On the Properties of Leveraged ETFs

In this paper, we examine if, for a successful long-term investment of leveraged ETFs, it is necessary to adjust the level of leverage according to the fluctuations of the financial markets. For this purpose, we illustrate in particular the behavior of the Leverages ETF based on the optimal leverage introduced by Giese (2009). This latter one, which is based on the growth rate expectation, behaves as a function of the prevailing market environment. More precisely, it implies that the investor should use high leverage in low volatility markets and low leverage in high volatility markets. We study also how the degree of leverage depends on the main factor of market environment, namely the volatility of the market in force.

Shareholder nationality among the major European and American defense contractors: an exploratory data analysis

This article presents the first results of a statistical analysis of the ownership links between the major European and American defence contractors. This approach, centred on the shareholders and subsidiaries of these companies, enables us to explore the depth of the national links (company and country of origin) and the density of the ownership cooperation that exists within Europe, as well as with the rest of the world, particularly the United States. Information about defence contractors’ ownership links is difficult to obtain and precautions must be taken in the interpretation of the results. In terms of defence contractor shareholders, it would appear first that the national link is strong for Sweden, Spain and France, less so for Germany and Italy, and particularly weak for the United Kingdom. Next, in European terms the links are concentrated on Airbus, MBDA and KNDS and are little developed in other companies. Finally, we observe asymmetrical links with the USA and a significant presence of American investment funds.

Central Bank Independence and Inflation: the Government debt and Inflation Targeting channel

The paper introduces government debt and monetary strategy (Inflation Targeting - IT) into the empirical literature about the relationship between Central Bank Independence (CBI) and inflation. According to Martin’s (2014) model, CBI is not sufficient to maintain price stability in the long run and requires the adoption of IT as a monetary strategy. Using annual data from the period 1998 to 2010 we consider 87 countries (18 considered as developed and 69 as emerging). By using a panel VAR model we explicitly test a possible reciprocal influence between inflation and government debt. At a global level results show an indirect negative effect of Inflation Targeting and CBI on inflation through the government debt channel. A high level of CBI or the choice of IT as a monetary strategy has a significant negative effect on government debt and on inflation.

Pay Dividends or Invest in Corporate Social Responsibility: Is there an Inverted-U relationship?

We offer new original insights on the ongoing debate about the financial determinants of CSR activities by investigating the relationship between dividend policy and corporate social performance. Based upon the stakeholder theory, we postulate that satisfying shareholder claims may lead, according to distributive justice, to serving the interests of other stakeholders through corporate social policies. However, when dividends paid are too high, the company may no longer have enough financial slack to satisfy the other stakeholders, implying that dividends are paid at the expense of corporate social policies. We thus expect a curvilinear relationship between dividend policy and corporate social performance. Using a worldwide sample of almost 7,000 observations, we find support for a U-inverted relationship, revealing an optimal amount to satisfy both shareholders and stakeholders. Our findings are robust to both social and environmental pillars, various dividend measures as well as ESG scores.

The magic of an Allaisian appraisal: implied and historical volatility revisited the VIX: once bitten, twice shy?

Many contributions have dealt with the relation between implied and historical volatility in reference to the S&P100 index and on mostly limited samples of data. A large part of this literature finds that implied volatility defined directly from option prices is a biased estimator of future realized volatility, although some dissent has been expressed Christensen and Prabhala (1998). We investigate the issue on the larger market of the S&P500, using the VIX index as the measure of implied volatility and on a much larger sample (314 months), extending from January 1990 to December 2016. Our results are in line with most of the literature inasmuch as they invalidate the efficient market hypothesis. More originally, however, we use a time series analysis derived from Maurice Allais’s “lost” work on monetary theory and show that the VIX incorporates a subtle version of perceived and memorized past data – the “missing link” in relating implied to realized volatility - rather than reflecting any kind of “rational expectation” of future realized volatility. Incidentally, we show that the VIX seems to have been over-valued until the middle of the first decade of our century and to be since then averagely under-valued. Amazingly enough, this trend of affairs seems to be steadily confirmed by the financial market, which calls for additional research, even if we offer two possible explanations.

Idiosyncratic volatility and nominal stock prices: evidence from approximate factor structures

Approximate factor structures defined by Chamberlain and Rotschild (1983) allow to test whether a given quantitative firm characteristic (the nominal stock price in this paper) is a determinant of the idiosyncratic volatility of stock returns. Our study of 8,000 U.S stocks over the period 1980-2014 shows that small price stocks exhibit a higher idiosyncratic volatility than large price stocks. This relationship is persistent over time and robust to variations in the number of common factors of the approximate factor structure. Moreover, this small price effect does not hide a small-firm effect because it is still valid when we analyze the tercile of large firms. Our result confirms that small price stocks have lottery-type characteristics and, therefore, it is not in line with the efficient market hypothesis.

Information, attention, sentiment, and buzz in the financial markets

This paper aims at focusing on the avenues of research related to the process of information integration by taking explicitly into account investors’ sentiment, investors’ attention, and the buzz hypothesis. New social media introduce change in the way information is processes in the market. Qualitative concepts such as rumor, opinion, sentiment, are often put in the frontstage. Moreover the formal dimensions of information become more important compared to the content of information. This leads to new avenues of research aside the standard information value hypothesis.

Company manager altruism and behavioural biases in family firms

Family actors behaviors have not been much studied over the last 20 years, while at the same time, literature about family firms produced increasingly many valuable papers. That is why a relevant Framework for knowing and understanding the behavioral biases of family members is still missing, and this lack concerns also the causes, outcomes and mechanisms of such biases. Particularly and contrary to the prominent literature, the altruism of the manager will be construed as behavioral bias leading to agency costs with an impact on family firm performance. Based on theoretical work, a modeling of these different problems of agency and altruism in the family business will be proposed.(paper in French)

The supply-side effect on the use of debt with very short and very long maturities

We find that the pre-documented factors influence debt maturity contingent upon credit accessibility and economic conditions. Firms reliant on bank loans avoid employing short-maturity debts even though they face severe information and agency problems. By contrast, firms with sufficient access use very short debt maturities to mitigate agency issues. When credit condition deteriorates, the former has no choice but borrow at the very short end of the maturity spectrum, whereas the latter evades refinancing risk more readily by borrowing at the end. Taken together, these findings indicate a vital role of capital supply in determining debt maturity.

PE and PEG both matter: a simple formula for unifying them

In business valuation reports, multiples computed by dividing the price of a comparable company’s stock by some relevant accounting numbers (a measure of income for example) are frequently used. Two ratios are especially very popular, the PE and PEG ratios. We show through a limited analytical development that generally no one ratio (PE or PEG) captures all the information provided by the accounting data (forecasted earning and expected growth) and it might be more accurate to combine both of them into a single approach. The proposed model is part of the literature of current valuation models based on accounting drivers, such as RIM or AEG models. Its goal is to take into account the effects of short-term growth, as generally forecast by financial analysts. It provides a simple extension to the so-called traditional model DDM and can be used to infer an estimate of the implied cost of capital.