Abstracts and papers (alphabetically by presenting authors)

This paper analyzes link between optimal CEO compensations and the optimal mix of private and public debt issued by a firm to resolve agency problems. We show that, absent adverse selection issues, optimal managerial compensation under moral hazard takes the form of a stock based compensation plan. The firm finances exclusively with bank loans and does not issue any public debt. However, with both types of agency problems, there is an optimal mix of private and public debt, and the optimal managerial compensation is shown to depend on growth opportunities, assets-in-place as well as the amount of public debt. Thus composition of debt is shown to influence CEO compensations under asymmetric information. While the mix of two types of debt enhances value of the firm ex-ante, ex-post it leads to inefficient restructuring.

Heterogeneous Multiple Bank Financing, Optimal Business Risk and Information Disclosure (Download Paper)

This paper studies optimal risk-taking and information disclosure by firms that obtain financing from both a “relationship” bank and “arm’s-length” banks. We find that firm decisions are asymmetrically influenced by the degree of heterogeneity among banks: lowly-collateralized firms vary optimal risk and information precision along with the degree of relationship lending for projects with low expected cash- flows, while highly-collateralized firms do so for projects with high expected cash- flows. Incidences of inefficient project liquidation are minimized if the former firms rely on a low degree of relationship banking, the latter on a large degree.

Warrant Pro 1: Market Price Synthesis with a Software Agent and a Neurosimulator (Download Paper)

Inherently today's derivative pricing is based on stochastic models developed since the 1970's. Especially the Cox/Ross/Rubenstein model is widely used. These models base on some unrealistic assumptions. Especially the necessary estimation of future volatility leads to imprecise prices. Derivatives are priced below or above the real market price. In both cases either the issuer or the customer disadvantaged. The imprecision is avoided by using software agents and high precision neural networks. The software WARRANT PRO 1 presented here combines the software agent PISA (Partially Intelligent Software Agent) and the neurosimulator FAUN (Fast Approximation with Universal Neural Networks) to synthesize market price functions instead of theoretical price functions. The architecture of WARRANT PRO I is described in detail. PISA automatically extracts data from the internet or other (semi-)structured text sources, e. g. videotext. Afterwards PISA automatically analyzes the resulting data, eliminates redundant and invalid values and creates neural network input files. High quality neural network training and validation patterns with predefinable denseness are generated. Using free sources like the internet the input patterns can be generated cost free for any available data. The neurosimulator FAUN learns true market price functions from the input patterns and generates a neural network. The neural network computes real market prices. It enables customers to single out overpriced and underpriced options a priori (extrapolation) and a posteriori (interpolation). On the other hand issuers are enabled to price over-the-counteroptions (OTC-options) just-in-time. Future versions of WARRANT PRO I will contain the possibility to export the market price function in a platform independent executable file. This enables the user to calculate accurate market prices on nearly every computer. This paper outlines an example with 53 German DAX call warrants. With statistical analysis the quality of the issuers' pricing mechanism is analyzed. Issuers and options with prices below and over the market price are singled out.

Determinanten der Mittelzuflüsse bei deutschen Aktienfonds (Download Paper)

In der vorliegenden Arbeit werden erstmals die Determinanten der Zuflüsse deutscher Aktienfonds empirisch untersucht. Für den Untersuchungszeitraum von 1991 bis 2003 finden wir einige interessante Unterschiede zum US-Markt. Zunächst bestätigen wir die in der Literatur dokumentierte positiv konvexe Beziehung zwischen vergangener Performance eines Fonds und seinen Netto-Zuflüssen, die aber in Deutschland weniger stark ausgeprägt ist als in den USA. Wir zeigen außerdem, dass die Eigenschaften der Fondsgesellschaft, zu der ein Fonds gehört, einen wesentlichen Einfluss auf dessen Zuflüsse haben. Insbesondere zeigen wir erstmals, dass es einen Kannibalisierungseffekt innerhalb von Fondsfamilien gibt, der besonders zwischen Fonds zu beobachten ist, die im gleichen Marktsegment angeboten werden. Unsere Ergebnisse haben wichtige Implikationen für das Risikoverhalten von Fondsmanagern sowie die Produktpolitik von Fondsgesellschaften.

Time varying decomposition of posted bid-ask spreads (Download Paper)

In this study, Huang and Stoll’s (1997) three way decomposition model for posted bid-ask spreads is estimated using a data set which consists of 376 131 observations from 10 stocks traded at Stockholmsbörsen (SB), randomly selected from the OMX stock index. The Huang and Stoll (1997) model encompasses statistical and trade indicator models by for example Ross (1984), Stoll (1989), George et al (1991), Glosten and Harris (1988), decomposing posted bid-ask spreads into order processing, inventory and adverse selection components. This study supports the Huang and Stoll’s (1997) three way decomposition of posted bid-ask, when adjusted to accommodate for the way transactions are recorded at SB. Fixed probabilities of reversed trade’s ranges from 12.38 to 21.25 percent, i.e. trade continuations are highly probable. The signs of estimated adverse selection cost coefficients are positive for all stocks, ranging from 0.31 to 10.75 percent. No bunching procedure is used, which yielded higher adverse selection coefficients in Huang and Stoll’s (1997) study. Also, the adjusted Huang and Stoll’s model is extended to account for repeating time of day patterns in the probability of a reversed trade. Notably, this extension does not affect the adverse selection or inventory coefficients. The pattern is consistent with the idea that expected mid quote changes is diurnal. Also, the results are consistent with informed trading right after the opening call.

The Impact of Illiquidity on the Asset Management of Insurance Companies (Download Paper)

This paper investigates the impact of illiquidity on insurance company company asset allocation and selling strategy. The need for insurers to settle claims as they arise by making funds available immediately make insurers especially susceptible to the effects of transaction illiquidity. Using a simplified model of a risk neutral insurance company, we examine the effect of permanent and temporary price impact on initial asset allocation. The optimal asset allocation and selling strategy are determined numerically. While a clear diversification benefit is evident on the basis of illiquidity, under certain market assumptions, the cash-flow matching strategy is optimal.

Quality and efficiency of analysts´ earnings forecasts - An empirical study of the German capital market (Download Paper)

Decomposing volume for VWAP strategies (Download Paper)

In this paper, we present a new methodology for modeling intraday volume which allows for a significant reduction of the VolumeWeighted Average Price (VWAP) orders risk. The result are obtained for the forty stocks included in CAC40 index at the beginning of September 2004. The idea of considered models is based on the decomposition of traded volume into two parts: one reflects volume changes due to market evolutions, the second describes the stock specific volume pattern. The dynamics of the specific part of volume is depicted by ARMA, and SETAR models.

Testing for Financial Spillovers in Calm and Turmoil Periods (Download Paper)

In this paper, we investigate financial spillovers between stock markets during calm and turbulent times. We explicitly define financial spillovers and financial contagion in accordance with the economic literature and construct statistical models corresponding to these definitions in a Markov switching framework. Applying the new testing methodology based on transition matrices, we find that spillovers from the US stock market to the UK, Japanese, and German markets are more frequent when the latter markets are in the crisis regime. However, we reject the hypothesis of strong financial contagion from the US market to the other markets.

