Segal Graduate School of Business Final Projects

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DETERMINANTS OF BANK PROFITABILITY AND RISK-TAKING IN CHINA

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2017-12
Abstract: 

By using the ordinary lease squares estimation technique, this paper examines the relationship between bank-specific characteristics together with macroeconomic factors, and profitability in Chinese banking sector. Therefore, to find out the how each factor affects the bank’s profitability. Moreover, this paper also uses three risk measures to analyze the banks’ business condition. The regression analysis is based on a panel data set consisting of 152 observations of 30Chinese banks over a 6-year period from 2011 to 2016.We found that for profitability, capital ratio and GDP growth rate have significant positive impacts and inflation rate has significant negative impact. Other independent variables do not have significant relationship with bank’s profitability. For risk, none of the independent variable has significant impact on Z-score and non-performing ratio; however, total deposits to total assets ratio and bank size have significant impact on non-interest income ratio.

Document type: 
Graduating extended essay / Research project
File(s): 
Senior supervisor: 
Christina Atanasova
Department: 
Beedie School of Business-Segal Graduate School

ASSESSING THE MODIFIED MERTON DISTANCE TO THE DEFAULT MODEL WITH CDS PRICE

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2017-12
Abstract: 

This paper provides a way that a Merton-model approach can be modified to develop measures of the probability of default of companies indexed in Standard & Poor’s 500 Index (S&P 500) after a financial crisis. It also examines the accuracy and contribution of the modified Merton Distance to default model based on Merton’s (1974) bond pricing model. Credit Default Swap (CDS) spreads as a plausible indicator of default risk are used in the assessment. The tests are implemented by modeling results’ correlation with data obtained from 2008 to 2017. The sample is based on 112 firms indexed in S&P 500 and is selected according to the availability of outstanding CDS contracts between the test periods.It is found that the results generated by the modified Merton-style approach is consistent with the spreads of credit default swaps. Then it can be concluded that although the modified KMV Merton model fails to generate a sufficient result for the probability of default, it still can be used as a reference for default estimate.

Document type: 
Graduating extended essay / Research project
File(s): 
Senior supervisor: 
Christina Atanasova
Department: 
Beedie School of Business-Segal Graduate School

HOW CAPITAL STRUCTURE AND PRICE RATIOS AFFECT THE MARKET CAPITALIZATION AFTER FINANCIAL CRISIS

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2017-12
Abstract: 

In this paper, we applied the Ohlson (1995) valuation model to evaluate the marketcapitalization of Toronto Stock Exchange-listed companies. The project focused on therelationship within the period after the financial crisis in 2007. Therefore, data werelimited from 2010 to 2016. We split the enterprise value into assets and liabilities basedon the theory proposed by Giner & Reverte (2001). With assuming different assetsclasses could influence a company’s market capitalization to different extents, weconducted our stage two analysis by breaking assets into current and non-current assets.We also attempted to use price-to-book ratios as a replacement for market capitalizationand formulated a multi-factor regression model using ratios in our stage three analysis.The results turned out that the Ohlson valuation model has the highest power ofexplanation, and some further research could be done to improve the model.

Document type: 
Graduating extended essay / Research project
File(s): 
Senior supervisor: 
Christina Atanasova
Department: 
Beedie School of Business-Segal Graduate School

ANALYST CHARACTERISTICS AND EARNINGS FORECAST ERRORS

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2017-12
Abstract: 

In this article, we investigate the association between analysts’ earnings forecast errors and analyst characteristics. These characteristics include working experience, company experience, brokerage house size, and boldness in making recommendations. We use t-tests and time-series regressions to examine the relationship. Our results reveal that analysts’ years of experience is the most important factor. The more experience analysts have, the more accurate their forecasts tend to be, which is consistent with the learning-by-doing theory. For the brokerage house size, analysts from larger brokerage houses are more likely to provide accurate forecasts. For boldness, when an analyst’s recommendation is far away from mean recommendation, the earnings forecast tends to be less accurate. Company-specific experience has no robust relation with forecast errors. We conclude that experience of analysts, brokerage size, and analysts’ recommendation dispersion are correlated with forecast accuracy.

Document type: 
Graduating extended essay / Research project
File(s): 
Senior supervisor: 
Amir Rubin
Department: 
Beedie School of Business-Segal Graduate School

THE IMPACT OF CREDIT RATING CHANGE ON NORTH AMERICAN COMPANIES' CORPORATE DECISION AND STOCK PERFORMANCE

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2017-12
Abstract: 

This paper analyses the impact of credit rating changes from two aspects. Firstly,credit rating will impact company capital structure decisions. It is found thatcompanies generally issue more debt when forecasting a credit downgrade totake the advantage of the relatively low cost of capital, while a small number offirms keep corporate structure unchanged due to flexibility concerns. Secondly,there is an offset pattern in daily abnormal returns and volatility of stock returnsincreases after a credit rating change event. Specifically, downgrade has abigger impact on stock performance.

