Ownership, occupation and risk: a view of the City of London office market

Office returns in the City of London are more volatile than in other UK markets. This volatility may reflect fluctuations in capital flows associated with changing patterns of ownership and the growing linkage between real estate and financial markets in the City. Using current and historical data, patterns of ownership in the City are investigated. They reveal that overseas ownership has grown markedly since 1985, that owners are predominantly FIRE-sector firms and that there are strong links between ownership and occupation. This raises concerns about future volatility and systemic risk in a market strongly influenced by the cyclical behaviour and shocks of the international financial system.

International investment, ownership and risk in the City of London office market: an analysis of trends 1972-1997

Office returns in the City of London are more volatile than in other UK markets. This volatility may reflect fluctuations in capital flows associated with changing patterns of ownership and the growing linkage between real estate and financial markets in the City. Using current and historical data, patterns of ownership in the City are investigated. They reveal that overseas ownership has grown markedly since 1985, that owners are predominantly FIRE sector firms and that there are strong links between ownership and occupation. This raises concerns about future volatility and systemic risk.

Developing “Best Practices” for bankers’ pay in line with Basel III

This paper proposes hybrid capital securities as a significant part of senior bank executive incentive compensation in light of Basel III, a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. The committee developed Basel III in a response to the deficiencies in financial regulation brought about by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. The hybrid bank capital securities we propose for bank executives’ compensation are preferred shares and subordinated debt that the June 2004 Basel II regulatory framework recognised as other admissible forms of capital. The past two decades have witnessed dramatic increase in performance-related pay in the banking industry. Stakeholders such as shareholders, debtholders and regulators criticise traditional cash and equity-based compensation for encouraging bank executives’ excessive risk taking and short-termism, which has resulted in the failure of risk management in high profile banks during the global financial crisis. Paying compensation in the form of hybrid bank capital securities may align the interests of executives with those of stakeholders and help banks regain their reputation for prudence after years of aggressive risk-taking. Additionally, banks are desperately seeking to raise capital in order to bolster balance sheets damaged by the ongoing credit crisis. Tapping their own senior employees with large incentive compensation packages may be a viable additional source of capital that is politically acceptable in times of large-scale bailouts of the financial sector and economically wise as it aligns the interests of the executives with the need for a stable financial system.

Handbook of research methods and applications in empirical finance

The objective of this book is to present the quantitative techniques that are commonly employed in empirical finance research together with real world, state of the art research examples. Each chapter is written by international experts in their fields. The unique approach is to describe a question or issue in finance and then to demonstrate the methodologies that may be used to solve it. All of the techniques described are used to address real problems rather than being presented for their own sake and the areas of application have been carefully selected so that a broad range of methodological approaches can be covered. This book is aimed primarily at doctoral researchers and academics who are engaged in conducting original empirical research in finance. In addition, the book will be useful to researchers in the financial markets and also advanced Masters-level students who are writing dissertations.

Information and efficiency: goal arrival in soccer betting

An efficient market incorporates news into prices immediately and fully. Tests for efficiency in financial markets have been undermined by information leakage. We test for efficiency in sports betting markets – real-world markets where news breaks remarkably cleanly. Applying a novel identification to high-frequency data, we investigate the reaction of prices to goals scored on the ‘cusp’ of half-time. This strategy allows us to separate the market's response to major news (a goal), from its reaction to the continual flow of minor game-time news. On our evidence, prices update swiftly and fully.

Cross-border capital flows into real estate

This study investigates the determinants of cross-border capital flows into direct real estate markets. In particular, it investigates how existing institutional, regulatory and real estate specific barriers affect cross-border real estate inflows and outflows in a sample of 24 developed and emerging countries, and whether investors seek out targets with lower barriers and regulatory arbitrage. We do not find evidence of significant cross-border institutional or regulatory arbitrage in the real estate market. However, real estate market liquidity is found to be the most important driver of cross-border flows. While many of the institutional barriers included in this analysis do not appear to impact the level of real estate inflows significantly, their presence tends to suppress real estate capital outflows to other countries. Overall, easy access to financial markets, a good economic environment and transparent real estate markets may enhance real estate outflows, while returns and the macroeconomy are found to enhance domestic real estate investment.