Regulation of Guru Analysts´ Conflicts of Interest and IPOs´ Underpricing via Overvaluation (Download Paper)

In the context of ”hot” IPOs markets, the large participation of unsophisticated retail investors offers to sell-side guru analysts a substantial influence on initial market valuation of firms going public, due to divergence of opinions under short-sell constraints. As a result, gurus are directly or indirectly subjected to pressures from head-to-head competing clients endowed with conflicting interests as regards initial stock prices and performancemeasurement horizon. Indeed, Firm’s insiders and privileged investors favor initial stock price overvaluation that induces underpricing: the resulting information momentum generates additional demand and supports short/mid-term performance until the expiration of the lock-up period. At the contrary, long-term investors favor initial fair valuation that supports long-term performance of IPOs. Thanks to a delegated common agency game under moral hazard and incomplete contracting, we endogenize the influence of environment variables on conflicts outcome as regards market initial valuation. We demonstrate first that the risk of underpricing through overvaluation depends crucially on the extent of the relative pricing preferences of opposite financial interests at stake in the IPO process. Thus, the more the potential profit from underwriting activities exceeds potential brokerage commissions, the more the bank favors issuers over investors, and the more likely initial market overvaluation is. Consequently, to protect unsophisticated retail investors unable to de-biais guru’s recommendations, we introduce in a second time a regulator in the framework of a simultaneous intrinsic relationship, which suffers from overvaluation on the one hand, and is allowed to take costly judicial proceedings to penalize banks on the other hand. We then show that coercive regulation greatly mitigates damaging conflicts outcomes as regards IPOs’ long-term underperformance when short-term focus is strong, even if it induces free-riding behaviors among fair-valuation partisans.

Benefits and costs of having bank and trade credit simultaneously (Download Paper)

This paper provides a rationale for the question whether to have bank debt only or bank and trade credit simultaneously. In the two creditors case a special incentive problem might occur prior to bankruptcy if the bank loan is secured by external collateral. In order to save her private fortune, the entrepreneur may be tempted to repay the bank by liquidating the firm's assets before bank debt becomes due. Even the bank might benefit. The unsecured supplier will lose. With pure bank financing - thus, paying the supplier via the bank account - the problem does not occur. However, then the supplier may have poor incentives to provide non- verifiable services later on. Collateral and shortterm dates of payments mitigate the entrepreneurial moral hazard problem.

On the Organization of Risk Management (Download Paper)

The Integrated Risk Management (IRM) approach advocates coordinated risk management decisions based on firm-wide information. We model how one generates such information within an organization. Without informational problems the centralized IRM approach dominates weakly the traditional decentralized risk management approach. However, in some situations it is optimal not to manage risks explicitly at all. The situation changes with the additional consideration of information asymmetries. Providing the agents with appropriate incentives induces costs that may outweigh the expected benefits from coordination. We highlight these agency costs of risk management and consequently provide a rationale for a decentralized approach to manage risks.

A Two-Factor Model for the Electricity Forward Market (Download Paper)

This paper aims to describe and calibrate a two-factor model for electricity futures, which captures the main features of the market, in particular seasonality, and fits the term structure of volatility. Additionally, options on futures will be priced within this context and we will especially take care of the existence of delivery periods in the underlying future. The approach is motivated by the one-factor-model of Clewlow and Strickland applied to the electricity market and extends it to a two-factor-model.

Put Options Are Not Too Expensive - An Analysis of Path Peso Problems (Download Paper)

Funds Tournament and Equity Portfolio Managers Risk-Taking (Download Paper)

This paper investigates the impact of prior performance of mutual funds on the risk-taking behavior of funds' managers. On a large database of French equity mutual funds running from 1993 to 2004 we show that portfolios' managers compete in an important tournament that characterizes the French and European industry. The extent of this risk-adjustment behavior clearly depends on the size of the peer group. In the French and European environments a particular peer group is considered: the funds’ family or management company because it usually belongs to the bank sector. Funds likely to end up as “losers” in their management company increase risk more than midyear “winners” that performed well in order to achieve a better rank at the end of the year.

The evolution of volatility and extreme risk in European banking (Paper coming soon)

This study analyses daily banking stock market indexes for 17 European countries and Europe as a whole by focusing on return volatility and extreme tail indexes over the period 1987 to 2003. Tests for detecting a single unknown change-point in volatility show that breaks almost uniformly exist in (or are close to) the year 1997. Similar tests for the tail index obtained by semi-parametric estimation methods hint towards possible change-points around the year 1997. The parametric approach shows dramatic changes in the GEV parameters when the period before and the period after mid-1997 are compared. Likelihood ratio test statistics indicate however that the extreme value index is stable for most countries over the period analysed

Efficiency of Cost-Averaging as an investment strategy – An analysis based on second order stochastic dominance (Download Paper)

The long-lasting controversy on the usefulness of cost-averaging as an investment strategy is revived by the increasingly more aggressive marketing for long term saving plans with new intensity. Albrecht et al. (2002) illustrated using a shortfall risk based approach that cost-averaging may be an efficient strategy compared to simple buyand- hold-strategies. The contribution of this paper is a detailed comparison of those investment strategies from the perspective of a general risk averse investor, given standard assumptions. Two theorems are derived to characterize the relevant second order stochastic dominance relations. It is proven that 1. that there are no stochastic dominance relations between cost-averaging and a purely risky buy-and-hold strategy and 2. that there is no cost-averaging-strategy that dominates any given buy-andhold- strategy combining a risky and risk free investment. In contrast, the converse of the second theorem does not hold.

Credit Market Competition and Capital Regulation (Download Paper)

Market discipline for financial institutions can be imposed not only from the liability side, as has often been stressed in the literature on the use of subordinated debt, but also from the asset side. This will be particularly true if good lending opportunities are in short supply, so that banks have to compete for projects. In such a setting, borrowers may demand that banks commit to monitoring by requiring that they use some of their own capital in lending, thus creating an asset market-based incentive for banks to hold capital. Borrowers can also provide banks with incentives to monitor by allowing them to reap some of the benefits from the loans, which accrue only if the loans are in fact paid off. Since borrowers do not fully internalize the cost of raising capital to the banks, the level of capital demanded by market participants may be above the one chosen by a regulator, even when capital is a relatively costly source of funds. This implies that capital requirements may not be binding, as recent evidence seems to indicate.

Efficiency and Value Creation in Acquisitions and Divestitutes: Evidence from the US Property-Liability Insurance Industry (Download Paper)

This paper analyzes acquisitions and divestitures in the US property-liability insurance industry during the period 1997-2003. It estimates the valuation effects of firms’ structural changes using an event study methodology and analyzes the effects of diversification versus focus over the dimensions of geographical areas and business sectors. The paper also analyzes the relationship between a firm’s pre-acquisition efficiency and its event-induced abnormal returns. It finds that acquirers, targets and divesting firms all earn significant positive abnormal returns. Acquisitions that focus both geography and business earn the highest abnormal returns, while other types of acquisitions earn close-to-zero abnormal returns. Firms that sell units unrelated to their corebusinesses earn higher abnormal returns, and the value created from divestitures is not from buyers’ overpayment. Acquirers with higher cost or revenue efficiency earn higher abnormal returns, while divesting firms with higher revenue efficiency earn lower abnormal returns.

Contribution values for allocation of risk capital and for premium calculation (Download Paper)

A class of contribution values for pairs of random variables is introduced as a technical tool for the problem how the risk capital needed for a portfolio of random activities should be allocated to it’s components. The well known allocation model with expected shortfall as corresponding risk value is a prominent member of this class. Our contribution values also apply to premium calculation within a portfolio of dependent (re-)insurance contracts.

