infonet-economy

Given a firms investment policy, its dividend policy is irrelevant (Miller and Modigliani (1961)). REITs, by law, pay at least 90 % of their corporate income as dividends, so that their dividend policy is given. This is a reversal of the dividend irrelevance theorem through regulatory means. Such a high dividend payment also means lower retained earnings, leaving firms with little free cash flow. Jensen (1986) argues that lower free cash flow results in mitigated agency problems. In this paper, I ask two questions. First, how does an average REIT, given its dividend policy restricted through regulation, respond to its investment opportunities? Second, does an average REIT, with mitigated agency problems, face less severe financing constraints? In response to the first question, I find that an average REITs investment responsiveness (as measured by Tobins q) is higher than that of firms in other industries. In response to the second question, I find that, despite mitigated agency costs, an average REIT faces, in fact, more severe financing constraints (as measured by sensitivity to cash ow) than other firms. Finally, using the natural experiment provided by the 2001 REIT Modernization Act (RMA) that allowed REITs to own taxable REIT subsidiaries (TRS) and reduce their dividend distribution from 95% to 90%, I show that, for a given increase in internal funds, the negative impact arising from increased agency problems dominates the positive impact of the wealth effect, resulting in a lower overall responsiveness of REITs to their investment opportunities.

We examine the stock price reactions of four Swiss banks to negotiations between Switzerland and the European Union and between Switzerland and the United States to (i) obtain an estimate of the value of banking secrecy to Swiss banks, and (ii) distinguish between tax evasion and genuine privacy concerns as sources of that value. We find that the value of banking secrecy to the private banks is large, accounting for 8 to 14% of their market value; in contrast, the value of banking secrecy to the universal banks is small. We further find that tax evasion may be less important and privacy concerns more important a source of value of banking secrecy than might previously have been thought.

Naively testing for accruals mispricing in 26 equity markets - one market at a time - we find statistical evidence of anomalous returns in some countries. However, some of these findings might well be spurious because of data snooping biases that arise when simultaneously testing several hypotheses. While the accrual anomaly is not deemed to be robust in some countries when properly accounting for multiple testing we find the international momentum effect to by and large pass the battery of multiple testing procedures. Moreover, we find the few robust accrual anomalies vanishing in recent times indicating that investors have been exploiting the mispricing.

In this paper we study the pricing and hedging of options on realized variance in the 3/2 non-affine stochastic volatility model by developing efficient transform-based pricing methods. This non-affine model gives prices of options on realized variance that allow upward-sloping implied volatility of variance smiles. Heston's model [Rev. Financial Stud., 1993, 6, 327–343], the benchmark affine stochastic volatility model, leads to downward-sloping volatility of variance smiles—in disagreement with variance markets in practice. Using control variates, we propose a robust method to express the Laplace transform of the variance call function in terms of the Laplace transform of the realized variance. The proposed method works in any model where the Laplace transform of realized variance is available in closed form. Additionally, we apply a new numerical Laplace inversion algorithm that gives fast and accurate prices for options on realized variance, simultaneously at a sequence of variance strikes. The method is also used to derive hedge ratios for options on variance with respect to variance swaps.

Lin and Chang (2009, 2010) establish a VIX futures and option pricing theory when modelingS&P 500 index by using a stochastic volatility process with asset return and volatility jumps.In this note, we prove that Lin and Chang's formula is not an exact solution of their pricingequation. More generally, we show that the characteristic function of their pricing equationcannot be exponentially ane, as proposed by them. Furthermore, their formula cannot serve asa reasonable approximation. Using the Heston (1993) model as a special case, we demonstratethat Lin and Chang formula misprices VIX futures and options in general and the error canbecome substantially large.

We study the pricing of options on realized variance in a general class of Log-OU stochastic volatility models. The class includes several important models proposed in the literature. Having as common feature the log-normal law of instantaneous variance, the application of standard Fourier-Laplace transform methods is not feasible. We derive extensions of Asian pricing methods, to obtain bounds, in particular, a very tight lower bound for options on realized variance.

We find that price and earnings momentum are pervasive features of international equity markets even when controlling for data snooping biases. For European countries, we find that price momentum is subsumed by earnings momentum on an aggregate level. However, this rationale does not apply to each and every country. While the above explanation is confined to certain time periods in the U.S., earnings momentum nevertheless appears to be a crucial driver of the price momentum anomaly in many markets. Since we cannot establish a decent relation between momentum and macroeconomic risks, we suspect a behavioral-based explanation to be at work. In fact, we find momentum profits to be more pronounced for portfolios characterized by higher information uncertainty. Hence, the momentum anomaly may well be rationalized in a model of investors underreacting to fundamental news. Finally, we find that momentum works better when limited to stocks with high idiosyncratic risk or higher illiquidity, suggesting that limits to arbitrage deter rational investors from exploiting the anomaly.

This paper proposes a novel measure of economic uncertainty based on the frequency of internet searches. The theoretical motivation is offered by findings in economic psychology that agents respond to increased uncertainty by intensifying their information search. The main advantages of using internet searches are broad reach, timeliness and the fact that they reflect actions, rather than words, which however are not directly related to the stock market. The search-based uncertainty measure compares well against a peer group of alternative indicators and is shown to have a significant relationship with aggregate stock returns and volatility.

Climate change is one of the greatest challenges facing our planet in the foreseeable future anddespite the urgency of the situation global GHG emissions are still increasing. In this context,and since future climate changes appear now unavoidable to some extent, adaptation measureshave recently gained a new political momentum as an important component of climate policies.Contrary to mitigation options, adaptation measures do not reduce emission levels but reducetheir impacts. To assess the relationship and effects on the global economy of both mitigationand adaptation, we use in this paper an integrated assessment model (IAM) that includes bothproactive adaptation strategies and access to “green” investments (clean technologies) for mitigation.We find that the relationship between adaptation and mitigation is complex and largelydependent on their respective attributes, with weakly effective adaptation acting as a late complementto mitigation efforts. As its effectiveness increases, adaptation becomes more and morea substitute for mitigation. Sensitivity analysis on the potential magnitude of damages also indicatesthat scientific efforts to better describe GHG impacts will have immediate and importantconsequences on the sequence of mitigation and adaptation strategies.