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Roberto Wessels , University of Groningen    Corresponding Author
Tom j. Wansbeek , University of Groningen
Lammertjan Dam , University of Groningen

Abstract:
We present a model to test the null hypothesis that firms organize their corporate governance arrangements optimally given the constraints they face. Following the literature, the model rejects the null if the conditional correlation between governance and performance is significantly different from zero. Our model provides a clean test of this hypothesis by controlling for measurement errors in all observed variables and avoiding simultaneous equation biases by casting our model as a reduced-form bivariate equation. We model governance, performance and the constraints on the firm’s investment decisions as latent variables. Our estimate of the conditional correlation between our measures of governance and performance is statistically speaking equal to zero, which therefore provides empirical support for the in-equilibrium view proposed by Demsetz (1983), of corporate governance arrangements.

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Exarsis? Business Solutions , My Primary Institution    Corresponding Author

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Fanos Theodosiou , University of Leicester    Corresponding Author
Fanos2 Theodosiou2 , Univeristy of Nicosia
Fanos3 Theodosiou3 , University of Leicester    Corresponding Author

Abstract:
Private equity is subject to public debate regarding its impact on economies. While several' papers have documented the effects of private equity on a firm level, the effects of private equity on an industry level is hardly addressed. This paper analyzes the influence of private equity on industry performance across twelve European countries. We find that the relative investment level of private equity positively influences the industries’ productivity, operating income, number of employees and average wage level. Causality tests show that the relative level of private equity investments causes the changes in the industries and not vice-versa.

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Exarsis Business Solutions , My Primary Institution    Corresponding Author

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Exarsis Business Solutions , My Primary Institution    Corresponding Author

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Exarsis Business Solutions , My Primary Institution    Corresponding Author

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Exarsis Business Solutions , My Primary Institution    Corresponding Author

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Exarsis Business Solutions , My Primary Institution    Corresponding Author

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Exarsis Business Solutions , My Primary Institution    Corresponding Author
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Fanos Theodosiou , University of Leicester    Corresponding Author

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Exarsis Business Solutions , My Primary Institution    Corresponding Author

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Fanos Theodosiou , University of Leicester    Corresponding Author

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Kelly Burns , RMIT University    Corresponding Author

Abstract:
This study revisits the Meese and Rogoff (1983) puzzle by estimating the traditional monetary models of exchange rate determination in state-space form, and comparing the accuracy of these forecasts against the naïve random walk model using a wide range of conventional and alternative measures of forecasting accuracy. The results demonstrate that incorporating stochastic movements in the parameters of exchange rate models does not enable the Meese-Rogoff puzzle to be overturned. However, estimating these models in state-space form substantially improves forecasting accuracy to the extent that the model and random walk produce an equivalent magnitude of error. Furthermore, the results prove that the Meese-Rogoff puzzle can be overturned if the forecasts are evaluated by alternative criteria. These criteria include direction accuracy, profitability and measures that jointly take into account both magnitude and direction accuracy.

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Exarsis Business Solutionswwsw , My Primary Institution    Corresponding Author

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Exarsis Business Solutions , My Primary Institution    Corresponding Author

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Abdulilah Ibrahim Alsheikhmubarak , Royal Holloway, University of London    Corresponding Author
Evangelos Giouvris , Royal Holloway, University of London

Abstract:
Modelling the volatility (or kurtosis) of the implied volatility is an important aspect of financial markets when analysing market consensus and risk strategies. The purpose of this study is to evaluate the ability of symmetric and asymmetric GARCH systems to model the volatility of the FTSE 100 Implied Volatility Index (IV). We use GARCH, EGARCH, GJR-GARCH and GARCH-MIDAS to model variance. We also introduce FTSE 100 returns and several macroeconomic variables (UK industrial production, 3M LIBOR, GBP effective exchange rate and unemployment rate) to investigate whether they explain variance. Our results show that market returns is a major explanatory factor besides macroeconomic variables. Also, GARCH (1,1) outperforms other asymmetric models unless there is exceptionally high volatility such as the crisis of 2008 in which case EGARCH performs better. GJR-GARCH is outperformed by all other models. GARCH-MIDAS shows that both macroeconomic variables and market returns are useful when estimating IV.

