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Now showing 1 - 10 of 11
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    Essays on International Finance: Stock Market Wealth Creation, Sovereign CDS Spreads, and Currency Comovement
    (Georgia Institute of Technology, 2021-08-11) Jang, Ernest S.
    Using the wealth creation measure developed by Bessembinder (2018), we estimate stock market wealth creation around the world and show the importance of national culture in explaining wealth creation. The 88 stock markets in our sample create $76.6 trillion net wealth from 1973 to 2019, with the U.S. contributing the most (52.5%). Among industries, finance creates the most wealth (17.6%). We find that countries with individualistic, less masculine, and less uncertainty avoidant cultures have comparative advantages in stock market wealth creation. We also show that culture influences wealth creation through multiple channels, such as innovation, governance, information, education, and sustainability. In this paper, we first document that the degree of co-movement of currencies varies a great deal across different base (measurement) currencies. In estimating the co-movement, we use the average of R2s from regressions of exchange rate changes of each of our 27 floating-rate sample currencies against the base currency on the currency market factor. Over our sample period 1999–2018, the average R2 is found to range from 22.1% for the Singapore dollar to 71.8% for the South African rand, with the average of 51.5% across sample base currencies. This implies that the extent to which the currency risk is diversifiable critically depends on the investor’s home currency; for instance, the currency risk would be highly diversifiable for Singapore dollar-based investors but largely systematic for South African rand-based investors. Motivated by our novel currency clustering analysis utilizing a base-currency independent metric, we then set forth and provide strong evidence supporting the hypothesis that the idiosyncratic (connected) currencies influenced weakly (strongly) by the major global currencies, i.e., the U.S. dollar and the euro, face high (low) degrees of co-movements of other currencies This paper analyzes the impact of the Federal funds rate surprises on the sovereign CDS spreads of 83 countries by using 138 FOMC announcements from 2002 to 2018. We document that sovereign CDS spreads tend to increase on the day after the announcements of unexpected reduction in federal fund rates. On average, a hypothetical 100 basis point negative Federal funds target rate shock is associated with about seven basis points increase in sovereign CDS spreads on the day after the FOMC announcement. We also find that the impact of Federal funds rate shock on sovereign CDS spread varies depending on macroeconomic conditions. Specifically, the impact is more pronounced for countries with higher external debts, lower foreign reserves, higher proportions of primary commodities in their exports, heavier dependency on the U.S. economy, and lower exchange rate volatility against U.S. dollar. We also find that countries with higher than median CDS spread mainly drive these results. Our findings in this paper suggest that U.S. monetary policy shock is an important determinant of the sovereign credit spread.
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    (Georgia Institute of Technology, 2020-06-22) Wei, Fengrong
    This dissertation consists of three essays on the application of network methods in finance study at the country-level, firm-level, and fund-level. In the first essay, we extend the analysis of globalization from the market factor to the rest of Fama-French factors and the Carhart momentum factor. The findings show that most of the sample local factors are significantly globalized, with the degree of globalization varying substantially across factors. Specifically, the market factor is the most globalized factor on average, followed by the momentum, size, value, profitability, and investment factors. In addition, we show that the impact of financial globalization has been imputed in the local factors, which explains the intriguing finding of integrated international asset pricing. That is, the local Fama-French factors outperform the global counterparts in pricing stocks, seemingly suggesting that stocks are priced as if financial markets were segmented despite the evident globalization. Our results indicate that this puzzle is attributable to the globalization of local factors. In the second essay, we propose a system-wide approach to the study of the firm-specific connections, which capture the distinct relatedness between firms through unique features, conditional on the U.S. market. The proposed approach provides a new system-wide and factor-free measurement of market integration. We find that the degree of the firm-specific connections has decreased over time, and industry and style attributes significantly positively affect these connections. By applying these connections, investors can consistently gain through holding relatively few stocks randomly chosen across communities clustered based on these connections. Moreover, this consistency of gains has increased substantially over time, pointing to the importance of considering the firm-specific connections in risk diversification. In the third essay, we use holding-linked network of mutual funds, measured by the similarity between funds' portfolios, to examine the network predictability of fund performance and flows. Using the new network method, we find evidence of significant predictability between funds with similar holdings. The predictability persists three to six months for alternative performance measures and at least twelve months for fund flows. In addition, a long-short strategy based on these holding links yields a significant annual alpha of about 4.5%. These findings reflect the similar underlying drivers of funds' portfolio holdings and show the persistent prediction of fund performance and flows by the holding linked network.
