Contributions published at Finance (Kjell G. Nyborg)

This thesis examines the WTI and Brent crude oil market. Between 2005 and 2011, WTI and Brent crude oil prices were most of the time in contango. The spread between them was a reaction of the market to a higher supply of WTI and high transportation costs. Due to a pipeline that links markets in the Houston area with oil storage facilities near Cushing, the spread began to narrow. WTI and Brent crude oil prices can be expected to be similar in the future with a discount on WTI because of the high transportation costs in the U.S.

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We survey 271 investment practitioners on investment valuation practice and policy. Particular focus was set on the implementation approach of relative valuation and discounted cash flow (DCF) models. We observe that the gap between investment valuation theory and investment valuation practice appears to be thinner than what highlighted by previous studies. Investment practitioners use the mainline models that receive wide academic support, namely discounted cash flow models and capital asset pricing model (CAPM). Beside these more sophisticated models, a consistently implemented relative valuation plays an important complementary role. However, the implementation of discounted cash flow (DCF) models is still subject to a great variety of practices, and the level of awareness on the implicit assumptions on riskiness of tax shield entailed in different discounted cash flow (DCF) models appears to be limited.

Die vorliegende Arbeit zeigt auf, weshalb es zum Systemwechsel vom Nennwert- zum Kapitaleinlageprinzip kam und welche Auswirkungen die neue Regelung mit sich bringt. Aufgrund der systemwidrigen steuerlichen Behandlung von Kapitaleinlagen unter dem Nennwertprinzip und der dadurch entstandenen Standortnachteile für die Schweiz war dieser Wechsel, welcher im Rahmen der Unternehmenssteuerreform II eingeführt wurde, überfällig. Das Kapitaleinlageprinzip, wie es heute ausgestaltet ist, wird allgemein als Stärkung für den Unternehmensstandort Schweiz beurteilt. Eine nachträgliche Einschränkung der Kapitalrückzahlungsmöglichkeiten, wie dies von Teilen der Politik aufgrund der prognostizierten Mindereinnahmen gefordert wird, würde der Glaubwürdigkeit und Rechtssicherheit der Schweiz schaden.

