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Working Paper
Regulation and the cost of capital in Japan: a case study
Over the last several years, a combination of loan losses and regulatory barriers to equity issuance have left Japanese banks starved for capital. In September 1995, the Mitsubishi Bank was permitted to issue a complicated convertible security in a foreign market. The results of simulations of the price path of the underlying equity imply that Mitsubishi Bank's annualized risk-adjusted cost of capital through this instrument was between 80 and 310 basis points higher than if the bank had instead been able to issue common stock at its current price.
AUTHORS: Ammer, John; Gibson, Michael S.
DATE: 1996
Working Paper
U.S. international equity investment
U.S. investors are the largest group of international equity investors in the world, but to date conclusive evidence on which types of foreign firms are able to attract U.S. investment is not available. Using a comprehensive dataset of all U.S. investment in foreign equities, we find that the single most important determinant of the amount of U.S. investment a foreign firm receives is whether the firm cross-lists on a U.S. exchange. Correcting for selection biases, cross-listing leads to a doubling (or more) in U.S. investment, an impact greater than all other factors combined. We also show that our firm-level analysis has implications for country-level studies, suggesting that research investigating equity investment patterns at the country-level should include cross-listing as an endogenous control variable. We describe easy-to-implement methods for including the importance of cross-listing at the country level.
AUTHORS: Holland, Sara B.; Ammer, John; Warnock, Francis E.; Smith, David C.
DATE: 2012
Working Paper
Macroeconomic state variables as determinants of asset price covariances
This paper explores the possible advantages of introducing observable state variables into risk management models as a strategy for modeling the evolution of second moments. A simulation exercise demonstrates that if asset returns depend upon a set of underlying state variables that are autoregressively conditionally heteroskedastic (ARCH), then a risk management model that fails to take account of this dependence can badly mismeasure a portfolio's "Value-at-Risk" (VaR), even if the model allows for conditional heteroskedasticity in asset returns. Variables measuring macroeconomic news are constructed as the orthogonalized residuals from a vector autoregression (VAR). These news variables are found to have some explanatory power for asset returns. We also estimate a model of asset returns in which time variation in variances and covariances derives only from conditional heteroskedasticity in the underlying macroeconomic shocks. Although the data give some support for several of the specifications that we tried, neither these models nor GARCH models that used only asset returns appear to have much ability to forecast the second moments of returns. Finally, we allow asset return variances and covariances to depend directly on unemployment rates -- proxying for the general state of the economy -- and find fairly strong evidence for this sort of specification relative to a null hypothesis of homoskedasticity.
AUTHORS: Ammer, John
DATE: 1996
Working Paper
Look at me now: the role of cross-listing in attracting U.S. investors
We use a comprehensive 1997 survey to examine U.S. investors' preferences for foreign equities. We document a variety of firm characteristics that can influence U.S. investment, but the most important determinant is whether the stock is cross-listed on a U.S. exchange. Our selection bias-corrected estimates imply that firms that cross-list can increase their U.S. holdings by 8 to 11 percent of their market capitalization, roughly doubling the amount held without cross-listing. All else equal, we find that firms experience smaller increases in U.S. shareholdings upon cross-listing if they are Canadian, from English-speaking countries, are members of the MSCI World index, or had higher quality accounting standards prior to cross-listing. We argue that these findings suggest that improvements in information production explain U.S. investors' attraction to foreign stocks that cross-list in the United States.
AUTHORS: Ammer, John; Holland, Sara B.; Smith, David C.; Warnock, Francis E.
DATE: 2004
Working Paper
How consistent are credit ratings? a geographic and sectoral analysis of default risk
We examine differences in default rates by sector and obligor domicile. We find evidence that credit ratings have been imperfectly calibrated across issuer sectors in the past. Controlling for year of issue and rating, default rates appear to be higher for U.S. financial firms than for U.S. industrial firms. Sectoral differences in recovery rates do not offset the higher default rates. By contrast, we do not find significant differences in default rates between U.S. and foreign firms.
