Wednesday, December 20, 2017

The Origins and Meanings of Our Different Moral Concepts

On the Genealogy of MoralsOn the Genealogy of Morals by Friedrich Nietzsche
My rating: 4 of 5 stars

On The Genealogy of Morals is made up of three essays, all of which question and critique the value of our moral judgments based on a genealogical method whereby Nietzsche examines the origins and meanings of our different moral concepts.

The first essay, "'Good and Evil,' 'Good and Bad'" contrasts what Nietzsche calls "master morality" and "slave morality." Master morality was developed by the strong, healthy, and free, who saw their own happiness as good and named it thus. By contrast, they saw those who were weak, unhealthy, and enslaved as "bad," since their weakness was undesirable. By contrast, the slaves, feeling oppressed by these wealthy and happy masters, called the masters "evil," and called themselves "good" by contrast.

The second essay, "'Guilt,' 'Bad Conscience,' and the like" deals with (surprise, surprise) guilt, bad conscience, and the like. Nietzsche traces the origins of concepts such as guilt and punishment, showing that originally they were not based on any sense of moral transgression. Rather, guilt simply meant that a debt was owed and punishment was simply a form of securing repayment. Only with the rise of slave morality did these moral concepts gain their present meanings. Nietzsche identifies bad conscience as our tendency to see ourselves as sinners and locates its origins in the need that came with the development of society to inhibit our animal instincts for aggression and cruelty and to turn them inward upon ourselves.

The third essay, "What is the meaning of ascetic ideals?" confronts asceticism, the powerful and paradoxical force that dominates contemporary life. Nietzsche sees it as the expression of a weak, sick will. Unable to cope with its struggle against itself, the sick will sees its animal instincts, its earthly nature, as vile, sinful, and horrible. Unable to free itself from these instincts, it attempts to subdue and tame itself as much as possible. Nietzsche concludes that "man would rather will nothingness than not will."

Nietzsche is difficult to read because he demands that we overturn or suspend many of the assumptions that our very reasoning relies upon. He is one of the Western tradition's deepest thinkers precisely because he calls so much into question. If we can come to understand Nietzsche's genealogical method, his doctrine of the will to power, and his perspectivism as all linked, his arguments will become much easier to follow.

In Nietzsche's distinction between a thing and its meaning, we find the initial doubt with which Nietzsche unravels so many of our assumptions. We are generally tempted to see things as having inherent meanings. For instance, punishment is at once the act of punishing and the reason behind the punishment. However, Nietzsche argues, these things have had different meanings at different times. For instance, the act of punishment has been at times a celebration of one's power, at times an act of cruelty, at times a simple tit-for-tat. We cannot understand a thing, and we certainly cannot understand its origin, if we assume that it has always held the same meaning.

Central to Nietzsche's critique, then, is an attempt at genealogy that will show the winding and undirected route our different moral concepts have taken to arrive in their present shape. Morality is generally treated as sacred because we assume that there is some transcendental ground for our morals, be it God, reason, tradition, or something else. Yet contrary to our assumption that "good," "bad," or "evil" have always had the same meanings, Nietzsche's genealogical method shows how these terms have evolved, shattering any illusion as to the continuity or absolute truth of our present moral concepts.

Because they can have different, even contradictory, meanings over the course of their long life spans, Nietzsche does not believe that concepts or things are the fundamental stuff that makes up reality. Instead, he looks beneath these things to see what drives the different meanings that they adopt over time. Hiding beneath he finds force and will. All of existence, Nietzsche asserts, is a struggle between different wills for the feeling of power. This "will to power" is most evident on a human level, where we see people constantly competing with one another, often for no other purpose than to feel superior to those that they overcome.

That a thing has a meaning at all means that there is some will dominating it, bending it toward a certain interpretation. That a thing may have different meanings over time suggests that different wills have come to dominate it. For instance, the concept of "good" was once dominated by the will of healthy, strong barbarians, and had the opposite meaning that it does now that it is dominated by the will of weak, "sick" ascetics.

According to Nietzsche, then, a belief in an absolute truth or an absolute anything is to give in to one particular meaning, one particular interpretation of a thing. It is essentially to allow oneself to be dominated by a particular will. A will that wishes to remain free will shun absolutes of all kinds and try to look at a matter from as many different perspectives as possible in order to gain its own. This doctrine that has deeply influenced postmodern thought is called "perspectivism."

Nietzsche's inquiries are thus conducted in a very irreverent spirit. Nothing is sacred, nothing is absolute, nothing, we might even say, is true. Our morality is not a set of duties passed down from God but an arbitrary code that has evolved as randomly as the human species itself. The only constant is that we, and everything else, are constantly striving for more power, and the only constant virtue is a will that is powerful, and free from bad conscience, hatred, and ressentiment.

Nietzsche's main project in the Genealogy is to question the value of our morality. Ultimately, he argues that our present morality is born out of a resentment and hatred that was felt toward anything that was powerful, strong, or healthy. As such, he sees our present morality as harmful to the future health and prosperity of our species. While the "blonde beasts" and barbarians of primitive master morality are animalistic brutes, at least they are strong and healthy. On the other hand, our present ascetic morality has "deepened" us by turning our aggressive instincts inward and seeing ourselves as a new wilderness to struggle against. Nietzsche's ideal is to maintain this depth and yet not be ashamed of our animal instincts or of the life that glows within us.

