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Category Archives: G20

Modeling Variation in U.S. Bank Holding Companies’ Net Interest Margins

By Daniel Dorchuck

This study explores variation in US bank holding companies’ (BHCs) net inter-est margins (NIMs) and the effects of interest rate risk exposure on NIMs. Interest rate risk (IRR) is intrinsic in maturity transformation and financial intermediation as banks take on short-term liabilities in the form of deposits and create assets in the form of loans with longer maturities and different repricing profiles. Accordingly, interest rate risk is necessary for bank holding companies (BHCs) to be profitable in financial intermediation, and net interest margins are chosen as a variable of inter-est because they are an isolated measure of bank’ profitability from interest earning assets. Naturally, BHCs employ maturity pairing and derivative hedging to mitigate IRR and ultimately increase and smooth earnings. Synthesizing banks’ balance sheet and income statement data, macroeconomic variables, credit conditions, and interest rate environment variables, this study hopes to expand on existing work by provid-ing insight on the determinants of NIMs as well as interest rate derivatives’ efficacy in increasing and stabilizing net interest margins. The models presented establish links between long term rate exposure, risk-averse capital positions, and increased margins. Additionally, the models suggest that banks earn smaller spreads (NIMs) in higher interest rate environments but benefit from steeper yield curves.

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Advisor: Mary Beth Fisher, Kent Kimbrough |  JEL Codes: E44, G20, G21 | Tagged: Depository Institutions, Interest Rate Derivatives, Interest Rate Risk, Net Interest Margins, US Commercial Banking 

Word-of-Mouth Effects in the Holdings and Trading Activities among Canadian Mutual Fund Managers

By Chang Liu

The study tests the word-of-mouth effects among mutual fund managers in Canada with methodology based on a previous study (Hong et al., 2005), with multiple modifications to it such as the method to locate the mutual fund managers. The results confirm the original findings yet with unexpected outcomes. This study demonstrates smaller word-of-mouth effects compared to the original study and reverse word-of-mouth effects in the largest financial city of Canada. The possible interpretations are further discussed in detail, among which a dynamic model of word-of-mouths effects and product differentiation is introduced. The study also discusses the market structure’s possible implications on such dynamic models.

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Advisor: Jia Li | JEL Codes: G02, G15, G20, G21 | Tagged: Word-of-Mouth, Product Differentiation, Herding Behavior

Are Asset Allocation Funds Good at Market Timing?

By Yunze Chen

“Don’t forget that your incredible success in consistently making each move at the right time in the
market is but my pathetic failure in making each move at the wrong time. … … I don’t know anyone who can do it successfully, nor anyone who has done so in the past. Heck, I don’t even know anyone who knows anyone who has timed the market with consistent, successful, replicable results.” (John Bogle, quoted in The Finance Buff, 2011).

John C. Bogle, the founder of the Vanguard Group, has long insisted on the superiority of index funds over actively managed mutual funds and the foolishness of attempts to time the market. He published two articles in the Journal of Portfolio Management showing that in eight out of nine style categories, managed mutual funds had lower risk-adjusted returns than the corresponding indexes did. While this demonstrates the failure of stock picking by mutual funds to serve investors well, it says nothing about their ability to time the market by changing styles. Managers of asset allocation funds often use a flexible combination of stocks, bonds, and cash; some, but not all, shift assets frequently based on analysis of business-cycle trends. To test his view of market timing, we evaluated the returns of 82 major asset allocation funds by comparing them with the returns of corresponding baskets of Vanguard’s index funds over a 13-year time span. We find that on average the index funds have higher risk-adjusted returns. We conclude that “simplicity is the ultimate sophistication” applies to mutual fund investments.

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Advisor: Edward Tower | JEL Codes: G10, G11, G20 | Tagged: Expense Ratio, Mutual fund families, Performance

Auctions as an Alternative to Book Building in the IPO Process: An Examination of Underpricing for Large Firms in France

By John Mekjian

A relevant factor in determining the quality of an initial public offering (IPO) mechanism is the level and variability of underpricing that occurs. The percentage difference between the IPO price and the closing price after one day of trading is a common way to define the “underpricing” of the stock. Although companies may value a small amount of positive underpricing, they certainly want this to be controlled. Both extreme positive and extreme negative underpricing are undesirable for a company. Building off of a paper that found a lower mean and variability of underpricing for firms that use the auction IPO mechanism as opposed to the book building IPO mechanism, this paper argues that auctions are not disadvantaged when only large firms are considered. Although this paper finds that the book building mechanism controls underpricing better than the auction mechanism, the advantage disappears when considering only large firms. This analysis is relevant because, aside from two companies, only small companies have used the auction IPO mechanism in the United States. Due to the lack of auction IPOs in the United States, this paper uses French data in its analysis. By showing that large firms using the auction mechanism are not disadvantaged when compared to large firms using the book building mechanism, this paper attempts to encourage large firms in the United States to consider using the auction method for their IPOs.

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Advisor: James Roberts, Marjorie McElroy | JEL Codes: G12, G14, G20, G30 | Tagged: Auction, IPO, Underpricing

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