Archive for the ‘banking’ Category
Sunday, February 14th, 2010
In the foregoing articles we have seen that in the short run, the prices of financial instruments may deviate from their fundamental value on account of microstructure frictions such as bid–ask bounce, inventory control and order imbalances. Previous article introduced empirical models for estimating transaction costs and the price impact of a trade. These models were quite simple: they assumed that the price impact of a trade was immediate. In reality, this is not always so, and there may be lagged effects or slow adjustments. We therefore need a richer dynamic structure in order to model prices and trades on financial markets. In this chapter, we introduce dynamic timeseries models for prices and trades, and show how they can be used to describe the market’s convergence on the new equilibrium price after a shock.
This article extends the simple empirical models of Chapter 6 to a full dynamic setting. We show how time-series models for prices and trades can be used to study these questions. Throughout the chapter, we focus more on the structure and interpretation of the models than on the econometric and sampling issues that often arise in estimating dynamic time series using microstructure data. Section 9.1 introduces a dynamic model for prices and order flow, with lagged effects of order flow on prices and order-flow dynamics. Section 9.2 generalizes that model to the vector autoregressive model, which was introduced into microstructure by Hasbrouck (1988, 1991, 1993, 1995) and has since become the standard reference model in the literature. We then turn to a formal decomposition of prices into permanent and transitory components, where the permanent component is interpreted as the equilibrium value of the
asset, or the efficient price. Section 9.3 examines price discovery, i.e. the process of convergence on the efficient price, and the role of order flow in this process. Section 9.4 studies price discovery for securities that are traded in multiple market-places. The appendix gives some tools for dealing with dynamic econometric models and lag polynomials.
Tags: bad debt, car loans, compare credit, currency trading, debt settlement, forex, funds, home equity, portfolio
Posted in accounting, attitude, banking, budget analysis, business goals | Comments Off
Wednesday, November 11th, 2009
A correlation between total returns of high yield and treasury bonds shows that interest rate risk can certainly not be neglected by high-yield investors. The mid-1990s serve as a good example. High yield and treasury returns had a quite high correlation in an environment of low default rates and tight credit spreads. In 2003 an increased correlation could be observed again when spreads were approaching historical lows and default rates were falling.
High-yield sensitivity to interest rates is a function of credit risk. This means that the high-yield upper tier (BB/BB) segment’s correlation to 10-year treasuries is higher than for lower tier credit (B and below). Duration management in high-yield portfolios will have a positive performance contribution. Particularly crossover credits and BB’s total returns will be also determined by the movements of interest rates.
During times of low default rates, historically tight spreads and low interest rates it is worthwhile to analyze the duration contribution of various sectors to the high-yield index. In a scenario of rising interest rates, sectors with tight spreads and a high average duration should be watched closely due to a high underperformance potential.
Tags: business competition, business objectives, cash reserves, CEO, investment opportunities, loans guide, merger, money guide, pricing policy, shareholders, shares
Posted in accounting, attitude, banking, budget analysis, business goals, business patterns, business publications | Comments Off
Thursday, October 29th, 2009
One approach to identify relative value between the above-mentioned asset classes is to compare risk premia. For corporate bonds this is equivalent to the spread over government bonds. The comparison versus equities requires the estimation of the equity risk premium, that is the difference between the expected rate of return on the stock market and a risk-free interest rate, usually long-term government bond yields. While there are differences in the sector structure of the equity and corporate bond markets, for example with respect to technology exposure, the equity credit premium may nevertheless provide valuable insights into the relative valuation of both markets. This is because risk factors such as economic growth, risk aversion and implied equity volatility influence both markets in a similar manner.
Tags: business competition, business objectives, cash reserves, CEO, loans guide, merger, money guide, pricing policy, shareholders, shares
Posted in banking, business patterns, campaigns, credit cards, developers, equity, finances, financial risks | Comments Off
Wednesday, October 28th, 2009
The rapid growth of the European corporate bond market since 1997 has promoted the acceptance of corporate bonds as a separate asset class. Therefore, identifying relative value not only between equities and government bonds, but also relative to corporate bonds, has become a central task of asset allocators. But, of course, this analysis is also relevant from the perspective of a pure fixed income investor. Not only does it help to assess the outlook for credit spreads in general, but also to decide on the beta or, in other words, the aggressiveness of a pure corporate bond portfolio relative to its benchmark. Although it has been common use to compare equities and government bonds, it is far less common to compare equities and corporate bonds.
Tags: credit score, get out of debt, income, international markets, making money, merger, money issues, money tips, personal finances, revenue, shares
Posted in accounting, attitude, banking, equity, expenses, finances, merchandise, money spending, negotiationg | Comments Off
Wednesday, October 21st, 2009
Clearly credit and equity investors tend to look at the corporate sector from different angles. While the focus of equity markets is primarily on earnings growth, credit investors rely on debt-related factors to make their decisions. However, if one combines both perspectives the result is a stylized debt–equity cycle that may support both parties in the process of decision-making. The four phases of the cycle depend on the degree of earnings growth (high or low) and changes in leverage (rising or falling). Changes in leverage reflect the companies’ efforts to change their capital structure as well as their ability to generate cash flows. As an example we will examine the last complete debt–equity cycle that reached from 1991 to 2003.
