Oghenovo A. Obrimah

Can Aversion to Variance Risk be Evidence of Risk Seeking Preferences? Evidence from Returns to VC Backed IPOs

In this paper, we examine how venture capital portfolios with risk averse and risk seeking return characteristics are priced by the representative investor in public equity markets. We find only portfolios with risk seeking return characteristics are associated with a market skewness premium. Also, while the representative investors aversion to variance risk and skewness preference are positively correlated in the pricing of portfolios with risk seeking return characteristics, they are negatively correlated in the pricing of portfolios with risk averse return characteristics. Our findings (a) show skewness preference is evidence of risk seeking behavior or preferences, and as such is inconsistent with globally concave utility functions; (b) indicate portfolio diversification (aversion to variance risk) can be evidence of risk averse or risk seeking preferences; and (c) establish empirically testable conditions for distinguishing between risk averse and risk seeking preferences.

Private Sector Profitability and Depreciation Pressure within Managed Floating Exchange Rate Regimes: Evidence from Nigeria

I find evidence for persistence in depreciation related currency pressure in the Naira to US

The Effects of Relative or Absolute Risk Aversion on Production Efficiency in Agriculture: Evidence from the 'Bread Basket' of Nigeria

exchange rate with persistence exacerbated by private sector profitability. The empirical evidence shows the Central Bank of Nigeria (CBN) reins in depreciation pressure induced within the private sector using buyback yields on Treasury Bills. Given the resultant appreciation of the Naira limits profitability within the private sector, this somewhat reactionary policy to exchange rate management simultaneously enables the CBN to manage investment risk within Nigerias banking sector. My findings indicate managed floating or alternative hybrid exchange rate regimes can be especially appropriate in countries within which currency values erode with private sector profitability. In such countries, my findings indicate it is advantageous for Central Banks to be responsible for both bank regulation and monetary policy.

Exchange Rate Predictability and the Skewness of Bid-Ask Spreads

We estimate stochastic frontier models for agricultural productivity using factors that proxy for absolute risk aversion (e.g. loan amounts) and factors that proxy for relative risk aversion (loan pricing or interest rates). Our findings show absolute risk aversion ceases to matter for agricultural productivity or the determination of the productivity frontier in models that incorporate both loan amounts and loan interest rates. These findings provide empirical evidence that interactions between capital and productivity within the agriculture sector are best studied within the context of the existence or imposition of a minimum required return on capital, as opposed to a focus on loan financing amounts.

Regime Switches in Adverse Selection Problems within IPO Markets: Implications for Intertemporal Variations in the Determination of IPO Underpricing

Purpose This study examines whether the skewness of bid-ask spreads (bid-ask skewness), an information factor, can outperform the skewness of the exchange rate process (FX skewness) - a momentum variable - at forecasting future realizations of exchange rates. Design/Methodology/Approach Empirical tests are implemented using Autoregressive Conditional Heteroscedasticity (ARCH) models of the US

How Relevant is the Capital Asset Pricing Model (CAPM) for Tests of Market Efficiency on the Nigerian Stock Exchange

:GBP exchange rate process and consist of within-sample tests that generate estimates of forecast parameters and out-of-sample tests of forecast power. Conditional skewness is estimated using switching regression models. Findings Empirical results show bid-ask skewness outperforms FX skewness in out-of-sample tests of model forecast power. Consistent with information properties, bid-ask skewness induces lower prices for exchange rate volatility, ameliorates currency valuation uncertainty, and generates information conveyed by the volatility of the exchange rate process. Research Implications Empirical findings provide an information (risk pricing) rationale for momentum effects within foreign exchange markets, and raise the possibility that momentum effects can be shown to be non-anomalous proxies for information effects within stock markets. Practical Implications Relative to FX skewness, empirical results recommend bid-ask skewness as a significantly less risky forecast factor for future realizations of exchange rates. Originality/Value In so far as the author(s) are aware, this is the first study to establish bid-ask skewness can outperform FX skewness as a predictor of future realizations of exchange rates.