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Sunday, December 17, 2017

Institutional Algorithmic Trading, Statistical Arbitrage and Technical Analysis

Shen, Ning. 2009. Institutional Algorithmic Trading, Statistical Arbitrage And Technical Analysis. Doctoral Dissertation, Cornell University.
Technical analysis tools are widely used by short term investors in the financial market to identify trading opportunities and generate abnormal profit. Two of the most popular ones, Moving Average Convergence - Divergence and Bollinger Bands, are adopted in this study for algorithmic traders and statistical arbitragers (intraday trading) to reveal their effectiveness in terms of realizing sizeable profit before and after transaction cost. The simple oscillator signals derived from MACD and BB fail to efficiently recognize optimal trading timing and negative profit before and after transaction cost are realized under both strategies. Numerical analysis describes the sensitivity of profit with and without transaction fee to the strategies parameters. The results disclose that the selection of relevant parameters is not able to improve the performance of the strategies. A Long Only Filter Strategy (LOFS) is created to further investigate the possible strategies employed by institutional investors. Successfully generating considerable profit after transaction cost with a significant lower level risk, LOFS outperforms the buy-and-hold benchmark strategy as well as MACD and Bollinger Bands. LOFS is a promising strategy for statistical arbitragers who aim to profit from trading after accounting for transaction costs.

Socially Responsible Investing: Morality, Religion And The Market From A Sociological Perspective

Peifer, Jared. 2011. Socially Responsible Investing: Morality, Religion And The Market From A Sociological Perspective. Doctoral Dissertation, Cornell University.
This study explores the intersection of religion and the economy by focusing on the case of socially responsible investing (SRI) mutual funds that are also religiously affiliated. Mutual fund managers and investors understandably want competitive return performance from their investments. Yet religious fund actors are also oriented toward avoiding ownership in "sin stocks" and/or trying to change the behavior of corporations that are held in investment portfolios. Meeting both monetary and moral objectives can be a challenge. In this study, I address two broad research questions. Firstly, how do social actors balance their moral commitments against their monetary interest? Through 29 semi-formal phone interviews with fund producers (or the employees) of Catholic, Muslim and Protestant religious mutual funds, I analyze their embedding and differentiating cultural work as they make sense of their involvement in the economic and religious spheres (Chapter 1). In a separate analysis, I conduct and analyze 41 phone interviews with investors of one religious fund family, Mennonite Mutual Aid (MMA) Praxis mutual funds. In particular, I compare the moral meaning respondents articulate for their charitable giving and their SR investing (Chapter 4). Secondly, I query whether the moral orientation of investors impacts their financial market behavior? Using data from the Center for Research in Security Prices (CRSP) from 1991 to 2007, I partition mutual funds into religious SRI, religious non-SRI and secular SRI and look for differences in levels of fund asset stability. This stability refers to fund flow volatility and the extent to which investors hold on to their fund shares with little regard to past return performance. Religious SRI assets are found to be the most stable fund category and I adjudicate whether the structural characteristics of religious groups or the moral orientation of religious investors best explains this empirical finding (Chapter 2). In a separate analysis, I analyze original phone survey data of MMA Praxis investors. This article's theoretical orientation focuses on moral and monetary "interest," defined as an individual level driving force. I find empirical evidence that moral interest induces fund commitment to SRI mutual funds, demonstrating that morality impacts behavior even in the financial market, a realm where monetary interest supposedly reigns. At the same time, I also find some evidence that monetary interest decreases fund commitment (Chapter 3).

Sources Of Synergy In Mergers And Acquisitions

Kim, Jin Young. 2011. Sources Of Synergy In Mergers And Acquisitions. Doctoral Dissertation, Cornell University.
The general findings of the merger literature have raised the question of why mergers continue to be so prevalent when there is no conclusive evidence of value gains. In particular, the zero or even negative stock price reaction of the acquirer firm surrounding the announcement has been puzzling. In order to provide insight into this apparent contradiction, this study examines the sources and the realization of synergistic gains from mergers and acquisitions more directly. Prior studies on the sources of synergy have not been very effective since the nature of the data may have obscured the true economic impact of mergers. Using the rich information gained from the U.S. hotel industry data from 1991 to 2009, this study investigates the sources of merger-related gains while controlling for the market condition. Along the way, the much-neglected area of value erosion from M & A is also addressed. The findings indicate that at the hotel property level, both the target and the acquirer show significant cost savings; target hotel properties achieve price gains when they are merged into similar brand families of the acquirer; acquirer hotel properties gain occupancy improvements from the demand spillover from the target hotel properties. The study also finds that local market conflicts have a negative impact on the revenue of both target and acquirer properties. No evidence was found for price-increasing collusion among the properties of the target and the acquirer. The investigation of the offer premium and the operating performance shows that the offer premium is positively associated with synergistic gains for the acquirer properties while it is non-significant for the target properties. These results suggest an interesting possibility that the premium may actually be a price to gain control over the target's resources, which is critical to generating value on the acquirer side.

