Annals of FinancePub Date : 2021-06-18DOI: 10.1007/s10436-021-00388-2
Carlo Alberto Magni
{"title":"Economic profitability and (non)additivity of residual income","authors":"Carlo Alberto Magni","doi":"10.1007/s10436-021-00388-2","DOIUrl":"10.1007/s10436-021-00388-2","url":null,"abstract":"<div><p>We show that the standard notion of residual income (RI) does not fulfill additive coherence. This gives rise to ambiguities and inconsistencies. The pitfall resides in the capital charge, which blends a non-market value with a market rate. We solve the problem by using a capital charge based on economic return, obtained as the product of a market value and a market rate. The resultant <i>economic RI</i> enjoys additivity. The economic RI is naturally associated to the average Return on Investment (ratio of total income to total invested capital). Subtracting the respective cost of capital (ratio of total economic return to total invested capital) the marginal economic efficiency of the capital is correctly captured. Economic RI guarantees consistency among the various sets of incomes, book values, economic values, accounting rates, and costs of capital, under an investment perspective as well as a financing one, both at a period level and at an aggregate level, either assuming time-invariant or time-varying costs of capital. Therefore, the economic RI offers a coherent tool for the assessment of a project’s or firm’s economic efficiency.</p></div>","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"17 4","pages":"471 - 499"},"PeriodicalIF":1.0,"publicationDate":"2021-06-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s10436-021-00388-2","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48920379","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"A stock market model based on CAPM and market size","authors":"Brandon Flores, Blessing Ofori-Atta, Andrey Sarantsev","doi":"10.1007/s10436-021-00390-8","DOIUrl":"10.1007/s10436-021-00390-8","url":null,"abstract":"<div><p>We introduce a new system of stochastic differential equations which models dependence of market beta and unsystematic risk upon size, measured by market capitalization. We fit our model using size deciles data from Kenneth French’s data library. This model is somewhat similar to generalized volatility-stabilized models. The novelty of our work is twofold. First, we take into account the difference between price and total returns (in other words, between market size and wealth processes). Second, we work with actual market data. We study the long-term properties of this system of equations, and reproduce observed linearity of the capital distribution curve. In the “Appendix”, we analyze size-based real-world index funds.</p></div>","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"17 3","pages":"405 - 424"},"PeriodicalIF":1.0,"publicationDate":"2021-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s10436-021-00390-8","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45385979","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Annals of FinancePub Date : 2021-05-31DOI: 10.1007/s10436-021-00389-1
Guglielmo D’Amico, Giovanni Villani
{"title":"Valuation of R&D compound option using Markov chain approach","authors":"Guglielmo D’Amico, Giovanni Villani","doi":"10.1007/s10436-021-00389-1","DOIUrl":"10.1007/s10436-021-00389-1","url":null,"abstract":"<div><p>Incorporation of technical risk in compound real options has been considered in Cassimon et al. (2011) concerning the valuation of multi-stage pharmaceutical R&D. There, the technical success probabilities at each development stage were assumed to be generated independently of each other. This assumption can be unrealistic in many applied problems, pharmaceutical R&D included. We present a valuation procedure dealing with dependent success probabilities and random development stage times. This greater flexibility allows a better description of the sequence of decision stages and results, which in turn, impact the value of the considered project. The theoretical results are illustrated through a numerical example that shows the implementation of the model to a pharmaceutical R&D problem.</p></div>","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"17 3","pages":"379 - 404"},"PeriodicalIF":1.0,"publicationDate":"2021-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s10436-021-00389-1","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41509793","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Annals of FinancePub Date : 2021-04-12DOI: 10.1007/s10436-021-00386-4
Lamprini Zarpala, Dimitris Voliotis
