Household Preferences for Financing Hurricane Risk Mitigation: A Survey Based Empirical Analysis

After a series of major storms over the last 20 years, the state of financing for U.S. natural disaster insurance has undergone substantial disruptions causing many federal and state backed programs against residential property damage to become severally underfunded. In order to regain actuarial soundness, policy makers have proposed a shift to a system that reflects risk-based pricing for property insurance. We examine survey responses from 1394 single-family homeowners in the state of Florida for support of several natural disaster mitigation policy reforms. Utilizing a partial proportional odds model we test for effects of location, risk perception, socio-economic and housing characteristics on support for policy reforms. Our findings suggest residents across the state, not just risk-prone homeowners, support the current subsidized model. We also examine several other policy questions from the survey to verify our initial results. Finally, the implications of our findings are discussed to provide inputs to policymakers.

Liquidity and asset pricing: A comparison between three-factor and three-moment capital asset pricing models

Liquidity is an important attribute of an asset that investors would like to take into consideration when making investment decisions. However, the previous empirical evidence whether liquidity is a determinant of stock return is not unanimous. This dissertation provides a very comprehensive study about the role of liquidity in asset pricing using the Fama-French (1993) three-factor and Kraus and Litzenberger (1976) three-moment CAPM as models for risk adjustment. The relationship between liquidity and well-known determinants of stock returns such as size and book-to-market are also investigated. This study examines the liquidity and asset pricing issues for both intertemporal as well as cross-sectional data. ^ The results indicate an existence of a liquidity premium, i.e., less liquid stocks would demand higher rate of return than more liquid stocks. More specifically, a drop of 1 percent in liquidity is associated with a higher rate of return of about 2 to 3 basis points per month. Further investigation reveals that neither the Fama-French three-factor model nor the three-moment CAPM captures the liquidity premium. Finally, the results show that well-known determinants of stock return such as size and book-to-market do not serve as proxy for liquidity. ^ Overall, this dissertation shows that a liquidity premium exists in the stock market and that liquidity is a distinct effect, and is not influenced by the presence of non-market factors, market factors and other stock characteristics.^

Estimation of global beta and tests of capital asset pricing models

With the rapid globalization and integration of world capital markets, more and more stocks are listed in multiple markets. With multi-listed stocks, the traditional measurement of systematic risk, the domestic beta, is not appropriate since it only contain information from one market. ^ Prakash et al. (1993) developed a technique, the global beta, to capture information from multiple markets wherein the stocks are listed. In this study, the global betas are obtained as well as domestic betas for 704 multi-listed stocks from 59 world equity markets. Welch tests show that domestic betas are not equal across markets, therefore, global beta is more appropriate in a global investment setting. ^ The traditional Capital Asset Pricing Models (CAPM) is also tested with regards to both domestic beta and global beta. The results generally support the positive relationship between stocks returns and global beta while tend to reject this relationship between stocks returns and domestic beta. Further tests of International CAPM with domestic beta and global beta strengthen the conclusion.^

Three essays on asset pricing

In this dissertation, I investigate three related topics on asset pricing: the consumption-based asset pricing under long-run risks and fat tails, the pricing of VIX (CBOE Volatility Index) options and the market price of risk embedded in stock returns and stock options. These three topics are fully explored in Chapter II through IV. Chapter V summarizes the main conclusions. In Chapter II, I explore the effects of fat tails on the equilibrium implications of the long run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. I estimate the structural parameters of the proposed model by maximum likelihood. I find that the stochastic volatility model with fat tails can, without resorting to high risk aversion, generate implied risk premium, expected risk free rate and their volatilities comparable to the magnitudes observed in data. In Chapter III, I examine the pricing performance of VIX option models. The contention that simpler-is-better is supported by the empirical evidence using actual VIX option market data. I find that no model has small pricing errors over the entire range of strike prices and times to expiration. In general, Whaley’s Black-like option model produces the best overall results, supporting the simpler-is-better contention. However, the Whaley model does under/overprice out-of-the-money call/put VIX options, which is contrary to the behavior of stock index option pricing models. In Chapter IV, I explore risk pricing through a model of time-changed Lvy processes based on the joint evidence from individual stock options and underlying stocks. I specify a pricing kernel that prices idiosyncratic and systematic risks. This approach to examining risk premia on stocks deviates from existing studies. The empirical results show that the market pays positive premia for idiosyncratic and market jump-diffusion risk, and idiosyncratic volatility risk. However, there is no consensus on the premium for market volatility risk. It can be positive or negative. The positive premium on idiosyncratic risk runs contrary to the implications of traditional capital asset pricing theory.

