Söhnke Bartram | University of Warwick (original) (raw)

Papers by Söhnke Bartram

Research paper thumbnail of Fundamental Analysis Works

SSRN Electronic Journal, 2015

To assess stock market informational efficiency with minimal data snooping, we take the view of a... more To assess stock market informational efficiency with minimal data snooping, we take the view of a statistician with little knowledge of finance. The statistician uses techniques like least squares to estimate peer-implied fair values from the market values of replicating portfolios with the same accounting statements as the company being valued. Divergence of a company’s peer-implied value estimate from its market value represents mispricing, motivating a convergence trade that earns risk-adjusted returns of up to 10% per year and is economically significant for both large and small cap firms. The rate of convergence decays to zero over the subsequent 34 months.

Research paper thumbnail of Informed Trading, Information Asymmetry, and Pricing of Information Risk: Empirical Evidence from the NYSE

SSRN Electronic Journal, 2009

We analyze commonality in informed trading across stocks, and how informed trading varies with th... more We analyze commonality in informed trading across stocks, and how informed trading varies with the structural and trading characteristics of a firm. We thereby isolate the residual level of informed trading that is unrelated to commonality, trading characteristics, and structural characteristics and analyze this measure with respect to its characteristics and pricing relevance. We find evidence of commonality in informed trading, and a systematic dependence of the level of informed trading on firm characteristics, such as, tick size, the existence of options, and the size of the ownership stake of outside parties. Most importantly, we find that the residual level of informed trading is the component of informed trading most strongly related to required returns. This indicates that an important part of the information risk premium is related to the inability to differentiate between price fluctuations that are caused by changes in fundamental value from random price moves.

Research paper thumbnail of How Important is Financial Risk?

We explore the determinants of equity price risk of nonfinancial corporations. Operating and asse... more We explore the determinants of equity price risk of nonfinancial corporations. Operating and asset characteristics are by far the most important determinants of risk. For the median firm, financial risk accounts for only 15% of observed stock price volatility. Furthermore, financial risk has declined over the last 3 decades, indicating that any upward trend in equity volatility was driven entirely by economic risk factors. This explains why financial distress (as opposed to economic distress) was surprisingly uncommon in the nonfinancial sector during the 2007-2009 crisis even as measures of equity volatility reached unprecedented highs.

Research paper thumbnail of Corporate Break-ups and Information Asymmetry: A Market-Microstructure Analysis

... rate restructurings (eg, Gilson et al. (2001); Krishnaswami and Subramaniam (1999)) capture t... more ... rate restructurings (eg, Gilson et al. (2001); Krishnaswami and Subramaniam (1999)) capture the price-relevant information-set of investors only by analyzing how a subset of these investors – finan-... (1993) and Krishnaswami and Subramaniam (1999), however, suggest. ...

Research paper thumbnail of The use of options in corporate risk management

Managerial Finance, 2006

PurposeThis paper investigates the motivations and practice of nonfinancial firms with regard to ... more PurposeThis paper investigates the motivations and practice of nonfinancial firms with regard to using options in their risk management activities.Design/methodology/approachThe paper provides a comprehensive account of the existing empirical evidence and analyzes data on the use of derivatives in general and options in particular by nonfinancial corporations across different underlyings and countries.FindingsOverall, a significant number of 15‐25 per cent of the firms outside the financial sector use options. This reflects the fact that options are very versatile risk management instruments that can be used to hedge various types of exposures, linear as well as nonlinear. In particular, options are a useful component of corporate risk management if exposures are uncertain, e.g. due to price and quantity risk. Depending on the correlation between price and quantity risk, the optimal hedge portfolio consists of a varying combination of linear and nonlinear risk management instruments...

