The present study has empirically examined the level of foreign exchange exposure and its determinants of CNX 100 companies. For the purpose of study, the relationship between exchange rate changes and stock returns for a sample of 82 companies was determined for the period April 2011-March 2016. The study finds that 49% of the sample companies had significant positive foreign exchange rate exposure and the found that the companies could be exporters or net importers. To explore factors determining foreign exchange rate exposure, variables such as export ratio, import ratio, size of a company, hedging activities were regressed against the exchange exposure and the study found that none of the factors was influencing the exchange rate exposure. The study concludes that the reasons for insignificant influence of the variables could be the natural hedging practices of companies, offsetting of exports and imports and heterogeneous of the sample size. The study offers few directions for future research in this area.
Month: June 2019
Liquidity Gap Report for Stress Testing Structural Liquidity Risk
The need to focus on banks funding structure and stress testing in an explicit way arose as a consequence of the crisis of past decades. Liquidity risks usually occur as a consequence of other kinds of risks, hence analysing scenarios in a prospective manner is essential for the assessment if the bank can fulfill its obligations as they come due and if its funding costs are appropriate. The structural liquidity risk and the degree of the liquidity mismatch can be measured based on the liquidity gap analysis, where expected cash-in- and outflows, divided in different time-buckets are depicted. The liquidity gap report (LGR) shows if a liquidity shortcoming appears in the future and how high is the amount a bank would have to pay, if any hedging were not possible. This paper shows how to build a comprehensive LGR which is the base for both, liquidity and wealth risk evaluation. To improve the accuracy of the forecast, the counterbalancing capacity will be incorporated into the LGR. This tool is a methodological basis for quantitative and qualitative risk assessment and stress testing.
Financial Factors Determining CAREs Ratings
Rating agencies evaluate a number of qualitative and quantitative factors while assigning rating to a particular company. Standard mathematical formulas do not exist for determining credit ratings. Instead, credit rating agencies use their experience and judgement in assigning ratings. What factors rating agencies consider significant in providing ratings to the companies is an important question. The present study aims to contribute to the above mentioned area by identifying the financial determinants of credit ratings assigned to Indian companies by CARE, one of the top rating agencies of India. Ordered probit analysis is used on unbalanced panel data with credit rating as the dependent categorical variable and six financial factors viz. size, liquidity, profitability, interest coverage, leverage, and growth as the independent variables. Results from ordered probit analysis indicate that the likelihood of credit ratings to be on higher side is more with increase of size, liquidity, profitability, interest coverage, growth and with a decrease in leverage. Further, size, profitability, and leverage are found to be statistically significant factors at the 1% level, liquidity and growth at the 5% level and interest coverage at the 10% level.
Determinants of Investment Decision Making: An Empirical Study
India as a developing country is becoming economically more powerful and requires huge capital for various developmental activities. In order to boost the investment among individual investors, it is necessary to study the investment behaviour of individuals and identify the factors that motivate them to invest, so that idle savings can be channelised into investment. Investment decisions are influenced by many reasons. It is a tolerable fact that the financiers are the central position in the financial market. Behaviour of investors is not fixed. It changes from position to position and from security to security. Hence, it is necessary to identify the factors which influence the investment decisions. In order to increase investment and formulate appropriate theories and policies, it is necessary to understand how individuals invest in the securities and other financial options available.
An Examination of Asymmetric Relation between Implied Volatility Index and Its Underlying Asset
The volatility index is the measure of 30-day expected volatility. Its association with stock index returns provides an insight to the volatility traders to launch derivatives products so that it can be used as a hedging tool. The aim of the present study is to empirically examine the relationship between the implied volatility indices and its underlying asset in context of developed and developing markets (like U.S., Japan, Germany, and China). The empirical findings report the asymmetric behaviour which indicates that a larger impact on implied volatility indices are from negative return shocks as compared to positive returns. This evinced that the investors and traders respond highly to negative returns in low volatile period by demanding more options at high premium which makes the implied volatility high. Therefore, the negative relationship between IVIX and stock index returns makes the index relevant for investors to diversifying their portfolio so that they can mitigate the investment risk associated with the volatility.
