Stock Price Dynamics of Listed Growth Companies: Evidence from the Options Market

-- Rainer Baule and Christian Tallau

This paper empirically investigates the stock price dynamics implied by the valuation model proposed by Schwartz and Moon (2001) for growth companies. We test the hypothesis that the inherent stochastic process for the firm equity value better describes the actual dynamics than standard geometric Brownian motion. Because the form of the stochastic process decisively influences the values of options written on a firm’s stock, we rely on price information from the options market to test the hypothesis. Therefore, we propose an adapted version of the Least-Squares Monte Carlo algorithm to price options on the stock of a growth company whose value is determined by the Schwartz-Moon model. Calibrating the model to real-world stock and option data, we analyze the stock price dynamics implied by the Schwartz-Moon model empirically by comparing them to a standard geometric Brownian motion model. The study is conducted for three high-growth Internet companies: Amazon.com, eBay and Google. Contrary to our expectations, we find no evidence that the Schwartz-Moon model is superior in explaining the options market for growth companies. The reason is due to the Schwartz-Moon model’s restriction on specifying the volatility of revenues, which allows only for exponentially decreasing functions.

© 2013 IUP. All Rights Reserved.

Are Share Repurchases Substitutes for Dividend Payments in India?

-- Raju L Hyderabad

The study examines the dividend substitution effect of share repurchase decisions of firms in India. According to dividend substitution hypothesis, firms use funds ordinarily meant for dividend payment to buy back shares. The yearwise analysis of dividends reveals that dividends are not lower in the year of buyback declaration in India. The statistical model employed generates a positive relationship between dividend forecast error and repurchase activity, contradicting the dividend substitution hypothesis. The Indian firms pay more dividends for every Rs.1 spent on buyback in the announcement year. The Chief Finance Officers of repurchasing companies disagree to the proposition of dividend substituting effect of repurchases. The high-levered small-sized firms with higher cash balances and lower valuations engage in share repurchase in India but not at the expense of dividends.

© 2013 IUP. All Rights Reserved.

Dynamics of Corporate Reserve Debt Capacity

--Paritosh Chandra Sinha and Santanu Kumar Ghosh

In explaining the dynamics of corporate Reserve Debt Capacity (RDC) at its utilization and creation of the high-risk and low-risk RDC by the high-value and low-value firms, the present paper seeks to put forward a new theory in literature. Utilizing the concept of suboptimality at firms’ pecking order track and that of ‘optimality’ at trade-off track, the theory recognizes the presence of ‘separating’ and ‘semi-separating’ equilibrium at the dynamic behaviors of their RDCs and their shifts from one track to the other. The theory conjectures that firms exploit their RDCs if the same are available or they recreate the same before utilization. The study also explores that the Indian firms issue secured as well as unsecured debts in utilization of RDC but these firms show greater reliance on the later sources of debts than the former. They behave differently on their inclusion in the high-value and low-value sub-samples. Both highvalue and low-value firms utilize their internal and external equity for creating their low-risk and high-risk RDC where they show greater reliance on their new issues of equity than their uses of internal equity.

© 2013 IUP. All Rights Reserved.

Distress in Money Markets During the Global Financial Crisis: An Analysis of Co-Movement and Transmission

-- Takayasu Ito

This paper aims to investigate the co-movement and transmission of distress through money markets during the global financial crisis by analyzing LIBOR-OIS spreads. It focuses on the US, Eurozone, UK and Japan. The sample is divided into two periods around the time of Lehman Brothers shock to investigate the asymmetrical impact of global financial crisis on LIBOR-OIS spreads. The first period (Sample A) runs from August 9, 2007 to September 12, 2008 and the second (Sample B) from September 15, 2008 to May 20, 2009. The results show that for Sample A, distress moved synchronously across the US, Eurozone, UK and Japan through the process of global transmission. However, in Sample B such a coordination was found only between UK and Eurozone.

© 2013 IUP. All Rights Reserved.

Are Shocks to Hedge Fund Returns Permanent or Temporary?

--Emmanuel Anoruo

This paper seeks to ascertain whether shocks to hedge fund returns are permanent or temporary by using M1 and M2 unit root procedures advanced by Narayan and Popp. In addition, the paper implements the GARCH-based unit root test developed by Liu and Narayan. These procedures allow for two structural breaks in the data. The results from M1 and M2 models indicate that the various hedge fund returns under study are stationary processes with two structural breaks. Similarly, the results from the GARCH-based unit root model confirm those obtained from both the M1 and M2 techniques in that the hedge fund return series were found to be stationary. Taken together, the results suggest that shocks to the various hedge fund returns are temporary. This finding implies that hedge funds can be included in portfolios with traditional assets such as stocks and bonds to reduce risk and enhance returns.

© 2013 IUP. All Rights Reserved.

Causal Relationship Between Stock Market Indices and Gold Price: Evidence from India

-- Samveg A Patel

This paper investigates the causal relationship between stock market indices and gold price in India. The monthly time series data for Mumbai gold prices and three stock market indices, viz., Sensex, BSE 100 and S&P CNX Nifty, are used for the period January 1991 to December 2011. By applying Augmented Dickey-Fuller unit root test, Johansen cointegration test and Granger causality test in Error Correction Model framework, the study concludes that all series are I(1)and there exists a long-run equilibrium relation between all the variables. The study also provides evidence that the Granger causality runs from gold price to Nifty only. Hence, gold price contains some significant information to forecast Nifty return.

© 2013 IUP. All Rights Reserved.