Research paper thumbnail of Crossing the lines: The conditional relation between exchange rate exposure and stock returns in emerging and developed markets

Journal of International Money and Finance, 2012

This paper examines the importance of exchange rate risk in the return generating process for a l... more This paper examines the importance of exchange rate risk in the return generating process for a large sample of non-financial firms from 37 countries. We argue that the effect of exchange rate exposure on stock returns should be conditional and show evidence of a significant return premium to firmlevel currency exposures when conditioning on the exchange rate change. The return premium is directly related to the size and sign of the subsequent exchange rate change, suggesting fluctuations in exchange rates themselves as a source of time-variation in currency risk premia. For the entire sample the return premium ranges from 1.2-3.3% per unit of currency exposure. The premium is larger for firms in emerging markets, while in developed markets it is statistically significant only for local currency depreciations. Overall, the results indicate that exchange rate exposure plays an important role in generating cross-sectional return variation. Moreover, we show that the impact of exchange rate risk on stock returns is predominantly a cash flow effect as opposed to a discount rate effect.

Research paper thumbnail of Resolving the exposure puzzle: The many facets of exchange rate exposure

Journal of Financial Economics, 2010

Theory predicts sizeable exchange rate (FX) exposure for many firms. However, empirical research ... more Theory predicts sizeable exchange rate (FX) exposure for many firms. However, empirical research has not documented such exposures. To examine this discrepancy, we extend prior theoretical results to model a global firm's FX exposure and show empirically that firms pass through part of currency changes to customers and utilize both operational and financial hedges. For a typical sample firm, pass-through and operational hedging each reduce exposure by 10% to 15%. Financial hedging with foreign debt, and to a lesser extent FX derivatives, decreases exposure by about 40%. The combination of these factors reduces FX exposures to observed levels.

Research paper thumbnail of Post-Retirement Benefit Plans, Leverage, and Real Investment

Research paper thumbnail of Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns

We study the role played by "bond book-to-market" ratios in U.S. corporate bond pricing. Controll... more We study the role played by "bond book-to-market" ratios in U.S. corporate bond pricing. Controlling for numerous risk factors tied to default and priced asset risk, including yield-to-maturity, we find that the ratio of a corporate bond's book value to its market price strongly predicts the bond's future return. The quintile of bonds with the highest book-to-market ratios outperforms the quintile with the lowest ratios by more than 3% per year, other things equal. Additional evidence on signal delay, scope of signal efficacy, and factor risk rejects the thesis that the corporate bond market is perfectly informationally efficient, although significant positive alpha spreads are erased by transaction costs.

Research paper thumbnail of Why Does Idiosyncratic Risk Increase with Market Risk?

From 1963 through 2015, idiosyncratic risk (IR) is high when market risk (MR) is high. We show th... more From 1963 through 2015, idiosyncratic risk (IR) is high when market risk (MR) is high. We show that the positive relation between IR and MR is highly stable through time and is robust across exchanges, firm size, liquidity, and market-to-book groupings. Though stock liquidity affects the strength of the relation, it is strong for the most liquid stocks. The relation has roots in fundamentals. Higher market risk predicts greater idiosyncratic earnings volatility as well as dispersion and errors in analysts' earnings forecasts. Firm characteristics related to the ability of firms to adjust to higher uncertainty help explain the strength of the relation. We find evidence that the relation is weaker for firms with more growth options, which is consistent with the view that such options provide a hedge against macroeconomic uncertainty.

Research paper thumbnail of The Financial Risks of Corporations in the Global Economy

ABSTRACT We comprehensively examine the cross-sectional determinants of financial risk for a larg... more ABSTRACT We comprehensively examine the cross-sectional determinants of financial risk for a large sample of non-financial corporations in over 40 countries. The level of total firm risk depends on many firm-specific operating and financial characteristics. Consistent with theoretical models and some prior empirical evidence for U.S. firms, the level and type of assets, as well as profitability characteristics, are significant drivers of total risk. In contrast, most financial characteristics are less important, but surprisingly, dividend policy has the strongest effect on total risk of all factors we consider. We also decompose total risk into market risk and firm-specific risk. Contrary to some theoretical predictions, our results indicate that many similar factors determine each type of risk though not necessarily in equal proportions. However, some factors such as foreign operations and asset liquidity are only significant determinants of market risk. Interestingly, the effects of operating and financial characteristics on firm risk depend on the overall level of economic and financial risk in a firm's home-country. For example, asset tangibility and the use of interest rate derivatives are only important in countries with high financial risk. Finally, we find that many determinants of total firm risk also have important effects on firm value in the way predicted by theory.

