Thomas J. Flavin

The U.S. and Irish credit crises: Their distinctive differences and common features

Although the 2007–2008 US credit crisis precipitated it, the subsequent Irish credit crisis is an identifiably separate one, which might have occurred in the absence of the U.S. crash. The distinctive differences between them are notable. Many of the apparent causal factors of the U.S. crisis are missing in the Irish case; and the same applies vice versa. At a deeper level, we identify four common features of the two credit crises: capital bonanzas, asset price bubbles, regulatory imprudence, and moral hazard. The particular manifestations of these four “deep” common features are quite different in the two cases.

Macroeconomic Influences on Optimal Asset Allocation

We develop a tactical asset allocation strategy that incorporates the effects of macroeconomic variables. The joint distribution of financial asset returns and the macroeconomic variables is modelled using a VAR with an M-GARCH error structure. As a result the portfolio frontier is time varying and subject to contagion from the macroeconomic variable. Optimal asset allocation requires that this be taken into account. We illustrate the how to do this using three risky UK assets and inflation as a macroeconomic factor. Taking account of inflation generates portfolio frontiers that lie closer to the origin, and offers investors superior risk-return combinations.

The sequencing of stock market liberalization events and corporate financing decisions

We examine if the sequence of stock market liberalization events matters for corporate financing choices. We contrast firms who attain ‘investable’ status through domestic reforms with those who do so by issuing American Depository Receipt programs. We find that the first liberalization event prompts similar corporate responses regardless of the path followed. However, we find differential effects between firms who issue ADRs after realizing financial liberalization and those who use ADR initiations to achieve this status. Here, the sequence matters and the capital structure choices of the two groups are very different.

Detecting shift and pure contagion in East Asian equity markets: a unified approach

We test for contagion between pairs of East Asian equity markets over the period 1990–2007. We develop an econometric methodology that allows us to test for both ‘shift’ and ‘pure’ contagion within a unified framework. Using both Hong Kong and Thailand as potential shock sources, we find strong evidence of both types of contagion. Therefore, during episodes of high volatility, equity returns are influenced by changes in the transmission of common shocks and additionally by the diffusion of idiosyncratic shocks through linkages that do not exist during normal times.

Shift versus Traditional Contagion in Emerging Markets: A Unified Approach

We test for contagion between pairs of East Asian equity markets over the period 1990–2007. We develop an econometric methodology that allows us to test for both ‘shift’ and ‘pure’ contagion within a unified framework. Using both Hong Kong and Thailand as potential shock sources, we find strong evidence of both types of contagion. Therefore, during episodes of high volatility, equity returns are influenced by changes in the transmission of common shocks and additionally by the diffusion of idiosyncratic shocks through linkages that do not exist during normal times.

Optimal International Asset Allocation With Time-Varying Risk

This paper examines the optimal allocation each period of an internationally diversified portfolio from the different points of view of a UK and a US investor. We find that investor location affects optimal asset allocation. The presence of exchange rate risk causes the markets to appear not fully integrated and creates a preference for home assets. Domestic equity is the dominant asset in the optimal portfolio for both investors, but the US investor bears less risk than the UK investor, and holds less foreign equity - 20% compared with 25%. Survey evidence indicates actual shares are 6% and 18%, respectively, making the home-bias puzzle more acute for US than UK investors. There would seem to be more potential gains from increased international diversification for the US than the UK investor.

How risk averse are fund managers? Evidence from Irish mutual funds

Employing a mean-variance framework and a multivariate GARCH model, the degree of risk aversion exhibited by Irish fund managers is estimated. Managers whose remit is ‘aggressive’ or ‘balanced’ management of their portfolios have coefficients lying between 1.69–2.42 and 3.24–3.69 respectively.

The Effects of Ownership Structure on Corporate Financing Decisions: Evidence from Stock Market Liberalization

We analyze the impact of firm-specific stock market liberalization events on the capital structure and debt maturity decisions of firms from emerging market economies. We differentiate between firms based on their ownership structures at the time of liberalization and analyze their post-liberalization behavior regarding corporate financing decisions. Our empirical results show that single-class-share firms (typically with stronger corporate governance and better information environments) respond differently to their dual-class-share counterparts. Liberalization results in lower debt reliance for the former group while the latter lengthen the maturity of their debt portfolios.

Fiscal policy and the term premium in real interest rate differentials

The paper seeks to identify the source of the risk premium in real interest rate differentials across European countries. In particular, the link between real interest rate differentials existing between various European countries and Germany, and domestic fiscal policy as proxied by the Debt/GDP ratios in these countries is examined. Results provide strong evidence that this variable exerts a significant influence on the determination of both the level and the volatility of the differential for both long-term and short-term interest rates. This is a noteworthy result bearing in mind the Maastricht criteria for European Monetary Union and the importance attached to convergence of Debt/GDP ratios.

The Effects of Ownership Structure and Governance on Corporate Financing Decisions

We analyze the impact of firm-specific stock market liberalization events on the capital structure and debt maturity decisions of firms from emerging market economies. In particular, we focus on the potentially different responses of firms with different ownership structures and associated governance regimes at the time of liberalization. Our empirical results show that single-class-share (typically with stronger corporate governance) firms respond differently to their dual-class-share counterparts. Liberalization results in lower debt reliance for the former group while the latter lengthen the maturity of their debt portfolios.