PublicationsThe Value of Corporate Voting Rights Embedded in Option Prices?
Journal of Corporate Finance 22, 16-34, 2013 [with Marco Poltera]
Abstract: This paper proposes and tests a new method to extract the value of corporate voting rights from market prices of American-style single-stock options. The method models voting-right values as non-cash dividends and backs them out via numerical optimization from prices of equity options. Simulation experiments show that the method is accurate and outperforms existing option-based approaches by reducing their measurement error from 17.2% to 1.57% in terms of root mean squared errors and almost eliminates their bias. The paper also contributes an empirical analysis of corporate voting-right values in European companies in the time period between 2003 and 2010. Voting rights have an annualized average value of 0.37% of the share price and are significantly worth more in months in which either ordinary or extraordinary general meetings take place but no single shareholder holds a majority stake in the company. Finally, voting values are higher in companies incorporated in French-civil-law countries (France and the Netherlands) than in German-civil-law countries (Germany and Switzerland).
Forced Manager Turnovers in English Soccer Leagues: A Long-Term Perspective
Journal of Sports Economics, forthcoming [with Stefano d'Addona]
Abstract: The authors conduct an empirical analysis of a hand-collected sample of 2,376 turnovers of soccer managers in the four major English leagues in the seasons from 1949-1950 to 2007-2008. While the relation between the probability of a manager being fired and long-term performance remained remarkably stable, both the absolute frequency and the sensitivity of firing decisions on the outcome of recent matches steadily and significantly increased during the six decades covered by the sample. This is likely to reflect the increased level of competition in and economic importance of the English soccer leagues.
WACC Calculations in Practice: Incorrect Results due to Inconsistent Assumptions - Status Quo and Improvements
Accounting and Finance Research 2(2), 2013 [with Matthias Grüninger]
Abstract: This paper argues that in practical applications the weighted average cost of capital (WACC) is often incorrectly estimated due to the simultaneous use of two inconsistent input parameters: (i) a beta of debt equal to zero when transforming asset betas into equity betas (beta levering) and (ii) a cost of debt above the risk-free interest rate when calculating the WACC. The paper discusses and quantifies the consequences of this inconsistency and offers viable solutions. By replacing the cost of debt with the risk-free rate, a more accurate WACC is calculated and the estimation of the cost of debt becomes obsolete. Furthermore, the paper presents a solution to obtain the correct WACC without increasing the calculation’s complexity.
What Drives the Performance of Convertible Bond Funds?
Journal of Banking and Finance, 34 (11), 2600-2613, 2010 [with Manuel Ammann and Ralf Seiz]
Abstract: This paper examines the performance of US mutual funds that invest primarily in convertible bonds. Multivariate cross-sectional analyses show a significant relation between a fund’s performance and its asset composition: the higher the difference in the percentage of assets invested in convertible bonds compared to the percentage invested in stocks, the higher the performance, on average. We show that this result can be explained by factors associated with investment opportunities in the convertible-bond market and trading strategies related to convertible arbitrage, as typically performed by hedge funds. Overall, convertible-bond fund performance measured by alpha is comparable to a passive investment in stocks, bonds, and convertible bonds. This performance is the result of weak selection skills and successful timing strategies related to convertible arbitrage.
Simulation-Based Pricing of Convertible Bonds
Journal of Empirical Finance, 15, 310-331, 2008 [with Manuel Ammann and Christian Wilde]
Abstract: We propose and empirically investigate a pricing model for convertible bonds based on Monte Carlo simulation. The method uses parametric representations of the early exercise decisions and consists of two stages. Pricing convertible bonds with the proposed Monte Carlo approach allows us to better capture both the dynamics of the underlying state variables and the rich set of real-world convertible bond specifications. Furthermore, using the simulation model proposed, we present an empirical pricing study of the US market, using 32 convertible bonds and 69 months of daily market prices. Our results do not confirm the evidence of previous studies that market prices of convertible bonds are on average lower than prices generated by a theoretical model. Similarly, our study is not supportive of a strong positive relationship between moneyness and mean pricing error, as argued in the literature.
International Stock-Bond Correlations in a Simple Affine Asset Pricing Model
Journal of Banking and Finance, 30 (10), 2747-2765, 2006 [with Stefano d'Addona]
Abstract: We use an affine asset pricing model to jointly value stocks and bonds. This enables us to derive endogenous correlations and to explain how economic fundamentals influence the correlation between stock and bond returns. The presented model is implemented for G7 post-war economies and its in-sample and out-of-sample performance is assessed by comparing the correlations generated by the model with conventional statistical measures. The affine framework developed in this paper is found to generate stock–bond correlations that are in line with empirically observed figures.
Pricing American-Style Options by Simulation
Financial Markets and Portfolio Management, 19 (1), 109-116, 2005
Abstract: This paper presents an overview of the recent advances in the pricing of American-style securities by simulation. In addition to general considerations related to the use of Monte Carlo simulation in the context of derivatives pricing, five approaches that address the valuation of early-exercisable options are presented: the regression approach, the parametric approach, the stratification approach, simulated trees, and stochastic meshes. The paper provides a brief discussion of each approach with references to the most significant contributions in the academic literature.
What is Going on in the Oil Market?
Financial Markets and Portfolio Management, 18 (4), 442-457, 2005 [with Frode Brevik]
Conclusion: In this article, we propose a consistent view on the recent oil-price history based on fundamental data and economic theory. We sum up: After the turn of the century three major stylized shocks have hit market. First, the demand curve has shifted fight outwards, mainly driven, as extensively reported in the media, by sustained growth in China and other Asian Countries. Second, supply disruptions in countries with low extraction costs (Iraq and Venezuela) have shifted the supply curve to the left. Third, we show that speculators adjust their inventories in order to take advantage of predictable price fluctuations and play themselves a major role in the price formation. Optimal storage theory implies that aggregate inventories are negatively related to the oil price and positively to the volatility of supply and demand shocks.
We provide evidence that the political events in the last years have increased volatility and induced the inventory curve to shift right outwards. We analyze in a graphical framework the interaction of all these shocks and conclude that speculators have caused the oil price to overshoot in the short run its long-run fundamental value. However, this is not at all attributable to market failure or the harmfulness of speculators. In fact, the opposite is true. Speculators have in general a dampening effect on the oil price. The record oil price in the very recent history is partly a consequence of speculators maintaining or building-up inventories to cope with the supply and demand shocks to come. Hence, high prices represent a short-term toll for future price stability. It follows from our analysis that the oil price is expected to fall towards its long-term mean, provided that no further shocks hit the economy and, critically, the oil supply. As we saw, this prediction is consistent with the observed prices in the futures markets. Also in terms of future price volatility, the outlook is rather upbeat. The increased inventory levels held by speculators will cushion the spot market against fluctuations in natural supply and demand and limit the degree to which the currently high underlying volatility will translate into higher price volatility.
Abstract:We investigate the pricing performance of three convertible bond pricing models on the French convertible bond market using daily market prices. We examine a component model separating the convertible bond into a bond and option component, a method based on the Margrabe model for pricing exchange options, and a binomial-tree model with exogenous credit risk. All three models are found to deliver theoretical values for the analyzed convertible bonds that tend to be higher than the observed market prices. The prices obtained by the binomial-tree model are nearest to market prices and the mispricing is no longer statistically significant for the majority of bonds in our sample. For all models, the difference between market and model prices is greater for out-of-the money convertibles than for at- or in-the-money convertibles.