A Wavelet-Based Analysis of Commodity Futures Markets

Power, Gabriel. 2007. A Wavelet-Based Analysis of Commodity Futures Markets. Doctoral Dissertation, Cornell University.
The time horizon of decision-making is an essential dimension of economic problems but is difficult to explicitly define. In this thesis, we use time series analysis augmented by wavelet transform methods to precisely identify distinct time horizons in economic data and measure their explanatory power. This enables us to address three timely and persistent questions in the literature on commodity derivatives markets are addressed. First, are findings of long memory (fractional integration) in commodity futures price volatility spurious, following Granger?s conjecture? Yes, only two out of eleven commodities are characterized by true long memory and certain stochastic break models (e.g. Markov-switching) are found to be more plausible. Second, do large Index Traders such as commodity pools and pension funds increase futures price volatility through a large volume of trading activity? This appears to be true only for non-storable commodity contracts. Third, can we improve the accuracy of term structure models of futures prices by (i) including more state variables to better capture maturity and inventory effects, and (ii) filtering out what appears to be noise at the shortest time horizons? The results suggest that (i) three state variables is an optimal choice and (ii) estimates using filtered data are not improved and the noise may be economically meaningful.

Three Essays In Financial Globalization

Thongpruksa, Mingkwan. 2009. Three Essays In Financial Globalization. Doctoral Dissertation, Cornell University.
Financial globalization has many economic implications for countries. On one hand, it provides protection against national shocks and more efficient global allocation of resources. On the other hand, the financial inter linkage driven by globalization increases the exposure of countries to the financial and real shocks and to the risk of sudden capital reversals. This, in turn, has an impact on countries in various aspects. This dissertation explains the three different roles of financial globalization in individual countries and group of countries.
The first essay examines the degree of regional consumption risk sharing of countries in ASEAN+3 and investigates the extent to which financial integration determines the degree of regional consumption risk sharing. There are three main questions that this paper attempts to answer. First, the paper examines whether or not consumption risk sharing exists in ASEAN+3. Second, the paper explores to what directions they should contribute to the degree of regional consumption risk sharing. Finally, this paper examines to what extent ASEAN+3 shares the risk within the region vis-a-vis the rest of the world. According to the a empirical analysis, there is a limited degree of regional and bilateral risk sharing among ASEAN+3 and the degree of such has not changed much during 2000-2007. However, despite the limited degree of regional risk sharing, countries that invest in ASEAN+3 in moderate proportion, that is, Singapore, Korea, and Thailand, tend to have a higher degree of regional consumption risk sharing than global risk sharing.
The second essay addresses the major issues of inflation targeting in Thailand. An empirical study shows there is no evidence that inflation targeting has contributed to economic improvement since Thailand does not perform any better, and even worse in terms of output stability, than non inflation targeting countries. Moreover, the results show that exchange rate channel under the transmission mechanism plays a major role which contradicts the traditional inflation targeting, and thus does not fit Thailand's economy. In addition, SVAR indicates that the disinflation is accompanied by declined and volatility in output, suggesting that the adoption of inflation is not free from expenses. Regarding oil price surge, results obtained from SVAR estimation suggest that any active interest policy is able to help relieve the oil price shock and leaving other variables unaffected while having an impact of shorter duration than does inflation targeting.
The third essay presents an analysis of the interrelation between financial institutions and the housing sector in the United States. The evidence presented in the first and the second section of the essay suggests that all economic sectors have increasingly participated in financial investment and have been exposed to a higher degree of volatility in financial investment, combining with changes of regulations, and new available instruments, creating the unsustainable boom in U.S. housing markets during the late 1990s to early 2000s, and later resulted in the subprime crisis. The third section sheds light on the dynamics of house price by the panel error correction formulation. The econometric estimation shows the slow adjustment of housing prices towards long-run equilibrium. The last section examines the spillover effects of housing markets to other economic sectors. The estimated results from VECM indicates the strong and statistically significant of all channels of wealth effect, credit effect, and balance sheet effect.

Roles Of Information In Corporate Mergers, Acquisitions And Investments

Simsir, Serif. 2009. Roles Of Information In Corporate Mergers, Acquisitions And Investments. Doctoral Dissertation, Cornell University.
The goal of this dissertation is to show how information asymmetries among market participants affect the way they operate in the financial markets. The first chapter investigates deal initiation in the context of mergers and acquisitions. We use Securities Exchange Commission (SEC) documents of the merging firms in our sample to discover which side (acquirer or target) initiated the deal. Our analysis indicates that target firms receive substantially lower premiums when they initiate the merger: abnormal returns to target firm stocks around the merger announcement date are 12 percentage points lower in such deals. When premiums are calculated over a longer time period, this difference increases to 27 percentage points. We argue that the information asymmetries between merging firms is the primary reason for this finding. Alternative explanations, such as financial distress and liquidity hypotheses, are considered as well. Our findings also relate to acquirer returns, synergy gains from mergers, characteristics of firms involved in buyer- and seller-initiated deals and the effect of the Sarbanes-Oxley Act on premium differences across initiation groups. The second chapter examines how information asymmetries within the set of outside investors influence the investment and financing decisions of firms. In our model, some investors have access to private level information which is not publicly available to others. We show that this external information asymmetry systematically influences the equilibrium stock price, which in turn affects firm's payoff from equity financing. In particular, firms are better off with equity financing when the information asymmetry among the set of outside investors is low. In the third chapter, we analyze past stock returns of the merging firms, and examine their role in explaining abnormal returns around the announcement of the merger to the public. We provide several hypotheses that link these two return variables, and discuss their relevance in our context.

