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on Corporate Finance |
| By: | Broadie, Mark; Chernov, Mikhail; Johannes, Michael |
| Abstract: | This paper studies the returns from investing in index options. Previous research documents significant average option returns, large CAPM alphas, and high Sharpe ratios, and concludes that put options are mispriced. We propose an alternative approach to evaluate the significance of option returns and obtain different conclusions. Instead of using these statistical metrics, we compare historical option returns to those generated by commonly used option pricing models. We find that the most puzzling finding in the existing literature, the large returns to writing out-of-the-money puts, is not even inconsistent with the Black-Scholes model. Moreover, simple stochastic volatility models with no risk premia generate put returns across all strikes that are not inconsistent with the observed data. At-the-money straddle returns are more challenging to understand, and we find that these returns are not inconsistent with explanations such as jump risk premia, Peso problems, and estimation risk. |
| Keywords: | jump risk premia; jump-diffusion models; options returns; put pricing puzzle |
| JEL: | C13 G12 G13 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6239&r=cfn |
| By: | Fortin, Ines (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Fuss, Sabine (University of Maastricht/UNU-Merit, Maastricht, The Netherlands); Hlouskova, Jaroslava (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Khabarov, Nikolay (International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria); Obersteiner, Michael (International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria); Szolgayova, Jana (International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria) |
| Abstract: | The objective of this paper is to combine a real options framework with portfolio optimization techniques and to apply this new framework to investments in the electricity sector. In particular, a real options model is used to assess the adoption decision of particular technologies under uncertainty. These technologies are coal-fired power plants, biomassfired power plants and onshore wind mills, and they are representative of technologies based on fossil fuels, biomass and renewables, respectively. The return distributions resulting from this analysis are then used as an input to a portfolio optimization, where the measure of risk is the Conditional Value-at-Risk (CVaR). |
| Keywords: | Portfolio optimization, CVaR, climate change policy, uncertainty, real options, electricity, investments |
| JEL: | C61 D81 D92 G11 Q4 Q56 Q58 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:209&r=cfn |
| By: | Mattlin, Mikael (BOFIT) |
| Abstract: | This paper reviews recent regulatory and policy changes that affect the Chinese central government's ownership and authority over the capital allocations of strategic state-owned enterprises (SOE). The paper examines the reform of the central government's relationship with key SOEs as a consequence of the establishment of the State Assets Supervision and Administration Commission of the State Council (SASAC) in 2003, the coming introduction of a centralised operating and budgeting system for SOEs, and the government's ongoing re-evaluation of its ownership policy. SASAC appears to have the potential to develop into a major actor in China's domestic capital allocation, with an active role in strategic financing and restructuring of key sectors of the Chinese economy. The data reviewed for this paper strongly suggests that the Chinese central government aims to retain significant ownership control over key SOEs and, by extension, over a major part of the domestic economy. The new operating and budgeting system is set to significantly enhance central government control over SOEs' capital allocation. |
| Keywords: | state-owned enterprises; privatisation; corporate governance; China |
| JEL: | G32 G38 P26 P31 |
| Date: | 2007–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2007_010&r=cfn |
| By: | Kilin, Fiodar |
| Abstract: | This paper compares the performance of three methods for pricing vanilla options in models with known characteristic function: (1) Direct integration, (2) Fast Fourier Transform (FFT), (3) Fractional FFT. The most important application of this comparison is the choice of the fastest method for the calibration of stochastic volatility models, e.g. Heston, Bates, Barndor®-Nielsen-Shephard models or Levy models with stochastic time. We show that using additional cache technique makes the calibration with the direct integration method at least seven times faster than the calibration with the fractional FFT method. |
| Keywords: | Stochastic Volatility Models; Calibration; Numerical Integration; Fast Fourier Transform |
| JEL: | G13 |
| Date: | 2006–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2975&r=cfn |
| By: | Demir, Firat |
| Abstract: | Based on the Euler equation approach, the paper analyzes the impacts of availability of internal funds on fixed investment spending in the presence of multiple investment options. It is argued that after financial liberalization real sector firms face a portfolio allocation problem between fixed and financial investments. Therefore, depending on the respective rates of returns the availability of internal funds may be a necessary but not sufficient condition for financing real investment projects. The empirical results using firm level data for Mexico and Turkey confirm this hypothesis and suggest that profits from fixed and financial assets have differential effects on fixed investment spending. |
| Keywords: | Private Investment; Financing Constraints; Cash Flow; Portfolio Choice |
| JEL: | G11 E22 C33 E44 O16 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3081&r=cfn |
| By: | Fonseca, Nelson; Bressan, Aureliano; Iquiapaza, Robert; Guerra, João |
| Abstract: | This study analyzes the performance of Brazilian Investment Funds between May 2001 and May 2006, using as a guideline the division in fixed-income funds and equity funds. The performance is evaluated in terms of risk and return, using Sharpe and Sortino indexes, with the returns and volatilities being also analyzed through t and F tests. The results indicate that the two categories did not present any significant statistical difference in terms of the mean return in the period. However, differences in the variance along the period generated a better risk x return relation for the fixed income funds, a result that is associated with the high interest rates that were experienced during that period. |
| Keywords: | Investment funds; Sharpe index; Sortino index. |
| JEL: | G11 G23 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2994&r=cfn |
| By: | Siddiqi, Hammad |
| Abstract: | Here, we show that agents who are ex ante rational, if allowed to interact locally, may generate clustering of volatility. Hence, there is no need to reject the notion of rationality in agent based models. |
| Keywords: | Volatility Clustering; Rationality; Local Interactions |
| JEL: | G12 G1 |
| Date: | 2007–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2984&r=cfn |
| By: | Martin Brown (Swiss National Bank); Tullio Jappelli (Università di Napoli "Federico II", CSEF and CEPR); Marco Pagano (Università di Napoli "Federico II", CSEF and CEPR) |
| Abstract: | We investigate whether information sharing among banks has affected credit market performance in the transition countries of Eastern Europe and the former Soviet Union, using a large sample of firm-level data. Our estimates show that information sharing is associated with improved availability and lower cost of credit to firms, and that this correlation is stronger for opaque firms than transparent firms. In cross-sectional estimates, we control for variation in country-level aggregate variables that may affect credit, by examining the differential impact of information sharing across firm types. In panel estimates, we also control for the presence of unobserved heterogeneity at the firm level and for changes in selected macroeconomic variables. |
| Keywords: | information sharing, credit access, transition countries |
| JEL: | D82 G21 G28 O16 P34 |
| Date: | 2007–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:178&r=cfn |
| By: | Veronica Cacdac Warnock; Francis E. Warnock |
| Abstract: | We examine the extent to which markets enable the provision of housing finance across a wide range of countries. Housing is a major purchase requiring long-term financing, and the factors that are associated with well functioning housing finance systems are those that enable the provision of long-term finance. Across all countries, controlling for country size, we find that countries with stronger legal rights for borrowers and lenders (through collateral and bankruptcy laws), deeper credit information systems, and a more stable macroeconomic environment have deeper housing finance systems. These same factors also help explain the variation in housing finance across emerging market economies. Across developed countries, which tend to have low macroeconomic volatility and relatively extensive credit information systems, variation in the strength of legal rights helps explain the extent of housing finance. We also examine another potential factor--the existence of sizeable government securities markets--that might enable the development of emerging markets' housing finance systems, but we find no evidence supporting that. |
| JEL: | G10 G18 G28 O16 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13081&r=cfn |