Relationship between Foreign Portfolio Investments (FPI), Domestic Institutional Investors, and Stock Market Returns in India
The present article attempts to understand the relationship between foreign portfolio investment (FPI), domestic institutional investors (DIIs), and stock market returns in India using high frequency data. The study analyses the trading strategies of FPIs, DIIs and its impact on the stock market return. We found that the trading strategies of FIIs and DIIs differ in Indian stock market. While FIIs follow positive feedback trading strategy, DIIs pursue the strategy of negative feedback trading which was more pronounced during the crisis. Further, there is negative relationship between FPI flows and DII flows. The results indicate the importance of developing strong domestic institutional investors to counteract the destabilising nature FIIs, particularly during turbulent times.
Integration of Stock Market – Evidence from India and Major Global Indices
In designing portfolio diversification plays an important role and diversifying into international market is one of important ingredient in it. High integration among the markets across the globe however also have its own risk of spillover effect of one country into another geography which will have cascading effect across entire globe. For this study has been done to identify interdependency among ten indices of market spread across Asia, Europe and America. The study has been done by measuring co-integration among various indices and also determining causality among the indices by Granger Causality. The study reveals to large extent presence of strong dependency across various markets. Among the indices studies SHANGAI from China showed low dependency across various geographies.
A Comparative Study on Financial Performance of Shariah Compliant Stocks and Conventional Stocks in India
Islamic Equity Market consist the companies which follow the Shariah norms in their business activities to be Shariah compliant. The objectives of this study are to examine the performance of select Shariah-compliant shares listed in BSE (Bombay Stock Exchange), India and to compare the performance of Shariah-compliant stocks with select conventional stocks. The study reveals that the performance of Shariah-compliant stocks is better than conventional stocks during the select period of study and the return of Shariah-compliant securities is less volatile than the conventional securities.
Determinants of Trading Decision: An Experiential Examination
In the midst of increasing globalization, the past two decades have observed huge inflow of outside capital in the shape of direct and portfolio investment. The increase in capital mobility is due to contact between the different economies across the globe. The growing liberalization in the capital market leads to the growth of various financial products and services. Over the past decade, the Indian capital market has witnessed numerous changes in the direction of developing the capital markets more robust. With the growing Indian economy, the larger inflow of funds has been fetched into the capital markets. The government is continuously working on investor’s education in order to increase retail participation in the Indian stock market. The habits of the risk-averse middle class have been changing where these investors started participating in the Indian stock market. It is an explored fact that human beings are irrational and considering this fact becomes imperative to investigate factors that influence the trading decisions. In this research, ‘an attempt has been made to investigate various factors that affect the individual trading decision’. The data has been collected from various stockbroking firms and from clients of those stockbroking firms their opinions were recorded by means of a questionnaire. Data collected through the structured questionnaire, 33 questions were prepared which was given to the 330 respondents on the basis of convenience sampling out of which 220 individuals filled questionnaire, the total of 200 questionnaires was included in the study after eliminating the incomplete questionnaire. Various factors are being explored from the literature and then with the help of factor analysis some of the most influential factors have been explored. Factors like overconfidence, optimism, cognitive bias, herd behavior, advisory effect, and idealism are the factors which influenced the trading decision of the investors the most. Such kind of a study is contributing in the area of behavioral finance as a trading decision is an important aspect while investing in the stock market. And this kind of study would be helping and assisting financial advisors to strategies for their clients in making the right allocation and also the policy maker and market regulators to come up with better reforms for the Indian stock markets.
