This issue consists of five papers. In the first paper, “Modeling Systematic and Non- Systematic Risk in the UK Cross-Sectional Equities: Evidence of Regimes and Overstated Parametric Estimates”, the author, Francesco Rossi, studies the behavior and interaction of systematic and idiosyncratic components of risk in a cross-section of UK stocks. The paper finds no clear evidence of a trend in any component of total risk, but documents different ‘regimes’ in the behavior of each component of total risk in their correlation patterns and thus in their contribution to aggregate risk. Comparing parametric and non-parametric estimates of residual risk, the author finds the former to significantly overstate diversifiable risk, contradicting some previous findings for the US market, with the difference being very large, especially when an industry component is included. This implies that the relative importance, variability and covariation of the components of total risk change significantly over time. The paper stresses upon two results. First, the industry component and the firm-specific (or idiosyncratic) component are always highly correlated, while the market component’s correlation with the other two is much more varying. Secondly, while the contribution of the three components to total risk is quite stable (with the firm-specific component accounting for over half of the total), the drivers of changes in total risk are not.

The second paper, “A Comparative Study of Book Value Insolvency of Indian Commercial Banks: An Application of Z-Score Model”, by Ranjan Aneja and Anita Makkar, addresses the problem of book value insolvency of the banks. It analyzes 47 Indian commercial banks (26 public sector and 21 private sector banks) across the period of 2006-07 to 2010-11. Book value insolvency score of banks has been calculated using Z-statistic. Further, the Z-static score of public and private sector banks has been compared to identify the probability of book value insolvency. In the study, selected internal determinants have also been analyzed. The study found that bank size is the major determinant that significantly affects the solvency of Indian commercial banks. Non-performing assets are positively related to insolvency risk that indicates that increase in NPA leads to high insolvency risk in Indian banks. The study concludes that public sector banks are safer than private sector banks and has efficient risk management.

The third paper, “Optimal Hedge Ratio and Hedging Effectiveness of Indian Agricultural Commodities Market”, by Irfan Ul Haq and K Chandrasekhara Rao, examines the cointegration between spot and future agricultural commodity prices. The authors have estimated optimal hedge ratio and hedging efficiency of agricultural commodities using error correction mechanism and Ederington measure, respectively. The Ederington Measure provides how far one can reduce the variance of the portfolio containing the future prices. The study confirms the reduction in the variance to a large extent.

The results of the study, conducted on 10 agricultural commodities, indicate good amount of hedging in Indian agricultural commodity markets.

In the next paper, “The Quadratic Approximation for the Value of American Options: An Alternative”, the author, Andreas Andrikopoulos, introduces a novel quadratic approximation for the valuation of American options on common stock. The paper models option value as a product of two functions, one being a function of time and the other one being a function of the stock price. It is faster than the binomial method or finite-difference schemes and its accuracy performance resembles the Barone-Adesi and Whaley (1987) analytical approximation. The numerical results demonstrate the accuracy of the method.

The last paper, “Single Tender Offers: Impact on Target Firms”, by Amporn Soongswang, primarily focuses on the effects of takeover 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 during a period of twelve months before and after the announcements by means of several metrics. For example, the market and market-adjusted models were used to estimate the returns for the bid period, the Cumulative Abnormal Return (CAR) and Buy-and-Hold Abnormal Return (BHAR) were applied for the measurement of the returns of the target firms, and the three parametric test statistics were also used. The results suggest that takeovers ensure substantial and positive wealth gains for the shareholders.

-Nupur Pavan Bang
Consulting Editor