Archive for the ‘financial risks’ Category
Wednesday, April 14th, 2010
As the previous section has shown, some price effects of trading are temporary, and in an efficient market, in the long run, prices are expected to return to their fundamental values. However, the equilibrium price itself is not a fixed value, but moves with public news and information revealed by the trading process. In this section, we develop models that separate the equilibrium price dynamics from short-term price fluctuations around the equilibrium. Such models can be used, for example, to assess the speed of convergence to the equilibrium after a shock (e.g. a large transaction). The variance of the short-term deviations from the equilibrium price are a measure of market liquidity.
Finally, in a setting where one asset is traded on several different markets (fragmented trading), the models can be used to assess how informative the trading process is in each market (the contribution to price discovery); this last topic will be dealt with in section 9.4.
Tags: business competition, CEO, merger, pricing policy, shareholders, shares
Posted in financial risks, funds, global market, innovative marketing, loans | Comments Off
Friday, October 30th, 2009
Whenever the equity risk premium falls below current spread levels, there is a quasi-arbitrage opportunity between corporate bonds and equities. After a long period with a positive equity credit premium, the picture changed in 1999, signaling the height of the equity bubble. The interpretation of this was that expected returns on corporate bonds versus equities were extremely attractive. While corporate bonds actually outperformed equities by far between 2000 and 2002, those years were characterized by a massive widening of credit spreads. Due to the bursting of the tech bubble and the credit spread tightening since fall 2002, the gap has closed.
Tags: bad debt, business objectives, car loans, compare credit, currency trading, debt consolidation, debt settlement, forex, funds, home equity, investment opportunities, loans guide, portfolio, refinancing
Posted in budget analysis, business goals, finances, financial principles, financial risks, loans, management, merchandise | 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
Saturday, October 24th, 2009
Credit spreads historically have been negatively correlated with 3-year rolling equity-market returns, as we would have expected from the Merton model. Indeed, there seems to be a longer term debt–equity cycle. But the chart also reveals a significant decoupling of equity and credit during the 1990s. Since equity-market performance alone is only temporarily able to explain variations of credit spreads, we will now analyze the impact of equity volatility on spreads. However, most of the time equity prices and implied volatility tell the same story. When stock prices are falling, demand for protection increases, and thus volatility, which is simply the price of protection, rises. The result is a strong negative correlation between equity prices and option-implied volatility. Yet the times, when both markets tell different stories, are the most interesting.
Tags: market cycles, money, Partnership, payment, price, Private Annuities, property, purchase real estate, shares, tax
Posted in finances, financial principles, financial risks, funds, global market, innovative marketing, loans | 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