Download or read book Convex Incentives and Tail Risk Taking written by Jerchern Lin and published by . This book was released on 2016 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines how convexity in incentives affects tail risks across and within different types of investment funds. The literature has documented different forms of convexity that a fund manager faces: discounts in closed-end funds, tournaments and fund flow-performance relation in open-end funds, and high-water mark provisions in hedge funds. Sorting funds by the degree of convexity and comparing skewness between the group with the most convexity and the group with the least convexity, we conclude that convexity affects fund tail risks. This result suggests that both implicit and explicit convexities provide incentives for fund managers to take systematic and idiosyncratic bets with tail risks.

Download or read book The Oxford Handbook of Hedge Funds written by Douglas Cumming and published by Oxford University Press. This book was released on 2021 with total page 577 pages. Available in PDF, EPUB and Kindle. Book excerpt: This handbook provides a comprehensive look at the hedge fund industry from a global perspective.

Download or read book Riding the Bubble with Convex Incentives written by Juan M. Sotes-Paladino and published by . This book was released on 2018 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show that benchmark-linked convex incentives can lead risk-averse money managers aware of mispricing to over-invest in overpriced securities. In the model, the managers' risk-seeking behavior varies in response to the interaction of mispricing with convexity and benchmarking concerns. Convexity effects can exacerbate the manager's over-investment in overvalued non-benchmark securities. In contrast, they potentially offset benchmarking effects studied in the literature, leading to under-investment in overpriced benchmark securities. Under correlated mispricing across assets, our model rationalizes positive positions in non-benchmark, negative-risk premium (i.e., "bubble") securities and "pairs trading" in two overvalued securities. Our findings help explain several empirical puzzles.

Download or read book The Adaptive Markets Hypothesis written by Andrew W. Lo and published by Oxford University Press. This book was released on 2024-02-22 with total page 801 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Adaptive Markets Hypothesis (AMH) presents a formal and systematic exposition of a new narrative about financial markets that reconciles rational investor behaviour with periods of temporary financial insanity. In this narrative, intelligent but fallible investors learn from and adapt to randomly shifting environments. Financial markets may not always be efficient, but they are highly competitive, innovative, and adaptive, varying in their degree of efficiency as investor populations and the financial landscape change over time. Andrew Lo and Ruixun Zhang develop the mathematical foundations of the AMH—a simple yet surprisingly powerful set of evolutionary models of behaviour—and then apply these foundations to show how the most fundamental economic behaviours that we take for granted can arise solely through natural selection. Drawing on recent advances in cognitive neuroscience and artificial intelligence, the book also explores how our brain affects economic and financial decision making. The AMH can be applied in many contexts, ranging from designing trading strategies, to managing risk and understanding financial crises, to formulating macroprudential policies to promote financial stability. This volume is a must read for anyone who has ever been puzzled and concerned by the behaviour of financial markets and the implications for their personal wealth, and seeks to learn how best to respond to such behaviour.

Download or read book Risking Other People s Money written by Peter M. DeMarzo and published by . This book was released on 2013 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider optimal incentive contracts when managers can, in addition to shirking or diverting funds, increase short term profits by putting the firm at risk of a low probability "disaster." To avoid such risk-taking, investors must cede additional rents to the manager. In a dynamic context, however, because managerial rents must be reduced following poor performance to prevent shirking, poorly performing managers will take on disaster risk even under an optimal contract. This risk taking can be mitigated if disaster states can be identified ex-post by paying the manager a large bonus if the firm survives. But even in this case, if performance is sufficiently weak the manager will forfeit eligibility for a bonus, and again take on disaster risk. When effort costs are convex, reductions in effort incentives is used to limit risk-taking, with a jump to high powered incentives in the gambling region. Our model can explain why suboptimal risk-taking can emerge even when investors are fully rational and managers are compensated optimally.

Download or read book Tournaments and Tail Risk Taking written by Jerchern Lin and published by . This book was released on 2016 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies how fund managers take skewed bets in tournaments in the investment management industry, assuming that a given fund manager constantly reexamines fund performance relative to her peers and takes a position with respect to skewness risk. I show that when a fund manager underperforms peers, she will gamble on trades with lottery-like returns. On the other hand, when a fund outperforms peer funds, its fund manager will take negatively skewed trades. Such skewness risk-shifting behavior is most pronounced in funds that face the most convexity in their payoffs. Moreover, younger and larger funds are less incentivized to adopt asymmetric investment strategies.

Download or read book A New Heuristic Measure of Fragility and Tail Risks written by Mr.Nassim N. Taleb and published by International Monetary Fund. This book was released on 2012-08-01 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a simple heuristic measure of tail risk, which is applied to individual bank stress tests and to public debt. Stress testing can be seen as a first order test of the level of potential negative outcomes in response to tail shocks. However, the results of stress testing can be misleading in the presence of model error and the uncertainty attending parameters and their estimation. The heuristic can be seen as a second order stress test to detect nonlinearities in the tails that can lead to fragility, i.e., provide additional information on the robustness of stress tests. It also shows how the measure can be used to assess the robustness of public debt forecasts, an important issue in many countries. The heuristic measure outlined here can be used in a variety of situations to ascertain an ordinal ranking of fragility to tail risks.

