Macroeconomic Dynamics of Market Risk Capital Requirements and Credit Supply Interdependence

Thesis (Ph.D.)--University of Washington, 2016-06

Credit and collateral

Collateral - generally defined as an asset used to provide security for a lender's loan - is an important feature of credit contracts and all the available evidence suggests that its use is getting more pervasive. This informative book builds upon recent research into this topic. Sena analyses three case-studies that revolve around the impact that financial constraints have on economic outcomes. In the first case-study, the relationship between firms' technical efficiency and increasing financial pressure is explored. The author then goes on to show, in the second case study, that under specific circumstances, increasing financial pressure and increasing product market competition can jointly have a positive impact on firms' technical efficiency, while not being true for all types of firms. In the third case, she analyses the impact that finance constraints have on women's start-ups. Unique and revealing, this is the first book to deal so extensively with the topic of collateral, and as such, is a valuable reference to postgraduates and professionals in the fields of macroeconomics, monetary and business economics. © 2008 Vania Sena. All rights reserved.

Sticky credit spreads, macroeconomic activity and equity market volatility

We uncover high persistence in credit spread series that can obscure the relationship between the theoretical determinants of credit risk and observed credit spreads. We use a Markovswitching model, which also captures the stability (low frequency changes) of credit ratings, to show why credit spreads may continue to respond to past levels of credit risk, even though the state of the economy has changed. A bivariate model of credit spreads and either macroeconomic activity or equity market volatility detects large and significant correlations that are consistent with theory but have not been observed in previous studies. © 2010 Nova Science Publishers, Inc. All rights reserved.

Macroeconomic Risk Factors and the Role of Mispriced Credit in the Returns from International Real Estate Securities

The benefits of diversification from international real estate securities are generally well established. However, the drivers of international real estate securities returns are insufficiently understood. We jointly examine the empirical implications of three major international asset pricing models that account for broad macroeconomic risk factors. In addition, we develop the hypothesis that an indicator of mispriced credit is significant in explaining the time series variation in international real estate securities returns. We employ the returns generated by a large sample of firms from 20 countries over the period 1999 to 2011 to test our hypothesis. We find support for the predictions of the major international asset pricing models. We also find evidence in favour of our hypothesised link between local credit conditions and the performance of international real estate securities.

Household portfolio allocation, risk attitudes and credit constraints : evidence from the eurozone

Mestrado em Economia Monetária e Financeira

Forecasting errors, directional accuracy and profitability of currency trading: The case of EUR/USD exchange rate

We provide a comprehensive study of out-of-sample forecasts for the EUR/USD exchange rate based on multivariate macroeconomic models and forecast combinations. We use profit maximization measures based on directional accuracy and trading strategies in addition to standard loss minimization measures. When comparing predictive accuracy and profit measures, data snooping bias free tests are used. The results indicate that forecast combinations, in particular those based on principal components of forecasts, help to improve over benchmark trading strategies, although the excess return per unit of deviation is limited.

Corporate governance : value creation and performance in credit unions

In this study, we examine the relationship between good corporate governance practices and the creation of value/performance of credit unions from 2010 to 2012. The objective was to create and validate a corporate governance index for credit unions, and to then analyse the relationship between good governance practices and the creation of value/performance. The problem question is: do good corporate governance practices provide value creation for credit unions? The research started by creating indices from factor analysis to identify latent dependent variables related to value creation and performance; next indices were created from the principal component analysis for the creation of independent latent variables related to corporate governance. Finally, based on panel data from regression models, the influence of the variables and indices related to corporate governance on the indices of value creation and performance was verified. Based on the research, it became evident that the Corporate Governance Index (IGC) is mainly impacted by Executive Management, with 40.31% of the IGC value, followed by the Representation and Participation dimension, with 34.07% of the IGC value. The contribution for academics was the creation of the Corporate Governance Index (IGC) applied for credit unions. As for the contribution to the system of credit unions, the highlight was the effectiveness of the mechanisms for economic-financial and asset management adopted by BACEN, credit unions and OCEMG.