Problem Covered Bonds are one of the most important refinancing instruments for banks in Europe and the respective market is one of the biggest private debt markets. Nevertheless, there is very little academic research on this topic. Since each country has adopted its own Covered Bond legislation, Covered Bonds might be treated very strict in one country but very limp in an other. Therefore, this paper compares several legal frameworks and overviews the Covered Bond topic from a theoretical perspective. Additionally, we analytically investigate the historical development of the Covered Bond market in terms of outstanding amount and riskiness. Method This thesis is split into three parts. The first part is based theoretical literature such as the Covered Bond Fact Book provided by the European Covered Bond Council (2011). In a first step, we propose a definition for Covered Bonds, then we introduce different issuance structures applied in different countries. Afterwards, based on existing literature, we state differences and convergences between Covered Bonds and mortgage-backed securities (MBS). In the last section we compare different legislations or contractual frameworks. In the second part, we compare the rating methodologies of the three big agencies Fitch, Moody’s and Standard & Poor’s and discuss the single procedures in detail. The last part of the thesis provides a market overview for Covered Bonds. In a first step, we analyze the outstanding amounts of Covered Bonds. Secondly, we analytically compare the development of average weekly Covered Bond prices and yield spreads for three different sub-samples: (i) by country, (ii) by country and collateral type and (iii) over all countries by collateral type. We examine data on 23,363 Covered Bonds which stem from Bloomberg and Datastream over a period from January 2005 until May 2012. Results In the first part, the developed definition consists of a list of requirements for Covered Bonds. We conclude, that a Covered Bond needs to be issued by a credit institution and that the size of the dynamic and monitored cover pool has to fit at least the outstanding bonds. Furthermore, the investors have a double recourse and their claims are ensured by protection mechanisms. Then, we inaugurate four different ways to issue Covered Bonds. The four structures are the Direct Issuance, the Pooling Model, the Issance by a specialized Funding Institution and the Issuance using a SPV.We do not find one structure superseding all other since we see advantages and disadvantages in every model. In the next section, we compare Covered Bonds and MBS. We state that MBS benefit from the independence of the issuer, the high transparency of the cover pool and lower market risk. Otherwise, Covered Bonds gain from the strict legislation, the higher quality of the cover pool and the double recourse. When comparing the legal frameworks, we find great distinctions between I the Anglo-Saxon countries and traditional European Covered Bond markets. Moreover, we observe clear distinctions between all legislations. We find some convergences when analyzing the methodologies of the rating agencies. All rating agencies rate Covered Bonds on a joint-default basis meaning that the issuer rating is both, the starting position and the lowest achievable rating. The uplift above the issuer rating is calculated differently. Fitch investigates the indipendence of the cover pool from the issuer. Moody’s focuses its analysis on the expected loss and on the probability of timely payments continuing after an issuer’s default and S&P’s approach is to analyze asset-liability mismatches. The first section of the last part examines the outstanding amount of Covered Bonds denominated in euros. Our investigation shows, that the outstanding amount of Covered Bonds backed by public sector loans has declined. The main driver behind that trend is Germany, where several legal amendments reduced the attractiveness to issue public Covered Bonds. On the other hand, the amount of outstanding mortgage Covered Bonds has increased in the last years. This trend is caused by the exploitation of new Covered Bond markets and the expanding amount of mortgage Covered Bonds in the established countries. The second purpose of the last part of the thesis is to explore the performance and the riskiness of the Covered Bond market. We find higher yield spreads for the U.S., Britain and Ireland immediately after the Lehman collapse compared to the other countries. With the beginning of the debt crisis, the spreads for countries deep in debt increased dramatically. For five countries we investigate differences between the certainty of public Covered Bonds and mortgage Covered Bonds. We find obvious differences only in countries which are struggling because of either a debt or a mortgage crisis. Additionally, for the differences of mortgage and public Covered Bonds we make a comparison over all countries. We find slightly higher spreads for mortgage Covered Bonds during the subprime crisis. With the beginning of the debt crisis we cannot observe any obvious differences. Evaluation When comparing the legal frameworks, we focus on the, in our view, most relevant criteria. We believe that the main differences between the legislation is caused by those properties. But there may be other differences not considered in this thesis which have a big influence as well. We discuss the procedures of the rating agencies in detail. But even after this study, the transparency of the methods is not fully assured. By making use of an application example, we realize that the assignment of a rating is not fully comprehensible. Since our analysis of the market development is based on analytical methods or descriptive statistics, our findings could be revised by statistical models. II