Download or read book Essays on Market Incentives Effort and Risk Taking Behavior written by Vito Antonio Sciaraffia Palominos and published by . This book was released on 2011 with total page 105 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation studies the effects of compensation incentives on individual behavior. Specifically, I look at changes in effort and risk-taking behavior among financial analysts, investment managers, and teenagers. The main chapter focuses on sell-side analysts. Evidence shows that investors heed to the predictions of sell-side analysts, who influence stock market prices. The informational content of their predictions depends on their incentives to reveal unbiased information. I hypothesize that relative performance evaluations provide analysts with incentives to distort their private information. The incentive cycle of analysts starts and ends mid-year, while their predictions are validated in the middle of this cycle. Hence, analysts with good early performance benefit later from sticking to the consensus (herding), while analysts with poor early performance can only escape their low standing by taking risk and deviating from the consensus (anti-herding). I confirm the hypotheses using data from 1990 through 2010 that include analyst recommendations and stock performance. The results suggest that asset price variation that is not due to fundamental are better understood in the context of the incentives that drive analyst behavior.

Download or read book CEO Compensation and Corporate Risk written by Todd A. Gormley and published by . This book was released on 2014 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the two-way relationship between managerial compensation and corporate risk by exploiting an unanticipated change in firms' business risks. The natural experiment provides an opportunity to examine two classic questions related to incentives and risk -- how boards adjust incentives in response to firms' risk and how these incentives affect managers' risk-taking. We find that, after left-tail risk increases, boards reduce managers' exposure to stock price movements and that less convexity from options-based pay leads to greater risk-reducing activities. Specifically, managers with less convex payoffs tend to cut leverage and R&D, stockpile cash, and engage in more diversifying acquisitions.

Download or read book On Managerial Risk Taking Incentives When Compensation May Be Hedged Against written by Jaksa Cvitanic and published by . This book was released on 2008 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: When the compensation risk can be hedged away completely, the manager will try to maximize the market value of the compensation. When the risk can be hedged partially, numerical examples for a CARA manager illustrate how incentive effects depend on the relative size of systematic and specific risk premia of the output and of the hedging asset. When the specific risk can be modified, higher specific risk premium leads to more incentive contracts. In most cases call and put options induce higher risk taking than shares, but put options may induce lowering of the specific risk. The hedging manager may be less aggressive than the non-hedging manager when the risk premium is low, or when modifying specific risk while being compensated by put options.

Download or read book Economic Policy Review written by and published by . This book was released on 2007 with total page 248 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Corporate Governance and Corporate Finance written by Ruud A.I. van Frederikslust and published by Routledge. This book was released on 2007-12-18 with total page 1313 pages. Available in PDF, EPUB and Kindle. Book excerpt: Ruud. A. I. van Frederikslust, Associate Professor of Finance, Rotterdam School of Management, Erasmus University Rotterdam James S. Ang, Bank of America Eminent Scholar, Professor of Finance, College of Business, The Florida State University Sudi Sudarsanam, Professor of Finance & Corporate Control, School of Management, Cranfield University Ruud. A. I. van Frederikslust, Associate Professor of Finance, Rotterdam School of Management, Erasmus University Rotterdam. He joined Rotterdam School of Management as Associate Professor of Finance 1984 from the Inter-University Graduate School of Management, The Netherlands, where he was Associate Professor of Finance. He is author of the work Predictability of Corporate Failure (Kluwer Academic Publishers). And editor in chief of the volume of collection: Mergers & Acquisitions (in Dutch) and of the volume Corporate Restructuring and Recovery (in Dutch) (Reed Elsevier LexisNexis). He has participated in the organizations of leading conferences in Europe and the USA and presented there also numerous research papers at the conferences. He has published in leading journals like the Multinational Finance Journal and the Journal of Financial Transformation. He was a member of the Board of the European Finance Association. James S. Ang, Bank of America Eminent Scholar, Professor of Finance, College of Business, Florida State University. He joined the College of Business, of Florida State University as a Professor of Finance in 1998 from Barnett Bank Chair Professor of Finance, Florida State University. His main areas of research interest are amongst others, in corporate restructuring, corporate governance and control. He has published extensively in leading academic journals like Journal of Corporate Finance, Journal of Financial Economics, Journal of Finance, The Bell Journal of Economics, Journal of Financial and Quantitative Analysis, Journal of Money, Credit and Banking, and The Review of Economics and Statistics. And he is a member (current and past) of the Editorial Board of several of these Journals. He is amongst others a member of the Board of Trustees of the Financial Management Association and formerly he was a member of the Board of Directors of the European Financial Management Association. Sudi Sudarsanam, Professor of Finance & Corporate Control, School of Management, Cranfield University. He joined Cranfield as Professor of Finance and Corporate Control on the 1 January 2000 from City University Business School where he was Professor of Finance and Accounting. His original commercial background was in banking and international trade finance. Sudi’s main areas of research interest are in corporate restructuring, mergers and acquisitions and corporate strategy, adopting a multidisciplinary approach. He is one of the leading authorities on mergers and acquisitions in Europe and author of The Essence of Mergers and Acquisitions (Prentice Hall), translated into five European and Asian languages. His recent book, Creating value from mergers and acquisitions: the challenges, an international and integrated perspective (FT Prentice Hall, 2003, pp613) has been widely acclaimed by both academics and practitioners and is considered a standard work on M & A. He has been a visiting professor at US and European business schools. He has been an expert commentator on mergers and acquisitions on radio and television and in the print media. Sudi has also published articles in top US and European journals on corporate restructuring, corporate governance and valuation of intellectual assets.

