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Browsing by Author "Patterson, Douglas M."

Now showing 1 - 11 of 11
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    Agency theory: a model of investor equilibrium and a test of an agency cost rationale for convertible bond financing
    Moore, William T. (Virginia Tech, 1982)
    The conflict that may arise among holders of competing claims on firms' assets is being studied under the heading of "agency theory." The primary purposes of the research done in this study were to: (1) economically model the individual investor's consumption-investment decision as it is modified by the agency problem, and (2) to econometrically model the firm's decision to issue convertible versus nonconvertible bonds using explanatory variables which measure the extent of the agency problem. Individual investors are assumed to maximize expected utility of consumption by choosing consumption and investment amounts over a single period. A mathematical model of the investor's consumption-investment decision was derived in an environment characterized by agency problems between stockholders and bondholders. It was demonstrated that if the capital markets exhibit conditions known as spanning and competitivity, then the only investors affected by the agency problem are those holding the affected securities prior to the act of expropriation. It was also shown that the agency problem does not vanish in general, even if investors attempt to avoid the expropriation by holding balanced portions of all outstanding claims on a firm's assets. Implications of the theoretical development were then tested by econometrically modelling the firm's choice of convertible versus nonconvertible debt. The explanatory variables included in the model included measures of the more popular reasons for convertible financing, such as the "debt sweetener" hypothesis and the "delayed equity" rationale discussed in most basic finance textbooks. In addition, measures of agency costs were included, since one possible solution to the agency problem is the issuance of convertible bonds. The empirical results showed that the model accounted for a significant portion of the discrimination between convertible and straight debt, and that the variables designed to measure agency costs were marginally significant.
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    An empirical examination of Value line options
    Broughton, John B. (Virginia Polytechnic Institute and State University, 1989)
    A number of studies have investigated the performance of common stocks recommended in The Value Line Investment Survey. Little attention, however, has been given to the performance of call options recommended in Value Line Options. This study has two major purposes. The first is to determine whether an investor acting on Value Line’s call purchase recommendations and following Value Line’s prescribed strategy earns abnormal returns, and if so, to identify the portion of the abnormal return that is associated with purchasing calls that are undervalued relative to the prevailing stock price and the portion that is due to the undervaluation of the underlying stock. The second major purpose is to determine whether there is a correlation between Value Line’s option and stock rankings and returns performance. Underlying both of these purposes is a test of the superiority of Value Line’s estimates of future stock price variance relative to volatilities implied by prevailing market stock and call option prices. The results indicate that abnormal returns are earned by following the prescribed strategy but that abnormal returns are eliminated after consideration of transactions costs. There is, however, a strong and persistent correlation between option rankings and returns performance. In general, the results are consistent with the relative superiority of Value Line’s estimates of future stock price variance.
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    An empirical investigation of high end-of-day transaction returns between 1978-1985
    Gosnell, Thomas Francis (Virginia Polytechnic Institute and State University, 1987)
    Using a random sample of transactions data from the time period of September 1, 1978 through August 31, 1985, the high end-of-day transaction returns noted by Wood, Mclnish and Ord and by Harris were examined to determine their persistence over time and their relationship to a commonly used measure of daily security performance. Additionally, final transactions were classified by type of price change-reversal or continuation-in order to document whether the high end-of-day returns are the result of security price appreciation or the result of increases in transactions at the ask price. New information provided by this study can be summarized as follows: 1. The end-of-day anomaly persisted over the time period of the study and appeared to be strongest in the last three years. 2. A Friday effect was found in that the mean return to the final transaction on Friday was at least as great or greater than the mean final transaction returns on the other days of the week. 3. A relationship was found to exist between CRSP excess return level (good day/bad day) and the final transaction return, and there was evidence that the final transaction may have had a large impact on the CRSP excess return. 4. Reversals are more frequent than continuations on the final trade, particularly after 3:56pm, and the mean return to reversals is greater than the mean return to continuations.