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    Essays on integration vs. segmentation of financial markets
    (Georgia Institute of Technology, 2018-05-21) Zhang, Teng
    Essay I: Uniform Mortgage Regulation and Distortion in Capital Allocation The U.S. economy is significantly influenced by local features, but most federal policies are national. In this essay, I study the unintended consequences of the uniformity of the national conforming loan limit (CLL) before 2008 on bank lending in local jumbo mortgage markets. When the national CLL increased, the jumbo share of residential mortgage markets in low-income counties was significantly reduced relative to high-income counties. I find that banks responded to the exogenous national shock by significantly increasing jumbo approval rates in low-income counties. The economic magnitude is large: a county with a \$10,000 lower median income is associated with, on average, a 6 percentage-point (or 11.77\%) higher jumbo loan approval rate compared to a county with a \$10,000 higher median income. The results are not driven by credit supply changes, borrower quality changes, home price anticipation, or the demand channel. Consistent with the competition mechanism in which lenders expand jumbo credit to defend market share, I also find that banks in low-income counties lower jumbo mortgage rates and later suffer from worse mortgage performance. Furthermore, smaller and less informed banks expand jumbo credit more aggressively, and, as a result, riskier borrowers receive more credit. Overall, my results highlight negative consequences of the uniformity of federal policy in mortgage markets by showing how it can lead to distorted bank lending and reduce efficiency of credit allocation across regions. Essay II: Housing Market Integration and Economic Convergence In this essay, I find that the increasing housing market integration in recent decades has contributed significantly to the convergence of output, income, and total employment growth across U.S. states. States with integrated housing markets also converge in their utilization of the home equity line of credit and in the prevalence of real-estate secured loans, which suggests the collateral channel as a key transmission mechanism through which housing market integration contributes to the economic convergence. To establish causality, I identify exogenous variations in state-level house prices using real estate related foreign direct investments that are orthogonal to state economic conditions. My findings are robust to controls for banking integration and geographic proximity, and are not driven by the performance of the real estate industry or changes in local demand. I also obtain similar results at the MSA level. Essay III: Global Diversification with Local Stocks: A Road Less Traveled In this essay, I document a great heterogeneity in the degree of global financial integration at the firm-level and delve into its implications for international portfolio diversification. Specifically, I estimate the degree of integration for about 14,000 sample firms per year, on average, from major developed markets over the period 1995-2014, using the R-square method. The key findings are: (i) The R-square, our measure of integration, is very widely distributed across sample firms, within and across countries; (ii) The firm-level integration is significantly affected by the three attributes tested – country, industry, and style; style exerts the greatest effect, followed by country and industry; (iii) `Local' stocks that are least driven by the common global factors are significantly more effective in portfolio risk diversification than either domestic or `global' stocks; this result holds during the recent global financial crises; (iv) Systematically identifying local stocks and holding them optimally, investors can significantly benefit from the enhanced the mean-variance efficiency within the familiar confines of developed markets. In light of the stark heterogeneity in global integration at the granular level, inferences of the diversification gains solely from stock market indices, the usual practice, are likely to understate the potential gains that world stock markets can provide.
