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The Reformed Broker wrote a new blog post titled We’re Coming to California
Are we meeting with you??? Let us know! ...
3 hours ago
The Reformed Broker wrote a new blog post titled “Private Equity”
Will the returns of private equity save the pension system?...
3 hours ago
Journal of Applied Corporate Finance wrote a new blog post titled Has Financial Regulation Been a Flop? (or How to Reform Dodd‐Frank)
Recent bank regulations have imposed large compliance costs on banks of all sizes, and have increased the costs of borrowing to both consumers and companies. But in this summary of his recent book, the author argues that the problems with banking system regulation go well beyond the excessive costs. Indeed, Dodd‐Frank and other post‐crisis regulatory reforms have failed to address the major shortcomings that produced the crisis of 2007–2009. Most importantly, excessive housing finance risk was not dealt with adequately, and is already on the rise again. And prudential standards for banks,...
6 hours ago
Journal of Applied Corporate Finance wrote a new blog post titled Statement of the Financial Economists Roundtable: Bank Capital as a Substitute for Prudential Regulation
The Financial CHOICE Act recently passed by the House proposes to create an “off‐ramp” that would allow banks to escape burdensome prudential regulation if the ratio of their equity capital to their total assets is 10% or more. The Financial Economists Roundtable supports this idea as a means of reducing regulatory costs, but believes some additional safeguards are needed. A capital ratio of 10% may not be high enough to discourage banks from excessive risk taking. A solution is to have two capital requirements for banks choosing the off‐ramp: one absolute (as proposed in the act) and one...
6 hours ago
Journal of Applied Corporate Finance wrote a new blog post titled High‐Frequency Trading and the New Stock Market: Sense And Nonsense
The stock market has been transformed during the last 25 years. Human suppliers of liquidity like the NASDAQ dealers and NYSE specialists have been replaced by algorithmic market making; stocks that once traded on a single venue now trade across twelve exchanges and a multitude of alternative trading systems. New venues like dark pools, and new participants like high‐frequency traders, have emerged to take on prominent roles. This new market has had more than its share of controversy and regulatory scrutiny, particularly in the wake of Michael Lewis’s bestseller Flash Boys. In this article,...
6 hours ago
Journal of Applied Corporate Finance wrote a new blog post titled Shadow Banking, Risk Transfer, and Financial Stability
Shadow banking is the process by which banks raise funds from and transfer risks to entities outside the traditional commercial banking system. Many observers blamed the sudden expansion in 2007 of U.S. sub‐prime mortgage market disruptions into a global financial crisis on a “liquidity run” that originated in the shadow banking system and spread to commercial banks. In response, national and international regulators have called for tighter and new regulations on shadow banking products and participants. Preferring the term “market‐based finance” to the term “shadow banking,” the authors...
6 hours ago
Journal of Applied Corporate Finance wrote a new blog post titled Why European Banks Are Undercapitalized and What Should Be Done About It
Major European banks are significantly undercapitalized as compared to large American banks, and, more importantly, as compared to the capital levels they would need to survive another severe financial crisis. Bank capital shortfalls in Italy, Spain, Germany, France and the United Kingdom, in particular, are largely the consequence of European bank regulations that: (1) apply static risk weights to assets like mortgages and sovereign debt; (2) fail to require an overall market‐based capital ratio that is high enough to enable banks to survive a severe financial crisis; (3) fail to get banks...
6 hours ago
Journal of Applied Corporate Finance wrote a new blog post titled Bloomberg Intelligence Roundtable on The Theory and Practice of Capital Structure Management
Since the formulation of the M&M propositions almost 60 years ago, financial economists have been debating whether there is such a thing as an optimal capital structure—a proportion of debt to equity that maximizes shareholder value. Some finance scholars have followed M&M in arguing that both capital structure and dividend policy are largely “irrelevant” in the sense that they have no significant, predictable effects on corporate market values. Another school of thought holds that corporate financing choices reflect an attempt by corporate managers to balance the tax shields and...
6 hours ago
Journal of Applied Corporate Finance wrote a new blog post titled Leverage and Taxes: Evidence from the Real Estate Industry
Finance theory has long viewed corporate income taxes as a potentially important determinant of corporate financing decisions and capital structures. But finance academics have been unable to provide convincing empirical evidence of a material effect of taxes on corporate leverage, in part because of difficulties in constructing an effective proxy for marginal corporate tax rates, and hence for the tax benefits of debt, for large samples of individual companies. The authors address this by analyzing leverage decisions in an industry whose publicly traded entities are organized either as...