State capitalism and social responsibility in China's banking industry

China’s financial system has experienced a series of major reforms in recent years. Efforts have been made towards introducing the shareholding system in state-owned commercial banks, restructuring of securities firms, re-organising equity of joint venture insurance companies, further improving the corporate governance structure, managing financial risks and ultimately establishing a system to protect investors (Xinhua, 2010). Financial product innovation, with the further opening up of financial markets and the development of the insurance and bond market, has increased liquidity as well as reduced financial risks. The U.S. subprime crisis indicated the benefit of financial innovations for the economy, but without proper control, they may lead to unexpected consequences. Kirkpatrick (2009) argues that failures and weaknesses in corporate governance arrangements and insufficient accounting standards and regulatory requirements attributed to the financial crisis. Similar to the financial crises of the last decade, the global financial crisis which sparked in 2008, surfaced a variety of significant corporate governance failures: the dysfunction of market mechanisms, the lack of transparency and accountability, misaligned compensation arrangements and the late response of government, all which encouraged management short-termism, poor risk management, as well as some fraudulent schemes. The unique characteristics of the Chinese banking system are an interesting point for studying post-crisis corporate governance reform. Considering that China modelled its governance system on the Anglo-American system, this paper examines the impact of the financial crisis on corporate governance reform in developed economies, and particularly, China’s reform of its financial sector. The paper further analyses the Chinese government’s role in bank supervision and risk management. In this regard, the paper contributes to the corporate governance literature within the Chinese context by providing insights into the contributing factors to the corporate governance failure that led to the global financial crisis. It also provides policy recommendations for China’s policy makers to seriously consider. The results suggest a need for the re-examination of corporate governance adequacy and the institutionalisation of business ethics. The paper’s next section provides a review of China’s financial system with reference to the financial crisis, followed by a critical evaluation of a capitalistic system and a review of Anglo-American and Continental European models. It then analyses the need for a new corporate governance model in China by considering the bank failures in developed economies and the potential risks and inefficiencies in a current State controlled system. The paper closes by reflecting the need for Chinese policy makers to continually develop, adapt and rewrite corporate governance practices capable of meeting the new challenge, and to pay attention to business ethics, an issue which goes beyond regulation.

Towards cost-sensitive adaptation: when is it worth updating your predictive model?

Our digital universe is rapidly expanding,more and more daily activities are digitally recorded, data arrives in streams, it needs to be analyzed in real time and may evolve over time. In the last decade many adaptive learning algorithms and prediction systems, which can automatically update themselves with the new incoming data, have been developed. The majority of those algorithms focus on improving the predictive performance and assume that model update is always desired as soon as possible and as frequently as possible. In this study we consider potential model update as an investment decision, which, as in the financial markets, should be taken only if a certain return on investment is expected. We introduce and motivate a new research problem for data streams ? cost-sensitive adaptation. We propose a reference framework for analyzing adaptation strategies in terms of costs and benefits. Our framework allows to characterize and decompose the costs of model updates, and to asses and interpret the gains in performance due to model adaptation for a given learning algorithm on a given prediction task. Our proof-of-concept experiment demonstrates how the framework can aid in analyzing and managing adaptation decisions in the chemical industry.

Business life cycle and capital structure: evidence from Chinese manufacturing firms

This paper uses a panel data-fixed effect approach and data collected from Chinese public manufacturing firms between 1999 and 2011 to investigate the impacts of business life cycle stages on capital structure. We find that cash flow patterns capture more information on business life cycle stages than firm age and have a stronger impact on capital structure decision-making. We also find that the adjustment speed of capital structure varies significantly across life cycle stages and that non-sequential transitions over life cycle stages play an important role in the determination of capital structure. Our study indicates that it is important for policy-makers to ensure that products and financial markets are well-balanced.

Accounting quality, information risk and implied volatility around earnings announcements

We examine the impact of accounting quality, used as a proxy for information risk, on the behavior of equity implied volatility around quarterly earnings announcements. Using US data during 1996–2010, we observe that lower (higher) accounting quality significantly relates to higher (lower) levels of implied volatility (IV) around announcements. Worse accounting quality is further associated with a significant increase in IV before announcements, and is found to relate to a larger resolution in IV after the announcement has taken place. We interpret our findings as indicative of information risk having a significant impact on implied volatility behavior around earnings announcements.

Housing provision in 21st century Europe

European housing markets exhibited considerable volatility so far in the 21st century while affordability worsened for many. Boom-bust has had greater housing impacts than any specific housing policy, which illustrates the difficulty in policy terms of seeing housing in isolation and the central significance of interlinked relationships between housing, the economy and financial markets. Europe historically invented a powerful set of interventionist tools to alter housing circumstances but, as the overview of rental markets here indicates, today they have mixed success. Examples of what to avoid in policy are at least as common as exemplars.

International financial centres, office market rents and volatility

Despite continuing developments in information technology and the growing economic significance of the emerging Eastern European, South American and Asian economies, international financial activity remains strongly concentrated in a relatively small number of international financial centres. That concentration of financial activity requires a critical mass of office occupation and creates demand for high specification, high cost space. The demand for that space is increasingly linked to the fortunes of global capital markets. That linkage has been emphasised by developments in real estate markets, notably the development of global real estate investment, innovation in property investment vehicles and the growth of debt securitisation. The resultant interlinking of occupier, asset, debt and development markets within and across global financial centres is a source of potential volatility and risk. The paper sets out a broad conceptual model of the linkages and their implications for systemic market risk and presents preliminary empirical results that provide support for the model proposed.