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    Identification of Coefficients in a Quadratic Moving Average Process Using the Generalized Method of Moments
    Ashley, Richard A.; Patterson, Douglas M. (Virginia Tech, 2002-06-21)
    The output of a causal, stable, time-invariant nonlinear filter can be approximately represented by the linear and quadratic terms of a finite parameter Volterra series expansion. We call this representation the “quadratic nonlinear MA model” since it is the logical extension of the usual linear MA process. Where the actual generating mechanism for the data is fairly smooth, this quadratic MA model should provide a better approximation to the true dynamics than the twostate threshold autoregression and Markov switching models usually considered. As with linear MA processes, the nonlinear MA model coefficients can be estimated via least squares fitting, but it is essential to begin with a reasonably parsimonious model identification and non-arbitrary preliminary estimates for the parameters. In linear ARMA modeling these are derived from the sample correlogram and the sample partial correlogram, but these tools are confounded by nonlinearity in the generating mechanism. Here we obtain analytic expressions for the second and third order moments – the autocovariances and third order cumulants – of a quadratic MA process driven by i.i.d. symmetric innovations. These expressions allow us to identify the significant coefficients in the process by using GMM to obtain preliminary coefficient estimates and their concomitant estimated standard errors. The utility of the method for specifying nonlinear time series models is illustrated using artificially generated data.
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    Investor preferences in the securities options market
    Taylor, Philip Davis (Virginia Polytechnic Institute and State University, 1989)
    Systematic mispricing by the state-of-the-art option pricing models is a paradox in financial economics as both the magnitude and direction of the mispricing is debated. The models have been found to overprice out-of-the-money and deep-in-the-money call options while underpricing in-the-money and deep-out-of-the-money calls. In addition, research has shown these biases have different signs in different time periods. We propose that when investors maximize expected utility for Friedman-Savage-Markowitz utility functions, the option mispricing observed in the market will result. The theories and empirical tests in the literature of higher-order utility functions and risk-neutral valuation (RNV) in the options market are presented. Though investor attitudes towards risk are irrelevant in the non-arbitrage world of modern option pricing, to the extent the options market does not meet the non-arbitrage conditions, investor risk preferences will affect the pricing of options. Risk-loving traders will bid up market prices relative to risk-neutral model prices; risk-averse traders will bid down prices. And investor risk preferences can, and do, change over time as market conditions change. New tests are run to analyze the relationship between mispricing biases and investor preferences before and after the historic stock market crash of October 19, 1987. We find mispricing biases which imply a decreased risk aversion on the part of investors in the IBM call option markets for the period prior to the market crash and mispricing biases which imply an increased risk-averse (and decreased risk-loving) behavior in those markets following the crash. Similar analyses are also performed in the Microsoft call options markets with less conclusive results.
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    Management and employee buyouts in the context of mass privatization in Romania
    Valsan, Calin (Virginia Tech, 1996)
    The purpose of this research is to present privatization in Romania, and in particular to analyze Management and Employee buyouts as a variety of insider privatization that is unique to Romania. The institutional setting and a short chronology of privatization from 1991 to 1995 is presented. The question of why outsiders consistently pay premiums above book value when acquiring state-owned companies while insiders pay only approximately book value is investigated. Based on the available evidence it is contended that adverse selection prevents uninformed outsiders, foreign companies, and national residents as well, from investing on a large scale in the companies offered for sale. Outsiders are willing to buy the companies only when they have enough information, acquired either from insiders or using their own business skills. It is very likely that outsiders seek investment opportunities rather than assets already in place, because information on assets already in place is relatively more difficult to obtain. When outside investors are interested in taking over a company, they bid up the price and crowd out capital constrained insiders. In the absence of competition from outsiders, book value is the default price, and workers and managers are the only potential buyers. Workers and managers are granted preferential financing from the government in order to acquire state-owned firms. When interpreted in the broader context of mass privatization, this approach might be preferred by the government because it is populist and relatively expedient. When other methods failed to produce satisfactory results in Romania, Management and Employee Buyouts appeared to be the only method that keeps privatization going.
