American J. of Finance and Accounting (9 papers in press)
A comparative analysis of dynamic and cross-sectional approaches for financial performance analysis
by Moslem Alimohammadlou, Abbas Bonyani
Abstract: The use of financial ratios as the necessary information is considered as one of the noticeable issues for researchers to apply quantitative models for evaluating the performance of institutions. The reason for introducing these new approaches is that the financial ratios cannot individually provide a correct and adequate understanding of an institutions performance. This study is aimed to compare the cross-sectional analysis and dynamic analysis to evaluate the financial performance. In this regard, 14 companies were examined based on two approaches during the period of 2011-2015 using the five influential ratios on financial performance evaluation. Then, results were compered to data of the test period (2016). Results showed that applying the dynamic analysis of performance instead of cross-sectional analysis and also carefully consideration in the analysis of efficient frontier shift can provide a more accurate evaluation of financial performance of companies compared to the multi-criteria decision-making analysis.
Keywords: Performance measurement; DEA window analysis; Malmquist index; Best-Worst method; PROMETHEE II.
Bank Behavior in Good Times and Bad Times: The Impact of Regulations and Risk Taking on Bank Performance
by Miroslav Mateev, Petko Bachvarov
Abstract: In this paper, we investigate the main determinants of bank performance before, during and after the recent financial crisis of 2007-2008. Using a sample of 178 large and medium sized banks from 33 countries around the globe, we test the validity of different hypotheses advanced in the academic literature. We find that financial institutions that performed more poorly during the crisis had, on average, lower return in 2006, less deposits and less leverage, higher risk, and more funding fragility, and they come from countries with better institutional environment. We also investigate the role of bank regulations and their impact on bank performance during good times and bad times. We provide new evidence that restrictions on bank activities are, in general, uncorrelated with the performance of banks during the crisis; however, this relationship is significant for large banks. We compare the main determinants of bank performance before, during and after the crisis, and find convincing evidence for the increased power of regulations and the diminishing role of bank risk taking after the crisis.
Keywords: Credit crisis; Risk taking; Bank fragility; Regulation; Ownership Control.
Stock price synchronicity and its effect on stock market volatility: Evidence from the MENA region
by Omar Farooq, Neveen Ahmed, Mohammed Bouaddi
Abstract: This study investigates whether stock price synchronicity contains information regarding future stock market volatility. More specifically, this paper answers three important questions: (1) Does historic stock price synchronicity affect stock market volatility? (2) If it does, how much of the volatility is explained by synchronicity? (3) Does the impact of unexpected shocks on stock market volatility depend on historic synchronicity? Using the data from MENA region (Morocco, Tunisia, Egypt, United Arab Emirates, Jordan, Oman, and Bahrain), we document significantly positive relationship between stock price synchronicity and stock market volatility during the period between 2005 and 2010. We show that, whether stocks co-move downward or co-move upward, it causes stock market volatility go up significantly. Our results are significant across all markets. We also show that synchronous component of volatility can, at times, completely explain stock market volatility. Furthermore, we also show that the impact of unexpected shocks on stock market volatility is an increasing function of stock price synchronicity.rn
Keywords: Stock Price Synchronicity; Stock Market Volatility; Emerging Markets.
The Effects of Eurozone Sovereign Credit Rating Change on the U.S. Treasury and Equity Markets
by Feng Jiao, Mahsa Nasher
Abstract: A growing number of researchers have investigated the spillover mechanism of how sovereign rating change in one market could affect other non-event security markets. Motivated by two competing hypothesis in the literature, i.e. contagion effect and `competitive effect', this paper focuses on the information content of sovereign rating change announcement and examines how such changes matter for assets returns and liquidity in U.S. capital markets. In an application to the aggregate U.S. equity and treasury market, this paper finds that both assets return and liquidity improves following a sovereign rating downgrade in the Euro-zone. Analyzing the individual firm level effects in addition to the aggregate market effects, we find that firms with low-market capitalization, low-book-to-market ratio, and high leverage react more significantly to a sovereign rating downgrade in the Euro-zone. Our results are consistent with the hypothesis of competitive effect in general and set the stage for future policy research and risk management developments.
Keywords: Sovereign Credit Rating; Eurozone; Liquidity.
Political uncertainty and market reaction: The case of Tunisian democratic transition
by Linda FAKHFAKH, Taher Hamza, Siwar ELLOUZ
Abstract: Political risk analysis is an important factor in influencing stock market reaction. This paper examines in the context of the Tunisian democratic transition, the impact of political uncertainty on stock market and bank sector returns. We aim to understand how the political risk is priced by the market actors. We apply the event study and BHAR methodology and test the relationship between political risk and stock returns in short and long-term horizons. Our results show that, in the short-term, the political risk associated with the revolution event, affects negatively the stock market returns but it shows a positive impact as part of a long-term portfolio strategy. However, the "2014 parliamentary elections" event has a positive effect on stock market returns in the short-term, but this effect seems to become negative over 18 months. For the "2011 parliamentary elections event, the positive effect seems to persist for the short and long-term. Overall, political risk in the context of democratic transition negatively affects the bank sector returns. This study proposes several managerial implications for investors as well as for market regulators.