Determinants of Premiums Paid in European Banking Mergers and Acquisitions (Download Paper)

This study aims at analysing the determinants of the premium paid in European banking mergers and acquisitions (M&A). This analysis will highlight the reasons for the bank M&A wave during the 1990s. The empirical study analyses a sample of 81 European banking mergers and acquisitions from 1994 to 2000. The results show that there are different variables that make the target bank attractive for the acquirer, such as the percentage of equity, the percentage of loans and financial profitability. However, geographical and product diversification have not been considered by the acquirers as a reason to pay higher premiums. Moreover, when analysing a sub-sample of savings banks and cooperatives, it is found that M&A deals have been used as a protection measure to avoid being acquired, since these acquisitions aim at attaining a great size, what implies higher premiums are paid for mergers between equals, for acquisitions of higher banks and by those who show lower growth.

What Drives European Private Equity Returns? - Fund Inflows, Skilled GPs and/or Risk? (Download Paper)

This paper analyzes the determinants of returns generated by private equity funds. It starts from the presumption that this asset class is characterized by illiquidity, stickiness, and segmentation. As a consequence, Gompers and Lerner (2000) have shown that venture deal valuations are driven by overall fund inflows into the industry giving way to the so called ’money chasing deals’ phenomenon. It is the aim of this paper to show that this phenomenon explains a significant part of variation in private equity funds’ returns. This is especially true for venture funds, as they are more affected by illiquidity and segmentation than buy-out funds. Actually, the paper presents a WLS-regression approach that is able to explain up to 47% of variation in funds’ returns. Apart from the highly significant impact of fund inflows into the industry it can also be shown that private equity funds’ returns are driven by market sentiment, GP’s skills as well as stand-alone investment risk. Moreover, returns seem to be unrelated to stock market returns and negatively correlated with the growth rate of the economy. In the context of a bootstrapping inference we can show that the results are quite stable.

Lower Salaries and No Options? On the Optimal Structure of Executive Pay (Download Paper)

We estimate a standard principal agent model with constant relative risk aversion and lognormal prices for a sample of 598 US CEOs. The model is widely used in the compensation literature, but it predicts that almost all of the CEOs in our sample should hold no stock options. Instead, CEOs should have lower base salaries and receive additional shares in their companies. For a typical value of relative risk aversion, almost half of the CEOs in our sample would be required to purchase additional stock in their companies from their private savings, investing on average one tenth of their wealth. The model predicts contracts that would reduce average compensation costs by 20% while providing the same incentives and the same utility to CEOs. We investigate a number of extensions and modifications of the standard model (taxes, liquidity constraints, incentives for risk taking, dynamic investment in the stock market), but find none of them to be fully satisfactory. We conc lude that the standard principal agent mo del typicall y used in t he literature cannot rationaliz e observed contracts. One reason may be that executive pay contracts are suboptimal.

Measuring Business Sector Concentration by an Infection Model (Download Paper)

Results from portfolio models for credit risk tell us that loan concentration in certain industry sectors can substantially increase the value-at-risk (V aR). The purpose of this paper is to analyse if a very tractable “infection model” can provide a meaningful estimate of the impact of concentration risk on the V aR. This would be achieved with quite parsimonious data requirements, which are comparable to those for Moody’s Binomial Expansion Technique (BET) and considerably lower than for a multi–factor model. The infection model extends the BET by introducing default infection into the hypothetical portfolio on which the real portfolio is mapped in order to get a simple solution for the V aR. The infection–probability is calibrated for a range of typical values of input parameters which capture the concentration of a portfolio in industry sectors, default dependencies between exposures and their credit quality. The accuracy of the new model is measured for test portfolios with a realistic industry–sector composition, obtained from the German central credit register. We find that a carefully calibrated infection model provides a reasonably close approximation to the V aR obtained from a multi–factor model. It out–performs by far the BET which we dismiss for its lack of accuracy. Pending further robustness checks we conclude that the calibrated infection model promises to provide a fit–for–purpose tool to measure concentration risk in business sectors that could be useful for internal risk controllers as well as banking supervisors.

Does the choice of the performance measure have an influence on the evaluation of hedge funds? (Download Paper)

Performance measurement is an integral part of investment analysis and risk management. Our analysis starts with the commonly held opinion in the literature that the Sharpe Ratio cannot be used as a measure of hedge fund performance because their returns tend to be far from normally distributed (see Lo, Financial Analysts Journal 2001; Kat, Journal of Wealth Management 2003). Instead one should use new performance measures, which illustrate the exposure to loss. In our empirical analysis we compare the criticized performance measure with the new approaches of measuring the performance of hedge funds. We find, that all performance measures produce similar rankings and thus result in an identical evaluation of the investments. From a practical point of view it is obvious that it really does not matter which of the considered performance measures one chooses to evaluate hedge funds.

Squeeze-outs in Germany: Determinants of the Announcement Effects (Download Paper)

In this paper we analyze the response of stock returns to announcements of squeeze-outs on the German stock market from 2002-2003. In 2002 a squeeze-out right was incorporated into the German takeover regulations. Since its introduction more than 100 companies have used this instrument to buy out the remaining minority shareholders. Using event-study methodology we examine the abnormal performances on the day of as well as before and after the announcement and analyze the determinants of the stock market reaction. We find that a squeeze-out announcement conveys new information to the market, yielding positive abnormal returns of the target company. However, we also find that the market anticipates part of the positive effect. In a cross-sectional analysis we show that certain institutional characteristics determine the magnitude of the abnormal return. Apart from the economic implications, these findings admit inferences for the economic discussion about the role of the stock price in the determination of appropriate compensations in squeeze-outs.

A common factor analysis for the US and the German stock market during overlapping trading hours (Download Paper)

The purpose of this study is to investigate the short- and longrun relationships between the US and the German stock markets during overlapping trading hours. We employ the framework of a bivariate common factor model for our empirical analysis to establish a permanent-stationary decomposition of the two major indices (the Deutsche Aktienindex (DAX) for Germany and the Dow Jones Industrial Average (DJIA) for the US). Based on a novel highfrequency data set for 2003 we are able to compute various measures to identify the fundamental dependencies between the two indices. Our findings can be summarized as follows: (1) we reveal a significant cointegration relationship between the DAX and the DJIA and identify a common trend shared by both stock indices; (2) we find that the DJIA contributes up to 95% to the total innovation of the common factor, clearly demonstrating the dominant role played by the US market during overlapping trading hours; (3) we show that both markets adjust within minutes to a system-wide shock and to shocks coming from either direction; and (4) analyzing the relevance of each individual factor component we verify that the DJIA is in fact the main driving force in the transatlantic system of stock indices.

Flexibility and Technology Choice in Gas Fired Power Plant Investments (Paper not available)

The value of a gas fired power depends on the spark spread, defined as the difference between the price of electricity and the cost of gas used for the generation of electricity. We model the spark spread using a two-factor model, allowing mean-reversion in short-term variations and uncertainty in the equilibrium price to which prices revert. We analyze two types of gas plants: peak and base load plants. A peak load plant generates electricity when spark spread exceeds emission costs, whereas a base load plant generates electricity at all levels of spark spread. A base load plant can be upgraded to a peak load plant. First, we find the upgrading threshold for a base load plant. The upgrading threshold gives the optimal type of gas plant as a function of spark spread. Second, we calculate building threshold for the investment costs. When the investment costs are below the threshold it is optimal to build the plant with the previously solved optimal technology. In the numerical example, we illustrate how our model can be used when investments in gas fired power plants are considered.