Alternative Financing Sources and Their Impact on Profitability

This article explores the advantages and disadvantages of various financing alternatives for the hospitality industry and discusses their potential effect on the profitability of the firm. The author provides background and perspective for developing the appropriate financing arrangement for a specific hospitality enterprise.

Towards an Understanding of Lodging Asset Management and its Components

Lodging asset management has emerged as one of the most important areas of strategic hotel management. Increasingly, lodging companies are soliciting the services of asset management firms or developing internal asset management competencies. This article synthesizes and discusses the essential components of dynamic lodging asset management. The article provides a detail background on asset management and its importance and explains the role of lodging asset managers and their working relationships with ownership and operators. The article also discusses the competencies and skills of asset managers.

Lodging Real Estate Finance: Securitization

Commercial Mortgage Backed Securities (CMBSs) introduced to the U.S. lodging industry in the early 1990’s were a panacea during a period of severe shortage of debt capital. These instruments changed commercial real estate capital markets by providing flexibility and liquidity to an otherwise illiquid investment As a relatively new form of financing to the lodging industry, the mechanics of securitization, the types of CMBS investments, and their structure are not well understood. The article illustrates the process of securitization and its importance as a significant source of debt financing to the lodging industry

Drivers of Innovation In Financing Transportation Infrastructure: A Systemic Investigation

Traditional methods of financing infrastructure, which include gas taxation, tax-exempt bonds, and reserve funds, have not been able to meet the growing demand for infrastructure. Innovative financing systems have emerged to close the gap that exists between the available and needed financing sources. The objective of the study presented in this paper is to assess determinants of innovative financing in the U.S. transportation infrastructure using a systemic approach. Innovation System of Systems approach is adopted for systemic assessment and a case-based research approach is utilized to explore the constituents of innovative financing for U.S. transportation infrastructure. The findings, which include constructs regarding the players, practices, and activities are used to create a model to enable understanding the dynamics of the drivers and inhibitors of innovation and, thus, to derive implications for practice. The model along with the constructs provides an analytical tool for practitioners in the U.S. transportation infrastructure.

Liquidity, governance and adverse selection in asset pricing

A plethora of recent literature on asset pricing provides plenty of empirical evidence on the importance of liquidity, governance and adverse selection of equity on pricing of assets together with more traditional factors such as market beta and the Fama-French factors. However, literature has usually stressed that these factors are priced individually. In this dissertation we argue that these factors may be related to each other, hence not only individual but also joint tests of their significance is called for. ^ In the three related essays, we examine the liquidity premium in the context of the finer three-digit SIC industry classification, joint importance of liquidity and governance factors as well as governance and adverse selection. Recent studies by Core, Guay and Rusticus (2006) and Ben-Rephael, Kadan and Wohl (2010) find that governance and liquidity premiums are dwindling in the last few years. One reason could be that liquidity is very unevenly distributed across industries. This could affect the interpretation of prior liquidity studies. Thus, in the first chapter we analyze the relation of industry clustering and liquidity risk following a finer industry classification suggested by Johnson, Moorman and Sorescu (2009). In the second chapter, we examine the dwindling influence of the governance factor if taken simultaneously with liquidity. We argue that this happens since governance characteristics are potentially a proxy for information asymmetry that may be better captured by market liquidity of a company's shares. Hence, we jointly examine both the factors, namely, governance and liquidity - in a series of standard asset pricing tests. Our results reconfirm the importance of governance and liquidity in explaining stock returns thus independently corroborating the findings of Amihud (2002) and Gompers, Ishii and Metrick (2003). Moreover, governance is not subsumed by liquidity. Lastly, we analyze the relation of governance and adverse selection, and again corroborate previous findings of a priced governance factor. Furthermore, we ascertain the importance of microstructure measures in asset pricing by employing Huang and Stoll's (1997) method to extract an adverse selection variable and finding evidence for its explanatory power in four-factor regressions.^