Question Structured products allow investors to diversify into all asset classes with predefined payolls. These products are orered by banks that satisfy the demand of investors and thereby also often hedge their risks. The benefit for retail investors is that they can invest beside stocks also into normally inaccessible markets, like commodities or emerging markets, with small amounts and implement their market expectations into a corresponding strategy. The issuing banks can charge high margins due to the information asymmetry between the parties. The investor is in an inferior position because of the complex pricing and also scenario misinterpretations. The lack of specific knowledge and the lack of transparency are reasons for an advantageous position of the issuers. Even in a risk-free world these reasons would play an important role. It gets even more complicated in reality, a risky world, where the issuers are a↵ected by the issuer risk, a kind of credit risk. This thesis investigates the relationship between structured products and the credit risk of issuers with the measurement of credit default swap (CDS) spreads. In particular, this thesis examines if issuers of structured products generally compensate the investors of structured products for bearing higher credit risks. The thesis further focuses on the question whether the raising awareness of investors concerning the issuer’s credit risk, mainly caused by the collapse of Lehman Brothers, forced the issuing banks to adjust their pricing policies regarding to credit risk and transparency. To a full understanding of the applied credit risk measurement we provide a theoretical part on credit default swaps. This part includes specifications of credit event triggers, the settlement, the auction process in case of a credit event as well as a theoretical and practical reflection on the method of CDS quoting. Procedure The applied data is a merger of the final database used by Woschitz (2010) and newer available data for structured products provided by Derivative Partners Group. We edit a data base of 2,742 structured products divided into six product classes. We then calculate the relative fair value gaps at issuance with the same procedure as Woschitz (2010). The fair value at issuance is computed by replicating the structured products in portfolios. The portfolios reproduce the structured products by using a bond component and an option strategy. The implied volatility as well as the market-based values for the embedded option of the structured product are determined with a method presented by Black and Scholes (1973) and Merton (1973). Finally, we end up with 1,188 fair value gaps. Due to the fact that CDS spreads exist only for large investment banks our sample is reduced to 376 fair value gaps assigned with either a 5-year CDS spread denominated in EUR or USD. Further, we provide three approaches to measure the credit risk. Firstly, we use the liquid 5-year CDS spread, secondly a linear unweighted interpolation and thirdly a linear weighted interpolation between the available upper and lower CDS spreads. While CDS spreads are available for durations of 1, 3, 5 and 10-years, structured products are much more flexible regarding to the duration. Therefore, we present the mentioned approaches. We make use of OLS regressions to analyze potential influences of the di↵erent CDS spread I approaches, which are our measurement for the issuer’s credit risk, on our calculated fair value gaps. We run regressions for three di↵erent samples and in each we distinguish between a full model, a pre and a post Lehman Brothers model. The first of the mentioned three samples is an overall sample of the available CDS spreads. In the second and third sample the CDS spreads are split into their corresponding currencies EUR and USD. Moreover, a set of control variables is included to catch several influencing factors on the fair value gaps. Results At first, the findings of the overall sample (irrespective of the CDS currency) are presented, followed by the EUR CDS findings and finally the CDS denominated in USD. Our pursued presumption for the first sample is that CDS spreads, irrespective of their currency, mirror the pure credit risk. In general, the coefficients of our first sample indicate for the approaches of the linear weighted and unweighted interpolated CDS spreads negative and highly significant relations with the fair value gap. Furthermore, we find a small negative and significant influence of the linear unweighted and weighted interpolated CDS spreads in the post Lehman Brothers sample. We interpret it in the following way: Issuers provide a compensation for their investors of structured products, if they are bearing a higher credit risk. Therefore, our prognostications are in line with the results of this sample. OLS regressions with all EUR denominated CDS spread approaches on the fair value gaps support our first hypothesis that investors are generally compensated. We receive negative coefficients for all our approaches. In terms of the linear weighted and unweighted interpolated CDS spread we observe even more negative coefficients as with the 5-year CDS. This means that investors are compensated by issuers in general for bearing credit risk. The 5-year CDS spread denominated in EUR is, however, the only credit risk measurement approach which can support the finding of Woschitz (2010) regarding a positive and significant coefficient for products issued before the bankruptcy of Lehman Brothers. In this case investors even had to pay a premium for higher credit risk. The third hypothesis, that issuers provide a compensation after the collapse of Lehman Brothers, cannot be supported by any of the approaches denominated in EUR. However, we can observe negative coefficients for all approaches but not a single one is significant. Finally, our findings for the third sample, which consists of CDS spreads denominated in USD, indicate that a strong significant and negative relationship exists for the linear weighted as well as for the linear unweighted approach in the full model and also for the products which were issued after the collapse of Lehman Brothers. We can even present a significant and negative influence of the 5-year CDS spread in the post Lehman Brothers sample. This indicates that US domiciled issuers of structured products or European issuers with a CDS denominated in USD compensate their investors in general as well as after the collapse of Lehman Brothers for bearing a higher credit risk. II General Evaluation The findings of the OLS regressions in this thesis are in line with our first hypothesis that investors are generally compensated by the issuer in level of their credit risk. However, it plays an important role which measurement in which sample is used to confirm the hypotheses. For example we could only capture a positive and significant relation in the EUR denominated sample with the 5-year CDS spread for the time before the collapse of Lehman Brothers. A guess for this result is that the 5-year CDS spread was the only CDS spread that could mirror the issuer’s credit risk until the collapse of Lehman Brothers thanks to its liquidity. Since then the demand for credit risk information increased generally and therefore also for short-termed CDS spreads which is why the interpolated CDS spread approaches performed in the post sample respectably well. This means that they are more significant and have higher coefficients than the 5-year CDS spread and are therefore presumably the more accurate measurement for credit risk in case of structured products. We can confirm overall as well as for the sample after the collapse of Lehman Brothers and irrespective of the CDS denominated currency, that in all these cases, the coefficients are negative and mostly significant. This means that investors require a compensation for bearing a higher credit risk, after the collapse of Lehman Brothers, which is provided by the issuers who changed their pricing policies due to changing circumstances and market environments.

