Modeling Systematic and Non-Systematic Risk in the UK Cross-Sectional Equities: Evidence of Regimes and Overstated Parametric Estimates

-- Francesco Rossi

The paper studies the behavior and interaction of systematic and idiosyncratic components of risk in a cross-section of UK stocks. No clear evidence is found of a trend in any component of total risk, but different ‘regimes’ in the behavior of each component of total risk, in their correlation patterns and thus in their contribution to aggregate risk, are documented. Comparing parametric and non-parametric estimates of residual risk, it is found that the former significantly overstates diversifiable risk, opposite to some previous findings for the US market, with the difference being very large, especially when an industry component is included.

© 2013 IUP. All Rights Reserved.

A Comparative Study of Book Value Insolvency of Indian Commercial Banks:
An Application of Z-Score Model

--Ranjan Aneja and Anita Makkar

The present study addresses the problem of book value insolvency by analyzing 47 Indian commercial banks (26 public sector and 21 private sector banks) over the period of 2006-07 to 2010-11. Book value insolvency score of banks is calculated using the Z-statistic, and further, the Z-statistic scores of public and private sector banks are compared. The study also analyzes selected internal determinants of book value insolvency. The results reveal that bank size is a major determinant that significantly affects the solvency of Indian commercial banks. On the other hand, it is found that increase in non-performing assets leads to high insolvency risk in Indian banks. The study concludes that public sector banks have efficient risk management and are safer than private sector banks.

© 2013 IUP. All Rights Reserved.

Optimal Hedge Ratio and Hedging Effectiveness of Indian Agricultural Commodities

--Irfan Ul Haq and K Chandrasekhara Rao

This paper examines the cointegration between spot and future prices of Indian agricultural commodities and thereby estimates the optimal hedge ratio and hedging efficiency of the agricultural commodities using error correction mechanism and Ederington measure respectively. The study is conducted on 10 agricultural commodities, data for which was obtained from National Commodity and Derivatives Exchange, India for the period from January 2006 to December 2011. The results indicate good amount of hedging in Indian agricultural commodity markets.

© 2013 IUP. All Rights Reserved.

The Quadratic Approximation for the Value of American Options:
An Alternative

--Andreas Andrikopoulos

The valuation of put options with early-exercise opportunities constitutes a major challenge of asset pricing. The option-theoretic response to this challenge relies on the estimation of the optimal exercise boundary. This paper introduces a novel quadratic approximation for the valuation of American options on common stock. The paper’s contribution lies in the tradition of semi-analytical approximation of American put options, which was put forward in Barone-Adesi and Whaley (1987). Assuming that the interest rate and the volatility are constant, the early-exercise premium is modeled as a product of two functions, one being a function of time and the other being a function of the stock price. The numerical results demonstrate the accuracy of the method, over competing alternatives such as the Barone-Adesi and Whaley (1987) algorithm.

© 2013 IUP. All Rights Reserved.

Single Tender Offers: Impact on Target Firms

--Amporn Soongswang

This study primarily focuses on takeover effects on the target firms traded on the Stock Exchange of Thailand (SET) in the context of single tender offers. This research investigates a long-window excess return, or over a period of 12 months before and after the announcements by means of several metrics. The market and market-adjusted models are used to estimate the returns for the bid period, the Cumulative Abnormal Return (CAR) and Buy-and-Hold Abnormal Return (BHAR) methods are applied for the measurement of the returns of the target firms, and the three parametric test statistics are also used to test the significance of the abnornal returns of the target firm’s shareholders. The results suggest that takeovers occurring in the Thai stock market result in substantial positive wealth gains for the shareholders of the target firms.

© 2013 IUP. All Rights Reserved.