Segal Graduate School of Business Final Projects

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The Impact of Credit Risk on Profitability of Commercial Banks

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No, item is not peer reviewed.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

This paper examines the relationship between credit risk and profitability of UScommercial banks. We use Capital Adequacy Ratio and Non-performing Loan Ratio tomeasure credit risk and Return on Equity and Return on Assets to measure profitability ofcommercial banks. Using a sample of 83 US commercial banks for the period fromDecember 2010 to December 2017, we estimate OLS regressions and find that credit riskhas an important effect on profitability. Our results show that 1% increase in NPL decreasesROA by 0.0881% and decreases ROE by 0.141%. Our findings have importantimplications for bank regulators and policy makers.

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

CEO Tenure and Abnormal Returns

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No, item is not peer reviewed.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

Given that CEO tenure is considered an impetus to firm performance, we analyze the abnormal returns for different tenure groups using the Fama-French (1993) and Carhart (1997) four-factor model. The empirical result shows that firm performance is positively related to CEO tenure. However, the relation is not linear. CEOs with tenure group of 7 to 10 years have the highest alpha and the abnormal return of tenure above 10 years is slightly smaller. Furthermore, portfolios constructed by tenure group suggest that it is practical to generate abnormal returns by taking a long position at firms with long-tenured CEOs and a short position at firms with short-tenured CEOs. The long-short strategy also implies that tenure has a greater effect on firm performance in small firms compared to large firms.

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

An Evaluation of the Altman Z-Score Model in Predicting Corporate Bankruptcy for Canadian Publicly Listed Firms

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No, item is not peer reviewed.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

The purpose of this study is to assess the effectiveness of Altman’s Z score in predicting corporate bankruptcy for Canadian listed companies. First, we estimate Altman’s original model and test the efficiency of the cut-off region, coefficients and the variables used. Secondly, we add Cash Flow from Operation (CFO) to Total Liabilities (TL) ratio as a sixth variable to improve Altman’s (1968) standard Z score model. By testing and comparing these models using a sample of 70 bankrupt firms against a population sample of 1,047 non-distressed firms, this study determines which models has a higher discriminating ability. While Altman’s research focuses on manufacturing companies, for the purpose of this study, we selected firms from five sectors; energy, consumer discretionary, consumer staples, industrials and materials. We use Multiple Discriminant Analysis (MDA) to compare the predictive abilities of these models. Our results show that the cut-off regions and the coefficients used by Altman should be time-varying and that our augmented model produces better results, when removing the effects of outliers.

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

A Performance Evaluation on Equal Sector Strategy

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

In this paper, we extended the works done by Conconi, Demidow, Klein and Niu(2013), which examined the equal sector strategy. It was claimed that allocating assets equally into different sectors instead of allocating assets based on market cap weighting would generate more return and outperform the benchmark. We used several performance indicators, including excess return, Jensen’s alpha, Sharpe ratio, Information ratio and Sortino ratio to see whether this strategy would generate alpha in different markets. We found that this allocating-asset-into-sectors-equally strategy was not effective in the US market and emerging markets, but this strategy has generated a statistically significant Jensen’s alpha in EAFE market for the examined time period. Also, we found that by implementing the strategy in some circumstances, it is likely to make portfolio less volatile.

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

GLOBAL EQUITY MARKETS’ VOLATILITIES AND RETURNS SPILLOVERS

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

Diebold and Yimlaz, in their paper, published in 2009 and titled Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets, provided a simple and intuitive measure of interdependence between markets by measuring the returns and volatilities spillovers of 19 countries’ equity markets, an approximation of global equity markets. The goal of this paper is to extend on the original paper from three perspectives. Firstly, the original paper’s results shows markets interdependence results up to 2007, which does not capture the 2008 global financial crisis and its aftermath, and it is very interesting to see what happened during and after such unprecedented crisis, and to see what happened after other major and recent events such as the European sovereign debt crisis. Secondly, this study’s dataset adds two key players in the global economy that are having increasing prominence: Saudi Arabia and India, increasing the number of equity markets studied to 22 countries. Thirdly, this paper uses an improved model that avoids identification schemes based on Cholesky factorization, where variance decompositions calculations depend on the ordering of the variables, by using Generalized VAR, an extension they suggested in 2009 and later used in 2012 for the same purpose of this paper but studying interdependence between different asset classes instead.