Research paper thumbnail of The Cross-Sectional Determinants of Firm Risk

ABSTRACT Using structural models of the firm, we examine the cross-sectional determinants of equi... more ABSTRACT Using structural models of the firm, we examine the cross-sectional determinants of equity price risk for a large group of non-financial corporations in the United States. The level of total firm risk depends on many firm-specific operating and financial characteristics. Consistent with theoretical models and prior empirical evidence, the level of assets, firm age, and the level and volatility, as well as the growth of profitability are significant drivers of total risk. In contrast, most financial characteristics are less important with dividend policy and leverage constituting exceptions.

Research paper thumbnail of Why has Idiosyncratic Risk been Historically Low in Recent Years?

and ECGI. We thank Laura Veldkamp for providing uncertainty index data. We are grateful for usefu... more and ECGI. We thank Laura Veldkamp for providing uncertainty index data. We are grateful for useful comments from Andrei Gon-çalves. Bartram gratefully acknowledges the warm hospitality of NYU's Stern School of Business. This paper uses some results from Bartram, Brown, and Stulz (2016) and supersedes it. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w24270.ack NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Research paper thumbnail of Corporate Hedging and Speculation with Derivatives

The version presented here may differ from the published version or, version of record, if you wi... more The version presented here may differ from the published version or, version of record, if you wish to cite this item you are advised to consult the publisher's version. Please see the 'permanent WRAP URL' above for details on accessing the published version and note that access may require a subscription.

Research paper thumbnail of Alternative Market Structures for Derivatives

In this paper, we compare option contracts from a traditional derivatives exchange to bank-issued... more In this paper, we compare option contracts from a traditional derivatives exchange to bank-issued options, also referred to as covered warrants, whose markets have grown rapidly around the world in recent years. While bank-issued option markets and traditional derivatives exchanges exhibit significant structural differences such as the absence of a central counterparty for bank-issued options, they frequently exist side-by-side, and the empirical evidence shows that there is significant overlap in their product offerings. We examine trading costs and liquidity in both markets and find that bank-issued options have smaller quoted percentage bid-ask spreads than traditional option contracts by an average of 4.3%. The bid-ask spread difference manifests itself in a highly regular fashion in that ask (bid) prices for bank-issued options are consistently higher than comparable ask (bid) prices for traditional option contracts. The difference of the bid prices is larger than the difference of the ask prices resulting in smaller bid-ask spreads for bank-issued options. The empirical analysis also indicates that bid-ask spreads in either market are lowered by competition from the other market. We present a potential explanation for the co-existence of the two market structures which suggests that the bank-issued option market caters more towards retail investors with predominantly speculative motives while traditional derivatives exchanges may cater more towards institutional investors with predominantly hedging motives.

Research paper thumbnail of Competition among Alternative Option Market Structures: Evidence from Eurex vs. Euwax

We study option market design by providing a theoretical motivation and comprehensive empirical a... more We study option market design by providing a theoretical motivation and comprehensive empirical analysis of two fundamentally di®erent option market structures, the EuRex derivatives exchange and EuWax, the world's largest market for bank-issued options. These markets exist side-by-side, o®ering many options with identical or similar characteristics. We motivate the two market structures based on option investor clienteles which di®er with respect to the probability of selling the option back to the dealer/issuer before maturity, which in turn a®ects the investors expected transaction costs. As suggested by the clientele argument, our main empirical¯nding is that EuWax ask prices and bid prices are consistently higher than comparable EuRex ask prices and bid prices. The di®erence of the bid prices is larger, resulting in smaller EuWax bid-ask spreads, which makes EuWax preferable for investors with a high probability of early liquidation. We¯nd that competition from one market reduces bid-ask spreads in the other market.

Research paper thumbnail of How Important are Foreign Ownership Linkages for International Stock Returns?

We develop a simple measure of international ownership linkages and show that this measure is of ... more We develop a simple measure of international ownership linkages and show that this measure is of similar importance as the traditional effects coming from country and industry fundamentals. International ownership linkages are not explained by omitted country/industry variations, wealth effects or other explanations like liquidity, investment style, or fund flows. We find that ownership linkages are a summary measure of investment locale that links investor capital around the world. Beyond the level of foreign ownership, the specific ownership composition of a stock is an important facet of international equity returns -a finding which has important implications for diversification. 9 Stulz (1981b) proposes that investors may prefer home country assets because these assets could provide superior hedges against future state variables that affect investors' intertemporal expected utility. It is possible that an investors' habitat of stocks is determined by certain intertemporal hedging properties.

