Söhnke M. Bartram

The Euro and European Financial Market Dependence

A time-varying copula model is used to investigate the impact of the introduction of the Euro on the dependence between 17 European stock markets during the period 1994–2003. The model is implemented with a GJR-GARCH-MA-t model for the marginal distributions and the Gaussian copula for the joint distribution, which allows capturing time-varying, non-linear relationships. The results show that, within the Euro area, market dependence increased after the introduction of the common currency only for large equity markets, such as in France, Germany, Italy, the Netherlands and Spain. Structural break tests indicate that the increase in financial market dependence started around the beginning of 1998 when Euro membership was determined and the relevant information was announced. The UK and Sweden, but not other European countries outside the Euro area, are found to exhibit an increase in equity market co-movement, which is consistent with the interpretation that these countries may be expected to join the Euro in the future.

The Effects of Derivatives on Firm Risk and Value

Using a large sample of nonfinancial firms from 47 countries, we examine the effect of derivative use on firm risk and value. We control for endogeneity by matching users and nonusers on the basis of their propensity to use derivatives. We also use a new technique to estimate the effect of omitted variable bias on our inferences. We find strong evidence that the use of financial derivatives reduces both total risk and systematic risk. The effect of derivative use on firm value is positive but more sensitive to endogeneity and omitted variable concerns. However, using derivatives is associated with significantly higher value, abnormal returns, and larger profits during the economic downturn in 2001–2002, suggesting that firms are hedging downside risk.

The impact of the introduction of the Euro on foreign exchange rate risk exposures

Abstract This paper tests whether significant changes in stock return volatility, market risk, and foreign exchange rate risk exposures took place around the launch of the Euro in 1999. The experiment analyzes weekly returns for 3220 nonfinancial firms from 18 European countries, the United States, and Japan. We find that though the Euros launch was associated with an increase in total stock return volatility, significant reductions in market risk exposures arose for nonfinancial firms both in and outside of Europe. We show that the reductions in market risk were concentrated in firms domiciled in the Euro area and in non-Euro firms with a high fraction of foreign sales or assets in Europe. The Euros introduction led to a net absolute decrease in the foreign exchange rate exposure of nonfinancial firms, but these changes are statistically and economically small. We interpret our findings in the context of existing theories of exchange rate risk management.

Why Are U.S. Stocks More Volatile

From 1991 to 2006, U.S. stocks are more volatile than stocks of similar foreign firms. A firm’s stock return volatility in a country can be higher than the stock return volatility of a similar firm in another country for reasons that contribute positively (good volatility) or negatively (bad volatility) to shareholder wealth and economic growth. We find that the volatility of U.S. firms is higher mostly because of good volatility. Specifically, firm stock volatility is higher in the U.S. because it increases with investor protection, stock market development, research intensity at the country level, and firm-level investment in R&D. These are all factors that are related to better growth opportunities for firms and better ability to take advantage of these opportunities. Though it is often argued that better disclosure is associated with greater volatility as more information is impounded in stock prices, we find instead that greater disclosure is associated with lower stock volatility.

Corporate Risk Management as a Lever for Shareholder Value Creation

This paper presents a comprehensive review of positive theories and their empirical evidence regarding the contibutionof corporate risk management to shareholder value. It is argued that vecause of realistic capital market imperfections, such as agency costs, transaction costs, taxes, and increasing costs of external financing, risk management on the firm level represents a means to increase firm value to the benefit of the shareholders.

Crossing the Lines: The Conditional Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets

This paper examines the importance of exchange rate exposure in the return generating process for a large sample of non-financial firms from 37 countries. We argue that the effect of exchange rate exposure on stock returns is conditional and show evidence of a significant return impact to firm-level currency exposures when conditioning on the exchange rate change. We further show that the realized return to exposure is directly related to the size and sign of the exchange rate change, suggesting fluctuations in exchange rates as a source of time-variation in currency return premia. For the entire sample the return impact ranges from 1.2 - 3.3% per unit of currency exposure, and it is larger for firms in emerging markets compared to developed markets. Overall, the results indicate that foreign exchange rate exposure estimates are economically meaningful, despite the fact that individual time-series results are noisy and many exposures are not statistically significant, and that exchange rate exposure plays an important role in generating cross-sectional return variation. Moreover, we show that the relation between exchange rate exposure and stock returns is more consistent with a cash flow effect than a discount rate effect.