Die vorliegende Masterarbeit widmet sich Advance Pricing Agreements. Dieses Instrument zur Vermeidung der Doppelbesteuerung wird aufgrund der zunehmenden Vernetzung mul-tinationaler Unternehmen im Welthandel immer häufiger angewendet. Die Arbeit soll ein Verständnis für die Funktionsweise von Advance Pricing Agreements schaffen. Dazu wer-den das Konzept und der Verhandlungsprozess von Advance Pricing Agreements aufge-zeigt. Des Weiteren soll die Rolle im internationalen Umfeld untersucht werden, um der wachsenden Bedeutung von Advance Pricing Agreements im Bereich der Verrechnungs-preise gerecht zu werden. Die Advance Pricing Agreement Programme ausgewählter Staa-ten werden beschrieben. Darüber hinaus wird die Situation bezüglich Advance Pricing Ag-reements in der Schweiz aufgezeigt.

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This thesis examines the possible effects of stricter capital regulations on banks. Following the history of Basel Accords, the focus of analysis lies on capital supervision and control. An issue for controversial discussions among bankers and academics, Basel III is to be implemented in the coming years as a consequence of the last financial crisis. The core element of the new directive is the requirement to raise the proportion of equity in the bank capital structure. The main reasoning is that equity is the loss-absorbing source of financing and when increased, will help to reduce the probability and severity of systemic risks. This initiative caused an intense opposition from the bankers’ side who claim, equity is too expensive compared to debt. They argue that more equity will negatively affect bank profits, lowering its lending abilities and eventually leading to a credit crunch. The thesis analyses both stand points of the debate with the conclusion that equity funding is not expensive per se. The justification of the opposite opinion can only be true under certain conditions, which include tax deductibility of debt and government guarantees. In this case, the paradoxical nature of government measures becomes obvious: strengthening the rules on capital, at the same time giving incentives to debt financing. Until the internal contradictions are solved and the message of the authorities is clear, the probability that financial institutions become risk-averse and stock up their capital reserves remains low.

Die vorliegende Bachelorarbeit beschäftigt sowohl theoretisch als auch empirisch mit Exchange Traded Funds. Der theoretische Teil, der zu Beginn der Arbeit folgt, hat zum Ziel ETFs und den Tracking Error dem Leser bekannt zu machen und ihm die Basis für die nachfolgende empirische Untersuchung zu geben. Dort werden verschiedene Aktien-ETFs (Länder-, Regionen-, Size- und Sektor-ETFs) sowie einige Rohstoff-ETFs bezüglich effizienter Preisstellung und Replikationsgüte des Benchmark-Index anhand des Tracking Errors zwischen Mid-Preis und NAV sowie jenem zwischen NAV und Benchmark-Index analysiert. Das Überprüfen auf eine effiziente Preisstellung ist insofern relevant, weil ETFs mit dem Creation-/Redemption-Prozess über einen Mechanismus verfügen, der ihnen erlauben würde die an der Börse gestellten Handelspreise im Falle einer Abweichung vom effektiven Wert des ETFs, dem NAV, durch Arbitragegeschäfte wieder ins Lot zu bringen und so einen Tracking Error zu verhindern. Die Replikationsgüte spielt wiederum eine wichtige Rolle, weil es das Ziel eines ETFs wäre, dieselbe Performance wie der Benchmark-Index zu liefern und keinen Tracking Error zu zulassen. Die empirische Analyse zeigte nun, dass bei allen untersuchten ETF-Kategorien sowohl ein Tracking Error zwischen Mid-Preis und NAV als auch zwischen NAV und Benchmark-Index auftrat, wobei dieser im ersten Fall mit mittleren täglichen Abweichungen von 0.51% bis 0.88% stets höher ausfiel als im zweiten Fall mit 0.28% bis 0.38%. Dies lässt den Schluss zu, dass es für die untersuchten ETFs schwieriger ist, effiziente Preise zu stellen, als die Performance ihres Benchmark-Index abzubilden.