Research paper thumbnail of Real-time Monitoring of International Bank Insolvency Risk

Research paper thumbnail of Corporate Risk Management as a Lever for Shareholder Value Creation

Firm value is influenced in many direct and indirect ways by financial risks which consist of une... more Firm value is influenced in many direct and indirect ways by financial risks which consist of unexpected changes in foreign exchange rates, interest rates and commodity prices. The fact that a significant number of corporations are committing resources to risk management activities is, however, only an indication of the potential of corporate risk management to increase firm value. This paper presents a comprehensive review of positive theories and their empirical evidence regarding the contribution of corporate risk management to shareholder value. It is argued that because of realistic capital market imperfections, such as agency costs, transaction costs, taxes, and increasing costs of external financing, risk manage-Ž . ment at the firm level as opposed to risk management by stock owners represents a means to increase firm value to the benefit of the shareholders.

Research paper thumbnail of The Effect of Corporate Break-ups on Information Asymmetry: A Market Microstructure Analysis

This paper investigates the information environment during and after a corporate break-up utilizi... more This paper investigates the information environment during and after a corporate break-up utilizing direct measures of information asymmetry developed in the market microstructure literature. The analysis is based on all corporate break-ups in the United States in the period 1995-2005. The results document that information asymmetry declines significantly as a result of a break-up. However, this reduction takes place not at the time of its announcement or its completion, but after it has been fully consummated. At the same time, not all investors are equally affected, but informed investors who generate private information by skilled analysis of public information come to play a more important role compared to traditional corporate insiders. This might explain why financial advisors promote break-ups among their corporate clients, as they are likely beneficiaries. The positive stock-market reaction to break-up announcements is significantly related to reductions in insider-related information asymmetry, indicating that the advantage of skilled information analysts does not offset the overall improvement in the information environment due to a break-up.

Research paper thumbnail of Fundamental Analysis Works

SSRN Electronic Journal, 2015

To assess stock market informational efficiency with minimal data snooping, we take the view of a... more To assess stock market informational efficiency with minimal data snooping, we take the view of a statistician with little knowledge of finance. The statistician uses techniques like least squares to estimate peer-implied fair values from the market values of replicating portfolios with the same accounting statements as the company being valued. Divergence of a company’s peer-implied value estimate from its market value represents mispricing, motivating a convergence trade that earns risk-adjusted returns of up to 10% per year and is economically significant for both large and small cap firms. The rate of convergence decays to zero over the subsequent 34 months.

Research paper thumbnail of Informed Trading, Information Asymmetry, and Pricing of Information Risk: Empirical Evidence from the NYSE

SSRN Electronic Journal, 2009

We analyze commonality in informed trading across stocks, and how informed trading varies with th... more We analyze commonality in informed trading across stocks, and how informed trading varies with the structural and trading characteristics of a firm. We thereby isolate the residual level of informed trading that is unrelated to commonality, trading characteristics, and structural characteristics and analyze this measure with respect to its characteristics and pricing relevance. We find evidence of commonality in informed trading, and a systematic dependence of the level of informed trading on firm characteristics, such as, tick size, the existence of options, and the size of the ownership stake of outside parties. Most importantly, we find that the residual level of informed trading is the component of informed trading most strongly related to required returns. This indicates that an important part of the information risk premium is related to the inability to differentiate between price fluctuations that are caused by changes in fundamental value from random price moves.

Research paper thumbnail of How Important is Financial Risk?

We explore the determinants of equity price risk of nonfinancial corporations. Operating and asse... more We explore the determinants of equity price risk of nonfinancial corporations. Operating and asset characteristics are by far the most important determinants of risk. For the median firm, financial risk accounts for only 15% of observed stock price volatility. Furthermore, financial risk has declined over the last 3 decades, indicating that any upward trend in equity volatility was driven entirely by economic risk factors. This explains why financial distress (as opposed to economic distress) was surprisingly uncommon in the nonfinancial sector during the 2007-2009 crisis even as measures of equity volatility reached unprecedented highs.

