Discussion Papers

The ICMA Centre is dedicated to high quality academic research in all financial markets, broadly defined. Well over 100 discussion papers are available to download (see menu on left). 

2014 Series

All discussion papers are downloadable on the SSRN website.

Risk-adjusted Valuation of the Real Option to Invest

Reference: 2014-16
Authors: Carol Alexander School of Business, Management and Economics, University of Sussex Xi Chen Henley Business School, University of Reading Charles Ward Henley Business School, University of Reading

This paper resolves the conceptual ambiguity of real option value and derives a model using risk-adjusted discount rates that can be applied to value the option to invest in a project. The approach adopts stochastic revenue and costs which provide a general solution with the added virtue of applicability. We found the option value arises from the difference between anContinue reading


Liquidity Risk Premia in the International Shipping Derivatives Market

Reference: 2014-15
Authors: Amir Alizadeh Cass Business School, City University Konstantina Kappou ICMA Centre, Henley Business School, University of Reading Dimitris Tsouknidis Regent’s University London Ilias Visvikis World Maritime University

The study examines the existence of liquidity risk premia on freight derivatives returns. The Amihud liquidity ratio and bid-ask spreads are utilized to assess the existence of liquidity premia. Other macroeconomic variables are used to control for market risk. Results indicate that liquidity risk is priced and both liquidity measures have a significant role in determining freight derivatives returns. ConsistentContinue reading


The Effects of Corporate and Country Sustainability Characteristics on the Cost of Debt: An International Investigation

Reference: 2014-14
Authors: Andreas Hoepner ICMA Centre, Henley Business School, University of Reading Ioannis Oikonomou ICMA Centre, Henley Business School, University of Reading Bert Scholtens Department of Economics, Econometrics and Finance, University of Groningen and School of Management, University of St Andrews Michael Schröder SEW Mannheim, International Finance and Financial Management and Frankfurt School of Finance & Management

We investigate the relationship between corporate and country sustainability on the cost of bank loans. We look into 470 loan agreements signed between 2005 and 2012 with borrowers based on 28 different countries across the world and operating in all major industries. Our principal findings reveal that country sustainability related to both social and environmental frameworks has a statistically andContinue reading


Sources of Stakeholder Salience in the Responsible Investment Movement: Why Do Investors Sign the Principles for Responsible Investment?

Reference: 2014-13
Authors: Arleta A Majoch ICMA Centre, Henley Business School, University of Reading Andreas G F Hoepner ICMA Centre, Henley Business School, University of Reading Tessa Hebb Carleton Centre for Community Innovation, Carleton University

Using five years of internal proprietary data collected directly from United Nations supported Principles for Responsible Investment (PRI) signatories, we examine the attributes of the stakeholder relationship between investment organisations and the PRI. The analysis is carried out in the framework of Mitchell’s et al. (1997) theory of stakeholder salience and its further developments by Gifford (2010).The findings highlight pragmaticContinue reading


Assessing the Evidence of Macro- Forecaster Herding: Forecasts of Inflation and Output Growth

Reference: 2014-12
Authors: Michael P Clements

We consider a number of ways of testing whether macroeconomic forecasters herd or anti-herd, i.e., whether they shade their forecasts towards those of others or purpose- fully exaggerate their differences. When applied to survey respondents expectations of inflation and output growth the tests indicate conflicting behaviour. We show that this can be explained in terms of a simple model inContinue reading


Variety is the Spice of Life – and Boardrooms

Reference: 2014-11
Authors: Carol Padgett

We examine the impact of board diversity on both the corporate value and equity risk of British companies since the financial crisis. We find that the inclusion of overseas directors on boards improves market value and reduces equity risk. When the number of female directors included on the board reaches a critical mass this also increases corporate value but hasContinue reading


Do US Macroeconomic Forecasters Exaggerate Their Differences?

Reference: 2014-10
Authors: Michael P. Clements, ICMA Centre, Henley Business School

Application of the Bernhardt, Campello and Kutsoati (2006) test of herding to the calendar-year annual output growth and inflation forecasts suggests forecasters tend to exaggerate their differences, except at the shortest horizon when they tend to herd. We consider whether these types of behaviour can help to explain the puzzle that professional forecasters sometimes make point predictions and histogram forecastsContinue reading


Commodity Risk Factors and the Cross-Section of Equity Returns

Reference: 2014-9
Authors: Chris Brooks, ICMA Centre; Adrian Fernandez-Perez, Auckland University of Technology, Auckland, NZ; Joëlle Miffre EDHEC Business School, France; Ogonna Nneji, ICMA Centre