{"title":"Blind portfolios’ auctions in two-rounds","authors":"Lamprini Zarpala, Dimitris Voliotis","doi":"10.1007/s10436-021-00386-4","DOIUrl":"10.1007/s10436-021-00386-4","url":null,"abstract":"<div><p>This paper proposes a two-stage sealed-bid model for the execution of portfolios. An asset manager auctions a portfolio of securities to a set of brokers who are unaware of the specific details about individual securities. We prove that our mechanism may reduce the costs of execution for the asset manager and may mitigate the “winner’s curse” for participating brokers.</p></div>","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"18 4","pages":"545 - 552"},"PeriodicalIF":1.0,"publicationDate":"2021-04-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s10436-021-00386-4","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50473332","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Annals of FinancePub Date : 2021-03-24DOI: 10.1007/s10436-021-00383-7
Joel M. Vanden
{"title":"Equilibrium asset pricing and the cross section of expected returns","authors":"Joel M. Vanden","doi":"10.1007/s10436-021-00383-7","DOIUrl":"10.1007/s10436-021-00383-7","url":null,"abstract":"<div><p>In a mean-variance framework with a representative agent, any linear model for the cross section of expected returns can be supported as an equilibrium as long as the market portfolio is spanned by the factor mimicking portfolios. Any set of factors is admissible as long as the spanning condition is satisfied. Factors based on size, book-to-market, momentum, investment, profitability, behavioral biases, principal components, or any combination of these can be used as equilibrium factors. An equilibrium model with <i>M</i> risk factors can be reduced to a collection of <i>M</i> models where each model has a single risk factor, which is covariance with the market portfolio.</p></div>","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"17 2","pages":"153 - 186"},"PeriodicalIF":1.0,"publicationDate":"2021-03-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s10436-021-00383-7","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47729846","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Annals of FinancePub Date : 2021-03-12DOI: 10.1007/s10436-021-00384-6
José Valentim Machado Vicente, Jaqueline Terra Moura Marins
{"title":"A volatility smile-based uncertainty index","authors":"José Valentim Machado Vicente, Jaqueline Terra Moura Marins","doi":"10.1007/s10436-021-00384-6","DOIUrl":"10.1007/s10436-021-00384-6","url":null,"abstract":"<div><p>We propose a new uncertainty index based on the discrepancy of the smile of FX options. We show that our index spikes near turbulent periods, forecasts economic activity and its innovations hold a significant and negative equity premium. Unlike other uncertainty indexes, our index is supported by equilibrium models, which relate the difference of options prices across moneyness to uncertainty. Moreover, our index is based on investment decisions, can be easily and continuously updated and is comparable across countries.</p></div>","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"17 2","pages":"231 - 246"},"PeriodicalIF":1.0,"publicationDate":"2021-03-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s10436-021-00384-6","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44262883","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Bank business models, negative policy rates, and prudential regulation","authors":"R. Savona","doi":"10.2139/ssrn.3824276","DOIUrl":"https://doi.org/10.2139/ssrn.3824276","url":null,"abstract":"Using data from Italian banks over the period 2011–2017, we study how negative interest rate policy and prudential regulation impact on bank business models. We report four key findings. First, banks shifted into retail- and market-oriented business models. Second, high- and low-deposit banks reduced loans and increased security/liquid assets; only market-oriented banks expanded lending. Third, interest rate income compression induced by negative rates has been substantial for the Italian banking system as a whole, although retail banks seem to have suffered less. Fourth, non-interest incomes played a compensatory effect. The portfolio reshuffling, as we observed for wholesale and retail banks (less lending and more securities/liquid assets), is related to the goal of reducing risk exposures and, in turn, the connected capital absorption required by prudential regulation.","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"18 1","pages":"355 - 392"},"PeriodicalIF":1.0,"publicationDate":"2021-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44231493","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Annals of FinancePub Date : 2021-01-18DOI: 10.1007/s10436-020-00382-0
Philip Protter, Alejandra Quintos
