Riza Emekter

Evaluating credit risk and loan performance in online Peer-to-Peer (P2P) lending

Online Peer-to-Peer (P2P) lending has emerged recently. This micro loan market could offer certain benefits to both borrowers and lenders. Using data from the Lending Club, which is one of the popular online P2P lending houses, this article explores the P2P loan characteristics, evaluates their credit risk and measures loan performances. We find that credit grade, debt-to-income ratio, FICO score and revolving line utilization play an important role in loan defaults. Loans with lower credit grade and longer duration are associated with high mortality rate. The result is consistent with the Cox Proportional Hazard test which suggests that the hazard rate or the likelihood of the loan default increases with the credit risk of the borrowers. Finally, we find that higher interest rates charged on the high-risk borrowers are not enough to compensate for higher probability of the loan default. The Lending Club must find ways to attract high FICO score and high-income borrowers in order to sustain their businesses.

Rational Speculative Bubbles and Commodities Markets: Application of Duration Dependence Test

The presence of rational speculative bubbles in 28 commodities is investigated using the duration dependence test on the stochastic interest-adjusted basis. Eleven of 28 commodities experienced some episodes of rational speculative bubble. These commodities are West Texas Intermediate (WTI) crude oil, coffee, corn, soya bean No. 2, soya bean meal and oil, wheat No. 2 soft red and hard winter wheat, lean hogs, gold and platinum. Additionally, natural gas, propane, live cattle, and pork bellies exhibit mean-reversion in the interest-adjusted basis.

Bubbles in Commodities Markets

We investigate the presence of rational speculative bubbles in 28 commodities traded in the U.S. markets. Using the duration dependence test on the stochastic interest-adjusted basis, we find that 11 of 28 commodities experienced some episodes of rational speculative bubble. These commodities are in the energy sector WTI crude oil; in foodstuffs and industrials sector coffee; in livestock and meats sector lean hogs; and in metals gold and platinum. In the grains and oilseeds sector corn, the soybean sub-sector (soybean No. 2, soybean meal and oil) and the wheat sub-sector, (wheat No. 2 soft red and hard winter) all exhibited speculative bubbles. Additionally, we report mean reversion in natural gas, propane, live cattle, and pork bellies.

Business conditions and nonrandom walk behaviour of US stocks and bonds returns

If security returns are predictable due to rational variations in expected returns, as been argued by Fama and French (1989), then abnormal returns should follow a random walk process. This article investigates whether monthly abnormal returns on four US securities – high-grade corporate bonds, low-grade corporate bonds, large-cap stocks and small-cap stocks - exhibit a random walk pattern. Abnormal returns on these securities are derived from regressing excess security returns on three proxies of business condition (term premium (TRISK), default premium (DRISK) and dividend yield (DIVYLD)) and federal funds rate (FedFund). Four alternative test procedures - variance ratio test, nonparametric runs test, Markov chain test and time reversibility tests – are employed. This study finds that abnormal returns on all securities, with the exception of high-grade corporate bonds, exhibit nonrandom pattern between 1973 and 2002, suggesting that these four common risk factors cannot capture the time-varying returns of both stocks and bonds.

Fundamental Value Hypothesis and Return Behavior: Evidence from Emerging Equity Markets

This study examines the return behavior of 15 emerging equity markets for persistent deviations from the fundamental value hypothesis. The duration dependence test shows that rational expectations bubble do not cause deviations from fundamental value in any of the markets. Markov chain test results imply that markets in China, Malaysia, the Philippines, and Singapore deviate from their fundamental values due to non-random price changes. A price decrease is more likely to follow two periods of price decrease in these four equity markets. Finally, time reversibility test reveals that all equity markets, except for Jordan and Egypt, exhibit asymmetrical price patterns, suggesting departures from fundamental values.

Is stock market overpriced? A benchmark approach

Abstract The fact that stock market is unpredictable does not deter investors, pundits, and academicians from speculating about the next market move. This paper uses multiple benchmarks to judge the current level of the stock market. Among those benchmarks are bonds; commodities; REITs; international stocks; company earnings, sales, and profits; and GDP. Ten-year moving averages of benchmark variables are individually and then collectively compared with S&P 500 index. Although our analysis finds that fundamentals do not support the current high level of the stock market, we do find evidence that a rational bubble exists in that market using the duration dependence test.