AUTHORS: Ammer, John; Packer, Frank
DATE: 2000
Working Paper
Sovereign CDS and bond pricing dynamics in emerging markets: does the cheapest-to-deliver option matter?
We examine the relationships between credit default swap (CDS) premiums and bond yield spreads for nine emerging market sovereign borrowers. We find that these two measures of credit risk deviate considerably in the short run, due to factors such as liquidity and contract specifications, but we estimate a stable long-term equilibrium relationship for most countries. In particular, CDS premiums tend to move more than one-for-one with yield spreads, which we show is broadly consistent with the presence of a significant "cheapest-to-deliver" (CTD) option. In addition, we find a variety of cross-sectional evidence of a CTD option being incorporated into CDS premiums. In our analysis of the short-term dynamics, we find that CDS premiums often move ahead of the bond market. However, we also find that bond spreads lead CDS premiums for emerging market sovereigns more often than has been found for investment-grade corporate credits, consistent with the CTD option impeding CDS liquidity for our riskier set of borrowers. Furthermore, the CDS market is less likely to lead for sovereigns that have issued more bonds, suggesting that the relative liquidity of the two markets is a key determinant of where price discovery occurs.
AUTHORS: Cai, Fang; Ammer, John
DATE: 2007
Working Paper
Strategic returns to international diversification: an application to the equity markets of Europe, Japan, and North America
We undertake a decomposition of the risk factor loadings of fifteen national stock market returns from 1972 to 1990, using a variant of the Campbell-Shiller (1988) linearization. We find considerable variation among countries in the relative importance of a cash flow component and a discount rate component in determining the beta with the world equity index return and with other risk factors. Also, the international heterogeneity we find in factor loadings suggests that a global portfolio allows substantial hedging opportunities, presumably deriving from differences in underlying economic structure.
AUTHORS: Ammer, John; Mei, Jianping
DATE: 1995
Working Paper
Macroeconomic risk and asset pricing: estimating the apt with observable factors
This paper develops and applies a new maximum likelihood method for estimating the Arbitrage Pricing Theory (APT) model with observable risk factors. The approach involves simultaneous estimation of the factor loadings and risk premiums and can be applied to return panel with more securities than time series observations per security. Observable economic factors are found to account for 25 to 40 percent of the covariation in U.S. equity returns, and the APT pricing restrictions cannot be rejected for most sample periods. A significant "firm size anomaly" is measured, but it may be partly due to sample selection bias.
AUTHORS: Ammer, John
DATE: 1993
Working Paper
Why do U.S. cross-listings matter?
This paper investigates the underlying determinants of home bias using a comprehensive sample of U.S. investor holdings of foreign stocks. We document that U.S. cross-listings are economically important, as U.S. ownership in a foreign firm roughly doubles upon cross-listing in the United States. We explore the cross-sectional variation in this "cross-listing effect" and show that increases in U.S. investment are largest in firms from weak accounting backgrounds and in firms that are otherwise informationally opaque, indicating that U.S. investors value the improvements in disclosure associated with cross-listing. We confirm that relative equity valuations rise for cross-listed stocks, and provide evidence suggesting that valuation increases are due in part to increases in U.S. shareholder demand and in part to the fact that the equities become more attractive to non-U.S. shareholders.
AUTHORS: Holland, Sara B.; Ammer, John; Warnock, Francis E.; Smith, David C.
DATE: 2008
Working Paper
Measuring international economic linkages with stock market data
The covariance between domestic and foreign equity return innovations is decomposed into components associated with news about future real and financial variables. In an application to fifteen national stock markets, we find that news about future dividend growth tends to be more highly correlated than contemporaneous output measures, suggesting that there are lags in the international transmission of real economic shocks. In addition, results from a longer sample period suggest that both real and financial linkages between the U.S. and the U.K. appear to have increased after the Bretton Woods currency arrangement was abandoned in the early 1970's.
AUTHORS: Ammer, John; Mei, Jianping
DATE: 1993