Research paper thumbnail of Corporate Break-ups and Information Asymmetry: A Market-Microstructure Analysis

... rate restructurings (eg, Gilson et al. (2001); Krishnaswami and Subramaniam (1999)) capture t... more ... rate restructurings (eg, Gilson et al. (2001); Krishnaswami and Subramaniam (1999)) capture the price-relevant information-set of investors only by analyzing how a subset of these investors – finan-... (1993) and Krishnaswami and Subramaniam (1999), however, suggest. ...

Research paper thumbnail of The use of options in corporate risk management

Managerial Finance, 2006

PurposeThis paper investigates the motivations and practice of nonfinancial firms with regard to ... more PurposeThis paper investigates the motivations and practice of nonfinancial firms with regard to using options in their risk management activities.Design/methodology/approachThe paper provides a comprehensive account of the existing empirical evidence and analyzes data on the use of derivatives in general and options in particular by nonfinancial corporations across different underlyings and countries.FindingsOverall, a significant number of 15‐25 per cent of the firms outside the financial sector use options. This reflects the fact that options are very versatile risk management instruments that can be used to hedge various types of exposures, linear as well as nonlinear. In particular, options are a useful component of corporate risk management if exposures are uncertain, e.g. due to price and quantity risk. Depending on the correlation between price and quantity risk, the optimal hedge portfolio consists of a varying combination of linear and nonlinear risk management instruments...

Research paper thumbnail of Crossing the lines: The conditional relation between exchange rate exposure and stock returns in emerging and developed markets

Journal of International Money and Finance, 2012

This paper examines the importance of exchange rate risk in the return generating process for a l... more This paper examines the importance of exchange rate risk in the return generating process for a large sample of non-financial firms from 37 countries. We argue that the effect of exchange rate exposure on stock returns should be conditional and show evidence of a significant return premium to firmlevel currency exposures when conditioning on the exchange rate change. The return premium is directly related to the size and sign of the subsequent exchange rate change, suggesting fluctuations in exchange rates themselves as a source of time-variation in currency risk premia. For the entire sample the return premium ranges from 1.2-3.3% per unit of currency exposure. The premium is larger for firms in emerging markets, while in developed markets it is statistically significant only for local currency depreciations. Overall, the results indicate that exchange rate exposure plays an important role in generating cross-sectional return variation. Moreover, we show that the impact of exchange rate risk on stock returns is predominantly a cash flow effect as opposed to a discount rate effect.

Research paper thumbnail of Resolving the exposure puzzle: The many facets of exchange rate exposure

Journal of Financial Economics, 2010

Theory predicts sizeable exchange rate (FX) exposure for many firms. However, empirical research ... more Theory predicts sizeable exchange rate (FX) exposure for many firms. However, empirical research has not documented such exposures. To examine this discrepancy, we extend prior theoretical results to model a global firm's FX exposure and show empirically that firms pass through part of currency changes to customers and utilize both operational and financial hedges. For a typical sample firm, pass-through and operational hedging each reduce exposure by 10% to 15%. Financial hedging with foreign debt, and to a lesser extent FX derivatives, decreases exposure by about 40%. The combination of these factors reduces FX exposures to observed levels.

Research paper thumbnail of Post-Retirement Benefit Plans, Leverage, and Real Investment

Research paper thumbnail of Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns

We study the role played by "bond book-to-market" ratios in U.S. corporate bond pricing. Controll... more We study the role played by "bond book-to-market" ratios in U.S. corporate bond pricing. Controlling for numerous risk factors tied to default and priced asset risk, including yield-to-maturity, we find that the ratio of a corporate bond's book value to its market price strongly predicts the bond's future return. The quintile of bonds with the highest book-to-market ratios outperforms the quintile with the lowest ratios by more than 3% per year, other things equal. Additional evidence on signal delay, scope of signal efficacy, and factor risk rejects the thesis that the corporate bond market is perfectly informationally efficient, although significant positive alpha spreads are erased by transaction costs.

Research paper thumbnail of Why Does Idiosyncratic Risk Increase with Market Risk?