Effect of Enterprise Risk Management on Firm Value: Empirical Evidence from Non-Financial Firms in Pakistan
This research examines the effect of enterprise risk management on firm value in Pakistan. Further, this study empirically examines company characteristics that establish the execution of an enterprise risk management system. Using a sample of final dataset of 83 non-financial firms located in Pakistan. The sample included non-financial firms from the year 1999 to 2015 and so up to seventeen observation years per company. As in context of Pakistan, most of the organizations are already implement an ERM programs and establish specialized ERM departments because the ERM is now a global term and has become increasingly relevant because of the growing difficulty of risk and an additional development of regulatory frame works. For the empirical evidences, data collected from non-financial firms listed at the Pakistan Stock Exchange (PSX). Results of logistic regression shows that Capital Opacity, Profitability, Financial Leverage, Firm Size and Slack have positive impact on the implementation of an ERM system but Industrial diversification, Industry and Return on Equity are negatively related to an ERM engagement. The results of ordinary least square regression finds positive relationship between use of an ERM and firm value.
A Study on Unfolding Volatility and Leverage Effect in Indian Stock Market
Return is the major attribute of an investment asset that can be considered as a random variable. The variability in return can be expressed as volatility. Forecasting volatility and modelling are the most prolific areas for the research. Volatility and Leverage effect are the two crucial stipulations to study market contradictions and trends that prevail for a drawn-out period. It is observed that when volatility beams the markets soar and when markets roar the volatility fades away. Leverage has a larger scope in managing volatility when investors tend to shuffle their positions. This literature aims to identify the volatility clustering and leverage effect caused to NSE NIFTY 50 index. The study contrasts volatility clustering using symmetric model of i.e., GARCH (1,1). Leverage effects is studied and compared using TGARCH and EGARCH models.
Stock Market Modeling in the Langevin Formalism
A Langevin formalism is proposed for stock market dynamics with modeling of various economic market features from first principles. Various processes and effects that occur in the stock market are mathematically incorporated in the said formulation. The Fokker Planck equation corresponding to the Langevin equation so obtained is solved and shows deviation from Gaussian behavior of the rate of change of stock price PDF. The deviation relates to factors such as market efficiency, market depth, liquidity of the relevant stock and informational asymmetries.
A Precisely Practical Measure of the Total Cost of Debt for Determining the Optimal Capital Structure and the Weighted Average Cost of Capital
This paper develops a precise method of estimating the cost of debt to a firm that is based on standard financial theories and empirical evidence on default risk and financial distress costs. An analysis with current data on the S&P 500 demonstrates that the capital structures of large firms are consistent with the model’s simple implications.
Testing the Relationship between Liquidity and Stock Returns in the Palestinian Banks Listed in the Palestine Exchange
This study examines the relationship between liquidity and stock returns in the Palestinian banks listed in the Palestine Exchange over the period July 2009–July 2018. The study uses three liquidity measures: trading probability (TP), turnover rate (TR), and the measure of Amihud (2002), ILLIQ. The results of Pearson’s correlation test showed a positive correlation between tow liquidity measures (TP and ILLIQ) and stock returns, and the results of fixed-effect model showed a significant effect for the same tow liquidity measures (TP and ILLIQ) on stock returns. So, in the context of Palestine, TP and ILLIQ seem to appear better measures for liquidity; thus, the investors can use these two measures of liquidity to predict the stock returns of the Palestinian banks.
Using VIX to Dynamically Hedge Portfolio Risk
Many investors accept buy and hold as their long-term investment strategy. However, during periods of heightened risk, staying disciplined can be problematic. Alternatively, market timing appeals to our emotions but is very difficult to employ successfully. Between these two extremes lies tactical asset allocation, where limited variances are allowed to take advantage of market conditions. Dynamic hedging is a form of tactical asset allocation. Instead of relying on future predictions of asset class returns, dynamic hedging strives to reduce portfolio risk when market risk is elevated. This paper presents a dynamic hedging strategy developed to accomplish this goal. It uses VIXs normal trading range to assess market risk. When VIX trades above its normal trading range and the upper Bollinger band, the dynamic hedging strategy is applied. The result is that portfolio risk is lowered when market risk is extreme. The application of this strategy provides better returns, lower volatility, and better downside protection than a strategic buy and hold allocation. It also avoids the deployment problems associated with market timing strategies.
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