Download or read book Bovernance and Bank Valuation written by Gerard Caprio and published by World Bank Publications. This book was released on 2003 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: "Which public policies and ownership structures enhance the governance of banks? This paper constructs a new database on the ownership of banks internationally and then assesses the ramifications of ownership, shareholder protection laws, and supervisory/regulatory policies on bank valuations. Except in a few countries with very strong shareholder protection laws, banks are not widely held, but rather families or the State tend to control banks. We find that (i) larger cash flow rights by the controlling owner boosts valuations, (ii) stronger shareholder protection laws increase valuations, and (iii) greater cash flow rights mitigate the adverse effects of weak shareholder protection laws on bank valuations. These results are consistent with the views that expropriation of minority shareholders is important internationally, that laws can restrain this expropriation, and concentrated cash flow rights represent an important mechanism for governing banks. Finally, the evidence does not support the view that empowering official supervisory and regulatory agencies will increase the market valuation of banks"--NBER website

Download or read book Swing Pricing and Fragility in Open end Mutual Funds written by Dunhong Jin and published by International Monetary Fund. This book was released on 2019-11-01 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: How to prevent runs on open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces redemptions during stress periods. The positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.

Download or read book Sovereign Wealth Funds and Long term Investing written by Patrick Bolton and published by Columbia University Press. This book was released on 2012 with total page 254 pages. Available in PDF, EPUB and Kindle. Book excerpt: Sovereign wealth funds (SWFs) are state-owned investment funds with combined asset holdings that are fast approaching four trillion dollars. Recently emerging as a major force in global financial markets, SWFs have other distinctive features besides their state-owned status: they are mainly located in developing countries and are intimately tied to energy and commodities exports, and they carry virtually no liabilities and have little redemption risk, which allows them to take a longer-term investment outlook than most other institutional investors. Edited by a Nobel laureate, a respected academic at the Columbia Business School, and a longtime international banker and asset manager, this volume examines the specificities of SWFs in greater detail and discusses the implications of their growing presence for the world economy. Based on essays delivered in 2011 at a major conference on SWFs held at Columbia University, this volume discusses the objectives and performance of SWFs, as well as their benchmarks and governance. What are the opportunities for SWFs as long-term investments? How do they fulfill their socially responsible mission? And what role can SWFs play in fostering sustainable development and greater global financial stability? These are some of the crucial questions addressed in this one-of-a-kind volume.

Download or read book Corporate Governance of Real Estate Investment Trusts written by Nicolai C. Striewe and published by Springer. This book was released on 2015-11-10 with total page 141 pages. Available in PDF, EPUB and Kindle. Book excerpt: Nicolai C. Striewe analyzes potential opportunistic behavior of REIT managers and provides empirical evidence on the effectiveness of institutional monitoring as a corporate governance mechanism. The author also suggests ways to promote sustainable management by means of institutional participation. The results of his study provide valuable insights to enhance corporate governance, transparency and efficiency in the REIT market. They encourage (a) academics to include a behavioral component into studies of the REIT market, (b) REIT managers to incorporate effective monitoring and control mechanisms, (c) investors to become more aware of agency conflicts in REITs and (d) policy makers to facilitate a legal framework conducive to a sustainable REIT market.

Download or read book Executive Remuneration and Employee Performance Related Pay written by Tito Boeri and published by Fondazione Rodolfo Debendetti. This book was released on 2013-03-28 with total page 311 pages. Available in PDF, EPUB and Kindle. Book excerpt: The compensation packages of a growing proportion of firms include pay schemes that are linked to employee or company performance, yet little is known about the patterns of performance related pay. This book compares US and European CEOs to investigate the evolution of executive compensation, its controversies, and its resulting regulations.