The article examines whether commodity risk is priced in the cross-section of equity returns. Alongside a long-only equally-weighted portfolio of commodity futures, we employ as an alternative commodity risk factor a term structure portfolio that captures the propensity of commodity futures markets to be backwardated or contangoed. Equity-sorted portfolios with greater sensitivities to the two commodity risk factors command higherContinue reading


Monte Carlo Approximate Tensor Moment Simulations

Reference: 2014-8
Authors: Juan C. Arismendi, ICMA Centre, University of Reading and University of Brasilia and Herbert Kimura, University of Brasilia

An algorithm to generate samples with approximate first-, second-, and third-order moments is presented extending the Cholesky matrix decomposition to a Cholesky tensor decomposition of an arbitrary order. The tensor decomposition of the first-, second-, and third-order objective moments generates a non-linear system of equations. The algorithm solves these equations by numerical methods. The results show that the optimisation algorithm delivers samples with an approximate errorContinue reading


An Analytic Approximation of the Implied Risk-Neutral Density of American Multi-Asset Options

Reference: 2014-7
Authors: Juan C. Arismendi, ICMA Centre and Universidade de Brasília (UnB) and Marcel Prokopczuk, Zeppelin University and ICMA Centre

The price of a European option can be computed as the expected value of the payoff function under the risk-neutral measure. For American options and path-dependent options in general, this principle can not be applied. In this paper, we derive a model-free analytical formula for the implied risk-neutral density under which the expected value will be the price of theContinue reading


Anticipating Early Data Revisions to US GDP and the Effects of Releases on Equity Markets

Reference: 2014-6
Authors: Michael P. Clements and Ana Beatriz Galvão

The effects of data uncertainty on real-time decision-making can be reduced by predicting early revisions to US GDP growth. We show that survey forecasts efficiently anticipate the first-revised estimate of GDP, but that forecasting models incorporating monthly economic indicators and daily equity returns provide superior forecasts of the second-revised estimate. We consider the implications of these findings for analyses ofContinue reading


Real-Time Factor Model Forecasting and the Effects of Instability

Reference: 2014-5
Authors: Michael P. Clements

We show that factor forecasting models deliver real-time gains over autoregressive models for US real activity variables during the recent period, but are less successful for nominal variables. The gains are largely due to the Financial Crisis period, and are primarily at the shortest (one quarter ahead) horizon. Excluding the pre-Great Moderation years from the factor forecasting model estimation periodContinue reading


Measuring Macroeconomic Uncertainty: US Inflation and Output Growth

Reference: 2014-4
Authors: Michael P Clements and Ana Beatriz Galvão

We find that model estimates of the term structure of ex ante or perceived macro uncertainty are more in line with realized uncertainty than survey respondents’ perceptions for both inflation and output growth. Survey estimates contain short-term vari- ation in short-horizon uncertainty which is less evident in the model-based estimates. We consider the extent to which these short-term variations coincideContinue reading


A Multi-Asset Option Approximation for General Stochastic Processes

Reference: 2014-3
Authors: Juan C Arismendi

We derived a model-free analytical approximation of the price of a multi-asset option defined over an arbitrary multivariate process, applying a semi-parametric expansion of the unknown risk-neutral density with the moments. The analytical expansion termed as the Multivariate Generalised Edgeworth Expansion (MGEE) is an infinite series over the derivatives of the known continuous time density. The expected value of the density expansion is calculated to approximateContinue reading


Asset Liability Modelling and Pension Schemes: the Application of Robust Optimization to USS

Reference: 2014-2b
Authors: Emmanouil Platanakis and Charles Sutcliffe

This paper uses a novel numerical optimization technique – robust optimization – that is well suited to solving the asset-liability management (ALM) problem for pension schemes. It requires the estimation of fewer stochastic parameters, reduces estimation risk and adopts a prudent approach to asset allocation. This study is the first to apply it to a real-world pension scheme. We disaggregateContinue reading


Long-Run Restrictions and Survey Forecasts of Output, Consumption and Investment

Reference: 2014-2
Authors: Michael P Clements

We consider whether imposing long-run restrictions on survey respondents’ long-horizon forecasts will enhance their accuracy. The restrictions are motivated by the belief that the macro-variables consumption, investment and output move together in the long run, and that this should be evident in long-horizon forecasts. The restrictions are imposed by exponential-tilting of simple auxiliary forecast densities. We find a modest overallContinue reading


Did Purchasing Power Parity Hold in Medieval Europe?

Reference: 2014-1
Authors: Adrian R. Bell, Chris Brooks and Tony K Moore

This paper employs a unique, hand-collected dataset of exchange rates for five major currencies (the lira of Barcelona, the pound sterling of England, the pond groot of Flanders, the florin of Florence and the livre tournois of France) to consider whether the law of one price and purchasing power parity held in Europe during the late fourteenth and early fifteenth centuries. Using single seriesContinue reading