The market value implications of pension asset allocation

Pension funds have been part of the private sector since the 1850's. Defined Benefit pension plans [DB], where a company promises to make regular contributions to investment accounts held for participating employees in order to pay a promised lifelong annuity, are significant capital markets participants, amounting to 2.3 trillion dollars in 2010 (Federal Reserve Board, 2013). In 2006, Statement of Financial Accounting Standards No.158 (SFAS 158), Employers' Accounting for Defined Benefit Pension and Other Postemployment Plans, shifted information concerning funding status and pension asset/liability composition from disclosure in the footnotes to recognition in the financial statements. I add to the literature by being the first to examine the effect of recent pension reform during the financial crisis of 2008-09. This dissertation is comprised of three related essays. In my first essay, I investigate whether investors assign different pricing multiples to the various classes of pension assets when valuing firms. The pricing multiples on all classes of assets are significantly different from each other, but only investments in bonds and equities were value-relevant during the recent financial crisis. Consistent with investors viewing pension liabilities as liabilities of the firm, the pricing multiples on pension liabilities are significantly larger than those on non-pension liabilities. The only pension costs significantly associated with firm value are actual rate of return and interest expense. In my second essay, I investigate the role of accruals in predicting future cash flows, extending the Barth et al. (2001a) model of the accrual process. Using market value of equity as a proxy for cash flows, the results of this study suggest that aggregate accounting amounts mask how the components of earnings affect investors' ability to predict future cash flows. Disaggregating pension earnings components and accruals results in an increase in predictive power. During the 2008-2009 financial crisis, however, investors placed a greater (and negative) weight on the incremental information contained in the individual components of accruals. The inferences are robust to alternative specifications of accruals. Finally, in my third essay I investigate how investors view under-funded plans. On average, investors: view deficits arising from under-funded plans as belonging to the firm; reward firms with fully or over-funded pension plans; and encourage those funds with unfunded pension plans to become funded. Investors also encourage conservative pension asset allocations to mitigate firm risk, and smaller firms are perceived as being better able to handle the risk associated with underfunded plans. During the financial crisis of 2008-2009 underfunded status had a lower negative association with market value. In all three models, there are significant differences in pre- and post- SFAS 158 periods. These results are robust to various scenarios of the timing of the financial crisis and an alternative measure of funding.

Assessment of policies for innovative financing in infrastructure systems

Infrastructure systems are drivers of the economy in the nation. A dollar spent on infrastructure development yields roughly double the initial spending in ultimate economic output in the short term; and over a twenty-year period, and generalized ‘public investment’ produces an aggregated $3.21 of economic activity per $1.00 spent [1]. Thus, formulation of policies pertaining to infrastructure investment and development is of significance affecting the social and economic wellbeing of the nation. The aim of this policy brief is to evaluate innovative financing in infrastructure systems from two different perspectives: (1) through consideration of the current condition of infrastructure in the U.S., the current trends in public spending, and the emerging innovative financing tools; (2) through evaluation of the roles and interactions of different agencies in the creation and the diffusion of innovative financing tools. Then using the example of transportation financing, the policy brief provides an assessment of policy landscapes which could lead to the closure of infrastructure financing gap in the U.S and proposes strategies for citizen involvement to gain public support of innovative financing.

Three Essays on Asset Pricing

In this dissertation, I investigate three related topics on asset pricing: the consumption-based asset pricing under long-run risks and fat tails, the pricing of VIX (CBOE Volatility Index) options and the market price of risk embedded in stock returns and stock options. These three topics are fully explored in Chapter II through IV. Chapter V summarizes the main conclusions. In Chapter II, I explore the effects of fat tails on the equilibrium implications of the long run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. I estimate the structural parameters of the proposed model by maximum likelihood. I find that the stochastic volatility model with fat tails can, without resorting to high risk aversion, generate implied risk premium, expected risk free rate and their volatilities comparable to the magnitudes observed in data. In Chapter III, I examine the pricing performance of VIX option models. The contention that simpler-is-better is supported by the empirical evidence using actual VIX option market data. I find that no model has small pricing errors over the entire range of strike prices and times to expiration. In general, Whaley’s Black-like option model produces the best overall results, supporting the simpler-is-better contention. However, the Whaley model does under/overprice out-of-the-money call/put VIX options, which is contrary to the behavior of stock index option pricing models. In Chapter IV, I explore risk pricing through a model of time-changed Lévy processes based on the joint evidence from individual stock options and underlying stocks. I specify a pricing kernel that prices idiosyncratic and systematic risks. This approach to examining risk premia on stocks deviates from existing studies. The empirical results show that the market pays positive premia for idiosyncratic and market jump-diffusion risk, and idiosyncratic volatility risk. However, there is no consensus on the premium for market volatility risk. It can be positive or negative. The positive premium on idiosyncratic risk runs contrary to the implications of traditional capital asset pricing theory.