International Journal of Financial Engineering and Risk Management (6 papers in press)
Special Issue on: Behavioural Finance and Decision-Making in Financial Markets
Racial Discrimination in TARP Investments
by Lucas Puente, Linus Wilson
Abstract: Minority and black owned banks were significantly less likely to receive funds from the Troubled Asset Relief Program (TARP) Community Development Capital Initiative (CDCI). A non-minority bank with the median characteristics was approximately ten times more likely to obtain TARP funds than an African American owned bank after controlling for other factors. We also find prior TARP recipients and banks with fewer troubled assets were more likely to obtain money from this program.
Keywords: Barney Frank; bailout; CDCI; CDFI; Community Development Capital Initiative; Community Development Financial Institution; discrimination; ethics; EESA; Emergency Economic Stabilization Act; Maxine Waters; minority ownership; OneUnited bank; politics; preferred stock; race; racial discrimination; subordinated debt; U.S. House Financial Services Committee; TARP.
Determinants of Mortgage Arrears: The case of Buy to Let
by Alexios Makropoulos
Abstract: This paper considers an error correction modelling (VECM) approach to identify determinants of mortgage portfolio arrears in the Buy to Let (BTL) segment of the UK mortgage market. Within this context, the alternative theories of the ability to pay view and the equity view are tested for the particular segment of the UK mortgage market. The empirical results suggest that UK Buy to Let arrears are related to the dual-trigger approach where elements of the ability to pay view are combined with elements from the equity view to determine the aggregate arrears behaviour. From a behavioural perspective the results imply that borrowers decisions may be influenced from personal biases and optimism around the long-run affordability and equity returns of their (BTL) investment decisions. Likewise, the 2008 crisis provided some indication that lenders may be affected from similar biases when making lending decisions. These findings may therefore be of practical use for mortgage portfolio managers and decision makers when considering policies for the BTL segment of the UK mortgage market.
Keywords: Credit risk; Buy to Let; BTL; mortgage arrears; mortgage defaults.
The dividend policy of tourist firms pre and during the economic crisis in Greece
by Mihail Diakomihalis, Nikolaos Kapsiohas
Abstract: The hotel industry constitutes one of the most significant branches of the Greek economy and is the fundamental pillar of Greek tourism. Hotel enterprises have not suffered notably from the financial crisis, thus demonstrating that tourism has been the heavy industry of Greece. In this paper, an extended survey was conducted regarding companies with share capital, their way of taxation, and also the way they dispose of their profits. Particular emphasis was given to corporations (S.A., or limited liability companies). Subsequently, S.A. companies were ex-amined on the basis of their turnover and the region of Greece where they are located. Finally, twenty hotel S.A. companies in highly developed tourist regions were selected.
The analysis was based on their published financial data covering the period 2004-2014. It was confirmed that in hotel enterprises as in all enterprises in Greece taxation was in-creased, especially in 2013 and 2014. Nevertheless, this increase does not seem to have had a great impact on distributed dividends to stockholders.
Furthermore, it is of particular interest that the turnover rate is low in all enterprises. It is an interesting point since it indicates that these enterprises, even though the vast majority of them raised both their capital and fixed assets, appear to have overinvested funds with respect to the amount of their sales, despite the upward turnover in 2014 and throughout the years of economic crisis in general.
The healthy status of Greek hotel enterprises is proven by the growth of their current assets, since 80% significantly increased their current assets, 15% maintained their current assets sta-ble and only 0.05% experienced a decrease.
Keywords: Tourist enterprises; dividends; taxation; economic crisis.
Quantitative Easing and Government Bonds: Evidence from the EU
by Antonios Sarantidis, Fotios Mitropoulos, Konstantinos Kollias
Abstract: This paper examines the relationship of quantitative easing policy programs, government bond yields and banking stock price returns for the EU periphery. The aim is to estimate and to analyze the effect of the ECBs QE policy on government bond yields and banking stock prices. The dataset consist of monthly panel data observations spanning from January 2008 until September 2017. The empirical part utilizes the Difference-in-Differences methodology. The findings suggest that the implementation of QE has positive effects, by decreasing the bond yields for the periphery countries that participated in the program; there were no effects noted for banking returns. Additional macroeconomic variables are included, where a reduction in government debt and unemployment and a raise in industrial production, tax revenues and FDI lead to lower government bond yields and to higher banking returns. The research provides to investors and government regulators empirical insights into the effects that QE policies have.
Keywords: Quantitative easing; Government bonds; Banking returns; Difference-in-Difference.
Special Issue on: Applications of Optimisation in Finance
Multi-period portfolio optimization with alpha decay
by Kartik Sivaramakrishnan, Dieter Vandenbussche
Abstract: The traditional Markowitz MVO approach is based on a single-period model. Single period models do not utilize any data or decisions beyond the rebalancing time horizon with the result that their policies are "myopic" in nature. For long-term investors, multi-period optimization offers the opportunity to make"wait-and-see" policy decisions by including approximate forecasts and long-term policy decisions beyond the rebalancing time horizon. We consider portfolio optimization with a composite alpha signal that is composed of a short-term and a long-term alpha signal. The short-term alpha better predicts returns at the end of the rebalancing period but it decays quickly, i.e., it has less memory of its previous values. On the other hand, the long-term alpha has less predictive power than the short-term alpha but it decays slowly. We develop a simple two stage multi-period model that incorporates this alpha model to construct the optimal portfolio at the end of the rebalancing period. We compare this model with the traditional single-period MVO model on a simulated example from Israelov & Katz and also a large strategy with realistic constraints and show that the multi-period model tends to generate portfolios that are likely to have a better realized performance.
Keywords: Markowitz mean-variance optimization; Multi-period portfolio optimization; Alpha decay.
Special Issue on: Applications of Optimisation in Finance
Factor-Based Optimization and the Creation/Redemption Mechanism of Fixed Income Exchange-Traded Funds
by Bennett Golub, Maurizio Ferconi, Ananth Madhavan, Alex Ulitsky
Abstract: Fixed income exchange-traded funds (ETFs) trade on organized exchanges, often with narrow spreads, liquidity, and pre- and post-trade transparency. The remarkable success of fixed income ETFs relies critically on the efficient functioning of the ETF creation-redemption mechanism which helps drive the funds market price to stay closely in line with the underlying values of the bond portfolios they represent. Creation of fixed income ETFs faces challenges though because of the less liquid nature of the markets for many bonds. In this article, we explain how custom fixed income baskets can be used with exchange-traded funds in a systematic, auditable, and repeatable manner. We use factor-based optimization to create ETF baskets for one or more ETFs and with one or many counter-parties. We conclude that optimization can improve the efficiency of ETF basket creation, which in turn induces higher liquidity and tighter spreads, benefitting investors.
Keywords: Fixed Income; ETFs; Factors.