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Yuriy Zabolotnyuk , Carleton University, Canada    Corresponding Author

Abstract:
This paper employs meta-analysis methodology to reconcile the diverse international empirical evidence on the effects of bond rating announcements on the stock prices of the issuing firms. The random-effects model meta-analysis of 53 published studies and 421 sub-samples of data covering a range of countries and 44,713 bond rating announcements reveals an average cumulative abnormal stock return of -1.64% associated with the bond downgrades and an average cumulative abnormal stock return of 0.28% associated with the bond upgrades. Factors such as initial bond rating, issuer location, announcement period, and rating change size have significant effects on the size of the abnormal stock returns around the rating announcement dates.

Keywords : bond rating announcements; wealth effects; meta-analysis; information asymmetry
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Elyas Elyasiani , Temple University, USA
Luca Gambarelli , University of Modena and Reggio Emilia, Italy
Silvia Muzzioli , University of Modena and Reggio Emilia, Italy    Corresponding Author

Abstract:
The aim of this paper is to propose a simple and unique measure of risk that subsumes the conflicting information contained in volatility and skewness indices and overcomes the limitations of these indices in accurately measuring future fear or greed in the market. To this end, the concept of upside and downside corridor implied volatility, which accounts for the asymmetry in the risk-neutral distribution, is exploited. The risk-asymmetry index is intended to capture the investors’ pricing asymmetry towards upside gains and downside losses. The results show that the proposed risk-asymmetry index can play a crucial role in predicting future returns, at various forecast horizons, since it subsumes the information embedded in both the volatility and skewness indices. Furthermore, the risk-asymmetry index is the only index that, at very high values, possesses the ability to clearly highlight a risky situation for the aggregate stock market.

Keywords : risk-asymmetry; corridor implied volatility; risk-neutral moments; risk measures; return predictability
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Abdulilah Ibrahim Alsheikhmubarak , Royal Holloway, University of London, UK    Corresponding Author
Evangelos Giouvris , Royal Holloway, University of London, UK

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

Abstract:
This study presents a formula for valuating a deposit insurance (DI) premium based on a specific official default probability. This formula can be used to flexibly determine the DI premium that reflects changes in economic circumstances. We provide a new estimation method to determine the implied asset risk based on the efficient frontier between asset value and asset risk. Doing so avoids the problem for estimating a bank’s assets and asset risk using market equity data. Empirical evidence shows current DI premium assumes that banks have too high default rates. We suggest the DI premium should be lower for banks that fully obey the financial supervisory regulations. Doing so should incentivize these banks to decrease their likelihood of default by strictly implementing financial regulations, thus stabilizing financial environment. We also suggest a new dynamic method to help them determine reasonable DI premiums and maintain the target level of DIF reserves.

Keywords : deposit insurance; premium; default probability; financial supervision
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Fatima Faruqi , Air University, Pakistan
Tanveer Ahsan , Rennes School of Business, France    Corresponding Author
Sultan Sikandar Mirza , Zhejiang Gongshang University, China
Zia-ur-Rehman Rao , Forman Christian College, Pakistan

Abstract:
The purpose of the study is to investigate the impact of corporate governance on bank performance and the mediating role of cash flows between corporate governance and bank performance in developed and developing countries. The study collects data for 2006-2015 for 30 commercial banks operating in five countries (Bangladesh, Malaysia, Pakistan, Australia, and the USA) and applies bank, time (year), and country fixed effects regression analysis to determine the direct impact of corporate governance and cash flows on bank performance. Structural equation modeling is employed to investigate the mediating role of cash flows between corporate governance and bank performance. The results suggest that the impact of corporate governance on bank performance is more significant in developed countries than in developing countries. The results also show that investment cash flows mediate the relationship between corporate governance and bank performance in developed as well as developing countries, while operating cash flows mediate the relationship between bank performance and corporate governance in developing countries only.

Keywords : corporate governance; cash flows; bank performance; panel data
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Lan Thi Phuong Nguyen , Multinational University, Malaysia    Corresponding Author
Cheng Ming Yu , Universiti Tunku Abdul Rahman (UTAR), Malaysia
Malick Osmane Sy , Royal Melbourne Institute of Technology (RMIT), Australia
Sayed Hossain , Cedar Valley College, USA
Chen Booi Tan , Multimedia University, Malaysia

Abstract:
This study aims to examine whether long/short funds of hedge funds truly provide better diversification benefits to hedge fund investors as compared to efficient portfolios of long/short hedge funds in North America, Europe, and Asia Pacific. Data of long/short hedge funds and long/short FOHFs are obtained from Eurekahedge databases from 1st January 2008 to 31st December 2016. Mean-variance optimization method is employed to construct efficient portfolios of 100 long/short hedge funds with highest Sharpe ratios for each of the selected regions. To ensure the robustness of our findings, two rolling windows of observation are set up for a comparative analysis. This study concludes that most of the single-region focused long/short FOHFs in the sample, did not outperform the constructed efficient portfolios of long/short hedge funds investing in the same region. In fact, many long/short FOHFs did not survive more than a period of six years as observed in this study.

Keywords : funds of hedge funds; long/short strategy; diversification; efficient portfolios; mean-variance method
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Abdul Rahman Khokhar , Saint Mary’s University, Canada

Abstract:
This study empirically compares the working capital investment of industrial firms and finds that Canadian firms invest less in working capital than their U.S. counterparts. Matched samples of 8,62 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. The study also investigates the determinants of the lower investment in working capital by Canadian firms and finds that working capital investment is negatively moderated by short-term interest rates and positively associated with international operations.

Keywords : working capital management; cash conversion cycle; working capital investment; short-term financial policies
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