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    The Nonlinear Behavior of Stock Prices: The Impact of Firm Size, Seasonality, and Trading Frequency
    Skaradzinski, Debra Ann (Virginia Tech, 2003-07-23)
    Statistically significant prediction of stock price changes requires security returns' correlation with, or dependence upon, some variable(s) across time. Since a security's past return is commonly employed in forecasting, and because the lack of lower-order correlation does not guarantee higher-order independence, nonlinear testing that focuses on higher-order moments of stock return distributions may reveal exploitable stock return dependencies. This dissertation fits AR models to TAQ data sampled at ten-minute intervals for 20 small-capitalization, 20 mid-capitalization, and 20 large-capitalization NYSE securities, for the years 1993, 1995, 1997, 1999 and 2001. The Hinich Patterson Bicovariance statistic (to reveal nonlinear and linear autocorrelation) is computed for each of the 1243 trading days for each of the 60 securities. This statistic is examined to see if it is more or less likely to occur in securities with differing market capitalization, at various calendar periods, in conjunction with trading volume, or instances of changing investor sentiment, as evidenced by the put-call ratio. There is a statistically significant difference in the level and incidence of nonlinear behavior for the different-sized portfolios. Large-cap stocks exhibit the highest level and greatest incidence of nonlinear behavior, followed by mid-cap stocks, and then small-cap stocks. These differences are most pronounced at the beginning of decade and remain significant throughout the decade. For all size portfolios, nonlinear correlation increases throughout the decade, while linear correlation decreases. Statistical significance between the nonlinear or the linear test statistics and trading volume occur on a year-by-year basis only for small-cap stocks. There is sporadic seasonality significance for all portfolios over the decade, but only the small-cap portfolio consistently exhibits a notable "December effect". The average nonlinear statistic for small-cap stocks is larger in December than for other months of the year. The fourth quarter of the year for small-cap stocks also exhibits significantly higher levels of nonlinearity. An OLS regression of the put/call ratio to proxy for investor sentiment against the H and C statistic was run from October 1995 through December 2001. There are instances of sporadic correlations among the different portfolios, indicating this relationship is more dynamic than previously imagined.
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    Nonlinearity and Overseas Capital Markets: Evidence from the Taiwan Stock Exchange
    Ammermann, Peter A. (Virginia Tech, 1999-07-16)
    Numerous studies have documented the existence of nonlinearity within various financial time series. But how important of a finding is this? This dissertation examines this issue from a number of perspectives. First, is the nonlinearity that has been found a statistical anomaly that is isolated to a few of the more widely known financial time series or is nonlinearity a statistical regularity inherent in such series? Second, even if nonlinearity is pervasive, does this finding have any practical relevance for finance practitioners or academics? Using the relatively financially isolated but nonetheless well-traded Taiwan Stock Exchange as a case study, it is found that virtually all of the stocks trading on this exchange exhibit nonlinearity. The pervasiveness of nonlinearity within this market, combined with earlier results from other markets, suggests that nonlinearity is an inherent aspect of financial time series. Furthermore, closer examination of the time-paths of various measures of this nonlinearity via both windowed testing and recursive testing and parameter estimation reveals an additional complication, the possibility of nonstationarity. The serial dependency structures, especially for the nonlinear dependencies, do not appear to be constant, but instead appear to exhibit a number of brief episodes of extremely strong dependencies, followed by longer stretches of relatively quiet behavior. On average, though, these nonlinearities appear with sufficient strength to be significant for the full sample. Continuing on to examine the relevance of such nonlinearities for empirical work in finance, a variety of conditionally heteroskedastic models were fit to the returns for a subsample Taiwanese stocks, the Taiwanese stock index, and stock indices for other stock markets, including New York, London, Tokyo, Hong Kong, and Singapore. In a majority of cases, such models appear to be successful at filtering out the extant nonlinearity from these series of returns; however, a variety of indicators suggest that these models are not statistically well-specified for these returns, calling into question the inferences obtained from these models. Furthermore, a comparison of the various conditionally heteroskedastic models with each other and with a dynamic linear regression model reveals that, for many of the data series, the inferences obtained from these models regarding the day-of-the-week effect and the extant autocorrelation within the data varied from model to model. This finding suggests the importance of adequately accounting for nonlinear serial dependencies (and of ensuring data stationarity) when studying financial time series, even when other empirical aspects of the data are the focus of attention.
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    Three Essays on Product Market Capital Market Interactions
    Chowdhury, Jaideep (Virginia Tech, 2008-11-05)
    The Industrial Organization literature investigates the product market decisions of a firm while the corporate finance literature explores the financing decisions of the firm. But the truth is both the financing decisions and the product market decisions are interdependent and should be modeled together to develop a better understanding of a firm's decisions. This thesis takes a step in that direction. The manager of a firm caters to the equity holders of the firm who are protected by limited liability. Ex-ante debt is issued and at the time of product market decision, debt is exogenous. The traditional product market capital market interaction literature has argued that debt financing leads to more aggressive product market strategies. If debt is treated as endogenous and/or the switching state of nature is endogenous, it can be shown that debt financing may lead to less aggressive product market strategies. Further, if external financing consists of both debt and equity financing, it is shown that a financially constrained firm shall produce less than what it would have produced if it was not financially constrained. Finally, managerial compensation is reported to be one of the reasons for product market aggressiveness of a firm in the context of product market capital market interaction.