Three Essays In Cross-Border Finance

Choi, Moon. 2010. Three Essays In Cross-Border Finance. Doctoral Dissertation, Cornell University.
This Ph.D. dissertation investigates various areas in financial economics: market microstructure, corporate finance, asset pricing, and financial econometrics. The three comprising essays have a common ground: cross-border finance. Chapter One documents the impact of differential private information on relative asset pricing across borders by studying the probability of informed trading (PIN) for Canadian shares traded on exchanges separated by Niagara Falls. Relative to the New York Stock Exchange (NYSE), the Toronto Stock Exchange (TSX) has more informed trades and accounts for a larger information share, indicating that informed traders contribute to cross-border price discovery. The information imbalance across the two markets is associated with small but positive price premiums for New York trades. The dynamics of these premiums depends on trade informedness. Lastly, the PIN of a TSX -listed share typically rises upon cross-listing on the NYSE, which is consistent with negative abnormal returns of the original listing. The theory of corporate governance suggests that managers of poorly governed firms are more likely to make poor investment decisions, and the evidence on high antitakeover provision (ATP) firms is consistent. In Chapter Two, I study the effect of domestic and foreign takeovers by U.S. firms and find that high-ATP bidders tend to pay relatively high premiums for either targets. While this suggests that these firms make poor decisions, high-ATP bidders also experience relatively high event study returns at times of foreign takeover news. This contradicts the findings of Masulis et al. (2007) for domestic takeovers. Finally, Chapter Three explores the convergence between the prices of American Depositary Receipts (ADRs) listed by Asia-Pacific firms and their original shares listed on home exchanges. Instead of relying on conventional parametric approaches that carry embedded model-specification errors, I contribute to the literature by introducing a nonparametric technique to estimate the convergence speed parameter. I present the time-varying characteristics of both firm and country-level convergence speed parameters. Furthermore, I empirically verify and visually corroborate the comparative dynamics of convergence with respect to short sales restrictions, trading time differences, and market-tier measures proxied by the Morgan Stanley Capital International indices. I conclude that enhancement in market efficiency accelerates the reversion to the parity of ADR -pairs.

Market Efficiency, Short Sales And Announcement Effects

Zheng, Lin. 2009. Market Efficiency, Short Sales And Announcement Effects. Doctoral Dissertation, Cornell University.
In this dissertation I aim at improving the understanding of the informativeness of short-selling in the context of the motivation, the impact on future stock returns, and the relation with market efficiencies. In Chapter 1, I study short sellers? reactions after quarterly earnings announcements as well as the associations between short sales and post announcement stock returns. Short sales increase immediately after both negative and positive earnings surprises. After positive earnings surprises, short sellers appear to act as contrarians, and trade against stock price overreaction, thereby inducing price reversal in the long run. After negative earnings surprises, short sellers act as momentum traders, and trade with post earnings announcement drift. However, they are not able to fully arbitrage away the downside post earnings announcement drift. The short sellers? different reactions at subsequent surprises in a series of same-sign earnings surprises implies that short sellers exploit the consequences of other investors? behavioral biases. The results highlight the motivations and impacts for short sales after earnings announcements. In Chapter 2, I investigate the informativeness of short-selling by combining Probability of Information-based Trading measure and short sales transaction data. Short sales depress stock returns in the short run, regardless of the information asymmetry level. However, short sales can not predict future stock return in the long run if information asymmetry levels are low. Large size short sales are the most informed. When short sales constraints are more binding, short-selling is more informed, especially for the stocks with high information asymmetry levels. In Chapter 3, I examine short sales prior to merger and acquisition announcements for acquiring firms. Short-selling increases prior to stock-financed not cash-financed mergers and acquisitions. Pre-announcement abnormal short-selling is negatively related to post-announcement stock returns. Short sellers are informed of the method of payment, but not the outcome. The results also indicate that short-sellers are more active in stocks with larger firm size, lower book-to-market ratio, and higher liquidity.