{"title":"Optimal group size in microlending","authors":"Philip Protter, Alejandra Quintos","doi":"10.1007/s10436-020-00382-0","DOIUrl":"10.1007/s10436-020-00382-0","url":null,"abstract":"<div><p>Microlending, where a bank lends to a small group of people without credit histories, began with the Grameen Bank in Bangladesh, and is widely seen as the creation of Muhammad Yunus, who received the Nobel Peace Prize in recognition of his largely successful efforts. Since that time the modeling of microlending has received a fair amount of academic attention. One of the issues not yet addressed in full detail, however, is the issue of the size of the group. Some attention has nevertheless been paid using an experimental and game theory approach. We, instead, take a mathematical approach to the issue of an optimal group size, where the goal is to minimize the probability of default of the group. To do this, one has to create a model with interacting forces, and to make precise the hypotheses of the model. We show that the original choice of Muhammad Yunus, of a group size of five people, is, under the right, and, we believe, reasonable hypotheses, either close to optimal, or even at times exactly optimal, i.e., the optimal group size is indeed five people.</p></div>","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"18 1","pages":"121 - 132"},"PeriodicalIF":1.0,"publicationDate":"2021-01-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s10436-020-00382-0","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49327105","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Annals of FinancePub Date : 2021-01-18DOI: 10.1007/s10436-020-00381-1
Alexander Melnikov, Hongxi Wan
{"title":"On modifications of the Bachelier model","authors":"Alexander Melnikov, Hongxi Wan","doi":"10.1007/s10436-020-00381-1","DOIUrl":"10.1007/s10436-020-00381-1","url":null,"abstract":"<div><p>Mathematically, stock prices described by a classical Bachelier model are sums of a Brownian motion and an absolute continuous drift. Hence, stock prices can take negative values, and financially, it is not appropriate. This drawback is overcome by Samuelson who has proposed the exponential transformation and provided the so-called Geometrical Brownian motion. In this paper, we introduce two additional modifications which are based on SDEs with absorption and reflection. We show that the model with reflection may admit arbitrage, but the model with an appropriate absorption leads to a better model. Comparisons regarding option pricing among the standard Bachelier model, the Black–Scholes model and the modified Bachelier model with absorption at zero are executed. Moreover, our main findings are also devoted to the Conditional Value-at-Risk based partial hedging in the framework of these models. Illustrative numerical examples are provided.</p></div>","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"17 2","pages":"187 - 214"},"PeriodicalIF":1.0,"publicationDate":"2021-01-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s10436-020-00381-1","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50492164","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Annals of FinancePub Date : 2020-11-27DOI: 10.1007/s10436-020-00380-2
Haim Shalit
{"title":"The Shapley value decomposition of optimal portfolios","authors":"Haim Shalit","doi":"10.1007/s10436-020-00380-2","DOIUrl":"10.1007/s10436-020-00380-2","url":null,"abstract":"<div><p>Investors want the ability to evaluate the true and complete risk of the financial assets held in a portfolio. Yet, the current analytic methods provide only partial risk measures. I suggest that, by viewing a portfolio of securities as a cooperative game played by the assets that minimize portfolio risk, investors can calculate the exact value, each security contributes to the common payoff of the game, which is known as the Shapley value. It is determined by computing the contribution of each asset to the portfolio risk by looking at all the possible coalitions in which the asset would participate. I develop this concept in order to decompose the risk of mean-variance and mean-Gini efficient portfolios. This decomposition gives us a better rank of assets by their comprehensive contribution to the risk of optimal portfolios. Such a procedure allows investors to make unbiased decisions when they analyze the inherent risk of their holdings. The Shapley value is calculated for index classes and the empirical results based on asset allocation data are contrary to some of the findings of conventional wisdom and beta analysis.</p></div>","PeriodicalId":45289,"journal":{"name":"Annals of Finance","volume":"17 1","pages":"1 - 25"},"PeriodicalIF":1.0,"publicationDate":"2020-11-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1007/s10436-020-00380-2","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50518682","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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