Optimal Compensation with Induced Moral Hazard in Investment (Download Paper)

We extend the principal-agent framework in the sense that the principal can neither verify the agent’s effort choice nor his investment strategy. In this setting, we provide a rationale for compensating the manager with equity based pay in a manner closely related to a call option. Moreover, contrary to the common belief, we show that maximizing the “incentives” by standard measures used in the finance literature induces the manager to an inoptimal investment and effort choice. Finally, benchmarking the manager’s compensation by market additional information turns out to be far from straightforward.

A Kalman Filter Approach for Structural Firm Value Models (Download Paper)

This paper proposes a direct empirical implementation of the Corporate Securities Framework. To date, only time series of equity prices have been used to estimate parameters of structural firm value models. We develop a Kalman filter that includes time series of bond prices which usually convey important information about a firm’s economic condition, and measurement errors of security prices. We suggest that the use of time series of all traded securities in an empirical study will improve the quality of the estimators of the latent EBIT-process because we can identify not only the EBIT-volatility but also the EBIT risk-neutral drift which used to be fixed by unreasonable assumptions in applications so far. The estimators are unbiased even in small samples and robust to specification errors.

Explaining Volatility Smiles of Equity Options with Capital Structure Models (Download Paper)

We investigate the behavior of prices of equity options in the Corporate Securities Framework suggested by Ammann and Genser (2004) where equity is the residual claim of a stochastic EBIT. Option prices are obtained by two numerical methods: (i) Approximation of the EBITprocess by a trinomial lattice and calculation of all securities by backward induction. (ii) Evaluation of the risk-neutrally expected value of the equity option at maturity by direct numerical integration. Economically, the current state of the firm with respect to bankruptcy and the capital structure influence to a large extent the particular risk-neutral equity (return) distribution at option maturity and the level and slope of implicit Black and Scholes (1973)-volatilities as a function of strike prices. Additionally, we oppose the tradition of relating equity return moments to implied volatilities. This connection might be misleading when bankruptcy probabilities become high.

IPOs, trade sales and liquidations: modelling venture capital exits using survival analysis (Download Paper)

This paper examines the dynamics of exit options for US venture capital funds. Using a detailed sample of more than 20,000 investment rounds, we analyze the time to ‘IPO’, ‘trade sale’ and ‘liquidation’ for 6,000 venture-backed firms. We model these exit times using competing risks models, which allow for a joint analysis of exit type and exit timing as well as their dynamic interplay. Biotech and internet firms have the fastest IPO exits. Internet firms are also the fastest to liquidate, while biotech firms are however the slowest. The hazard rate for IPOs are clearly non-monotonous with respect to time. As time flows, venture capital-backed firms first exhibit an increased likelihood of exiting to an IPO. However, after having reached a plateau, investments that have not yet exited have fewer and fewer possibilities of IPO exits as time increases. This sharply contrasts with exit options through a trade sale, where the hazard rate is less time-varying.

Risk-Adjusted Performance of Private Equity Investments (Download Paper)

We investigate the risk-adjusted performance of Private Equity (PE) investments on a sample of 133 transactions completed in the United States between 1984 and 2004. The benchmark for the risk adjustment is a levered mimicking strategy of investments in the S&P 500 Index. To set up the strategy, initial and final equity betas of the sample transactions were calculated, based on information usually not available to academic researchers. In calculating the betas, we specify the risk of debt and determine a method for “unlevering” and “relevering”. We conduct a sensitivity analysis and investigate the role of debt and operating risk on the performance of the mimicking strategy. Our results emphasize the necessity of correctly specifying the risk borne by lenders and in assessing PE investment performance. We find superior performance of the Private Equity investments expressed by significant positive Jensen alphas in some cases of the sensitivity analysis. The alphas are large and significant if Private Equity funds structure deals transferring a substantial part of the risk to the lenders. In general, it is not adequate to measure the performance of Private Equity investments without adjusting for leverage risks, nor it is possible to easily track Private Equity investments with public market securities.

Recovery Rates of Bank Loans: Empirical Evidence from Germany (Download Paper)

Only few studies exist concerning the recovery rate of bank loans. The recovery rate is defined as the payback quota of a defaulted borrower. Prediction models of recovery rates are gaining in importance because of the Basel II-reform and the impact for the credit risk management, the calculation of interest rates and the results of credit risk models. Factors that influence the recovery rate can be divided into the groups features of the borrower, intensity of the business connection, terms of credit and macroeconomic factors. According to the literature, the impact of the company size and the quota of collateral can be confirmed. Not yet analyzed is the detected influence of the probability of default, the intensity of the business connection and the sum of discounted outpayments. The found negative correlation between the probability of default and the recovery rate is important because the commonly used formula to calculate standard risk cost determines an expected loss that can be too low. Furthermore, this correlation leads to an underestimation of credit risk of credit risk models.

Ownership Concentration in Privatized Firms: The Role of Disclosure Standards, Auditor Choice, and Auditing Infrastructure (Paper not available)

We rely on a unique data set to estimate the impact of disclosure standards and auditor-related characteristics on ownership concentration in 190 privatized firms from 31 countries. Accounting transparency can help alleviate the agency conflict between minority investors and controlling shareholders, which is evident in the extent of ownership concentration, since the expropriation of corporate resources hinges on these private benefits remaining hidden. After controlling for other country-level and firm-level determinants, we find weak (no) evidence that extensive disclosure standards (auditor choice) reduce ownership concentration. In contrast, we provide strong, robust evidence that ownership concentration is lower in countries with securities laws that specify a lower burden of proof in civil and criminal litigation against auditors, consistent with Ball’s (2001) predictions. Collectively, our research implies that minority investors worldwide value legal institutions that discipline auditors in the event of financial reporting failure over both the presence of a Big Five auditor and better disclosure standards.

Equity Return Prediction: Are Coefficients Time Varying? (Download Paper)

Most papers in equity return prediction rely on the assumption that coefficients are constant over time. We want to question and empirically evaluate this assumption. Therefore, we develop an econometric framework that enables us to compare models that assume static coefficients and models that allow for time-variation in coefficients. We find that models which allow for time varying regression coefficients receive strong empirical support. While at the beginning of the analyzed horizon static models show superior performance, dynamic models successfully compete with static models in the late 20-th century and, finally, dominate in the period from 2000 to 2005. Furthermore, we find that best-performing static models change more often over time and contain a larger number of predictive variables than best performers among dynamic models. Finally, we address the question of overall predictability. We find in-sample predictability, fail to document unambiguously out-of-sample predictability and show that only predictive models with time-varying coefficients consistently outperform the non-predictability benchmark model.

Does Diversification Improve the Performance of German Banks? Evidence from Individual Bank Loan Portfolios (Download Paper)

Should banks be diversified or focused? Does diversification indeed lead to increased performance and therefore greater safety of banks as traditional portfolio and banking theory would suggest? In this paper we try to shed some light on these questions by empirically investigating the situation of German banks. By exploiting a unique data set of individual bank loan portfolios for the period 1996-2002, we analyze the link between banks’ portfolio diversification across different industries, broader economic sectors and geographical regions and banks’ profitability. Up to the authors’ knowledge this is the first paper studying the effect of all three types of diversification jointly, and also the first one based on micro-level data of German banks. The evidence we present indicates that on average each kind of diversification harms banks’ return, i.e. in general focus increases profitability. Moreover, our results suggest that banks do not use diversification to move on a constant risk-return efficiency level, which implies that overall German banks are not risk-return efficient. Next, the impact of all types of diversification on banks’ return changes with the risk level. While the effect of sectoral focus on return declines monotonely with increasing risk, there is mixed evidence for either a monotonely decreasing or a U-shaped relationship for regional focus and rather distinct indication for a U-shape with respect to industrial focus. Besides, for our data diversification significantly improves banks’ profits only in the case of moderate risk levels and industrial diversification. Hence, from a policy point of view our results suggest that bank regulations which might tend to increase the level of industrial, sectoral or geographical diversification should be evaluated carefully.