Implications of New Keynesian Theory for Research Design: Differences Induced by Cross-Country Variations in Exchange Rate Regimes

I find regime switches in the severity of adverse selection problems induce systematic intertemporal variations in the determination of IPO underpricing such that while increases in IPO underpricing (initial returns to IPOs) are indicative of an increase in IPO risk during periods characterized by less severe adverse selection problems, increases that occur during periods characterized by relatively severe adverse selection problems result from the hedging objectives of the representative agent who can be characterized by risk aversion. These findings imply that while intertemporal increases in initial returns to IPOs always are evidence of an increase in market risk, they are not always evidence of an increase in IPO risk; that is, less risky IPOs can be conferred with higher underpricing during periods characterized by relatively severe adverse selection problems. Consistent with hedging objectives, I find the price of market volatility risk is negative only during regimes characterized by relatively severe adverse selection problems. I also find IPO volume is not sensitive to changes in market risk only during regimes characterized by relatively severe adverse selection problems.

Disaggregating Exit Success Rates into Ability and Risk Components

We find an asset pricing model which consists of the market portfolio, the market skewness or co-skewness factors, and portfolio idiosyncratic volatility factor best explains portfolio risk-return trade-offs on the Nigerian Stock Exchange (NSE), indicating this model is appropriate for studies of semi-strong form efficiency of the Nigerian Stock Market. Our finding that an asset pricing model which consists of the market portfolio alone tends to consistently understate portfolio risk indicates this conventional one-factor specification of the CAPM is inappropriate for tests of the efficiency of the Nigerian Stock Market. With respect to the effects of non-synchronous trading of stocks on portfolio risk-return trade-offs, while the presence of non-synchronous trading induces greater diversification benefits for investors, we find it simultaneously results in a higher price for market risk; that is, higher levels of risk aversion. Our findings demonstrate preference for market skewness or co-skewness can be a risk mitigating response to anticipated adverse effects of changes in the risk of the market portfolio on portfolio returns.

Performance Reversals and Attitudes Towards Risk in the Venture Capital (VC) Market

Relative to free floating exchange rate regimes, I find the adoption of a hybrid exchange rate regime induces alternate research questions within the context of new Keynesian theory. Specifically, while exchange rates are measures of differences in monetary equilibria within a cross-section of countries that run free floating exchange rate regimes, it is balance of payments situations that constitute measures of differences in monetary equilibria within a cross-section of countries that run hybrid exchange rate regimes. Also, while relations between deposit or lending interest rates and inflows of Foreign Direct Investment (FDI) into countries with hybrid exchange rate regimes yield insights into the extent to which inflows of foreign capital induce distortionary effects on price equilibriums, these relations do not yield similar insights within a cross-section of countries that run free floating exchange rate regimes. An important implication of these empirical results is that inflation is not a measure of differences in price equilibriums within a cross-section of countries that operate hybrid exchange rate regimes. These findings, generated within the context of new Keynesian theory, identify theoretically appropriate differences in research questions and research design or methodology conditional on differences in exchange rate regimes.

Investor Protections and Their Impact on Capital Markets

I develop a model that enables the disaggregation of exit rates into ability and risk components. Consequent on this disaggregation, I find decreasing returns to scale within the cross-section of the VC market is induced by strictly concave relations that obtain between the risk component of exit rates and fund size. These strictly concave relations result in a situation where strategies that simply leverage fund risk do not result in superior investment performance. In empirical tests of the relation between ability and fund size, my findings show the ability component of exit rates increases monotonically with fund size, such that fund size is a unique and time invariant proxy for managerial ability, as well as an extremely precise out-of-sample predictor of future investment performance. My findings have implications for models of interactions between VCs and their principals, as well as empirical studies of investment performance within the VC market.