Wassim Dbouk

Coordinating a three-level supply chain with delay in payments and a discounted interest rate

Both researchers and practitioners recognize the importance of the interactions between financial and inventory decisions in the development of cost effective supply chains. Moreover, achieving effective coordination among the supply chain players has become a pertinent research issue. This paper considers a three-level supply chain, consisting of a capital-constrained supplier, a retailer, and a financial intermediary (bank), coordinating their decisions to minimize the total supply chain costs. Specifically, we consider a retailer managing its cash through the suppliers bank, in return for permissible delay in payments from the supplier. The bank, benefiting from increasing its cash holdings with the retailers cash deposits, offers the supplier a discount on its borrowing rate. We show that the proposed coordination mechanism achieves significant cost reduction, by up to 26.2%, when compared to the non-coordinated model. We also find that, with coordination, the retailer orders in larger quantities than its economic order quantity, and that a higher return on cash for the retailer leads to a higher order quantity. Furthermore, we empirically validate our proposed coordination mechanism, by showing that banks, retailers, and suppliers have much to gain through collaboration. Thus, using COMPUSTAT datasets for the years 1950 through 2012, we determine the most important factors that affect the behavior of the retailers and suppliers in granting and receiving trade credit. Our results indicate that engaging into such a coordination mechanism is a win-win situation to all parties involved.

The Effectiveness of Technical Trading for Arab Stocks

In this paper, we examine the profitability of technical analysis for a cross section of individual Arab stocks. Our analysis, undertaken from the perspective of an Islamic investor, reveals that technical trading rules do not yield economically or statistically significant returns. While our results uncover some scant statistical evidence of technical trading rule profitability, risk adjusting the returns weakens the evidence in favor of predictability. Furthermore, break-even transaction costs do not exceed estimated transaction costs or bid-ask spreads in the markets examined.

Determinants of credit spread changes for the financial sector

Purpose - Most of the credit spread literature deals with the determinants of credit spread changes for individual bonds. The purpose of this paper is to investigate the explanatory power of credit spread changes and their determinants for portfolios. Design/methodology/approach - Using ordinary least squares (OLS) regressions and monthly data from 1990 to 1997, this paper tests several new potential determinants (e.g. portfolio diversification) and expectations (and realizations) for some previously identified determinants (e.g. gross domestic product (GDP)) of credit spread changes for portfolios of financials as derived from spot curves. Findings - Strong empirical support is reported that default risk and undiversified risk are priced in credit spreads. The paper finds that forecasts for GDP and inflation are better determinants of credit spread changes than the realized values previously used in the literature, which is consistent with the notion that term structures convey expectations about future interest rates. Research limitations/implications - Interesting issues for future research include the sensitivity of the results to the use of other procedures for deriving zero-coupon spot rates, and whether forecasts of macrovariables (such as GDP) are better determinants of credit spreads for other industrial categories, such as utilities and industrials. Practical implications - The findings provide guidance for the management of risk for fixed income portfolios, for the pricing of fixed income securities differentiated by the difficulties encountered in achieving well-diversified portfolios, and for assessing the performance of credit spread portfolios managed by financial institutions. Originality/value - The empirical model, which achieves substantial explanatory power while being parsimonious, is the first to support the usage of forecasts instead of realized values in determining credit spreads, and to show that undiversifiable risk is an important component of the credit spreads of portfolios.

Diversification benefits for bond portfolios

Finance research has focused primarily on the diversification of stock portfolios. Various metrics are used herein to assess the diversification benefits, and the optimal bond portfolio sizes (PSs) for investment opportunity (IO) sets differentiated by issuer type, credit ratings and term-to-maturity. While PSs of 25–40 bonds appear optimal for the marginal reduction of dispersion with increasing PS, larger (smaller) PSs are optimal if the investor is concerned about left tail weight (positive skewness or reward-to-downside risk). Although the marginal reduction of dispersion is less than 1% beyond these optimal PSs, much potential diversification benefits still remain unrealized for many of the IO sets studied herein.

Impact of bond index revisions

This appears to be the first investigation of the impact of bond index additions and deletions on the returns of bonds and stocks of the underlying issuers using various unconditional and conditional return-generating models. The effect of additions and deletions is symmetric for each asset class, and robust across various return-generating models. While bond returns are positively (negatively) affected by bond index inclusions (exclusions), stock returns are unaffected by these bond index revisions. These results suggest that, although bond index additions and deletions materially affect bond values when measured at market, equity investors do not perceive any material change in financial risk from such changes.