Kent Centre for Finance

Professor Roman Matousek, Kent Business School organizes a research workshop that will be held in Bloomberg London’s Office on 2 July 2014. The workshop aims to focus on the post financial crisis period and the implication of systemic changes in banking regulation on financial institutions’ business model. A panel of financial experts will among other discuss how an enormous public pressure has forced financial institutions to ‘revise’ a business model that has been based on excessive risk taking activities. The key question remains if the changes in bank’s corporate governance are temporary measures or a systemic change for the financial system.

Dr. Silvia Stanescu was invited to speak at the 2014 ICBI Global Derivatives Conference, a prestigious quantitative finance practitioners’ conference, where she presented recent joint work with Professor Radu Tunaru on investment strategies with volatility derivatives. In the first part of the presented study, the authors analyse the performance of various portfolios mixing equity with bonds but also considering volatility futures. The analysis was carried out comparatively for US using VIX futures and also for the Eurozone where VSTOXX futures were employed. The results point out that the best portfolio will contain a large proportion of equity, a smaller proportion of bonds and also of volatility index futures. The key finding here is that bonds will help investors in periods of liquidity pressure while volatility futures will help to insulate the portfolio against temporary market crashes and systemic shock events. In the second part of the study, the authors identify a statistical arbitrage opportunity between the VIX and VSTOXX futures markets. The analysis is based on a unique data set, comprising the synchronous daily time-series of VIX and VSTOXX futures prices, which was compiled with help from Eurex. The in-sample results show that the VIX-VSTOXX (futures price) difference is significantly negative, in effect that there was more volatility in the Eurozone than in US. This relationship may change in the future but the statistical methodology presented in the paper along with the proposed trading strategies can be applied the same way. The presented study is available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2351427.

Tommaso Paletta has presented a poster at the prestigious Bachelier congress that was hold in Bruxelles this year. Tommaso has presented a summary of one of his papers “Pricing and Hedging Basket Options with Exact Moment Matching”, jointly with Dr. Arturo Leccadito from University of Calabria and Prof. Radu Tunaru from KBS.

Dr Huamao Wang (SMSAS) made a presentation titled Investment for cash flows with mixed-costs guarantee and jump risk, joint with Pengfei Luo and Zhaojun Yang,at the 4th International Conference of Financial Engineering and Banking Society (FEBS), University of Surrey, on 21-23 June 2014.

Abstract: Many SMEs and young entrepreneurs’ accesses to debt financing are subject to low credibility. A mixed-costs guarantee swap with both equity and cash as guarantee fees solves the borrowing constraint, since it provides profits to the insurer during recession and prosperity. With debt and equity financing, a SME invests in a project with the earnings demonstrating leptokurtic returns, upward and downward jumps, which is captured by a double exponential jump diffusion process. Our numerical analysis shows that the jump intensity increases firm option value and delays investment. The guarantee level reduces credit spread until zero. The large marginal cost of debt financing leads to under-investment and low agency cost, while the high guarantee fee results in over-investment and high agency cost. Essentially, the equity-maximizing policy is more risky with over-investment.

Dr Nikolaos Voukelatos from Ken Business School had a working paper presented at the 7^th Financial Risks International Forum at Paris in March 2014. The paper examines the effects of tick size changes on the liquidity of options markets.

Dr Ekaterini Panopoulou (KBS) presented her paper “Hedge Fund Return Predictability; To Combine Forecasts or Combine Information” joint with S. Vrontos at the 31st French Finance Association Conference, held at Puyricard, Aix-en-Provence at the IAE Aix Graduate School of Management, Aix-Marseille University (May 19-21, 2014).

Dr Nikolaos Voukelatos (KBS) had a working paper presented at the 31st Spring International Conference of the French Finance Association at Aix-en-Provence in May 2014. The paper examines the effects of tick size changes on the liquidity of options markets.