Impact of Bonus Depreciation on Capital Expenditures

Abstract Bonus depreciation was enacted by the United States Congress and signed into law in 2002 largely in response to the economic malaise that engulfed the U.S. economy after the September 11, 2001 terrorist attacks. We investigate whether bonus depreciation, a capital asset expensing allowance under the U.S. federal income tax code, impacts the level of business investment in property, plant, and equipment in the time periods that followed 9-11 in comparison to other earlier time periods. Based on the empirical evidence, the bonus depreciation policy has a positive effect on capital expenditures only in the period in which this policy was legislatively anticipated, specifically the period spanning the last quarter of 2001 and the first quarter of 2002. Otherwise, we find no significant increase in capital expenditures during the period that this special depreciation provision policy is initially in place from 2002 to 2005. Although bonus depreciation is re-enacted in response to the fiscal distress and recession that began in 2007, capital expenditures actually decline during the recovery era, a period following the post-2008 subprime mortgage crisis. Though Congress continues to temporarily re-enact bonus depreciation on an annual basis through December 31, 2014, there is no strong evidence that capital investment is positively impacted. Instead, the empirical results show that factors that positively affect the level of companies’ capital expenditures include capital intensity, cost of capital, amount of cash holdings, changes in sales and loans. Our empirical results invite the question of Congress’ intended goal in re-instating bonus depreciation for 2015 through 2019.

Do residual earnings price ratios explain cross-sectional variations in stock returns?

Purpose - – Variations in price/earnings (P/E) ratios are explained in a rational expectations framework by a number of fundamental factors, such as differences in growth expectations and risk. The purpose of this paper is to use a regression model and data from four sample periods (1996, 2000, 2001, and 2008) to separate the earnings/price (E/P) ratio into two parts – the portion of E/P that is related to fundamental determinants and a residual portion that cannot be explained by fundamentals. The authors use the residual portion as an indicator of over or undervaluation; a large negative residual is consistent with overvaluation while a large positive residual implies undervaluation. The authors find that stocks with larger negative residuals are associated with lower subsequent returns and reward-to-risk ratio, while stocks with larger positive residuals are associated with higher subsequent returns and reward-to-risk ratio. This pattern persists for both one and two-year holding periods. Design/methodology/approach - – This study uses a regression methodology to decompose E/P into two parts – the portion of E/P than is related to fundamental determinants and a residual portion that cannot be explained by fundamentals. Focussing on the second portion allows us to isolate a potential indicator of stock over or undervaluation. Using a sample of stocks from four time periods (1996, 2000, 2001, and 2008, the authors calculate the residuals from a regression model of the fundamental determinants of cross-sectional variation in E/P. These residuals are then ranked and used to divide the stock sample into deciles, with the first decile containing the stocks with the highest negative residuals (indicating overvaluation) and the tenth decile containing stocks with the highest positive residuals (indicating undervaluation). Total returns for subsequent one and two-year holding periods are then calculated for each decile portfolio. Findings - – The authors find that high positive residual stocks substantially outperform high negative residual stocks. This is true even after risk adjustments to the portfolio returns. The residual E/P appears to accurately predict relative stock performance with a relatively high degree of accuracy. Research limitations/implications - – The findings of this paper provide some important implications for practitioners and investors, particularly for the stock selection, fund allocations, and portfolio strategies. Practitioners can still rely on a valuation measure such as E/P as a useful tool for making successful investment decisions and enhance portfolio performance. Investors can earn abnormal returns by allocating more weights on stocks with high E/P multiples. Portfolios of high E/P multiples or undervalued stocks are found to enjoy higher risk-adjusted returns after controlling for the fundamental factors. The most beneficial performance holding period return will be for a relatively short period of time ranging from one to two years. Relying on the E/P valuation ratios for a long-term investment may add little value. Practical implications - – Practitioners and academics have long relied on the P/E ratio as an indicator of relative overvaluation. An increase in the absolute value of P/E, however, does not always indicate overvaluation. Instead, a high P/E ratio can simply reflect changes in the fundamental factors that affect P/E. The authors find that stocks with larger negative residuals are associated with lower subsequent returns and coefficients of variation, while stocks with larger positive residuals are associated with higher subsequent returns and coefficients of variation. This pattern persists for both one and two-year holding periods. Originality/value - – The P/E ratio is widely used, particularly by practitioners, as a measure of relative stock valuation. The ratio has been used in both cross-sectional and time series comparisons as a metric for determining whether stocks are under or overvalued. An increase in the absolute value of P/E, however, does not always indicate overvaluation. Instead, a high P/E ratio can simply reflect changes in the fundamental factors that affect P/E. If interest rates are relatively low, for example, the time series P/E should be correspondingly higher. Similarly, if the risk of a stock is low, that stock’s P/E ratio should be higher than the P/E ratios of less risky stocks. The authors examine the cross-sectional behavior of the P/E (the authors actually use the E/P ratio for reasons explained below) after controlling for factors that are likely to fundamentally affect this ratio. These factors include the dividend payout ratio, risk measures, growth measures, and factors such as size and book to market that have been identified by Fama and French (1993) and others as important in explaining the cross-sectional variation in common stock returns. To control for changes in these primary determinants of E/P, the authors use a simple regression model. The residuals from this model represent the unexplained cross-sectional variation in E/P. The authors argue that this unexplained variation is a more reliable indicator than the raw E/P ratio of the relative under or overvaluation of stocks.