Bayesian Learning in Financial Markets - Testing for the Relevance of Information Precision in Price Discovery (Download Paper)

An important claim of Bayesian learning and a standard assumption in price discovery models is that the strength of the price impact of unanticipated information depends on the precision of the news. In this paper, we test for this assumption by analyzing intra-day price responses of CBOT T-bond futures to U.S. employment announcements. By employing additional detail information besides the widely used headline figures, we extract release-specific precision measures which allow to test for the claim of Bayesian updating. We find that the price impact of more precise information is significantly stronger. The results remain stable even after controlling for an asymmetric price response to 'good' and 'bad' news.

On the Noncompensation for Illiquidity in Equilibrium Asset Returns (Download Paper)

This paper studies how asset prices and traders' portfolios are affected by illiquidity, emphasising the microstructure view of market liquidity. We set up a static CARA-Gaussian model in which a risky asset is traded under imperfect competition in an otherwise frictionless market. We find that each trader bears liquidity costs because of his price impact, which results in Pareto inefficient risk sharing. The expected return on the risky asset, however, is unaffected by illiquidity, and thus reflects only the traditional risk premium but no liquidity premium. This result is contradictory to asset pricing models on exogenous transaction costs, which argue that expected return partly represents a liquidity premium to compensate traders for the costs that they bear in illiquid markets.

Pricing an Option on a Non-Decreasing Asset Value: An Application to Movie Revenue (Download Paper)

Modeling the revenue function of a new innovation has been addressed by a number of researchers. The marketing literature focuses on the introduction and acceptance of new products. Likewise, the adoption pattern and eventual economic success of a newly released movie can be viewed as an innovation subject to many of the same forces. Recently there have been references in the popular literature to option writing on the revenue of newly released films. Unique technical problems to be addressed include 1) the requirement that the total revenue function be nondecreasing over time and 2) the lack of observations on the innovation at the time of release. In addition, the great majority of extant innovation models are deterministic in nature, quantifying only the expected number of adopters or expected revenue function. Option pricing, on the other hand, is driven in large part by the volatility of the underlying process. In this paper we develop general properties and derive formulas for options on movie revenues. Parameter estimates and simulations are also provided.

Optimal Investment Timing When External Financing Is Costly (Download Paper)

This paper bridges the gap between investment timing options and investment-cash flow sensitivities of financially constrained firms. In a real options model with costly external financing where risky debt is preferred to equity, we derive optimal investment timing as a trade-off of present and expected future financing costs.
While a pure-quantity constrained firm always overinvests in investment states, we find that financing costs can induce both voluntary delay and acceleration of investment, and we show that both investment volume and investment-cash flow sensitivities are non-monotonic in financial constraints.
For high- and low-liquidity firms, we find that sensitivities are increasing in constraints, and that both dimensions of constraints, namely insufficient liquid funds and capital market frictions inducing financing costs, have similar effects on investment. In contrast, the effects are ambiguous for firms with intermediate liquidity.

Incentive Contracts and Hedge Fund Management (Download Paper)

This paper investigates dynamically optimal risk-taking by an expected-utility maximizing manager of a hedge fund. We examine the effects of variations on a compensation structure that includes a percentage management fee, a performance incentive for exceeding a specified highwater mark, and managerial ownership of fund shares. In our basic model, there is an exogenous liquidation barrier where the fund is shut down due to poor performance. We also consider extensions where the manager can voluntarily choose to shut down the fund as well as to enhance the fund’s Sharpe Ratio through additional effort. We find managerial risk-taking which differs considerably from the optimal risk-taking for a fund investor with the same utility function. In some portions of the state space, the manager takes extreme risks. In another area, she pursues a lock-in style strategy. Indeed, the manager’s optimal behavior even results in a trimodal return distribution. We find that seemingly minor changes in the compensation structure can have major implications for risk-taking. Additionally, we are able to compare results from our more general model with those from several recent papers that turn out to be focused on differing parts of the larger picture.

Modelling the economic value of credit rating systems (Download Paper)

In this paper we develop a model of the economic value of a credit rating system. Increasing international competition and changes in the regulatory framework driven by the Basel Committee on Banking Supervision (Basel II) called forth incentives for banks to improve their credit rating systems. An improvement of the statistical power of a rating system decreases the potential effects of adverse selection, and, combined with meeting several qualitative standards, decreases the amount of regulatory capital requirements. As a consequence, many banks have to make investment decisions where they have to consider the costs and the potential benefits of improving their rating systems. In our model the quality of a rating system depends on several parameters such as the accuracy of forecasting individual default probabilities and the rating class structure. We measure effects of adverse selection in a competitive one-period framework by parametrizing customer elasticity. Capital requirements are obtained by applying the current framework released by the Basel Committee on Banking Supervision. Results of a numerical analysis indicate that improving a rating system with low accuracy to medium accuracy can increase the annual rate of return on a portfolio by 30 to 40 bp. This effect is even stronger for banks operating in markets with high customer elasticity and high loss rates. Compared to the estimated implementation costs banks could have a strong incentive to invest in their rating systems. The potential of reduced capital requirements on the portfolio return is rather weak compared to the effect of adverse selection.

Socially Responsible Investing: Moral and Optimal? (Download Paper)

I evaluate the performance of static and dynamic strategies involving socially responsible investments (SRI). I show that although the average SRI fund underperforms a market index, a portfolio that accounts for time variation in the number of SRI funds available to investors, actually outperforms the market index. An examination of the dynamic performance of the SRI portfolio shows that returns to SRI funds are less sensitive to unanticipated shifts in the business cycle than the returns to a market portfolio. I show that a sector rotation strategy which involves timing business cycle shifts by reallocating between the CRSP index and the SRI portfolio earns a positive and statistically significant return. Finally, I find weak evidence that an SRI investment represents a flight to quality during periods of high relative risk aversion.

Do Banks Diversify Loan Portfolios? A Tentative Answer Based on Individual Bank Loan Portfolios (Download Paper)

Theory of financial intermediation gives contradicting answers to the question whether banks should diversify or focus their loan portfolios. Our aim is to find out which of the two strategies is predominant in the German banking market. To this end we measure diversification for all German banks in the period from 1993 to 2002. As measures we use a broad set of heuristic approaches which capture the deviation of a bank's portfolio from a specified benchmark. Conceivable benchmarks are naive diversification across all industries or, alternatively, the economy's industry structure. With this framework our analysis comprises the widespread measures of concentration, like the Hirschman-Herfindahl index, but also the less known and in this context innovative group of distance measures. We find that different statistical measures of diversification may indicate contradicting results on the individual bank level. Since distance measures are more appealing from a theoretical point of view, the common practice to rely on measures of concentration only in the debate about diversi cation and focus, may be misleading. We further find that, despite these differences on the individual bank level, both approaches reveal that the majority of banks significantly increased loan portfolio diversification over the last decade. This tendency is especially driven by the large number of credit cooperatives and savings banks. However, some banks (especially regional banks and subsidiaries of foreign banks) reveal a strategy that seems to be more focused on certain industries.