Reference-Dependent Ambiguity Aversion

Mihm, Maximilian. 2011. Reference-Dependent Ambiguity Aversion. Doctoral Dissertation, Cornell University.
This dissertation contributes to the growing literature in economics on ambiguity aversion. I identify an implicit reference-point assumption in the multiple priors model of Gilboa and Schmeidler (1989), generalize their decision theory to allow for stochastic reference-points, and study the market implications of endowment-dependent ambiguity aversion. Chapter 2 identifies the implicit reference-point assumption in the multiple priors model and provides an axiomatic characterization of a reference-dependent multiple priors model. I also provide an axiomatic characterization of a reference-dependent version of the Choquet Expected Utility model of Schmeidler (1989), which can accommodate different attitudes towards ambiguity. Chapter 3 studies the implications of reference-dependent ambiguity aversion when reference points are given by the endowment in an Arrow-Debreu exchange economy. I illustrate that no-trade and underinsurance are robust implications of ambiguity aversion when investors view ambiguity from the perspective of their endowments. Chapter 4 extends the decision model to intertemporal choice problems and studies the effects of reference-dependent ambiguity aversion in the context of a dynamic asset pricing model.

Three Essays On Financial Policy Of A Firm

Larkin, Yelena. 2012. Three Essays On Financial Policy Of A Firm. Doctoral Dissertation, Cornell University.
The first chapter of the dissertation analyzes how characteristics of a firm's brand affect financial decisions by using a proprietary database of consumer brand evaluation. It demonstrates that positive consumer attitude alleviates financial frictions by providing more net debt capacity, as measured by higher leverage and lower cash holdings. Brand perception reduces the overall riskiness of a firm, as strong consumer evaluations translate into lower future cash flow volatility, higher Z-scores, and better performance during recession. Creditors favor strong brands by demanding lower yields on corporate public bonds. The results are more pronounced among small firms and non-investment grade bonds, contradicting a number of reverse causality and omitted variables explanations. The second chapter develops a framework that shows how exactly market timing and trade-off forces coexist. The idea is that market timing benefits dominate trade-off costs when firms are close to their target leverage, but become offset by the rebalancing considerations when firms are farther away. Two sets of empirical results support the validity of the framework. First, the sensitivity of equity issuances to past stock performance is the highest among firms close to the target leverage. Second, the long-run performance of equity issuers is also a function of their deviation from target leverage. The lower the leverage of issuing firms is relative to the target, the worse their after-issuance returns are, consistent with higher market timing incentives compared to other issuers. The third chapter studies whether investors value dividend smoothing stocks differently by exploring the implications of dividend smoothing for firms' expected returns and their investor clientele. First, it demonstrates that dividend smoothing is associated with lower average stock returns in both univariate and multivariate settings. Some of this return differential can be attributed to lower risk, captured by return comovement among high (low) smoothing firms. Second, the chapter shows that institutional investors, and specifically, mutual funds, are more likely to hold dividend smoothing stocks. Last, firms that smooth their dividends issue equity more frequently. Together, these results are consistent with the role of dividend smoothing in mitigating the impact of agency conflicts on the cost of capital.

Reaction of Stock Market to Monetary Policy Surprises

Wiranto, Wellian. 2008. Reaction of Stock Market to Monetary Policy Surprises. Doctoral Dissertation, Cornell University.
This paper provides an empirical analysis of stock market reactions to monetary policy surprises. Its principal objective is to understand the heterogeneous nature of this type of response by examining a set of possible explanatory factors. I find that a hypothetical unanticipated increase of 25 bps in the target Federal Reserve funds rate would result in a one-day decline of 1.3 percent in the prices of S&P 500 stocks. There is some evidence that factors such as sector and industry groups, firm size, and the foreign earnings exposure of a firm could affect the reaction reflected in its stock price. The severity of the equity market’s response also appears to be associated with elements of the macroeconomic environment such as the level of prevailing interest rates and inflation expectations. Moreover, my results suggest that a lack of unanimity in the FOMC votes could curb the reaction of the stock market.

Three Essays On Monetary Policy In Economies With Financial Frictions

Anand, Rahul. 2010. Three Essays On Monetary Policy In Economies With Financial Frictions. Doctoral Dissertation, Cornell University.
The objective of this dissertation is to understand the role of financial frictions in the transmission of shocks and their effect on the monetary policy transmission mechanism. To accomplish the task, we develop Dynamic Stochastic General equilibrium models with financial frictions. In the first chapter, we develop a model to analytically determine the appropriate price index to target in the presence of financial frictions (where a fraction of households are constrained to consume their wage income each period). The analysis suggests that in the presence of financial frictions, a welfare-maximizing central bank should adopt flexible headline inflation targeting - i.e. a headline inflation target but with some weight on the output gap. These results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit constrained. In the second chapter, we develop a small open economy model with macrofinancial linkages. The model includes a financial accelerator - entrepreneurs are assumed to partially finance investment using domestic and foreign currency debt - to assess the importance of financial frictions in the amplification and propagation of the effects of transitory shocks to productivity, interest rates and net worth of firms. We use Bayesian estimation techniques to estimate the model using India data. The model is used to assess the importance of the financial accelerator in India and to assess the optimality of the current monetary policy rule. In the third chapter, we develop a small open economy New Keynesian model with financial frictions and an active banking sector for India. We find that the presence of a monopolistic banking sector with sticky interest rate setting attenuates the shocks. However, if the interest rates are flexible it results in the amplification of shocks. We also find that an unexpected reduction in bank capital can have a substantial impact on the real economy and particularly on investment. Use of nonmonetary policy tools result in greater volatility as compared to when central banks use traditional monetary tightening.