Diversification and value-at-risk

A pervasive and puzzling feature of banks’ Value-at-Risk (VaR) is its abnormally high level, which leads to excessive regulatory capital. A possible explanation for the tendency of commercial banks to overstate their VaR is that they incompletely account for the diversification effect among broad risk categories (e.g., equity, interest rate, commodity, credit spread, and foreign exchange). By underestimating the diversification effect, bank’s proprietary VaR models produce overly prudent market risk assessments. In this paper, we examine empirically the validity of this hypothesis using actual VaR data from major US commercial banks. In contrast to the VaR diversification hypothesis, we find that US banks show no sign of systematic underestimation of the diversification effect. In particular, diversification effects used by banks is very close to (and quite often larger than) our empirical diversification estimates. A direct implication of this finding is that individual VaRs for each broad risk category, just like aggregate VaRs, are biased risk assessments.

Knowledge management for enterprise systems: observations from small, medium and large organizations

Anecdotal evidence suggests that the lifecycle-wide management of Enterprise System (ES) related knowledge is critical for ES health and longevity. At a time where many ES-vendors now offering solutions to Small and Medium size organizations, this paper investigates the ability of Small and Medium size organizations to maintain a lifecycle-wide knowledge management strategy. The paper explores the alleged differences in the knowledge management practices across 27 small, medium and large organizations that had implemented a market-leading ES. Results suggest that: (1) despite similar knowledge creation efforts in all three organizational sizes, small organizations struggle with retaining, transferring and applying the knowledge. The study also reveals that, (2) the overall goodness of the knowledge management process in larger organizations remains higher than their small and medium counterparts.

Towards a unified service description language for the internet of services : requirements and first developments

Service-oriented Architectures (SOA) and Web services leverage the technical value of solutions in the areas of distributed systems and cross-enterprise integration. The emergence of Internet marketplaces for business services is driving the need to describe services, not only from a technical level, but also from a business and operational perspective. While, SOA and Web services reside in an IT layer, organizations owing Internet marketplaces are requiring advertising and trading business services which reside in a business layer. As a result, the gap between business and IT needs to be closed. This paper presents USDL (Unified Service Description Language), a specification language to describe services from a business, operational and technical perspective. USDL plays a major role in the Internet of Services to describe tradable services which are advertised in electronic marketplaces. The language has been tested using two service marketplaces as use cases.

New and young firms Entrepreneurship policy and the role of government – evidence from the Federation of Small Businesses survey

Purpose – The purpose of this paper is to investigate whether new and young firms are different from older firms. This analysis is undertaken to explore general characteristics, use of external resources and growth orientation. Design/methodology/approach – Data from the 2008 UK Federation of Small Businesses survey provided 8,000 responses. Quantitative analysis identified significantly different characteristics of firms from 0-4, 4-9, 9-19 and 20+ years. Factor analysis was utilised to identify the advice sets, finance and public procurement customers of greatest interest, with ANOVA used to statistically compare firms in the identified age groups with different growth aspirations. Findings – The findings reveal key differences between new, young and older firms in terms of characteristics including business sector, owner/manager age, education/business experience, legal status, intellectual property and trading performance. New and young firms were more able to access beneficial resources in terms of finance and advice from several sources. New and young firms were also able to more easily access government and external finance, as well as government advice, but less able to access public procurement. Research limitations/implications – New and young firms are utilising external networks to access several resources for development purposes, and this differs for older firms. This suggests that a more explicit age-differentiated focus is required for government policies aimed at supporting firm growth. Originality/value – The study provides important baseline data for future quantitative and qualitative studies focused on the impact of firm age and government policy.

The valuation accuracy of multiples in mergers and acquisitions, and their association with firm misvaluation