Keywords: Political uncertainty; market reaction; Bank sector; Revolution and Democratic Transition.
A Homoscedastic Co-integration Analysis of Malaysian Financial Market
by Mohamed Ibrahim Mugableh
Abstract: This article examined long-term relationships and dynamic links between Malaysian equity market and macroeconomic forces, including inflation rates, interest rates, money supply, and real economic activity. It employed the vector error correction model and annual time series for the 1977-2015 period. The empirical results show the existence of six co-integrating vectors, implying a long-term relationship between the selected variables. In addition, inflation rates and interest rates were shown to be negatively associated with Malaysian capital market. Money supply and real economic activity were found to be positively related to Malaysian capital market. However, the sample resulted in several observations during the economic and financial crises periods which influence the findings obtained from the regression.
Keywords: Equity Market; Macroeconomics; Malaysia; Market Efficiency.
Energy portfolio risk management using time-varying copula methods: Application to Bonds, Interest Rate and VIX
by Samar Zlitni, Ahmed Ghorbel, Walid Khoufi
Abstract: This work is concerned with the statistical modeling of hedging and safe haven strategies between the energy sector (crude oil), bonds, vix and interest rate using the concept of copulas and proposes a method for choosing the best asset in order to hedge against extreme fluctuations of energy prices based on the combination of time series. rnVarious copula functions are used to model the dependence structure between oil and different assets (Interest rates, Bonds and VIX). We investigate whether there are significant changes in the relationships between energy sector and these assets especially for different horizons of investment: the Global Financial Crisis (06/27/2008 to 12/31/2009), the Sovereign Debt Crisis in Europe (01/04/2010 to 12/31/2012) and the Post-Crisis period (01/02/2013 to 02/24/2016). Results show that TRUS is the best hedge for the energy sector because it presents the highest hedge ratio in most cases. The implied volatility (VIX) provides the second highest hedging ratio indicating the usefulness of a volatility index in hedging oil prices. Second, hedge ratios vary considerably over the sample as a consequence of the change in the dependence structure and the horizon of investment period indicating that hedged positions should be updated regularly.
Keywords: energy sector; risk management; copula; hedge; safe haven; crises; bonds; interest rate; VIX.
Portfolio Selection Using Analytic Hierarchy Process and Numerical Taxonomy Analysis : Case Study of Iran
by Fereydoon Rahnamay Roodposhti, Mohammad Bahrani Jahromi, Sahar Kamalzadeh
Abstract: In spite of large number of different models used to solve the problem of optimal portfolio selection, the problem of choosing a portfolio containing securities from different industries is still a matter of discussion among academics. Evaluating financial performance of the firm can be a crucial issue in selecting stocks. The purpose of this paper is to develop a model for evaluating the performance of firms by using financial ratios and at the same time, taking subjective judgments of decision makers in to account. Proposed approach is based on Analytic Hierarchy Process (AHP) and Numerical Taxonomy methods. AHP is used in determining the weights of criteria by decision makers and then rankings of the firms are determined through Numerical Taxonomy. The model is used for evaluating performance of firms in Tehran Stock Exchange by using their financial ratios. Then the rankings of the firms are determined according to their results
Keywords: (S) Multiple Criteria Analysis; Rating stocks; AHP; Taxonomy.
HOW THE LEVEL OF CENSUS DATA AND TRI RELEASES AFFECT EMPIRICAL MODELS ESTIMATING THE AMOUNT SPENT ON SUPPLEMENTAL ENVIRONMENTAL PROJECTS
by Musa Essayyad, William Galose
Abstract: This is an environmental finance paper. Empirical models estimating how the demographics of the community affect environmental outcomes are influenced by both the scale of demographic variables and the control variables. Supplemental Environmental Projects (SEPs) are a way to finance environmental projects which provide restorative justice benefits to communities afflicted by environmental violations. This paper estimates models of the amount spent on SEPs included in the settlements of a sample of U.S. Environmental Protection Agency (EPA) administrative cases. Demographic variables were generally statistically significant in estimates of models employing U.S. Census Bureau tract-level data for demographic variables. U.S. Census Bureau block group data within a three-mile radius of the involved facility were obtained from U.S. EPA Facility Reports. The block group data demographic variables were generally not statistically significant in models which were similar to the tract-level data models. The inclusion of TRI control variables did not substantially affect the results. Thus, when employing SEPs to finance environmental projects, the scale of demographic variables influences empirical models estimating the amount spent on SEPs.
Keywords: Supplemental environmental projects; EPA; Ordinary least squares models.