Document type: 
Graduating extended essay / Research project
File(s): 
Senior supervisor: 
Christina Atanasova
Department: 
Beedie School of Business-Segal Graduate School

INCORPORATION OF CONDITIONAL VALUE-AT-RISK INTO MEAN-VARIANCE OPTIMIZATION FOR PORTFOLIOS OF HEDGE FUNDS

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2017-12
Abstract: 

In this paper we aim to search for a systematic optimization model that can properlymeasure hedge fund risks and can optimize capital across Canadian hedge fund portfolios thatcan cater to investors’ risk appetites. As the characteristics of hedge funds returns imposedifferent layers of risk from traditional equity and bond investments, the conventional meanvarianceoptimization would not accurately capture the risk associated with non-normaldistributions and negative skewness. The process requires a different approach that modifiesthe drawback of a mean-variance optimization to take non-normal and asymmetricdistributions into consideration. The research of this process leads to a Mean-ConditionalValue-at-Risk (CVaR) optimization. CVaR measures the mean expected short fall betweenvalue-at-risk and excess losses that reflect the risks of kurtosis and negative skewness.Combining the cluster analysis to overcome variation of correlation issue and Mean-CVaRoptimization, we found the Mean-CVaR optimization model that will serve the requirementsof guiding investors’ capital allocation among hedge fund strategies.

Document type: 
Graduating extended essay / Research project
File(s): 
Senior supervisor: 
Peter Klein
Department: 
Beedie School of Business-Segal Graduate School

INSTITUTIONAL OWNERSHIP LEVEL AND RISK-ADJUSTED RETURN

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2017-12
Abstract: 

This paper examines the relationship between the level of institutional ownership andrisk-adjusted return on stocks. We find a significant positive relationship between the level ofinstitutional ownership on a stock and its risk-adjusted return. This result holds both in the longrun and in shorter time periods. Our findings suggest that all things being equal, it is possible toobtain risk-adjusted return by going short on the stocks with low institutional ownership andgoing long on those with a high level of institutional ownership.

Document type: 
Graduating extended essay / Research project
File(s): 
Senior supervisor: 
Amir Rubin
Department: 
Beedie School of Business-Segal Graduate School

HEDGE FUND REPLICATION STRATEGIES: THE GLOBAL MACRO CASE

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2017-12
Abstract: 

This paper performs and analyzes hedge fund replication strategies using liquid exchange-traded instruments to build linear multi-factor models (“clones”) that mimic Hedge Funds returns. First, we follow Hasanhodzic and Lo (2006) six-factor model, using Barclay Hedge Indexes monthly returns for the period of January 1997 to August 2017 on seventeen hedge fund strategies. Next, we introduce variations and new propositions to the model in order to obtain closer risk-return characteristics, focusing on one particular hedge fund strategy: Global Macro. Finally, we use these results to base our conclusion and propose applications for this method.Our findings promote the use of shorter month period in rolling-windows approach and monthly rebalancing strategy for a faster reaction and adaptation to market conditions. Also, it suggests the addition of a strategic-specific factor to obtain better expected-return replications. These findings are particularly relevant to institutional investors that need diversification and could benefit from this asset class exposure, but many times are restricted from investing in hedge funds due to their high fee structure, illiquidity, and opaque tactics.

Document type: 
Graduating extended essay / Research project
File(s): 
Senior supervisor: 
Peter Klein
Department: 
Beedie School of Business-Segal Graduate School

IS THERE DIVERSIFICATION BENEFIT BETWEEN EMERGING AND DEVELOPED STOCK MARKET: EVIDENCE FROM THE BRIC AND US STOCK MARKET

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2017-12
Abstract: 

This paper seeks to investigate the linkage and co-movement relationships between the stock markets of US and BRIC, and determine the degree of diversification benefits among them within the sample period from January 2001 to September 2017. The entire sample period is divided into three phases: pre-crisis, during crisis and post-crisis in order to be more comparative. The empirical results show that there is a strong linkage and co-movement relationship between BRIC and US stock markets, especially after 2007 financial crisis. Also, the upward long run conditional correlations demonstrate that the diversification benefits are weakened substantially. However, there is not any evidence showing the existence of co-integration between BRIC and US market for all three phases, except for the stock market of China during the crisis. Moreover, most of the BRIC stock markets are appeared to have no short term causality to US market.

Document type: 
Graduating extended essay / Research project
File(s): 
Senior supervisor: 
Peter Klein
Department: 
Beedie School of Business-Segal Graduate School

THE EFFECT OF IDIOSYNCRATIC AND SYSTEMATIC STOCK VOLATILITY ON BOAD RATES AND YIELDS

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2017-12
Abstract: 

This paper uses Fama-French and Carhart Four-factor Model to compute systematic risk andidiosyncratic risk for firm’s equity risk. It then assesses these two equity risk components tobond credit rating and bond yield. The analysis is conducted by applying a multivariateregression model on a universe of US equity and bond data over the last ten years from 2007 to2016. Our research shows that idiosyncratic risk is an important determinant of both bond ratingand yield. Interestingly, while systematic risk seems not to affect the rating, it seems to be animportant determinant for bond yields. For low credit rating bonds, yields are mainly driven byidiosyncratic risk; but for high rating bonds, systematic risk is just as important (and sometimeseven more important than) as the idiosyncratic risk. Additionally, this relationship varies with theeconomic condition; for example, the systematic risk was not an important factor during thefinancial crisis period of 2007-2010.

Document type: 
Graduating extended essay / Research project
File(s): 
Senior supervisor: 
Amir Rubin
Department: 
Beedie School of Business-Segal Graduate School