Insider Trading Rules and Price Formation in Securities Markets - An Entropy Analysis of Strategic Trading (Download Paper)

This paper addresses the issue of how insider trading rules affect price formation in securities markets and suggests the application of information theory to market microstructure theory. We analyze a variant of Kyle's (1985) setting by simply introducing a more general criterion for informational efficiency borrowed from information theory - namely maximum information transmission. The analysis shows that both the insider's optimal trading strategy and the market price of the risky security depend on the insider trading restriction. Insider trading restrictions are reported to be detrimental to the liquidity of the securities market. We find that a unique insider trading rule exists which implements semi-strong form informational efficiency of the securities market. Alternative restrictions on insider trading give rise to either underreaction or overreaction in securities prices. Too strict insider trading rules are shown to account for excess volatility in securities prices. Contrary to common notion, the uninformed investors are shown to be hurt by too restrictive insider trading rules. We conclude that loose insider trading rules are preferred by the group of investors as a whole.

Fair Valuation of Insurance Contracts under Lévy Process Specifications (Download Paper)

The valuation of insurance contracts using concepts from financial mathematics (in particular, from option pricing theory), typically referred to as Fair Valuation, has recently attracted considerable interest in academia as well as among practitioners. We will investigate the valuation of so-call participating (with-profits) contracts, which are characterised by embedded rate guarantees and bonus distribution rules. We will study two model specific situations, one of which includes a bonus account. While our analysis reveals information on fair parameter settings of the contract, the main focus of the study will be on the impact of different Lévy process specifications on the fair values obtained. Our findings imply that regardless of the models current German regulatory requirements are not compatible with the fair valuation principle. We also find that a change in the underlying asset model will imply a significant change in prices for the guarantees, indicating a substantial model risk.

How Mediator Compensation Affects the Conflicting Parties´, and the Mediator´s Behavior. An Economic and Experimental Analysis (Download Paper)

This paper examines three different types of payment schemes for mediators: contingent payment, fixed payment, and partisan payment. We examine theoretically and experimentally the impact of each type of contract on the willingness of two disputing parties to employ a mediator, on the mediator’s effort to settle the conflict, and on the efficiency of the settlement result. In our model, the mediator is an expert and, therefore, an informational asymmetry exists between the mediator and the conflicting parties. The parties are interested in obtaining the mediator’s private information since it enhances settlement efficiency. The experimental data confirm a widely known conjecture regarding contingent payment in economic theory: Mediators who are paid a proportion of the amount at stake have a vivid interest in an efficient settlement and, thus, if employed, most often reveal their information. Unsurprisingly, they are employed very often. However, the data also justify the common German practice to compensate mediators even though this is in sharp contradiction with economic theory: a fixed payment is nearly as efficient as contingent fees. Moreover, as theory predicts and data show, a partisan mediator is seldom employed, never reveals his private information, and is a severe damage to efficiency.

The Interaction of Guarantees, Surplus Distribution, and Asset Allocation in With Profit Life Insurance Policies (Download Paper)

Between limit and market order (Paper in German, presentation in English)
In recent years, the increasing competition among stock exchanges for the liquidity of the traders has initiated several innovations in the area of the market structures. Traditionally those innovations pertained to aspects of information revelation (open order book), intermediaries and price discovery (Xetra Best). In the last couple years, innovations occurred increasingly in the area of order types.
Among those innovations ranks the order type, which allows for a discretionary margin. This grants the new order type the advantages of both limit and market orders: a immediate execution without having to pay the entire bid-ask spread. Stated differently, such an order type can be conceived as superior substitute for market orders, as it provides immediacy to more favorable conditions.
As a consequence, it is less surprising that several stock exchanges as well as ECNs (e.g. NASDAQ, Instinet) have already adopted those innovative order types like the pegged or discretionary order. Broker-dealer and banks (e.g. Sino, InteractiveBrokers) emulate those order types by means of their backend systems. Despite its application in practice the impact of those innovations on the market quality is almost unknown. Hence, statements such as the claim that those innovations are superior to market orders are bound to skepticism. 
This paper takes up the idea of a self-adjusting limit order, the so-called relative order and analyzes the impact of this order type on the market quality. The methodology is spawned around a simulation model. Different than formal equilibrium models this method can analyze the outcome of this order type along the entire market process, rather than in some devoted equilibria. This contribution strives for solving the following two primary research questions.
• Firstly it will be investigated how the introduction of the innovative order type affects the market quality
• Secondly it will be explored how accurate simulation models are capable to provide insights for market design.
The simulation for answering the first questions argues in favor of the innovative order type. Accordingly, the relative order indeed increases the execution probability considerably compared to a limit order. This entails a decrease in the execution time compared to limit orders and an increase in the execution time in comparison to market orders. Nonetheless, this desirable effect comes along with a decrease of the consumer surplus of the bidders, who use limit orders. Apparently, if we have all dimensions of market quality in mind, there is a trade-off between them. Although it cannot be said which order type is superior to others, it can be stated that the relative order appears to be a valuable add-on to the canon of standard order types.
Concerning the second research question, the paper will demonstrate that the chose simulation model can be an important tool in market design. This stems from the ability of the simulation to explore the goodness of the market structure holistically. Despite its strength, this method is certainly no panacea, but a useful addition to current empirical methods.

ART versus reinsurance: the disciplining effect of information insensitivity (Download Paper)

We provide a novel benefit of "Alternative Risk Transfer" (ART) products with parametric or index triggers. When a reinsurer has private information about his client's risk, outside reinsurers will price their reinsurance offer less aggressively. Outsiders are subject to adverse selection as only a high-risk insurer might find it optimal to change reinsurers. This creates a hold-up problem that allows the incumbent to extract an information rent. An informationinsensitive ART product with a parametric or index trigger is not subject to adverse selection. It can therefore be used to compete against an informed reinsurer, thereby reducing the premium that a low-risk insurer has to pay for the indemnity contract. However, ART products exhibit an interesting fate in our model as they are useful, but not used in equilibrium because of basis-risk.

Mutual versus Stock Insurers: Fair Premium, Capital, and Solvency (Download Paper)

Mutual and stock insurers are distinct corporate forms for organizing risk sharing when total claims are uncertain. Owners and policyholders are separated in a stock insurer, while they coincide for a mutual insurer. Based on this distinction, we show that (i) up-front capital is necessary to offer insurance at a fair premium for a stock insurer, but not for a mutual. (ii) For a mutual insurer, the probability of financial distress decreases in the number of policyholders, while it increases for a stock insurer, which offers insurance at a fair premium. (iii) Policyholders in a stock insurer with low level of capital benefit from premium loading. Furthermore, premium loading and a mutual insurer overcome the free rider problem, which arises, when it is collectively beneficial for policyholders to provide (additional) costly capital to improve risk sharing.