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    Essays in international capital markets
    (Georgia Institute of Technology, 2011-11-14) Lee, Kyuseok
    My dissertation consists of three essays in international capital markets. In Chapter I, we examine the herd trading behavior of institutional investors trading around the world. Using a new transaction-level trades database of 531 U.S. institutional investors trading across 37 countries for the period 2002-2009, we find robust evidence of intra- and inter-period herdings at the monthly frequency. We find no evidence that trades by institutions in our sample destabilize local stock markets. Further analysis shows that: (i) in the buy side, both intra- and inter-period herdings are more pronounced in countries with weaker information environments; and (ii) in the sell side, intra-period herding is more pronounced in countries with stronger information environments, whereas inter-period herding is not significantly related to information environments. In Chapter II, we document that the degree of co-movement between bilateral USD ex- change rates has increased substantially since the introduction of the euro in 1999 and investigate what drives the increased co-movement. For each of our 33 sampled bilateral USD exchange rates, we measure the degree of co-movement using the R-square from re- gressing weekly exchange rate changes on the weekly world exchange rate factor. Our results show that, for the majority of sample exchange rates, the R-square has increased substan- tially over the period 1999-2010. Specifically, the average R-square was 0.15 in 1999, but it increased to 0.47 by more than 200% in 2010. Further analysis reveals that the rising influence of the euro relative to USD over a third currency can explain most of the increase in the measured co-movement over time. In Chapter III, we examine the level and trend of U.S. domestic market integration. For each of our sample states, we construct the state (market) portfolio comprising public firms headquartered within the state and compute R-square, our measure of integration, from regressing state portfolio returns on national stock market factors. Using weekly returns, we estimate the regression for each year of our sample period 1963-2008. The key findings are: (i) For the majority of sample states, the R-square exhibits a statistically significant upward trend, implying that U.S. domestic stock markets were not fully integrated and have been integrating during the sample period; (ii) consistent with the previous result, the explanatory power of the state factor over individual stock returns has been decreasing for the majority of states; and (iii) the increasing integration of U.S. domestic stock markets is associated with the decreasing home state bias, suggesting that investors' pursuit of nation- wide investment opportunities may be a significant driver of domestic financial integration.
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    Essays on the role of peer networks in investment banking
    (Georgia Institute of Technology, 2009-05-18) Chuluun, Tugsjargal
    The following series of three essays examine the impact of peer networks of investment banks, including those commercial banks that recently entered security underwriting, on investment banking activities. Specifically, I focus on underwriter and financial advisor peer networks in security underwriting and mergers and acquisitions advisory services, and examine how the structure of these peer networks affects the performance of initial public offerings, the shareholders' wealth in mergers and acquisitions, and the market share of underwriters. The results indicate that the peer relations of underwriters and advisors have significant implications along various dimensions.
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    Three essays on stock market seasonality
    (Georgia Institute of Technology, 2008-11-17) Choi, Hyung-Suk
    Three Essays on Stock Market Seasonality Hyung-Suk Choi 136 pages Directed by Dr. Cheol S. Eun In chapter 1, we examine seasonality in returns to style portfolios, which serve as important benchmarks for asset allocation, and investigate its implications for investment. In doing so, we consider monthly returns on the style portfolios classified by six size/book-to-market sorting and six size/prior-return sorting over the sample period 1927 - 2006. The key findings are: first, as is well documented in the literature, small-cap oriented portfolios are subject to the January effect, but also to the 'negative' September and October effects. Second, cross-style return dispersion exhibits a seasonal pattern of its own (it is largest in January and smallest in August), suggesting possibly profitable trading strategies. Third, our seasonal strategies indeed yield significant profits, as high as about 18.7 % per annum. This profit is mostly attributable to the seasonal autocorrelation in style returns. Lastly, we find substantial seasonal patterns in style returns not only in the U.S. but also in other major stock markets Germany, Japan, and the U.K. Our seasonal style rotation strategy yields economically and statistically significant profits in all of these stock markets. In chapter 2, we examine the abnormal, negative stock returns in September which have received little attention from academic researchers. We find that in most of the 18 developed stock markets the mean return in September is negative and in 15 countries it is significantly lower than the unconditional monthly mean return. This September effect has not weakened in the recent period. Further, the examinations of the various style portfolios in the US market show that the September effect is the most pervasive anomalous phenomenon that is not affected by size, book-to-market ratio, past performance, or industry. Our finding suggests that the forward looking nature of stock prices combined with the negative economic growth in the last quarter causes the September effect. Especially in the fall season when most investors become more risk averse, the stock prices reflect the future economic growth more than the rest of the year. Our investment strategy based on the September effect yields a higher mean return and a lower standard deviation than the buy-and-hold strategy. In chapter 3, we establish the presence of seasonality in the cash flows to the U.S. domestic mutual funds. January is the month with the highest net cash flows to equity funds and December is the month with the lowest net cash flows. The large net flows in January are attributed to the increased purchases, and the small net flows in December are due to the increased redemptions. Thus, the turn-of-the-year period is the time when most mutual fund investors make their investment decisions. We offer the possible sources for the seasonality in mutual funds flows.