We study the prices that individual banks pay for liquidity (captured by borrowing rates in repos with the central bank and benchmarked by the overnight index swap) as a function of market conditions and bank characteristics. These prices depend in particular on the distribution of liquidity across banks, which is calculated over time using individual bank-level data on reserve requirements and actual holdings. Banks pay more for liquidity when positions are more imbalanced across banks, consistent with the existence of short squeezing. We also show that small banks pay more for liquidity and are more vulnerable to squeezes. Healthier banks pay less but, contrary to what one might expect, banks in formal liquidity networks do not. State guarantees reduce the price of liquidity but do not protect against squeezes.

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Die vorliegende Bachelorarbeit beschäftigt sowohl theoretisch als auch empirisch mit Exchange Traded Funds. Der theoretische Teil, der zu Beginn der Arbeit folgt, hat zum Ziel ETFs und den Tracking Error dem Leser bekannt zu machen und ihm die Basis für die nachfolgende empirische Untersuchung zu geben. Dort werden verschiedene Aktien-ETFs (Länder-, Regionen-, Size- und Sektor-ETFs) sowie einige Rohstoff-ETFs bezüglich effizienter Preisstellung und Replikationsgüte des Benchmark-Index anhand des Tracking Errors zwischen Mid-Preis und NAV sowie jenem zwischen NAV und Benchmark-Index analysiert. Das Überprüfen auf eine effiziente Preisstellung ist insofern relevant, weil ETFs mit dem Creation-/Redemption-Prozess über einen Mechanismus verfügen, der ihnen erlauben würde die an der Börse gestellten Handelspreise im Falle einer Abweichung vom effektiven Wert des ETFs, dem NAV, durch Arbitragegeschäfte wieder ins Lot zu bringen und so einen Tracking Error zu verhindern. Die Replikationsgüte spielt wiederum eine wichtige Rolle, weil es das Ziel eines ETFs wäre, dieselbe Performance wie der Benchmark-Index zu liefern und keinen Tracking Error zu zulassen. Die empirische Analyse zeigte nun, dass bei allen untersuchten ETF-Kategorien sowohl ein Tracking Error zwischen Mid-Preis und NAV als auch zwischen NAV und Benchmark-Index auftrat, wobei dieser im ersten Fall mit mittleren täglichen Abweichungen von 0.51% bis 0.88% stets höher ausfiel als im zweiten Fall mit 0.28% bis 0.38%. Dies lässt den Schluss zu, dass es für die untersuchten ETFs schwieriger ist, effiziente Preise zu stellen, als die Performance ihres Benchmark-Index abzubilden.

Cross-border M&A plays a pivotal role in the internationalization process of Chinese firms. This thesis empirically examines the wealth effects for Chinese acquirers in such transactions and analyzes the cross-sectional determinants in cumulative abnormal returns using a short-run event study model and multivariate regressions. Based on a sample of 117 outbound transactions conducted between January 2000 and February 2011, I find strong evidence that bidders, on average, gain abnormal returns of 1.4% to 2.0% over the three-day window [-1,+1] and 0.9% to 1.3% on the announcement day itself. Ceteris paribus, the bidder abnormal returns increase significantly, (1) when the bidder has the experience of more than two cross-border deals, (2) the more culturally similar the target country to China, (3) the larger the transaction relative to the bidder’s size, (4) the lower the pre-offer market-to-book ratio of the acquirer, and (5) the smaller the acquiring firm. The thesis extends the preliminary research by Boateng, Qian and Tianle (2008) and Chen and Lin (2009) on short-term wealth effects for Chinese acquirers in outbound M&A, initiates research on several determinants of M&A success in the Chinese cross-border context and tests the generalization of results from developed countries in an important emerging market.

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We develop an incomplete contracts model to study the extent to which control rights of different financings affect corporate growth. The model admits a standard hold-up problem under equity financing; insiders may be disincentivized to do R&D because outside investors can use their control rights to expropriate large parts of the returns by hiring more efficient managers in the future. Debt financing may give rise to a double moral hazard problem; both managers and shareholders may divert corporate resources to themselves before debt is serviced. However, in many cases, these phenomena do not occur in equilibrium and control rights are irrelevant. Cross-sectional predictions are derived from those cases where control rights matter. Consistent with the empirical evidence, leverage is inversely related to growth and to profitability.