From 1963 through 2015, idiosyncratic risk (IR) is high when market risk (MR) is high. We show th... more From 1963 through 2015, idiosyncratic risk (IR) is high when market risk (MR) is high. We show that the positive relation between IR and MR is highly stable through time and is robust across exchanges, firm size, liquidity, and market-to-book groupings. Though stock liquidity affects the strength of the relation, it is strong for the most liquid stocks. The relation has roots in fundamentals. Higher market risk predicts greater idiosyncratic earnings volatility as well as dispersion and errors in analysts' earnings forecasts. Firm characteristics related to the ability of firms to adjust to higher uncertainty help explain the strength of the relation. We find evidence that the relation is weaker for firms with more growth options, which is consistent with the view that such options provide a hedge against macroeconomic uncertainty.

Research paper thumbnail of The Financial Risks of Corporations in the Global Economy

ABSTRACT We comprehensively examine the cross-sectional determinants of financial risk for a larg... more ABSTRACT We comprehensively examine the cross-sectional determinants of financial risk for a large sample of non-financial corporations in over 40 countries. The level of total firm risk depends on many firm-specific operating and financial characteristics. Consistent with theoretical models and some prior empirical evidence for U.S. firms, the level and type of assets, as well as profitability characteristics, are significant drivers of total risk. In contrast, most financial characteristics are less important, but surprisingly, dividend policy has the strongest effect on total risk of all factors we consider. We also decompose total risk into market risk and firm-specific risk. Contrary to some theoretical predictions, our results indicate that many similar factors determine each type of risk though not necessarily in equal proportions. However, some factors such as foreign operations and asset liquidity are only significant determinants of market risk. Interestingly, the effects of operating and financial characteristics on firm risk depend on the overall level of economic and financial risk in a firm's home-country. For example, asset tangibility and the use of interest rate derivatives are only important in countries with high financial risk. Finally, we find that many determinants of total firm risk also have important effects on firm value in the way predicted by theory.

Research paper thumbnail of The Cross-Sectional Determinants of Firm Risk

ABSTRACT Using structural models of the firm, we examine the cross-sectional determinants of equi... more ABSTRACT Using structural models of the firm, we examine the cross-sectional determinants of equity price risk for a large group of non-financial corporations in the United States. The level of total firm risk depends on many firm-specific operating and financial characteristics. Consistent with theoretical models and prior empirical evidence, the level of assets, firm age, and the level and volatility, as well as the growth of profitability are significant drivers of total risk. In contrast, most financial characteristics are less important with dividend policy and leverage constituting exceptions.

Research paper thumbnail of Why has Idiosyncratic Risk been Historically Low in Recent Years?

and ECGI. We thank Laura Veldkamp for providing uncertainty index data. We are grateful for usefu... more and ECGI. We thank Laura Veldkamp for providing uncertainty index data. We are grateful for useful comments from Andrei Gon-çalves. Bartram gratefully acknowledges the warm hospitality of NYU's Stern School of Business. This paper uses some results from Bartram, Brown, and Stulz (2016) and supersedes it. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w24270.ack NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Research paper thumbnail of Corporate Hedging and Speculation with Derivatives

The version presented here may differ from the published version or, version of record, if you wi... more The version presented here may differ from the published version or, version of record, if you wish to cite this item you are advised to consult the publisher's version. Please see the 'permanent WRAP URL' above for details on accessing the published version and note that access may require a subscription.

Research paper thumbnail of Alternative Market Structures for Derivatives

In this paper, we compare option contracts from a traditional derivatives exchange to bank-issued... more In this paper, we compare option contracts from a traditional derivatives exchange to bank-issued options, also referred to as covered warrants, whose markets have grown rapidly around the world in recent years. While bank-issued option markets and traditional derivatives exchanges exhibit significant structural differences such as the absence of a central counterparty for bank-issued options, they frequently exist side-by-side, and the empirical evidence shows that there is significant overlap in their product offerings. We examine trading costs and liquidity in both markets and find that bank-issued options have smaller quoted percentage bid-ask spreads than traditional option contracts by an average of 4.3%. The bid-ask spread difference manifests itself in a highly regular fashion in that ask (bid) prices for bank-issued options are consistently higher than comparable ask (bid) prices for traditional option contracts. The difference of the bid prices is larger than the difference of the ask prices resulting in smaller bid-ask spreads for bank-issued options. The empirical analysis also indicates that bid-ask spreads in either market are lowered by competition from the other market. We present a potential explanation for the co-existence of the two market structures which suggests that the bank-issued option market caters more towards retail investors with predominantly speculative motives while traditional derivatives exchanges may cater more towards institutional investors with predominantly hedging motives.