Keywords : FTSE 100 implied volatility index (IV); GARCH; EGARCH; GJR-GARCH; GARCH-MIDAS; FTSE 100 index returns; macroeconomic variables
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Fatima Faruqi , Air University
Tanveer Ahsan , Rennes School of Business    Corresponding Author
Sultan Sikandar Mirza , Zhejiang Gongshang University
Rao Rehman , University of Engineering and Technology

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The study investigates the impact of corporate governance on bank performance and mediating role of cash-flows between corporate governance and bank performance in developed and developing countries. Data for the period 2006-2015 for 30 commercial banks from 5 countries (Australia, Bangladesh, Malaysia, Pakistan, and USA) has been collected and GMM-system has been applied to find out the direct impact of corporate governance and cash-flows on bank performance. Further, structural equation modelling has been applied to investigate the mediating role of cash-flows between corporate governance and bank performance. The results explain that the impact of corporate governance on bank performance is more significant in developed countries as compared to developing countries. Further, the results explain that investing cashflows mediates the relationship between board meetings and bank performance in developed countries while in developing countries financing cash-flows mediates the relationship between bank performance and different dimensions of corporate governance.

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Slim Mseddi , Al Imam Mohammad Ibn Saud Islamic University
Noureddine Benlagha , Qatar University    Corresponding Author

Abstract:
Recent global financial crisis have seriously affected the conventional banking system in the whole of the world, and has induced a series of failure of many banks and led to an increased interest in the Islamic banking system. The resilience of banks to crisis may be reflected by the behavior of stock bank returns during (short run) and after the crisis (long run). In this particular context, we focus on dependence and spillover effects between Islamic and conventional stock banks returns in GCC countries. We use daily return data for Islamic and conventional banks for the Gulf Cooperation Council countries for the period 2005-2015 to analyze the behavior of volatility through time. We are particularly interested in understanding whether periods of high volatility are correlated across banks. The analysis uses univariate and multivariate GARCH volatility models, especially Dynamic Conditional Correlation, which is compared to Diebold and Yilmaz’s methodology.

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Jyri Kinnunen , Hanken School of Economics    Corresponding Author
Minna Martikainen , Hanken School of Economics

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We explore the relevance of dynamic autocorrelation in modeling expected returns and allocating funds between developed and emerging stock markets. Using stock market data for the US and Latin America, we find that autocorrelation in monthly returns vary with conditional volatility, implying some investors implement feedback trading strategies. Dynamic autocorrelation models fit the data considerably better than a conditional version of the zero-beta CAPM, while differences between models with an autoregressive term are modest. Investors can improve their portfolio optimization between developed and emerging stock markets by considering time-varying autocorrelation. The most drastic difference in portfolio performance is not due to allowing autocorrelation to vary over time, but realizing that stock returns are autocorrelated, especially in emerging stock markets.

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Lan Thi Phuong Nguyen , Multinational University    Corresponding Author
Cheng Ming Yu , Universiti Tunku Abdul Rahman (UTAR),
Malick Osmane Sy , Royal Melbourne Institute of Technology (RMIT)
Sayed Hossain , Adjunct, Cedar Valley College,
Chen Booi Tan , Multimedia University

Abstract:
This study aims to confirm whether funds of hedge funds (FOFs) truly offer better diversification benefits to investors. Data from three Eureka Hedge Inc.'s databases for North American, European, Asia- Pacific, and funds of hedge funds are employed for a period of 1st January 2008 and 30th April 2016. Only FOFs and other hedge funds with long/short and multi-strategy strategies are selected for this study due to their dominance in the hedge fund industry. Mean-variance optimization method is employed to construct replicating portfolios of long/short equity and multi-strategy hedge funds investing in global as well as in Asia-Pacific, European, and North-American markets. The performance of these portfolios are then compared with the actual FOFs with similar strategies and geographical markets. This study concludes that FOFs do not offer superior diversification benefits to hedge fund investors; and that an efficient portfolio of hedge funds may be still a better alternative.

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Shu Ling Chiang , National Kaohsiung Normal University
Ming Shann Tsai , National University of Kaohsiung    Corresponding Author

Abstract:
After undergoing several financial crises, many countries have required that each bank obeys strict financial regulations. The general purpose of these financial regulations is to require bank’s default probability lower than a specific official default rate. Thus, when pricing a fair deposit insurance (DI) premium for banks obeying these financial regulations, the official default rate should be incorporated into the valuation model. In this paper, we present a valuation formula for DI premiums based on this premise. Moreover, we discuss a bank’s optimal investment based on the efficient frontier. Doing so can avoid probable inaccurate estimation of DI premiums caused by using market equity data. We use data from Taiwanese commercial banks to illustrate the application of our model. The empirical evidence clearly shows that the DI premium for banks that obey the financial regulations is lower than the premium estimated by the traditional model. According to the results, we suggest that the DI premium should be lower for banks that fully obey the financial supervisory regulations and do an excellent job in keeping their risks low. Doing so should be able to incentivize these banks to decrease their likelihood of default by strictly implementing the financial regulations, thus stabilizing the financial environment.