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    A Treatise on Downside Risk
    Artavanis, Nikolaos (Virginia Tech, 2013-04-24)
    This dissertation is comprised of two papers. The first paper (Chapter 1) provides the theoretical foundation for the estimation of systematic downside risk. Using a new approach, I derive a measure of downside systematic risk, downside beta, that is free of the endogeneity problem and thus straightforward to calculate. Since there is no consensus in the literature regarding the appropriate method for the estimation of downside beta, I review the alternative specifications proposed in the past. I explicitly show that the derived formula here is more efficient in capturing downside risk on both theoretical grounds and in terms of empirical results. Using this efficient specification of systematic downside risk, I show that downside beta has increased explanatory power towards the cross-section of equity returns as compared to unconditional beta. In particular, downside beta predicts larger and more significant future premia, insignificant intercepts in portfolio cross-section tests and cannot be subsumed by additional risk factors proposed in the past literature. I attribute this superior performance to the ability of downside risk to capture distress risk and to the fact that it does not penalize (reward) good (bad) events in good states. In the second paper (Chapter 2) that is co-authored with my advisor, Gregory Kadlec, we exploit the notion of downside risk to explain a long-withstanding market anomaly; the long-term stock return reversals. We show that downside betas of past losers are significantly greater than downside betas of past winners, and the inclusion of downside beta in Fama-Macbeth regressions subsumes the reversal effect.
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    Two Essays on Herding in Financial Markets
    Sharma, Vivek (Virginia Tech, 2004-01-19)
    The dissertation consists of two essays. In the first essay, we measure herding by institutional investors in the new economy (internet) stocks during 1998-2001 by examining the changes in the quarterly institutional holdings of internet stocks relative to an average stock. More than 95% of the stocks that are examined are listed on NASDAQ. The second essay attempts to detect intra-day herding using two new measures in an average NYSE stock during 1998-2001. In the second essay, rather than asking whether institutional investors herd in a specific segment of the market, we endeavor to ask if herding occurs in an average stock across all categories of investors. The first essay analyzes herding in one of the largest bull runs in the history of U.S. equity markets. Instead of providing a corrective stabilizing force, banks, insurance firms, investment companies, investment advisors, university endowments, hedge funds, and internally managed pension funds participated in herds in the rise and to a lesser extent in the fall of new economy stocks. In contrast to previous research, we find strong evidence of herding by all categories of institutional investors across stocks of all sizes of companies, including the stocks of large companies, which are their preferred holdings. We present evidence that institutional investors herded into all performance categories of new economy stocks, and thus the documented herding cannot be explained by simple momentum-based trading. Institutional investors' buying exerted upward price pressure, and the reversal of excess returns in the subsequent quarter provides evidence that the herding was destabilizing and not based on information. The second essay attempts to detect herding in financial markets using a set of two methodologies based on runs test and dependence between interarrival trade times. Our first and the most important finding is that markets function efficiently and show no evidence of any meaningful herding in general. Second, herding seems to be confined to very small subset of small stocks. Third, dispersion of opinion among investors does not have much of impact on herding. Fourth, analysts' recommendations do not contribute to herding. Last, the limited amount of herding on price increase days seems to be destabilizing but on the price decrease days, the herding helps impound fundamental information into security prices thus making markets more efficient. Our results are consistent with Avery and Zemsky (1998) prediction that flexible financial asset prices prevent herding from arising. The seemingly contradictory results of the two essays can be reconciled based on the different sample of stocks, and the different methodologies of the two essays which are designed to detect different types of herding. In the first essay, herding is measured for NASDAQ-listed (primarily) internet stocks relative to an average stock, while the second essay documents herding for an average stock. In the first essay, we document herding in more volatile internet stocks, but we do not find any evidence of herding in more established NYSE stocks. The first essay examines herding by institutional investors, while the second essay examines herding, irrespective of the investor type. Consequently, in the first essay, we find that a subset of investors herd but in the second essay market as a whole does not exhibit any herding. Moreover, the first essay measures herding by examining the quarterly institutional holdings of internet stocks, while the second essay measures herding by examining the intra-day trading patterns for stocks. This suggests that it takes a while for investors to find out what others are doing leading to herding at quarterly interval but no herding is observed at intra-day level. The evidence presented in the two essays suggests that while institutional investors herded in the internet stocks during 1998-2001, there was very little herding by all investors in an average stock during this period.