Segal Graduate School of Business Final Projects

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Leverage and Pricing of U.S. and Canadian Leveraged Buyouts

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2018-12
Abstract: 

This paper provides the empirical analysis of leverage and pricing of leveraged buyout (LBO) transactions. We collected sample data of 87 deals that were completed over the period of 1995 to 2013 in United States and Canada. We analysed the LBOs patterns based on industry, geography and time period using key financial multiples reflecting leverage and pricing ratios. We further matched firms following LBOs with comparable public companies as well as pre-buyout position and draw results using regression analysis. Based on the empirical analysis of our sample, the results show that the capital structure of the leverage buyouts is not driven by industry characteristics but there could be links between leverage and pricing of deals based on market-wide factors and fund managers’ behaviours.

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

Hedge Fund Size and Return Analysis Before and After 2008 Financial Crisis

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2018-12
Abstract: 

In this paper, we attempt to examine the relationship between hedge fund asset under management (AUM) and fund return. We refer to the methodology and conclusions used in Platt, Cai, and Platt (2015). Focusing on funds reporting in US dollar, we analyze a sample of 2355 hedge funds from Lipper Hedge Fund database. We conduct equal-weighted method and AUM-weighted method to form the return indices.

We find that the AUM of hedge fund has a negative impact on the fund return performance before the 2008 financial crisis. This finding is consistent with researchers such as Brorsen and Harri (2004) and Platt, Cai, and Platt (2015). However, after the crisis, this effect becomes ambiguous. Moreover, we find that either market neutral or directional approach does not influence the fund return. S&P 500 also has significant power to explain the fund return.

Compared with the conclusions in Platt, Cai, and Platt (2015), we reach the same conclusion about the negative relationship between return and size of AUM and the indifferent influence power of market neutral and directional fund approach.

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

The Dynamic Interaction of Credit Default Swaps, Sovereign Bonds, and Stocks in the European Market

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2018-12
Abstract: 

The paper focuses on finding the interaction among stock, bonds and CDS markets from a country’s level to get the pattern of lead-lag relationship among three markets. It adopts a three-dimensional VAR model to analyse the lead-lag relationship in the European market of ten countries and different credit quality groups. To gain insight into the influence of debt crisis on the correlation of stock and different industries, the paper also uses the pairwise correlation coefficient method. The paper finds that: Before the debt crisis, stocks took the leading position with respect to bonds and CDS. Bonds are also found in some cases due to the financial crisis in previous years. The countries with low CDS premium do not show significant change during the crisis. The stock market and CDS in the consumer has the lowest correlation and the market is stable. They relate most tightly in the financial market.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Carlos da Costa
Department: 
Beedie School of Business-Segal Graduate School

Immigrant and Mortgage Delinquency Rate in Canada

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2018-12
Abstract: 

This article studies the effect that immigrant has on mortgage delinquency rate in Canadianhousing market. We refer the paper ‘Immigrant and mortgage delinquency’ made by Lin, Liu and Xie(2016), where authors state that the immigrant flows could drive an increase in mortgagedelinquency rate in the U.S. We try to replicate their method and use data sets in Canada toexamine whether their conclusion still hold in Canadian housing market. Furthermore, like thepaper we referred, we also subgroup the 2016 immigrant data in terms of age when immigratingto Canada and their origins to identify which group has the most significant impact on mortgagedelinquency rate. After all analysis, we find that unlike the case in the U.S., immigrant flows inCanada has a negative effect on mortgage delinquency rate in the housing market, the higher theimmigrant concentration, the lower the delinquency rate in that area.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Andrey Pavlov
Department: 
Beedie School of Business-Segal Graduate School

Application of the Schwartz-Smith Model (2000) in Copper Derivatives Pricing

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2018-12
Abstract: 

In this paper, we explore the use of Schwartz and Smith two-factor model incopper pricing. We used both Copper future data from LME and Analyst Forecast datafrom Bloomberg (LME) and World Bank as input to generate futures curve and spotcurve. The Schwartz- Smith model incorporates the long-term equilibrium prices thatcommodity price will approach in the long-term and short-term mean reversioncharacteristic of commodity prices. To estimate the state variables and modelparameters, Kalman filter technique was used to update the state variables throughiteration and Maximum likelihood approximation to compute the term structure, sinceKalman filter is able to estimate model's parameters when the model relies on nonobservabledata. This model is able to explain the copper's term structure in an intuitiveway. We begin by describing the input data in section 2 and explaining the short-term andlong-term model in section 3. In section 4, we discuss the estimation process using theKalman filter and, in section 5 we describe the empirical result by applying the model toCopper futures and forecast data. In section6, we offer the concluding remarks.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Eduardo Schwartz
Department: 
Beedie School of Business-Segal Graduate School