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Abdul Rahman Khokhar , Saint Mary’s University, Canada

Abstract:
This study empirically compares the working capital investment of Canadian and U.S. industrial firms and finds that Canadian firms invest less in working capital compared to their U.S. counterparts. Matched samples of 8627 firm-year observations each from Canada and the U.S. are utilized covering the period 1988 to 2016. Compared to their U.S. counterparts, Canadian firms have a significantly lower cash conversion cycle, non-cash working capital to asset ratio and non-cash working capital to sales ratio. The difference in working capital investment is robust to variety of firm, industry and country controls as well as to year and industry fixed effects. Finally, we investigate the determinants of the lower investment in working capital by Canadian firms and find that working capital investment is positively associated with short-term interest rates and negatively associated with multinational operations.

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Osamah Alkhazali , American University of Sharjah    Corresponding Author

Abstract:
Using Pettengill et al. (1995) model, this paper examines the relationship between conditional beta and return in 12 emerging stock markets over the period of 2005 to 2017. In applying weekly and monthly data, the evidence show that there is a flat relationship between beta and return for the unconditional CAPM. However, the opposite is true when applying the Pettengill et al. (1995) model. The findings indicate that the relation between beta and return is positive in bullish market and negative in a bearish market. In addition, the results support conditional CAPM for all months of the year. Finally, the results show that market excess returns are positive and the risk-return relationship is symmetrical in both bullish and bearish markets. We conclude that beta is still a valuable risk measure, which helps portfolio managers in making optimal investment decisions.

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George Athanassakos , University of Western Ontario    Corresponding Author
Vasiliki Athanasakou , London School of Economics

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The purpose of this paper is to examine whether earnings quality contributes to the book-to-market’s predictive power in the cross section of stock returns. Earnings quality is embedded in the value-growth effect given that retained earnings is a key part of the book value of equity. Earnings quality reflects the effects of managerial discretion on reported earnings, which has been shown to be associated with both risk and behavioral biases in asset pricing. Our results affirm the existence of a value premium and show that the value premium is more pronounced within poor earnings quality stocks. Moreover, we find that poor earnings quality contributes to the value premium mainly through the pricing of growth stocks. Our results suggest that the quality of reported earnings has an incremental role in shaping expected returns of value versus growth stocks.

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Haim Kedar-Levy , Ben Gurion University    Corresponding Author
Elroi Hadad , Holon Institute of Technology
Gitit Gur-Gershgoren , Ono Academic College

Abstract:
The discount rate reporting entities apply for future employee benefits obligations has a profound impact on their present value, both at the firm and at the country level. The IAS-19 accounting standard requires the existence of a ‘deep market’ in high-quality corporate bonds in order to use their yields as the discount rate, and in its absence, the often-lower government bond yields should be used. From a financial economics perspective, the term ‘deep market’ is vaguely defined in IAS-19, therefore we propose a dual approach. First, from the macro-economic perspective, we explore funding liquidity, and second, from the micro-economic perspective, we measure the illiquidity premium in high-quality corporate bonds. We argue that both aspects are essential because they are inter-connected. Our approach is tested empirically on a sample of 32 countries, with detailed analysis of the Israeli market as a case in point.

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Sean Lu , Quantitative Management Associates, USA    Corresponding Author
Cindy Lu , Stanford University, USA

Abstract:
A new approach of constructing an idiosyncratic momentum using common style factors from the Barra risk model has been proposed. The method removes the limitation in the conventional approach of constructing idiosyncratic momentum using Fama-French factors, and allows to build more effective idiosyncratic momentum factor for a wide variety of international markets where the Fama-French model is not available. The performance results indicate that the idiosyncratic momentum factor carries a resemblance to the conventional price momentum, but with much lower variance and exposure to the common market factors, such as value, size, and volatility. The long-short portfolio test for both China's A-Share IMI and CSI 500 indices in the Chinese equity market demonstrates the significant improvement of this factor's return over the conventional momentum. The results strongly suggest the idiosyncratic momentum factor could be used as an effective momentum strategy for investing in China's stock market.

Keywords : stocks; price momentum; idiosyncratic momentum; risk model; regression
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