Tags: annuitant, Annuities, banking, banks, Bearish Patterns, Budgeting, cash, company costs, currency cycles, Debt
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Monday, September 7th, 2009
Cautious investors often place stop-loss orders on their account. These orders sell out your shares should they decline by the amount of pain you anticipate you are willing to endure. Stop-loss orders are supposed to make an unmanageable situation manageable. Brokers encourage this as stock fluctuations inevitably trigger sales creating more commissions and spreads.
In a market break, the sell point may be much lower than the level you specify. For example, on a surprising corporate announcement, it is common for prices to gap down by $10 or more. Your stop loss may have only been down $2, but you will be sold out at the next trade, $10 lower. Of course, you always have the opportunity to buy back in again for more commissions and increasingly wide spreads. Stop-loss orders often lead to anger and frustration as an attempt to bring order to an unmanageable situation fails for you, yet enriches your broker.
Brokerage accounts also offer you a “parking place” for your cash. These are sweep accounts: money market funds that collect dividends and the change leftover from trades. In the old days, dividend checks and change were sent to your home and you had the onerous task of depositing them in your checking account. The sweep accounts are marketed as a great convenience to you. In fact, they are a great convenience to your broker as they gather your funds within short distance of the trading desk. Again, particularly optimistic types should have the dividends sent home. Maybe there is only $1,000 at stake, but would you rather have a new couch to lie on during the bear market or would you prefer to whittle it away in commissions, spreads, and poor stock picks?
Tags: fiscal problems, interests, manufacturers, methodology, mortgage, preserving cash
Posted in banking, budget analysis, business goals | Comments Off
Friday, August 28th, 2009
In every margin scenario, you may note, the broker collects larger commissions and more spreads than in a simple purchase-and-hold scenario. More shares are used in the transaction, plus the transaction inevitably involves a purchase, a sale, and margin interest.
Overconfidence in your investment ability is the main cause of margin investing. It is not a coincidence that the highest margin on record, $279 billion dollars, occurred at the peak of the NASDAQ in March 2000. Five years of 20 percent plus returns led investors to believe they could handle margin. Margin investing is best left to speculators or those with an admitted desire to lose their fortune. Optimists will be happier with a buy-andhold strategy. Even after the worst bear market, they will still own their stocks, assuming no bankruptcies, and have the opportunity to again hope for a great rise.
Tags: business plans, cash dynamics, credit score, executives, interests
Posted in accounting, attitude, banking | Comments Off
Wednesday, August 5th, 2009
Comfort zone investing does not mean you become a flawless investor or a spiritual giant. For most people, striving for financial maturity is a process of self-discovery and self-acceptance, not a process of self-improvement.
To achieve serenity in investing, once you know how you relate to different investments, you do not have to change who you are; you simply need to change your investments to fit you. Often in marriage or work relationships, you must change yourself if you are to be happy, because your spouse or boss is not about to change. Changing yourself is much more difficult and painful than changing your investments.
Changing investments is not, however, entirely cost free. Switching from stocks to real estate, for example, incurs taxes, commissions, closing fees, research, and assessment hours, as well as other monetary, time, and effort costs. There are social costs as well. You may have to reach outside office norms to find what works for you. If you are a real estate guy and the firm only offers 401(k)s with no REIT option and lots of free company stock, you might have to explain to your colleagues why you put nothing in the plan and spend weekends driving around looking at shopping centers.
Posted in banking, credit cards, finances, global market | Comments Off
Monday, August 3rd, 2009
The business plan offers general and specific guidance on reaching company goals. It outlines actions. It also separates the dreamers from the doers. It is often the great equalizer between the enthusiastic idea generators and the serious business people who will accomplish their dreams.
Business plans are usually annual, based on the fiscal year. But there also are multiple-year plans—the most common of which is the five-year plan.
An annual plan is operational and necessary to manage the company’s economic needs for the coming year. A five-year plan is more strategic and designed to chart the firm’s direction. In addition, five-year plans should be rolling plans.
The thinking behind a rolling five-year plan can be applied to other cyclical planning, such as the annual budget process or the marketing schedule. When May ends, for example, the managers can study the forecasts for that month and the results, determine the reasons behind the variances, then use their findings to shape a budget for the following May. Rolling plans allow managers to make the most of their budget analyses, provide greater continuity, and ease the burden of annual planning.
Tags: benchmark, business plans, economy, marketing schedule, sales
Posted in attitude, banking, budget analysis, business goals, business patterns | Comments Off
Thursday, July 30th, 2009
Businesses, especially new companies or old companies making forays into new enterprises, run the risk of sinking funds into the wrong end of the operation and then not having enough cash when it’s desperately needed. Adequately reserving for growth, especially during the early days of the business, is critical. It also helps to recognize the areas where cash can disappear without a trace.
No matter how prepared the business may think it is, unless it is operating in an area in which it has had years of experience—in terms of both the product and the market—the chances of anticipating the majority of risks that could come its way are remote. If managers hope for the best but reserve for the worst, they will find themselves in a better position when those cash-draining contingencies do arrive.
Tags: cash crunch, cash flow, productivity, profit, sales
Posted in accounting, banking, credit cards, financial risks | Comments Off