This study explores the accuracy and valuation implications of the application of a comprehensive list of equity multiples in the takeover context. Motivating the study is the prevalent use of equity multiples in practice, the observed long-run underperformance of acquirers following takeovers, and the scarcity of multiplesbased research in the merger and acquisition setting. In exploring the application of equity multiples in this context three research questions are addressed: (1) how accurate are equity multiples (RQ1); which equity multiples are more accurate in valuing the firm (RQ2); and which equity multiples are associated with greater misvaluation of the firm (RQ3). Following a comprehensive review of the extant multiples-based literature it is hypothesised that the accuracy of multiples in estimating stock market prices in the takeover context will rank as follows (from best to worst): (1) forecasted earnings multiples, (2) multiples closer to bottom line earnings, (3) multiples based on Net Cash Flow from Operations (NCFO) and trading revenue. The relative inaccuracies in multiples are expected to flow through to equity misvaluation (as measured by the ratio of estimated market capitalisation to residual income value, or P/V). Accordingly, it is hypothesised that greater overvaluation will be exhibited for multiples based on Trading Revenue, NCFO, Book Value (BV) and earnings before interest, tax, depreciation and amortisation (EBITDA) versus multiples based on bottom line earnings; and that multiples based on Intrinsic Value will display the least overvaluation. The hypotheses are tested using a sample of 147 acquirers and 129 targets involved in Australian takeover transactions announced between 1990 and 2005. The results show that first, the majority of computed multiples examined exhibit valuation errors within 30 percent of stock market values. Second, and consistent with expectations, the results provide support for the superiority of multiples based on forecasted earnings in valuing targets and acquirers engaged in takeover transactions. Although a gradual improvement in estimating stock market values is not entirely evident when moving down the Income Statement, historical earnings multiples perform better than multiples based on Trading Revenue or NCFO. Third, while multiples based on forecasted earnings have the highest valuation accuracy they, along with Trading Revenue multiples for targets, produce the most overvalued valuations for acquirers and targets. Consistent with predictions, greater overvaluation is exhibited for multiples based on Trading Revenue for targets, and NCFO and EBITDA for both acquirers and targets. Finally, as expected, multiples based Intrinsic Value (along with BV) are associated with the least overvaluation. Given the widespread usage of valuation multiples in takeover contexts these findings offer a unique insight into their relative effectiveness. Importantly, the findings add to the growing body of valuation accuracy literature, especially within Australia, and should assist market participants to better understand the relative accuracy and misvaluation consequences of various equity multiples used in takeover documentation and assist them in subsequent investment decision making.

Catch limits, capacity utilization and cost reduction in Japanese fishery management

Japan's fishery harvest peaked in the late 1980s. To limit the race for fish, each fisherman could be provided with specific catch limits in the form of individual transferable quotas (ITQs). The market for ITQs would also help remove the most inefficient fishers. In this article we estimate the potential cost reduction associated with catch limits, and find that about 300 billion yen or about 3 billion dollars could be saved through the allocation and trading of individual-specific catch shares.

An international comparison of the continuing professional development process (CPD) in Australia, New Zealand and the United Kingdom

Background: The Pharmacy Board of Australia stipulated that for renewal of registration, pharmacists must have accrued a minimum of 20 CPD credits over the 2010-11 registration years (1). Mandatory CPD is not new in Pharmacy. The UK and New Zealand have both established systems of CPD in recent years. The purpose of this study is to investigate established CPD processes in the UK and New Zealand with the view to making recommendations for the implementation of the CPD process in Australia. Objectives: To compare the acquisition and guidance on documentation of CPD credit points in Australia, New Zealand and the United Kingdom. Methodology: A comparative online search of the websites of each of the registering authorities was undertaken. Any practice standards or guidelines which relate to registration or continuing professional development were analysed and compared. Results: In New Zealand the Pharmacy Council require Pharmacists to have a minimum of 12 outcome credits over a 3-year period for recertification (2, 3). The outcome credit related to each CPD action and is based on relevance to the pharmacist and their practice. It is graded between one, for CPD which has occasional relevance to practice and three which have considerable relevance to practice. There are examples of completed CPD recording sheets on their website (8). In the UK, The General Pharmaceutical Council require Pharmacists to make a minimum of nine CPD entries per year (4) and detailed guidance on how to record CPD activities is provided (5,7). The Pharmacy Board of Australia divides CPD activities into three groups (6). Of the 20 credits required annually only 10 can be gained from group one activities, which is information accessed without assessment. There is only brief guidance on the recording of CPD. Discussion: The GPhC in the UK provided the most comprehensive guidance on acquisition of CPD credit points and documentation (5,7) The Pharmacy Council of New Zealand made CPD points relevant to practice.(2,8) The Pharmacy Board of Australia provided limited information for pharmacists on CPD activities, which may impede pharmacist participation. Information may assist in increasing pharmacists’ engagement in CPD activities. In conclusion, there is variation between the three countries in the amount and type of information provided about CPD requirements.