Informational asymmetry between managers and investors in the optimal capital structure decision (Download Paper)

In this article, we consider the impact of asymmetric information between managers and investors on the optimal capital structure decision. This is done within a continuous-time framework, where the relevant state variable is given by the EBIT value of the firm; an approach taken by Goldstein et al. (2001), Hackbarth et al. (2003), Dangl & Zechner (2004) amongst others. Our setup differs in that we assume the EBIT to follow an Arithmetic Brownian motion, i.e. it can assume negative values. More importantly, we extend this framework in two directions: (i) We introduce a separate management claim. (ii) We introduce asymmetric information between managers and investors by assuming that claimants receive noisy signals, which they process according to rational expectation principles. Our results show, that managers always try to avoid debt, and that their optimal bankruptcy threshold is always lower, than the threshold set by equity holders. The introduction of asymmetric information changes the optimality conditions, and consequently the capital structure decision. It is shown, that the informational asymmetry can substantially lower the op- timal leverage ratio, even without assuming that managers are entrenched.

Implications of Asymmetry Risk for Portfolio Analysis and Asset Pricing (Download Paper)

Asymmetric shocks are common on markets; securities’ payoffs are not normally distributed and exhibit skewness. This paper studies the portfolio holdings of heterogeneous agents with preferences over mean, variance and skewness, and derives equilibrium prices. A three funds separation theorem holds, adding a skewness portfolio to the market portfolio; the pricing kernel depends linearly only on the market return and its squared value. Our analysis extends Harvey and Siddique’s (2000) conditional mean-variance-skewness asset pricing model to non-vanishing risk-neutral market variance. Empirical relevance of this extension is documented in the context of the asymmetric GARCH-inmean model of Bekaert and Liu (2004).

Information leakage and opportunistic behavior before analyst recommendations: An analysis of the quoting behavior of Nasdaq market makers (Download Paper)

We document evidence consistent with the presence of information leakage and opportunistic behavior before analyst recommendation revisions for Nasdaq-listed stocks. We examine the quoting behavior of market makers affiliated with the same brokerage house as the recommending analysts (“recommending market makers”). In the hour and a half (three hours) before upgrades (downgrades), recommending market makers change their quoting behavior. These changes anticipate the direction of pending recommendations and are highly significant, even after controlling for their own non-announcement behavior and for the contemporaneous quoting behavior of other market makers. Further, the recommending market makers’ quoting behavior has explanatory power for stock returns immediately preceding the public announcements. These findings are consistent with non-public information being impounded into stock prices due to opportunistic behavior by recommending market makers or by investors who trade through recommending market makers.

Warrant Exercise and Bond Conversion in Large Trader Economies (Download Paper)

It is well known that the sequential (premature) exercise of American-type warrants may be advantageous for large warrantholders, even in the absence of regular dividends, because using exercise proceeds to repurchase stock or to expand the firm’s scale increases the riskiness of an equity share. We present an upper bound on this advantage and show that this advantage is negligible for a realistic parameter setting. This result, however, does not justify in general the simplifying restriction that warrants or convertible securities are valued as if exercised as a block. It turns out that the option to exercise only a fraction of the outstanding convertibles at the maturity date (partial exercise option) has a positive value in large trader economies. Moreover, we show that there is a gain from hoarding warrants in the presence of at least two large warrantholders.

A note on the relation between book value and market value of firms (Download Paper)

From the empirical literature it is well known that the book value of a company has an important impact on the market value of the firm. If we simply plug this empirical relation into the existing theories on market valuation, arbitrage opportunities or irrational behavior of investors would result. Our aim is to present a theoretical (discounted cash flow) model that incorporates both the market as well as the book value of a company. It turns out that, given a particular investment policy, it can indeed be proven that both values are highly correlated. If the cash flows are normally distributed however, the book–to–market ratio has a distribution with no expectation. Therefore, our model cannot be used as a foundation of the book–to–market ratio multiple that is used in valuation by practioneers.

Nachhaltigkeitsorientierte Investments im Immobilienbereich - Trends, Theorie und Typologie (Download Paper)

Die Umsetzung von Prinzipen einer nachhaltigen Entwicklung im Immobilienbereich erfordert u.a. neben der Einbeziehung ökonomischer Aspekte die gleichzeitige und gleichberechtigte Berücksichtigung der ökologischen und sozialen Randbedingungen und Konsequenzen in die Investitionsentscheidungen. Ausgehend von allgemeinen Schutzzielen und Schutzgütern (Schutz des Ökosystems, Schutz natürlicher Ressourcen, Schutz der Gesundheit, Schutz gesellschaftlicher Werte und öffentlicher Güter, Erhaltung von Kapital) ist es zunächst erforderlich, Ansätze und Definitionen einer nachhaltigen Entwicklung in den Bau- und Immobilienbereich zu übertragen und auf Betrachtungs- und Bewertungsgegenstände wie Einzelgebäude, Immobilienbestände und Immobilienfonds durch Bewertung des Beitrages zu einer nachhaltigen Entwicklung anzupassen. Im Immobilienbereich muss neben einer stets zwischen Marktteilnehmern gegebenen Informationsasymmetrie von einem allgemeinen Informationsdefizit ausgegangen werden. Die bisher übliche Beschreibung von Merkmalen und Eigenschaften von Gebäuden reicht nicht aus, um deren auch ökologische und soziale Qualität zu untersuchen, zu beurteilen und zu kommunizieren sowie um einen Zusammenhang zwischen der Gebäudequalität / Objektperformance und der Entwicklung von Wert und Ertrag herzustellen. Eine Voraussetzung für künftige Untersuchungen und Entwicklungen ist daher die systematische Verbesserung der Informationsgrundlagen zu Gebäuden und Immobilienbeständen. Ansätze werden in der Nutzung von Gebäudepässen, der Einführung lebenszyklusbegleitender Objektdokumentationen und der Weiterentwicklung von immobilienbezogenen Portfolio-Analysen gesehen. Bisherige Methoden der Bewertung und Wertermittlung berücksichtigen die ökologisch (Ressourceninanspruchnahme, Umweltbelastung, Risiken für lokale und globale Umwelt) und sozial (im Zusammenhang mit Einzelimmobilien z.B. Gesundheit, Behaglichkeit, Sicherheit, Nutzerzufriedenheit, gestalterische, kulturelle und städtebauliche Qualität) relevanten Merkmale und Eigenschaften von Immobilien nicht oder nur unzureichend. Es wird diskutiert, wie durch die Weiterentwicklung dieser Methoden derartige Aspekte künftig berücksichtigt werden können. Das Interesse an den Prinzipien einer nachhaltigen Entwicklung verpflichteten Fonds und sonstigen Produkte hat stark zugenommen. Der Beitrag liefert hierzu einen Überblick. Vor dem Hintergrund existierender Schwierigkeiten (fehlende Informationen, unklare Auswahl- und Beurteilungskriterien, unzureichende Bewertungsverfahren, nicht standardisierte Formen der Beschreibung und Kommunikation) werden bisher jedoch „nachhaltige Immobilienfonds“ nicht angeboten. Im Beitrag wird diskutiert, in welcher Form derartige Produkte entwickelt werden können, wie sie zu beurteilen und zu beschreiben sind und wie ihre Marktchancen und Marktanteile gesehen werden. Ausgehend von aktuellen Entwicklungen (UNEP-FI, equator-principles der Weltbank u.a.) wird abschließend auf die Rolle von Finanzinstituten bei der Umsetzung von Prinzipen einer nachhaltigen Entwicklung im Immobiliensektor eingegangen.