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

HEDGE FUND ALPHA, PERFORMANCE PERSISTENCE AND RELATIONSHIP BETWEEN PERFORMANCE AND CAPITAL FLOWS

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

I use a comprehensive data set of hedge funds to investigate alpha, performance persistence andcapital formation in the hedge fund industry from 1989 to 2014. First part of this paper describeswhether hedge fund can generate significant positive alphas under different strategies such aslong/short, market neutral, fix income arbitrage, event driven etc. I find that at an over 20-yearhorizon, all the hedge fund strategies can produce positive significant alphas and the long/shortstrategy has the best performance with highest alpha. Then I test the performance persistence ofeach strategy with the rolling regression approach by setting the window size 36 month and findthat hedge fund performance persists at annual or even longer horizons. Moreover, I further try tofind the relationship between the capital flows and each fund’s performance, the result shows asignificant negative correlation, which means the capital inflows will attenuate the ability of thealpha producers to continue to deliver alpha in the future.

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

APPLICATIONS OF REALIZED VOLATITILY, LOCAL VOLATILITY AND IMPLIED VOLATILITY SURFACE IN ACCURACY ENHANCEMENT OF DERIVATIVE PRICING MODEL

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

In this research paper, a pricing method on derivatives, here taking European options on Dow Jones index as an example, is put forth with higher level of precision. This method is able to price options with a narrower deviation scope from intrinsic value of options. The finding of this pricing method starts with testing the features of implied volatility surface. Two of three axles in constructed three-dimensional surface are respectively dynamic strike price at a given time point and the decreasing time to maturity within the life duration of one strike-specified option. General features of implied volatility surface are justified by the real trading data. With the dynamic strike price and variable volatility, option price is assumed to reflect the market expectation towards the performance of underlying asset and accompanied uncertainty when approaching the maturity. Therefore, the applications of implied volatility, local volatility and realized volatility are involved in the pricing of derivatives, because of their respective compatibilities of the forward-looking expectation, the stochastic parameter and the tight fit to the real return distribution. In the researching and analysing process, it is found that the realized volatility and the real return distribution are the derivative pricing combination with highest accuracy in the three categories of volatility. The implied volatility fails to fit the derivative price for its emphasis on market expectation and lack of independence from existing model, at the meantime, the local volatility loses its ground in practical application in pricing derivatives, with insufficient small-interval data of transactions.

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

BENEFITS OF MARKET VALUE CALCULATIONS FOR CREDIT UNIONS

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

This research paper focuses on two different interest rate risk measures used by credit unions in Canada, described by regulatory standards as complementary and indispensable. These two measures pertain either sensitivity of market value or net interest income, caused by changes in interest rates. Whereas credit unions can relate to and understand the latter perspective, market value does not seem as relevant as credit unions hold assets and liabilities until maturity and are not exposed to changes in market value. We use data from three credit unions to explain the two measures and show that one can be expressed by the other, which in fact discredits the perceived complementary nature of both measures. Additionally, we further develop the concept of net interest income sensitivity to overcome the weaknesses of market value by employing a more realistic measurement of interest rate risk and a reduction of required capital which eventually would enable credit unions to operate more profitably.

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

The Determinants of Capital Structure: Evidence from Canada

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

Corporate capital structure is examined in this paper with a panel of 960 observations from 60 Canadian companies in a period from 2001 to 2016. The OLS regression analysis was applied to show the substantial influence of estimated variables, namely, profitability, tangibility, firm size and growth opportunity, on changes in book leverage and market leverage. The effects of financial economic crisis in 2008 were studied. By comparison between two segmented results (before 2008 and in/after 2008), growth opportunity became more substantial while firm size became irrelevant. The effect of heteroscedasticity to the research results is examined at the end by Robust Least Square method. The comparison confirmed that heteroscedasticity is not a serious problem for this research.

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

FINANCIAL LEVERAGE AND FIRM PERFORMANCE DURING AND AFTER THE FINANCIAL CRISIS

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

The objective of this paper is to analyse the relation between a company’sleverage and its performance during the financial crisis of 2007-­2009. A hypothesisis proposed that leverage would negatively impact abnormal return during thefinancial crisis. Interestingly, it is found that, at the peak of the crisis, during 2008,firms with higher leverage performed better. The opposite effect is found in 2009,when firms with high leverage under-­performed. These results seem somewhatcounter-­intuitive, so that after taking into account industry effects the resultsindicate that leverage had a negative effect on companies’ performance during the2008-­2009 period.

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