Does Compensation Affect Bank Profitability? Evidence from US Banks

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2018-12
Abstract: 

The purpose of this paper is to investigate the relationship between compensation andbank profitability from 2002 to 2016. We divide the entire observation into three sub-periodgroups: Before the financial crisis, During the financial crisis, and After the financial crisis. Wefind that compensation has a negative correlation with bank profitability regardless of theeconomic condition.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Jijun Niu
Department: 
Beedie School of Business-Segal Graduate School

An Analysis of the International Linkages between China and the US Market: A Multivariate GARCH Approach

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2018-12
Abstract: 

This paper attempts to re-examine Li (2007)’s study on the interrelationships among the stock exchanges in mainland China, Hong Kong and the U.S. by applying a four-variable BEKK-GARCH model. After extending the data to a longer and more recent period, we find that global economic recession and financial market integration do affect the correlations among international financial markets. The U.S. market, playing a crucial role in the global markets, directly affects the Chinese stock markets, which is supported by the evidence of unidirectional return and shock spillovers from the stock exchange in the U.S. to those in China. We also find a strong integration of mainland Chinese stock exchanges with Hong Kong market, which is indicated by the bidirectional shock spillovers between the stock exchanges in mainland and that in Hong Kong. These findings differ from Li’s conclusions and suggest that international markets have become far more linked than before. Thus, international investors may not benefit as much from the reduction of diversifiable risk by adding mainland Chinese stocks to investment portfolio as before and need to consider more foreign stock market information.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Andrey Pavlov
Department: 
Beedie School of Business-Segal Graduate School

Determinants of Bank Profitability: Evidence from the US, 2010-2016

Author: 
Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2018-12
Abstract: 

This paper examines how bank-specific variables and macroeconomic variablesaffect the profitability of US commercial banks over the period 2010-2016.Taking return on assets (ROA) and return on equity (ROE) as measures ofprofitability, we estimate regressions using Ordinary Least Squares (OLS). Wefind that capital ratio, loans, deposits, noninterest income, and unemploymentrate affect bank profitability. When we divide banks into several size groups,we find that size affects the profitability of small banks.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Jijun Niu
Department: 
Beedie School of Business-Segal Graduate School

Determinants of Bank Profitability: Comparison between the USA and Canada

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2018-12
Abstract: 

This paper summarizes findings of an empirical study on determinants of banks’ profitability in the USA and Canada. The time periods are divided into pre-subprime crisis, during-subprime crisis and post-subprime crisis to see if the determinants change because of the financial crisis. The analysis focuses on macroeconomic, industry-specific and bank-specific factors. Data covers 197 US banks (with total assets above USD $2 billion) and eight Canadian banks (with total assets above CAD $2.5 billion). We used the ordinary least squares estimation technique to estimate the significance of the factors in MATLAB.

We found that in both countries the bank performance is mostly driven by bank-specific characteristics and that macroeconomic and industry-specific factors are less statistically significant. While some variables have the same effect on the profitability, others, such as Bank Age and Bank Size, have the opposite effect. The previous bank performance is also an important factor, especially in defining NIM.

Document type: 
Graduating extended essay / Research project
File(s): 
Supervisor(s): 
Carlos da Costa
Department: 
Beedie School of Business-Segal Graduate School

Implementing a Quantitative Methodology to Translate Strategic Risk into Economic Capital for a Canadian Bank

Peer reviewed: 
No, item is not peer reviewed.
Date created: 
2018-12
Abstract: 

This research paper focusses on a model to quantify strategic risk and calculate adequate capital that can be used to absorb losses in times of distress. Strategic risk, used interchangeably as business risk is relatively a new risk type and not as researched as other types like credit, market, operational etc. We analyse this subject particularly in the context of the Canadian economic environment. Most big banks are holding capital due to minimum capital requirements enforced by regulatory supervisors. However, there are no concrete explanations pertaining to the accounting of this risk type and the allocated capital. We use net income data for the Royal Bank of Canada and calculate Value at Risk and Expected Shortfall for Strategic risk. Our research can be used by Canadian regulators to mandate an efficient model for strategic risk calculations. By setting a common ground, this can be used by banks to calculate their strategic risk and compare it with their competitors. This will greatly reduce the ambiguity regarding the quantification of strategic risk and the associated capital held by Canadian banks.

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