Research paper thumbnail of Competition among Alternative Option Market Structures: Evidence from Eurex vs. Euwax

We study option market design by providing a theoretical motivation and comprehensive empirical a... more We study option market design by providing a theoretical motivation and comprehensive empirical analysis of two fundamentally di®erent option market structures, the EuRex derivatives exchange and EuWax, the world's largest market for bank-issued options. These markets exist side-by-side, o®ering many options with identical or similar characteristics. We motivate the two market structures based on option investor clienteles which di®er with respect to the probability of selling the option back to the dealer/issuer before maturity, which in turn a®ects the investors expected transaction costs. As suggested by the clientele argument, our main empirical¯nding is that EuWax ask prices and bid prices are consistently higher than comparable EuRex ask prices and bid prices. The di®erence of the bid prices is larger, resulting in smaller EuWax bid-ask spreads, which makes EuWax preferable for investors with a high probability of early liquidation. We¯nd that competition from one market reduces bid-ask spreads in the other market.

Research paper thumbnail of How Important are Foreign Ownership Linkages for International Stock Returns?

We develop a simple measure of international ownership linkages and show that this measure is of ... more We develop a simple measure of international ownership linkages and show that this measure is of similar importance as the traditional effects coming from country and industry fundamentals. International ownership linkages are not explained by omitted country/industry variations, wealth effects or other explanations like liquidity, investment style, or fund flows. We find that ownership linkages are a summary measure of investment locale that links investor capital around the world. Beyond the level of foreign ownership, the specific ownership composition of a stock is an important facet of international equity returns -a finding which has important implications for diversification. 9 Stulz (1981b) proposes that investors may prefer home country assets because these assets could provide superior hedges against future state variables that affect investors' intertemporal expected utility. It is possible that an investors' habitat of stocks is determined by certain intertemporal hedging properties.

Research paper thumbnail of Real-time Monitoring of International Bank Insolvency Risk

Research paper thumbnail of Corporate Risk Management as a Lever for Shareholder Value Creation

Firm value is influenced in many direct and indirect ways by financial risks which consist of une... more Firm value is influenced in many direct and indirect ways by financial risks which consist of unexpected changes in foreign exchange rates, interest rates and commodity prices. The fact that a significant number of corporations are committing resources to risk management activities is, however, only an indication of the potential of corporate risk management to increase firm value. This paper presents a comprehensive review of positive theories and their empirical evidence regarding the contribution of corporate risk management to shareholder value. It is argued that because of realistic capital market imperfections, such as agency costs, transaction costs, taxes, and increasing costs of external financing, risk manage-Ž . ment at the firm level as opposed to risk management by stock owners represents a means to increase firm value to the benefit of the shareholders.

Research paper thumbnail of The Effect of Corporate Break-ups on Information Asymmetry: A Market Microstructure Analysis

This paper investigates the information environment during and after a corporate break-up utilizi... more This paper investigates the information environment during and after a corporate break-up utilizing direct measures of information asymmetry developed in the market microstructure literature. The analysis is based on all corporate break-ups in the United States in the period 1995-2005. The results document that information asymmetry declines significantly as a result of a break-up. However, this reduction takes place not at the time of its announcement or its completion, but after it has been fully consummated. At the same time, not all investors are equally affected, but informed investors who generate private information by skilled analysis of public information come to play a more important role compared to traditional corporate insiders. This might explain why financial advisors promote break-ups among their corporate clients, as they are likely beneficiaries. The positive stock-market reaction to break-up announcements is significantly related to reductions in insider-related information asymmetry, indicating that the advantage of skilled information analysts does not offset the overall improvement in the information environment due to a break-up.