International Review of Finance

Publisher:
Wiley
Publication date:
2021-02-01
ISBN:
1369-412X

Latest documents

  • Issue Information
  • Patience Is a Virtue: In Value Investing*

    This note illustrates a simple but important insight for financial investment. In a heterogeneous agent‐based evolutionary finance market model with long‐lived assets, markets are stable if clients of fundamental (“value”) investment funds are more patient than clients of other funds.

  • Are Incentive Contract Settlements Nonevents?*

    We examine the information conveyed in managers’ incentive contracts such as prepaid variable forward (PVF) contracts. Using a large database, we perform event studies on cumulative abnormal returns (CARs) and volatility around the signature and the settlement of such contracts. The results show that PVF settlements, which involve no divulgation of new information, can be interpreted as nonevents. For firms with lower visibility, CARs are significantly negative immediately after settlement, whereas firms with higher visibility incur this effect upon signature. The signature and settlement dates have a small negative effect on the firms’ volatility suggesting slow adjustment mechanisms.

  • Comovement in Anomalies between the Australian and US Equity Markets*

    This study examines the comovement between eight prominent Australian asset pricing anomalies and their corresponding US counterparts. It confirms the continued existence of these anomalies in Australia and finds that these anomalies do not co‐move with their US counterparts. Given the conflicting findings in prior research on the integration or segmentation of the Australian and US equity markets, this study adds to the body of evidence supporting segmentation.

  • Maxing Out in China: Optimism or Attention?

    Bali et al. (2011) document a maximum daily returns (MAX) premium in the US where stocks with the highest MAX underperform stocks with the lowest MAX in the subsequent month. However, the source of this MAX premium is contentious. Fong and Toh (2014) find that the MAX premium exclusively follows high sentiment periods suggesting that it is driven by investor optimism during high sentiment periods. In contrast Cheon and Lee (2017) find that the MAX premium is stronger following low sentiment periods suggesting that it is driven by the attention‐grabbing characteristic of high MAX stocks in low sentiment periods. We present evidence from China consistent with the MAX premium being driven by investor optimism during high sentiment periods.

  • The q‐Factors and Macroeconomic Conditions: Asymmetric Effects of the Business Cycles on Long and Short Sides*

    We examine whether the q‐factors—the investment factor (INV) and the return‐on‐equity factor (ROE)—are related to the macroeconomy. We find reliable evidence that returns on INV are positively related to future economic growth. When conditioning on good and bad states of the business cycle, we show that returns on INV are significantly higher during good states than bad states. We also find that the conditioning effect of economic conditions on INV is asymmetric between long and short sides of INV. On the other hand, we find that returns on ROE are negatively associated with future aggregate earnings change. The relations remain robust even in the presence of business cycle variables and after controlling for the book‐to‐market effect.

  • Market Volatility Risk and Stock Returns around the World: Implication for Multinational Corporations*

    We investigate the pricing of market volatility risk as a risk factor—the innovation risk and as a characteristic risk—the level risk. We find that the pricing of the country‐level (local) market volatility risk factor is not robust across 21 developed markets and that the global market volatility risk factor prices 21 developed market portfolios after controlling for global market, value, and size factors. Capturing various market information, idiosyncratic market volatility as a country‐specific characteristic risk dominates global market, value, size, and market volatility risk factors in predicting returns of market portfolios. Countries with higher investor protection and accounting standards have higher country‐specific market volatility. Market volatility is higher in these countries because corporate managers take higher risks on innovative projects that benefit economic growth.

  • Momentum Trading with the ℓ1‐Filter: Are the Markets Efficient?*

    This paper explores the possibility of generating consistent momentum profits by trading on nine major indices across the globe using the ℓ1‐filter. This methodology penalizes slope reversion of the filtered trend and identifies piecewise linear trends in the asset prices. We find the buy strategy to offer considerably higher momentum returns compared to the sell strategy. Our strategy beats the buy‐and‐hold (BH) strategy on all fronts and, thus, highlights the inefficiencies in financial markets in recent years (2000–2016). Comparing the momentum profits across a set of advanced economies (AEs) and emerging market economies (EMEs), we find that the developed and efficient financial markets of the AEs provide lower opportunities for momentum profits. The momentum profits are more than double in the EMEs as compared to the AEs. Highlighting the instability of the momentum strategy in different market states by using the global financial crisis (GFC) as a turning point, we further find that considerable opportunity exists for momentum strategies in the bullish runs that precede the crisis, as happened before the GFC. However, the momentum profits reduce significantly as the crisis sets in, increasing the degree of market uncertainty, fear, and risk‐aversiveness.

  • On Education Level and Terms in Obtaining P2P Funding: New Evidence from China*

    This paper examines the role of education in China's fast‐growing peer‐to‐peer (P2P) lending market. The level of education, as part of a borrower's profile, is an important yet relatively neglected factor that can affect both the demand and supply of credit in an increasingly more technologically oriented marketplace. With this in mind, we test the relationship between a borrower's education level and the interest rate, loan amount, and loan maturity based on more than 10,000 transactions from Renrendai.com. Controlling for a variety of other factors, we find on average that an individual with a higher education level obtains a lower interest rate, larger loan amount, and longer maturity. In contrast, less educated individuals pay higher interest rates, obtain smaller loans, and for shorter time periods.

  • Risk Information Disclosure and Bank Soundness: Does Regulation Matter? Evidence from China*

    This paper examines the impact of the Regulation for Commercial Bank Capital Management in China on banks’ risk taking and disclosure behavior. We construct a risk disclosure index for Chinese commercial banks around this Regulation and find that compliance with the Regulation through a higher risk disclosure index improves bank soundness. We also find that the component of the risk disclosure index associated with risk compensation is the main driving factor of our findings. Moreover, our results show the effect of the Regulation is much smaller for publicly listed banks, suggesting a substituting regulation effect of the public capital market.

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