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    Three Essays on the Role of Information Networks in Financial Markets
    (Georgia Institute of Technology, 2007-07-06) Gupta-Mukherjee, Swasti
    Based on previous evidence that there are information heterogeneities in capital markets, three essays including empirical frameworks for examining the information processes that impact portfolio investments and corporate investments was proposed. The first essay considers information channels among mutual fund managers (fund-fund networks), and between holding companies and fund managers (fund-company networks). Results show that (1) fund-fund (fund-company) information networks help in generating positive risk-adjusted returns from holdings in absence of fund-company (fund-fund) networks; (2) fund-company networks create information advantage only when the networks are relatively exclusive. Superior networks seem to pick stocks which outperform beyond the quarter. The second essay examines mutual fund managers tendency to deviate from the strategies of their peers. Results indicate a significantly negative relationship between the managers deviating tendency and fund performance, suggesting that the average fund manager is more likely to make erroneous decisions when they deviate from their peers. The third essay investigates the determinants of target choices in corporate acquisitions. Results reveal the influence of various factors, including information asymmetries, which may drive this behavior, including economic opportunities, anti-takeover regimes, competitive responses to other managers, and acquirers size and book-to-market ratios.
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    Convergence in Global Capital Markets
    (Georgia Institute of Technology, 2006-05-19) Lee, Jinsoo
    In chapter 1, we show (i) that the risk-return characteristics of our sample of 17 developed stock markets of the world have converged significantly toward each other during our study period 1974 2004, and (ii) that this international convergence in risk-return characteristics is driven mainly by the declining country effect, rather than the rising industry effect, suggesting that the convergence is associated with international market integration. Specifically, we first compute the risk-return distance among international stock markets based on the Euclidean distance and find that the distance thus computed has been deceasing significantly over time, implying a mean-variance convergence. In particular, the average risk-return distance has decreased by about 43% over our sample period. The speed of convergence, however, varies greatly across individual markets, largely reflecting the initial distance of each individual market from the international average risk-return characteristic. Lastly, we document that the risk-return characteristics of our sample of 14 emerging markets have been converging rapidly toward those of developed markets in recent years. This development notwithstanding, emerging markets still remain as a distinct asset class. In chapter 2, we examine the historical evolution of international earnings-to-price ratios for a sample of 17 markets over the period 1980 2004. We introduce a distance measure of earnings-to-price ratios among international stock markets and find that earnings-to-price ratios of 17 markets have significantly converged toward each other during the period. The average distance measure for 17 markets has decreased by about 80 percent during the period. The speed of convergence for individual markets varies and mainly reflects the initial distance of individual markets from the international average. We also find that although both country and industry effects account for convergence in earnings-to-price ratios among the sample markets, country effect dominates industry effect in terms of the magnitude. We further examine what could explain the declining country effect and document that the time trend of dividend-yield distance measure closely follows that of earnings-to-price distance measure. This result suggests that convergence in earnings-to-price ratio is mainly due to convergence in economic factors such as growth opportunities or discount rates rather than due to convergence in accounting practices.
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    Essays on financial economics
    (Georgia Institute of Technology, 2003-08) Lai, Shu-Ching
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    Essays on international asset pricing
    (Georgia Institute of Technology, 2001-08) Huang, Wei