The Impact of the Introduction of the Euro on Foreign Exchange Rate Risk Exposures

In a monotube hydraulic damper containing a volume of gas a guide for the piston-rod is fixed in the upper end of the tube, and a seal for the piston-rod is located between the guide and a support which is fixed in the tube and through which the piston-rod passes with clearance, a reservoir for oil brought up on the surface of the piston-rod being provided between the seal and the support.

Why Do Foreign Firms Have Less Idiosyncratic Risk than U.S. Firms

Using a large panel of firms across the world from 1991-2006, we show that the median foreign firm has lower idiosyncratic risk than a comparable U.S. firm. Country characteristics help explain variation in idiosyncratic risk across countries in both level and change regressions, but less so than firm characteristics. There exists a strong negative relation between idiosyncratic risk and an index of government stability and quality. Further, idiosyncratic risk is positively related to financial development. Surprisingly, there is evidence that firms have less idiosyncratic risk in countries with greater transparency. Finally, idiosyncratic risk does not appear to be related to investor protection laws. Our results support theories predicting that better financial development leads firms to undertake riskier investments, but they are inconsistent with theories predicting that more firm-specific information increases idiosyncratic stock return volatility.

Why Hedge? Rationales for Corporate Hedging and Value Implications

Purpose - In the presence of capital market imperfections, risk management at the enterprise level is apt to increase the firms value to shareholders by reducing costs associated with agency conflicts, external financing, financial distress, and taxes. The purpose of this paper is to provide an accessible and comprehensive account of these rationales for corporate risk management and to give a short overview of the empirical support found in the literature. Design/methodology/approach - The paper outlines the main theories suggesting that corporate risk management can enhance shareholder value and briefly reviews the empirical evidence on these theories. Findings - When there are imperfections in capital markets, corporate hedging can enhance shareholder value through its impact on agency costs, costly external financing, direct and indirect costs of bankruptcy, as well as taxes. More specifically, corporate hedging can alleviate underinvestment and asset substitution problems by reducing the volatility of cash flows, and it can accommodate the risk aversion of undiversified managers and increase the effectiveness of managerial incentive structures through eliminating unsystematic risk. Lower volatility of cash flows also leads to lower bankruptcy costs. Moreover, corporate hedging can also align the availability of internal resources with the need for investment funds, helping firms to avoid costly external financing. Finally, corporate risk management can reduce the corporate tax burden in the presence of convex tax schedules. While there is empirical support for these rationales of hedging at the firm level, the evidence is only modestly supportive, suggesting alternative explanations. Originality/value - The discussed theories and the empirical evidence are described in an accessible way, in part by using numerical examples.

The Use of Options in Corporate Risk Management

This paper investigates the motivations and practice of nonfinancial firms with regard to using financial options in their risk management activities. To this end, it provides a comprehensive account of the existing empirical evidence on the use of derivatives in general and options in particular by nonfinancial corporations across different underlyings and countries. Overall, a significant number of 15%-25% of the firms outside the financial sector use financial options. This reflects the fact that options are very versatile risk management instruments that can be used to hedge various types of exposures, linear as well as nonlinear. In particular, options are a useful component of corporate risk management if exposures are uncertain, e.g. due to price and quantity risk. Depending on the correlation between price and quantity risk, the optimal hedge portfolio consists of a varying combination of linear and nonlinear risk management instruments. Moreover, the accounting treatment as well as liquidity effects can impact the choice of derivative instrument. At the same time, there may be agency-related incentives to use options because of their role to present dual bets on both direction as well as future volatility of the underlying.