Target leverage and the costs of issuing seasoned equity (Download Paper)

This paper provides a new test of the trade-off theory of capital structure. I examine the relation between the direct costs of issuing seasoned equity (SEO gross spreads) and the change in deviation of firms' leverage ratios from their estimated targets following SEOs. If the underwriters have bargaining power in setting SEO fees and if the trade-off theory holds, then SEO fees should be negatively related to the change in absolute deviation of firms' leverage ratios from their targets. I use various definitions of target leverage and find that this relation is indeed negative. This result is robust to various target leverage specifications. In addition to providing support for the trade-off models of capital structure using a new type of tests, this paper provides rough lower bound estimates of the economic importance of deviating from optimal capital structure. The economic importance of being close to optimal capital structure is possibly higher than earlier simulations-based estimates suggested.

The size of venture capitalists' portfolios (Download Paper)

This paper contributes to the emerging literature on the optimal size of venture capitalists' (VCs') portfolios of entrepreneurial firms. We develop a model in which a VC maximizes his expected portfolio value, net of effort costs, with respect to the number of projects he invests in and to the share of each project's profits that he leaves to entrepreneurs. The relationship between the VC and entreprneurs is characterized by double-sided moral hazard, which causes the VC to trade-off larger portfolios against lower profit shares. We analyze the relation between the VC's optimal portfolio structure and exogenous factors, such as entrepreneurs' and VC's productivities, their disutilities of effort, the value of a successful project, and the required initial investment in each venture. The analysis results in ambiguous predictions for the reduced-form effects of the exogenous factors on the optimal VC's portfolio size. We demonstrate that the testing of the theory should focus on the unambiguous structural relations, while accounting for the inherent endogeneity of the profit sharing rule. We test the predictions of the model empirically using a proprietary dataset collected through a survey targeted to VC funds worldwide, and find some support for the theory.

Return Guarantees with Delayed Payment (Download Paper)

A unit–linked insurance contract can be formulated in terms of a guaranteed amount together with a fraction of a positive excess return of a benchmark portfolio. Normally, the excess return is determined annually and accumulated until the maturity of the contract. The accumulation factor which is granted with respect to the delayed payments can either be deterministic or equal to the (stochastic) bank account. It turns out that the common choice of a deterministic accumulation factor gives rise to problems concerning the pricing and the risk management of the insurance contract.

Estimation of rating class transition probabilities with incomplete data (Download Paper)

This paper shows that the well known ''duration'' and ''cohort'' methods for estimating transition probabilities of external bond ratings are not suitable for internal rating data. More precisely, the duration method cannot and the cohort method should not be used in connection with bank rating data. Structural differences within the borrower monitoring process of banks and rating agencies are responsible for this result. A Maximum Likelihood (ML) estimation procedure, which accounts for the peculiarities of internal bank ratings, is introduced and applied to data from a German bank. The empirical results indicate that the differences between cohort and ML transition matrices are both, statistically and economically significant. Furthermore, evidence of rating reversals, business cycle dependent transition probabilities and on the factors which determine the borrower monitoring intensity of banks is provided.

Corporate Governance and the Value of Cash Holdings (Download Paper)

In this paper, we investigate the impact of corporate governance on firm value. We do this by examining how managerial entrenchment and lack of shareholder oversight influence both the value and use of cash resources. We focus on cash because cash, in particular cash holdings not needed for investment or operations, represent a large fraction of corporate assets and can easily be spent by management. We find that governance has a substantial impact on firm value through its impact on cash policy: the market value of excess cash reserves is reduced by up to one-half when firms are poorly governed. We further find that firms with poor corporate governance dissipate excess cash more quickly than those with good governance. More importantly, we show that firms with poor governance invest excess cash reserves in assets with low accounting returns. This negative impact of excess cash investment on operating performance is cancelled out if the firm is well governed. These findings provide direct evidence of how governance can improve firm value and insight into the importance of governance in determining corporate cash policy.

Modelling Best Execution Systems with Market Modelling Language (Download Paper)

The worldwide integration of the financial markets leads to increasing competition between financial institutions. Thus, best execution systems and bank internal systems have been initiated in order to improve the competitive ability and customer services. Not all of these systems have been successful. Therefore, tools are required to support the design and testing of such systems in order to avoid pricey flops. The generic electronic trading platform meet2trade provides a set of tools that facilitate the design of electronic markets. In this paper, we examine MetaMarkets and market modelling language MML in order to demonstrate their feasibility in modelling real existing best execution systems Xetra Best of Deutsche Boerse AG and BestEx service of Nasdaq Germany and bank internal system ICOM of Commerzbank AG.

Commonalities in the Liquidity of a Limit Order Book (Download Paper)

This paper investigates the commonality of liquidity for an electronic limit order market. We use order book data from the trading facility for German equities. We construct measures of order book liquidity by aggregating the liquidity supply in the book and by estimating the shape of the price impact function. The data provide evidence of substantial common movements in liquidity. Commonalities are much stronger for the complete liquidity supply as opposed to liquidity at the best price alone. Furthermore, commonalities vary with the time of the day and with market momentum, yet we find no significant industry factor.

Transferable Ageing Provisions in Individual Health Insurance Contracts (Download Paper)

We consider lifetime health insurance contracts in which ageing provisions are used to smooth the premium profile. The stock of capital accumulated for each individual can be decomposed into two parts: a premium insurance and an annuitised life insurance, where the latter would be transferable between insurers without triggering premium changes through risk segmentation. In a simulation based on German data, the transferable share declines in age. It is smaller for women than for men, and it falls with an increasing age of entry into the contract.

Socially Responsible Investments in continental Europe: a multifactor style analysis (Download Paper)

Following the literature about SRI funds performance and investment strategies, this study tries to detail how continental Europe SR funds behave, in order to help investors to correctly evaluate this new kind of investments. Firstly, the analysis tries to test the existence of a style bias in terms of size exposure and investment style (growth and value) through a multifactor style analysis regression à la Fama and French. The focus is on continental Europe SR funds investing on Euro and European markets and on relevant SR benchmarks. In this case, as found in previous researches about UK and North America, results show a significant small cap bias. The existence of this bias on so different geographical markets seems to highlight an underlying common strategy focused on avoidance of large stocks. We verify also a significant value bias that has two different and convincing possible explanations. The first one is the avoidance of growth stock due to involvement of new technologies in armaments; the second reason is connected to the market crash after the dot coms bubble and the following predilection towards value stock. Applying the F&F model to three SR benchmarks we obtain completely different results. In this case, indeed, the exhibits show a significative large cap bias. In addition, a comparison among SRI funds and relevant benchmarks is performed to verify if an active management based on specific research about sustainability can add value with regard to a market benchmark, from a retail investor perspective. This second test is performed through a single factor CAPM based model. Results show a general and significative underperformance when SRI funds’ performances are regressed on several market benchmark returns and, additionally, a common and conservative attitude towards market risk.

Modelling International Bond Markets with Affine Term Structure Models (Download Paper)

This paper investigates the performance of international affine term structure models (ATSMs) that are driven by a mutual set of global state variables. We discuss which mixture of Gaussian and square root processes is best suited for modelling international bond markets. We derive necessary conditions for the correlation and volatility structure of mixture models to accommodate various empirical stylized facts such as the forward premium puzzle and differently shaped yield curves. Using UK-US data we estimate international ATSMs taking into account the joint transition density of yields and exchange rates without assuming normality. We find strong empirical evidence for negatively correlated global factors in international bond markets. Further, the empirical results do not support the existence of local factors in the UK-US setting, suggesting that diversification benefits from holding currency-hedged bond portfolios in these markets are likely to be small. Altogether, we find that mixture models greatly enhance the performance of ATSMs.

Insuring the Uninsurable: Brokers and Incomplete Insurance Contracts (Download Paper)