6 hours ago
Journal of Applied Corporate Finance wrote a new blog post titled Formulaic Transparency: The Hidden Enabler of Exceptional U.S. Securitization
Why does the securitization of residential mortgages, credit cards, auto loans, and other such consumer debt in the U.S. exceed the securitization of such debt in Europe by several trillion dollars? The author points out that lemon problems do not stop the sale of used cars but they do prevent the operation of a market in which buyers place sight‐unseen bids for used cars offered by unknown sellers. Buyers prefer to know who the seller is and test‐drive vehicles. Similarly until the 1980s, creditors were willing to forgo the information they could secure in private transactions to get...
6 hours ago
Journal of Applied Corporate Finance wrote a new blog post titled How Investment Opportunities Affect Optimal Capital Structure
This article addresses the question of how competition for investments among companies in a certain industry affects their capital structure. The authors develop a new modelling framework that simulates financial variables of a set of firms in a given sector, and uses the framework to analyze how such firms compete for new investments. The leverage of companies affects their flexibility to react to and take advantage of investment opportunities, and the authors show how such flexibility can be optimized to maximize the firm’s growth. As an illustration, they apply the model to a set of...
6 hours ago
Journal of Applied Corporate Finance wrote a new blog post titled How to Integrate ESG into Investment Decision‐Making: Results of a Global Survey of Institutional Investors
The authors review the findings of their global survey of 582 institutional investors that were either practicing or planning to practice some degree of integration of environmental, social, and governance (ESG) factors into their investment decision‐making process. The investors were evenly split between asset owners and asset managers, equity and fixed income, and across the three regions of the Americas, Asia Pacific, Europe, Middle East, and Africa. The survey explored reasons for ESG investing; the barriers to such investing and investor approaches to overcoming them; and the time frames...
6 hours ago
Journal of Applied Corporate Finance wrote a new blog post titled Maximum Withdrawal Rates: A Novel and Useful Tool
Even after accumulating a portfolio of investment assets, retirees still need to know how much of their wealth they can spend each year without risking running out of money before they die. Traditionally, financial advisers use extensive simulation to predict a “failure rate” (i.e. the probability of a retiree running out of money before they die). Unfortunately, the failure rate approach is flawed because strategies with the same failure rate may not be comparable overall. For example, different withdrawal strategies may have the same failure rate but wind up leaving significantly different...
6 hours ago
All About Alpha wrote a new blog post titled What about beta?
A View From CAIA By Bill Kelly, CAIA Association CEO Shadow or not, the groundhog brought volatility out of its burrow on February 2nd, and it is safe to say that it will persist for a lot longer than the six weeks of additional winter in the Northeast part ofRead More
7 hours ago
The Reformed Broker wrote a new blog post titled “Private Banker”
I find fancy investment advice and fancy products to be problematic in and of themselves, regardless of how many disclosures are made in the sales process. ...
7 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Market Impact in a Latent Order Book. (arXiv:1802.06101v1 [q-fin.TR])
We revisit the classical problem of market impact through the lens of a new agent-based model. Drawing from the mean-field approach in Statistical Mechanics and Physics, we assume a large number of agents interacting in the order book. By taking the 'continuum' limit we obtain a set of nonlinear differential equations, the core of our dynamical theory of price formation. And we explicitly solve them using Fourier analysis. One could talk as well of a "micro-macro" approach of equilibrium, where the market price is the consequence of each ("microscopic") agent behaving with respect to...
18 hours ago
Quantitative Finance at arXiv wrote a new blog post titled Simple Bounds for Transaction Costs. (arXiv:1802.06120v1 [q-fin.PM])
Using elementary arguments, we derive $\L_{p}$-error bounds for the approximation of frictionless wealth process in markets with proportional transaction costs. For utilities with bounded risk aversion, these estimates yield lower bounds for the frictional value function, which pave the way for its asymptotic analysis using stability results for viscosity solutions. Using tools from Malliavin calculus, we also derive simple sufficient conditions for the regularity of frictionless optimal trading strategies, the second main ingredient for the asymptotic analysis of small transaction costs.
18 hours ago