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Author: Charles Cao
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
While recent studies document increasing idiosyncratic volatility over the past four decades, an explanation for this trend remains elusive. We establish a theoretic link between growth options available to managers and the idiosyncratic risk of equity. Empirically both the level and variance of corporate growth options are significantly related to idiosyncratic volatility. Accounting for growth options eliminates or reverses the trend in aggregate firm specific risk. These results are robust for different measures of idiosyncratic volatility, different growth option proxies, across exchanges, and through time. Finally, our results suggest that growth options explain the trend in idiosyncratic volatility beyond alternative explanations.
Author: Charles Cao
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
While recent studies document increasing idiosyncratic volatility over the past four decades, an explanation for this trend remains elusive. We establish a theoretic link between growth options available to managers and the idiosyncratic risk of equity. Empirically both the level and variance of corporate growth options are significantly related to idiosyncratic volatility. Accounting for growth options eliminates or reverses the trend in aggregate firm specific risk. These results are robust for different measures of idiosyncratic volatility, different growth option proxies, across exchanges, and through time. Finally, our results suggest that growth options explain the trend in idiosyncratic volatility beyond alternative explanations.
Author: Nadejda Vozlioublennaia
Publisher:
ISBN:
Category : Institutional investors
Languages : en
Pages : 228
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Book Description
Author: Harjoat Singh Bhamra
Publisher:
ISBN:
Category :
Languages : en
Pages : 43
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Book Description
Stocks with high idiosyncratic volatility perform poorly relative to low idiosyncratic volatility stocks. We offer a novel explanation of this anomaly based on real options, which is consistent with earlier findings on idiosyncratic volatility (the positive contemporaneous relation between firm-level stock returns and idiosyncratic volatility). Our approach is based on introducing stochastic idiosyncratic cash flow risk into an equity valuation model of firms with growth options. Within our model, a firm's systematic risk depends on the delta of its growth option. The growth option's delta is lower when idiosyncratic volatility rises, driving down the firm's systematic risk and hence its expected return - firms with higher idiosyncratic volatility therefore have lower expected returns. Our model additionally offers the following novel empirical predictions: (i) returns correlate positively with idiosyncratic volatility during intervals between large changes in idiosyncratic volatility (the switch effect), and (ii) the anomalies and the switch effect are stronger for firms with more real options and which undergo larger changes in idiosyncratic volatility. Empirical results support the predictions of our model.
Author: Turan G. Bali
Publisher:
ISBN:
Category :
Languages : en
Pages : 83
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Book Description
Growth options increase idiosyncratic skewness and reduce risk exposure, and thereby create the appearance of profitability, distress, lotteryness, and volatility anomalies, influencing their returns via the channel of idiosyncratic skewness. To capture these effects, we estimate expected idiosyncratic skewness due to growth options reflecting investors' expectation about the firm's mix of growth options versus assets-in-place. We find that investors require a positive premium to hold stocks of inflexible firms with low growth options and hence negative expected idiosyncratic skewness, and that a newly proposed skewness factor based on growth options or firm inflexibility explains the aforementioned anomalies.
Author: Söhnke M. Bartram
Publisher:
ISBN:
Category : Assets (Accounting)
Languages : en
Pages : 46
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Book Description
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, the relation is strong for the most liquid stocks. The relation has roots in fundamentals as higher market risk predicts greater idiosyncratic earnings volatility and as firm characteristics related to the ability of firms to adjust to higher uncertainty help explain the strength of the relation. Consistent with the view that growth options provide a hedge against macroeconomic uncertainty, we find evidence that the relation is weaker for firms with more growth options.
Author: Hengjie Ai
Publisher:
ISBN:
Category :
Languages : en
Pages : 56
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Book Description
We propose to measure growth opportunities by firms' exposure to idiosyncratic volatility news. Theoretically, we show that the value of a growth option increases in idiosyncratic volatility but its response to volatility of aggregate shocks can be either positive or negative depending on option moneyness. Empirically, we show that price sensitivity to variation in idiosyncratic volatility carries significant information about firms' future investment and growth even after controlling for conventional proxies of growth options such as book-to-market and other relevant firm characteristics. Consistent with our theoretical arguments, we also find that firm' exposure to aggregate volatility, while priced, does not help predict their future growth. Option-intensive firms identified using our idiosyncratic volatility-based measure earn a lower premium than do firms that rely more heavily on assets in place.
Author: Walter V. "Bud" Haslett, Jr.
Publisher: John Wiley & Sons
ISBN: 0470934115
Category : Business & Economics
Languages : en
Pages : 790
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Book Description
Key readings in risk management from CFA Institute, the preeminent organization representing financial analysts Risk management may have been the single most important topic in finance over the past two decades. To appreciate its complexity, one must understand the art as well as the science behind it. Risk Management: Foundations for a Changing Financial World provides investment professionals with a solid framework for understanding the theory, philosophy, and development of the practice of risk management by Outlining the evolution of risk management and how the discipline has adapted to address the future of managing risk Covering the full range of risk management issues, including firm, portfolio, and credit risk management Examining the various aspects of measuring risk and the practical aspects of managing risk Including key writings from leading risk management practitioners and academics, such as Andrew Lo, Robert Merton, John Bogle, and Richard Bookstaber For financial analysts, money managers, and others in the finance industry, this book offers an in-depth understanding of the critical topics and issues in risk management that are most important to today’s investment professionals.
Author: Sheridan Titman
Publisher:
ISBN: 9780321384140
Category : Capital investments
Languages : en
Pages : 556
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Book Description
Author: John H. Cochrane
Publisher: Now Publishers Inc
ISBN: 1933019158
Category : Business & Economics
Languages : en
Pages : 117
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Book Description
Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Author: Han T. J. Smit
Publisher: Princeton University Press
ISBN: 0691176418
Category : Business & Economics
Languages : en
Pages : 215
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Book Description
A groundbreaking approach to mergers and acquisitions It is widely accepted that a large proportion of acquisition strategies fail to deliver the expected value. Globalizing markets characterized by growing uncertainty, together with the advent of new competitors, are further complicating the task of valuing acquisitions. Too often, managers rely on flawed valuation models or their intuition and experience when making risky investment decisions, exposing their companies to potentially costly pitfalls. Playing at Acquisitions provides managers with a powerful methodology for designing and executing successful acquisition strategies. The book tackles the myriad executive biases that infect decision making at every stage of the acquisition process, and the inadequacy of current valuation approaches to help mitigate these biases and more realistically represent value in uncertain environments. Bringing together the latest advances in behavioral finance, real option valuation, and game theory, this unique playbook explains how to express acquisition strategies as sets of real options, explicitly introducing uncertainty and future optionality into acquisition strategy design. It shows how to incorporate the competitive dynamics that exist in different acquisition contexts, acknowledge and even embrace uncertainty, identify the value of the real options embedded in targets, and more. Rooted in economic theory and featuring numerous real-world case studies, Playing at Acquisitions will enhance the ability of CEOs and their teams to derive value from their acquisition strategies, and is also an ideal resource for researchers and MBAs.