Price Manipulation with Dark Pools And Multi-Product Separation In Inventory Hedging

Sun, Yuemeng. 2011. Price Manipulation with Dark Pools And Multi-Product Separation In Inventory Hedging. Doctoral Dissertation, Cornell University.
This dissertation addresses two different problems within mathematical finance: an optimal execution problem with dark pools using a market impact model, and multi-product separation with financial hedging for inventory management. In the first part of the dissertation we consider an optimal liquidation problem in which a large investor can sell on a traditional exchange or in a so-called dark pool. Dark pools differ from traditional exchanges in that the orders placed in it generate little to no price impact on the market price of the asset. Within the framework of the Almgren-Chriss market impact model, we study an extended model which includes the cross-impact between the two venues. By analyzing the optimal execution strategy, we identify those model specifications for which the corresponding order execution problem is stable in the sense that are no price manipulation strategies which can be beneficial. In the second part of the dissertation, we propose financial hedging tools for inventory management. Based on a framework for hedging against the correlation of operational returns with financial market returns, we consider the general problem of optimizing simultaneously over both the operational policy and the hedging policy of the corporation. Our main goal is to achieve a separation result such that for a corporation with multiple products and inventory departments, the inventory decisions of each department can be made independently of the other departments' decisions. We focus initially on a single-period, multi-product hedging problem for inventory management, and model an economy experiencing monetary inflation. We use the Heath-Jarrow- Morton model to represent the financial market. We then extend the model to consider multiple periods and more general market models. In both cases, we prove a separation result for inventory management that allows each inventory department to make decisions independently. In particular, the separation result for the multi-period problem is a global separation in the sense that no interaction needs to be considered among products in intermediate time periods. In addition, we propose a dynamic programming simplification of the multi-period single-item inventory problem which further simplifies the computation by reducing the dimension of the state space.

A Cross-Time Study Of U.S. Earnings, Splits, And Dividends Data

Motelson, Kerry. 2009. A Cross-Time Study Of U.S. Earnings, Splits, And Dividends Data. Doctoral Dissertation, Cornell University.
This paper details the share price reaction to dividend, earnings, and stock split announcements over a 37-year period. It first considers whether there is differential information content in similar corporate news announcements for different types of firms. Second, it investigates whether the value of news information about these firms has declined over time (addressing the question of whether news has become "less newsworthy").
We go on to study the relationship between stock price reactions to corporate news announcements and characteristics of the firms. Operating under the assumption that news announcements have an asymmetrical impact on stock price according to factors like firm size, years of being publicly traded, or industry classification, we categorize firms by whether their corporate news announcements will be more or less valuable to the public. For example, since the public may know more about larger firms, we expect the market to react less strongly (in absolute value) to new information from large firms. We find strong support for this hypothesis. We find little evidence that is consistent with the idea that "news has become less newsworthy" over the past four decades. However, although we do find that the share price reaction to "good" dividend news has become less positive and to "bad" dividend news has become less negative over time, no such related evidence exists for stock splits and earnings announcements.
We also find an increase in standard deviation of three day returns around earnings and splits announcements over time, with noteworthy convergence amongst positive, negative and neutral earnings announcements. Additional investigation of entire distributions of returns using kernel density estimators also rejects the "news is no longer newsworthy" idea.

Essays On CEO Inside Debt

Cen, Wei. 2011. Essays On CEO Inside Debt. Doctoral Dissertation, Cornell University.
Executive defined benefit pensions and deferred compensation are known as "inside debt". The reason is that their values depend on the ability of the firm to make future payments to its participant employees. Such plans have the potential of mitigating the risk-shifting problem of managers (Jensen and Meckling (1976)) because executives who own inside debt are worried about firm default risk and not only about shareholder return. In this dissertation, I examine the determinants of CEO inside debt and its components. I then use the inside debt as a measure of CEO risk preferences and examine its relation to firms' risk. In Chapter one, I use the new SEC disclosure rule of 2006 to examine the determinants of CEO inside debt. I find that CEOs defer a larger fraction of their compensation when their cash compensation is high, firm liquidity is high, firm default risk is low, and when executive personal wealth is high. These findings are consistent with CEOs choosing to defer compensation when they least need the money and when they do not expect the firm to default. In contrast to previous studies, I find a non-linear inverted U-shape relation between firm leverage and CEO inside debt. In particular, CEOs reduce their inside-debt when the firm is highly levered. Using novel data from executive deferred compensation, Chapter two presents new evidence on the relationship between CEO risk preference and firm risk (the volatility of firm performance measures such as stock return, earnings and operating cash flows). My results show a negative association between the CEO risk aversion (as measured by realized performance on inside debt) and the volatility of firm market performance: Firms with risk-averse CEOs have experience less stock price volatility. I also find that firms providing deferred compensation plans have lower performance volatility. The results contribute to the inside debt literature by showing that debt compensation is related to lower firm risk and lower firm market value.

