamentally unrelated asset markets. The paper also discusses potential implications of recent and on-going changes in the investor base for emerging market securities for the asset price volatility.

Investment Restrictions and Contagion in Emerging Markets

The objectives of this paper are: (1) to analyze an optimal portfolio rebalancing by a fund manager in response to a volatility shock in one of the asset markets, under sufficiently realistic assumptions about the fund manager's performance criteria and investment restrictions; and (2) to analyze the sensitivity of the equilibrium price of an asset to shocks originating in other fundamentally unrelated asset markets for a given mix of common investors. The analysis confirms that certain combinations of investment restrictions (notably short-sale constraints and benchmark-based performance criteria) can create additional transmission mechanisms for propagating shocks across fundamentally unrelated asset markets. The paper also discusses potential implications of recent and on-going changes in the investor base for emerging market securities for the asset price volatility.

Mutual Fund Performance and Seemingly Unrelated Assets

Mutual Fund Performance and Seemingly Unrelated Assets

Mutual fund performance and seemingly unrelated assets

Estimates of standard performance measures can be improved by using returns on assets not used to define those measures. Alpha, the intercept in a regression of a fund's return on passive benchmark returns, can be estimated more precisely by using information in returns on nonbenchmark passive assets, whether or not one believes those assets are priced by the benchmarks. A fund's Sharpe ratio can be estimated more precisely by using returns on other assets as well as the fund. New estimates of these performance measures for a large universe of equity mutual funds exhibit substantial differences from the usual estimates.

Mutual Fund Performance and Seemingly Unrelated Assets

Estimates of standard performance measures can be improved by using returns on assets not used to de?ne those measures. Alpha, the intercept in a regression of a fund's return on passive benchmark returns, can be estimated more precisely by using information in returns on non-benchmark passive assets, whether or not one believes those assets are priced by the benchmarks. A fund's Sharpe ratio can be estimated more precisely by using returns on other assets as well as the fund. New estimates of these performance measures for a large universe of equity mutual funds exhibit substantial dierences from the usual estimates.

Value creation in bundling utility mergers: A corporate focus anomaly

Recent empirical studies have documented the significantly positive monotonic relationship between changes in corporate focus and firm value. Focus-decreasing activities such as diversifying mergers have been shown to diminish firm value while focus-increasing activities, including divestitures of unrelated assets, exhibit a value-enhancing effect. However, many of these studies follow the convention of excluding utilities as their regulated industry makes then incomparable to unregulated industries. Examining only utility mergers and acquisitions, this study finds that only those which occur between utilities operating in different primary lines of business (“bundling” mergers) experience significant increases in firm value. Consistent with other studies, conglomerate mergers lead to a substantial decrease in firm value. Horizontal and vertical mergers lead to insignificant wealth gains. These results present an anomaly to the corporate focus theory and indicate that the regulation of utilities creates value for related diversification - contrary to the monotonic relationship exhibited in unregulated industries.