Valuation Of Financial Instruments Research Articles

Corporate Social Responsibility: Is it Rewarded by the Corporate Bond Market? A Critical Note

The question of whether corporate social responsibility (CSR) has a positive impact on firm value has been almost exclusively analysed from the perspective of the stock market. We have therefore investigated the relationship between the valuation of Euro corporate bonds and the standards of CSR of mainly European companies for the first time in this article. Generally, the debt market exhibits a considerable weight for corporate finance, for which reason creditors should basically play a significant role in the transmission of CSR into the valuation of financial instruments. Given that socially responsible firms are often regarded as economically more successful and less risky, they should have lower risk premia. The results of the empirical analysis, however, reveal that based on an extensive data panel the risk premium for socially responsible firms – according to the classification by SAM Group – was ceterius paribus higher than for non-socially responsible companies. However, only one case of the models investigated was weakly significant. Thus, largely the relationship has to be classified as marginal; so CSR has apparently not yet been incorporated into the pricing of corporate bonds.

Did Fair Valuation Depress Equity Values During the 2008 Financial Crisis?

We investigate the assertion that fair valuation of financial instruments exacerbated the 2008 financial crisis. We focus on the 4th quarter of 2008 following the Lehman Brothers bankruptcy, the Reserve Primary fund “breaking the buck” and other adverse events. Our central finding is that firms with higher percentage of assets fair valued had higher abnormal stock returns. Both fair value level 1 and level 2 measurements are positively associated with stock returns. We show that fair valuation is widespread not only in financial firms but also in industrial firms and that the above results hold for both financial and industrial firms. We do not find evidence that these results are driven by a specific subsample, mean reversion in stock returns, anticipation of the crisis, or liquidity factors alone. Our findings are inconsistent with fair valuation depressing equity values.

A More General Valuation and Arbitrage Theory for Itô Processes

We specialize the results on characterization of arbitrage and valuation of European and American Contingent claims obtained in Londoño [7] for a model that is computational friendly, and include those whose price processes are of Itô type with coefficients that are only Hölder continuous. A unified framework for valuation of financial instruments of both European and American type is presented under some technical conditions. Also valuation of European and American contingent claims where the matrix of volatilities does not have maximal rank is provided, and valuation of contingent claims with random expiration date is developed.

Valuation of Pension Liabilities in Incomplete Markets

This paper discusses the valuation of financial instruments whose payoff is linked to an index. Examples are TIPS, wage-indexed pension fund liabilities, and GDP bonds. Valuation of these primary assets by replication is typically not possible as the index cannot be hedged perfectly with (nominal) market instruments. This paper discusses several methods to find a value in such incomplete markets and advocates utility-based valuation. This approach implies a simple adjustment on the discount factor.

Credit risk analysis of mortgage loans: An application to the Italian market

The valuation of financial instruments in which both credit risk and interest rate risk are taken into account is an outstanding task for financial institutions. In this paper, we propose an affine-reduced model dealing with this topic. We show that this model offers analytical tractability as well as flexibility. We also show that the parameters of the model can be estimated via maximum likelihood in a straightforward way. To outline the procedure, we estimate the model on Italian data, using zero-coupon bond and historical default probabilities, as provided by the Bank of Italy.

Impact of the new International Accounting Standards on the financial statements

The new accounting principles adopted by the IASB will lead to the introduction of increased volatility in the profit and loss account and in the shareholder's equity of banks. The presentation of the net result and of the variations in equity not coming from shareholders' operations in the same profit and loss schedule will also increase this phenomena and will reduce the visibility in terms of understanding the performance of the various activities of the enterprise. This evolution will not enhance the comparability between the financial statements of banks nor the pertinence of the financial information. The principles adopted regarding the valuation of financial instruments are to the detriment of the stability of the results and the principle of prudence, favouring instantaneous valuation without improving the conditions for neither financial information preparation nor the quality of such information. These principles will in no doubt have an influence on how banks manage their interest rate exposure leading to a process of reduction of risks. JEL classifications : G21, M41

Credit Risk Analysis of Mortgage Loans: An Application to the Italian Market

The valuation of financial instruments in which both credit risk and interest rate risk are taken into account is an outstanding task for financial institutions. In this paper, we propose an affine-reduced model to deal with this topic. We show that this model offers analytical tractability as well as richness and flexibility. We also show that the parameters of the model can be estimated via maximum likelihood in a straightforward way. To outline the procedure, we estimate the model on Italian data.

Physics in finance

These days it is not unusual to find people with a PhD in physics on the trading floor of a bank, but seven years ago such folk were very rare. This article is about what happens when a physicist works on the trading floor; not only the financial mathematics and research but also the people and the situations that he or she encounters. It is partly biographical, beginning with the description of the research at the Clarendon Laboratory that the author was involved in, and describing how she ended up working for a bank. Various aspects of the finance research that she now pursues are explained, starting with simple foreign exchange rate calculations, going on to discuss some subtle aspects of the Black?Scholes model used in the valuation of financial instruments, and concluding with study on the fair price of options which illustrates how important it is to apply the research methods learnt in physics to the world of finance.