Essays On The Macroeconomic Effects of Oil Price Shocks On The U.S. Economy

Mukherjee, Romita. 2011. Essays On The Macroeconomic Effects Of Oil Price Shocks On The U.S. Economy. Doctoral Dissertation, Cornell University.
A large volume of research has acknowledged the role of oil price shocks to generate a significant stagflationary impact on U.S. and other oil importing nations. Recent research however shows a paradigm shift in this oil price-macroeconomy relationship since the mid 1980s, during which the U.S. economy has been relatively resilient to oil shocks. Both output contraction and inflationary expectations have been milder in the post mid 1980s than before. But the 2007-08 oil shock episode has re-emphasized the immense impact of the ebbs and flows of oil prices on the U.S. economy’s ups and downs. Global oil price peaked at $148 a barrel in June 2008. With the mortgage crisis and credit crunch, oil was another blow too many. The U.S. economy swamped into one of the greatest recessions of all times. According to Hamilton (2009), the 2007-08 oil shock had a significant contribution to the recent recession. While a lot of work have been done on the effects of oil price shocks on the U.S. economy, relatively little work has investigated what triggers oil price increase. My research illustrates why it is important to study the cause of an oil price rise. First, the effects of oil price rise on the macro variables depend heavily on what causes the shock. Secondly, whereas the oil price hikes of the 1970s and early 1980s can mostly be attributed to exogenous events in OPEC (Arab Oil Embargo, Iran-Iraq War, Iranian Revolution), a significant source of oil price spikes in the post mid 1980 era have been an increase in global oil demand confronting stagnating oil production. From a policy perspective, of course, policies aimed at dealing with higher oil prices must take careful account of what causes oil prices to rise. Empirical research that demonstrates the resilience of U.S. economy to oil price shocks builds on the implicit assumption that as oil price varies, everything else in the global economy is held constant. Thus all variations in oil prices are taken as alike and exogenous. This overlooks the possibility that oil price rise sparked off by diverse events can potentially lead to different repercussions. This thesis is an attempt to develop framework to study the endogenous increase in oil price. The oil price increase arises from increase in U.S. growth rate, increase in foreign growth rate and a purely exogenous oil supply shock by OPEC. The most important result is that the source of oil price rise has changed after the mid 1980s - whereas before the mid 1980s, bulk of the variation in oil price was due to supply shocks by OPEC, post mid 1980s, most of the variation in oil price is explained by increase in U.S. and foreign growth. Furthermore, if the origin of the oil price rise is the same, then the responses of most U.S. macroeconomic variables display remarkable similarity in the pre and post mid 1980s. This result gives us a new way to look at the resilience of the U.S. economic activity to oil price rise since the mid 1980s. The resilience can be explained to a significant extent by the fact that the type of shocks resulting in oil price rise has changed.

Price Discovery And Liquidity In A Fragmented Stock Market

Ye, Mao. 2011. Price Discovery And Liquidity In A Fragmented Stock Market. Doctoral Dissertation, Cornell University.
One of the most striking changes in U.S. equity markets has been the proliferation of trading venues. My dissertation studies the impact of market fragmentation on liquidity and price discovery from three different perspectives. The first section, coauthored with Maureen O'Hara, examines how fragmentation of trading is affecting the quality of trading. We use newly-available trade reporting facilities volumes to measure fragmentation levels in individual stocks, and we use a matched sample to compare execution quality and efficiency of stocks with more and less fragmented trading. We find market fragmentation generally reduces transaction costs, as measured by effective spread and realized spread, and increases execution speeds. Fragmentation does increase short-term volatility, but prices are more efficient in that they are closer to being a random walk. The second section focuses on a particular type of new trading mechanism, crossing network, in which buy and sell orders are passively matched using the price set by the stock exchange. The results show that the crossing network harms price discovery and the relative lack of revealed information most strongly affects stocks with high uncertainty in their fundamental values. I find that an increase in the uncertainty of the fundamental value of the asset increases the transaction costs in both markets, but stocks with higher fundamental value uncertainty are more likely to have higher market shares in the crossing network. The impact of different allocation rules in the crossing network on market outcomes is also examined. The third section tests the theoretical prediction of the second essay. I find that crossing networks have lower effective spread and price impact of trade, but they also have lower execution probability and speed of trade. Non-execution is positive correlated with price impact, decreases in trading volume and increases in volatility. Crossing networks have higher market share for stocks with lower volatility and higher volume. We also find that the underlying assumption in previous literature, that stocks with higher effective spreads have higher reductions in effective spread by trading in crossing networks, is not supported by data.

