Craig Wilson

The Term Structure of Interest Rates in a Hidden Markov Setting

We describe an interest rate model in which randomness in the short-term interest rate is partially due to a Markov chain. We model randomness through the volatility and mean-reverting level as well as through the interest rate directly. The short- term interest rate is modeled in a risk-neutral setting as a continuous process in continuous time. This allows the valuation of interest rate derivatives using the martingale approach. In particular, a solution is found for the value of a zero-coupon bond. This leads to a non-linear regression model for the yield to maturity, which is used to filter the state of the unobservable Markov chain.

The Intraday Pattern of Information Asymmetry, Spread, and Depth: Evidence from the NYSE

Studies suggest that investment flows, liquidity imbalances, and institutional trading may create intraday trading patterns and opportunities for investors to time their trades to reduce transaction costs. Motivated by these studies, we divide each trading day into 13 half‐hour trading intervals and measure information asymmetry from price changes, trade sizes, and trade directions. We find that information asymmetry starts high in the morning, drops continuously until it reaches a midday low during Interval 7, rises to a midday high during Interval 10, and drops continuously after. In contrast, neither the spread nor the depth exhibit similar midday extreme values. Essentially, we identify a 90‐min window in the afternoon when net valuable information arrives to the market in high frequency while liquidity is stable, and that may be an opportunity for some investors to time their trades. In addition, we show that market makers employ dynamic strategies that change the spread, the depth, or both to manage information asymmetry. This is particularly evident during the last three trading intervals, where the significant drop in information asymmetry is countered primarily by a significant increase in the depth while the spread is almost constant.

Family Control, Regulatory Environment, and the Growth of Entrepreneurial Firms: International Evidence

Manuscript Type. Empirical. Research Issue. We investigate the joint effects of family control and the regulatory environment on entrepreneurial growth through the lens of socio‐emotional wealth (SEW) theory. Research Findings. Taking into consideration both economic and non‐economic goals of entrepreneurial firms, measured by sales growth and employment growth respectively, we find that, compared to their non‐family‐controlled counterparts, family‐controlled firms tend to have lower sales growth rates, but higher employment growth rates. Furthermore, less favorable regulatory environments reduce both sales and workforce growth rates to a greater extent for family‐controlled firms than for non‐family‐controlled firms. Theoretical/Academic Implications. We add to the corporate governance and family business management literature by documenting that the regulatory environment moderates the corporate governance effect of family control on the economic and non‐economic goals of family‐controlled firms. The findings also contribute to the family business management literature by enriching and providing strong evidence in favor of the SEW theory through our exploration of the moderating role that macro‐governance plays in the family control‐SEW relation. This research also makes contributions to the entrepreneurship literature, laying a foundation for future empirical studies on entrepreneurial growth by separating its economic from its non‐economic dimensions. Practitioner/Policy Implications. Our findings provide practical implications for both policy makers and entrepreneurs. They not only help entrepreneurs better understand growth strategies in various macro‐governance settings, but also provide governments and policymakers with potential policy implications to encourage entrepreneurial and economic growth. Policies that improve the macro‐governance environment can help family firms to prosper by contributing to their economic and non‐economic growth, both of which are important for economic development.

Investor perceptions of the benefits of political connections: Evidence from China's A-share premiums

Purpose - – The purpose of this paper is to investigate how foreign and domestic investors differ in their beliefs about the relative merits of a firms political connections. Design/methodology/approach - – These differences are employed to explain cross-sectional variation in the previously documented premium in A-share prices relative to otherwise equivalent foreign currency denominated B-shares for Chinese firms. Findings - – Chinese domestic individual investors were excluded from owning B-shares of Chinese firms prior to February 20, 2001. The authors find that firms with more political connections have higher premiums and a smaller reduction in premiums associated with this event. Research limitations/implications - – This is consistent with domestic block holders deriving additional benefits from politically connected firms. Practical implications - – The findings also have important policy implications by showing that government can have a strong effect on the economy even without applying macro-policy tools. Social implications - – Government ownership in listed companies can result in discrepancies among classes of investors with respect to their valuations. Furthermore, the prohibition of short sales prevents arbitrage from correcting this bias, and eventually the role of the market in allocating resources efficiently is undermined. Originality/value - – The authors investigate the role of political connections as implied by the proportion of state ownership in explaining the A-share premium. Unlike previous studies that associate state ownership with political risk, the paper relates state ownership to political connections that are particularly beneficial to domestic large block shareholders. This interpretation is consistent with the findings and with previous literature on state ownership and political connections of Chinese firms.

Shanxi Piaohao and Shanghai Qianzhuang: a comparison of the two main banking systems of nineteenth-century China

Abstract We investigate the creation, development, and main business strategies of Shanxi Piaohao banks and Shanghai Qianzhuang banks. We also detail the characteristics associated with governance and family involvement in these different banking systems, and compare the two systems to illustrate differences in business practices. Piaohao banks had very conservative business practices, and Qianzhuang banks had very risky business practices. These differences arose from different intermediation needs in the two regions, and they were associated with different governance and ownership structures, which led to substantially different methods for dealing with potential agency problems.

When should venture capitalists exit their investee companies

Purpose - – Exit strategies are critical for external private equity holders, such as venture capitalists and business angels, to receive investment returns successfully. The paper models the exit decision as a fixed date with the option to exit early, and develop an approach to help private equity holders determine an optimal early exit region based on a target equity value and the time remaining. Design/methodology/approach - – The paper sets up a continuous time model to derive analytical solutions and apply simulations to numerical examples in this study. Findings - – By numerically analyzing the nature of the solution the paper illustrates that a higher return drift of the investee company, a lower return volatility of the investee company, and a higher target return of the private equity holder results a smaller early exit region. Originality/value - – This study helps determine the optimal time of stopping investments, and provides venture capitalists with a usable way to make exit decisions.

Stochastic Volatility or Stochastic Central Tendency: Evidence from a Hidden Markov Model of the Short-Term Interest Rate

We develop a two-factor model for the short-term interest rate that incorporates additional randomness in both the drift and diffusion components. In particular, the model nests stochastic volatility and stochastic central tendency, and therefore provides a medium for testing the overall importance of both factors. The randomness in the drift and diffusion terms is governed by a hidden Markov chain. The likelihood function is determined through an iterative procedure and maximum likelihood estimates are obtained via numerical maximization. This process allows likelihood ratio testing of nested restrictions. These tests show that stochastic volatility is more important than stochastic central tendency for describing the short rate dynamics.

Leveraged stock portfolios over long holding periods: A continuous-time model

We use a continuous-time model to derive return and wealth distributions for leveraged portfolios over long holding periods. These theoretical distributions closely match empirical distributions obtained from a resampling procedure. The expected annualized return is a concave function of the degree of leverage. With historical parameter values, the function is maximized at 203% stock, borrowing an amount equal to 103% of net wealth. This maximal stock proportion is considerably reduced if the borrowing rate is higher than the historical lending rate.