Three Essays On Market Efficiency: Global Price Leadership, Informal Parallel Markets, And Market Microstructure

Tanompongphandh, Thanasin. 2011. Three Essays On Market Efficiency: Global Price Leadership, Informal Parallel Markets, And Market Microstructure. Doctoral Dissertation, Cornell University.
This dissertation tackles the concept of market efficiency from three distinct topics in applied economics, from microfinance, to agriculture commodity market, and further to market microstructure of the most advanced economy. The first essay, entitled "Market Efficiency and Price Discovery Among Leading Rice Exporting Countries", focuses on the issue of rice market efficiency. The study establishes, under Johansen's procedure, that there are long-run price co-movements existing among the three major rice-exporting countries, and within the United States domestic markets, the long-run efficient linkage between spot and future prices of rough rice, as Chicago Board of Trade rough rice futures converge to United States Department of Agriculture rough rice prices in a cash market. Regarding the efficiency among the export market prices, results show that the hypothesis of market efficiency are rejected in two of the three pairs, namely Thai-Vietnam and ThaiUS (Arkansas). The Gonzalo Granger (1995) decomposition method finds that the Thai and United States rice are dominant in the price discovery process. Within the United States domestic markets, the dominant is the futures market followed by the cash market of the rough rice and then the milled rice export price. The second essay, entitled "Determinants for Formal Credit and Informal Credit Access: The Case of Thai Farm Households", examines determinants for Thai agricultural households' participation in formal and its informal parallel credit markets. The study follows Heckman's two-stage selection model (1979) approach to determine the informal loan participation of Thai agricultural households. Results reveal that households tend to 'stick' to the credit market in which they were previously engaged. This finding reinforces the vicious cycle which makes it more difficult for farmers to get out of debt. Secondly, the study finds that wealthier households are less likely to access credit, and are more likely to participate in formal credits than their less wealthy peers. Results also show less probability of credit access between May and December coinciding with the planting and harvesting season accentuating the nature of loans as working-capital rather than consumption loans. Finally, the study discovers that households with owned farmland are more likely to participate in the formal credit market, while households with rented farmland are more likely to participate in the informal credit market stressing the use of owned land as collateral to participate in the former. The final essay, entitled "On the Challenge of Testing Weak-Form Market Efficiency using High Frequency Data", explores the issue of efficiency in microstructure of the Exchange-Traded-Fund (ETF). This essay shows that the profitability of a simple technical trading strategy hinges heavily on the way the Trades And Quotes (TAQ) dataset is filtered for mistakes and outliers. This paper uses ultra-high-frequency TAQ data that cover the time-span since the inception of the S& P 500 ETF from January 1993 to December 2006. First, a widely used filtering methodology proposed by Hasbrouck (2003) is adopted. Under this methodology, the technical trading strategy clearly outperforms the buy-and-hold benchmark. However, when a more appropriate (stringent) filtering methodology is used, the technical trading strategy clearly underperforms the buy-and-hold benchmark. This evidence suggests that studies that based their methodology on Hasbrouck's (2003) less stringent filtering criterion could produce misleading results.

The Effects Of Government Sponsored Enterprise Status On The Pricing Of Bonds Issued By The Federal Farm Credit Banks Funding Corporation

Wang, Yiwo. 2011. The Effects Of Government Sponsored Enterprise (Gse) Status On The Pricing Of Bonds Issued By The Federal Farm Credit Banks Funding Corporation (Ffcb). Doctoral Dissertation, Cornell University.
This thesis develops a framework to price the implicit government guarantee embedded in the bonds issued by the Farm Credit System. It shows that the value of the implicit government guarantee for a specific bond is dependent on the yield spread, the risk-free interest rate, the maturity and the future value of the bond price. It also reconfirms Merton's theory (1974) that yield spreads are influenced by variances of the firm (volatility square), maturity and quasi debt to collateral value ratio (d-ratio). Furthermore, the hypothetical bond yields for the Farm Credit System bonds without GSE status are calculated based on the Black-Scholes Model.

Essays On Firms Behaviors And Efficiencies

Huang, Hao. 2010. Essays On Firms Behaviors And Efficiencies. Doctoral Dissertation, Cornell University.
In Chapter 1, we study the relationship between the target value creation and acquirer corporate governance measures. We show that, based on the 2-day, 5-day and 10day announcement windows, the targets acquired by companies with more antitakeover provisions (ATP) experience higher announcement returns. We also study the link between acquirer’s corporate governance measure and net synergistic effects on the capital market. We find that high-ATP acquirers engage in mergers that are not only destructive to their own firm values, but as a whole high-ATP acquirers also on average make acquisitions that yield lower net synergistic values. We also study the acquirer returns to confirm MWX’s results. Lastly, we examine the impacts of Gindices on combined company’s value changes in asymmetric windows, and we find the breakeven G-indices under which the net synergistic effects tend to be positive for different windows. In Chapter 2, we examine the relationship between various types of market shares and net interest margins in the Taiwanese banking industry. The study uses previously untapped Taiwanese banking data with more than 5000 observations and three model specifications over a 19-year span. The results show that the market shares have positive and statistically significant impacts on net interest margins for most aggregate samples. But the results also show that as the banking industry became saturated and banks began engaging in pricing wars and risky lending, the deposit and branch market shares have had negative impacts on bank spreads since 2001. The credit lending market share became a much more important factor for profitability; it was less important before around 2001 because (non-collateralized) credit lending was not as prevalent, and the market for credit cards or cash cards, which yield higher interest rates, was small. The results support the argument for further industry consolidation to build healthier and larger financial institutions.

Das Kapital

Das Kapital by Karl Marx My rating: 5 of 5 stars Karl Marx's Capital can be read as a work of economics, sociology and history. He...