Although the role of irrationality in the trading choice has been extensively discussed in the li... more Although the role of irrationality in the trading choice has been extensively discussed in the literature, individual characteristics, which are equally crucial, have been neglected. The purpose of this paper is to add a different way of looking with finance by focusing on individuals’ emotions. In particular, this work emphasizes the role of social life in emotional states. We investigated several possible links between psychological factors and trading choices in a sample of non professional agents, which managed a virtual portfolio pretending to be traders. Using a series of daily surveys over a seven week period as well as introductive inventory surveys, we constructed measures of personality traits and emotional moods and correlate these with subjects’ financial choices. Our aim is to find some evidence of the contribution of emotional state to the way to invest, indicating the added value of using an emotional intelligence measure beyond the classic economic theory. JEL classi...
We investigate the effect of founder family influence on hedging and speculation in medium-sized,... more We investigate the effect of founder family influence on hedging and speculation in medium-sized, manufacturing firms in Denmark. On a crude measure of use / non-use of foreign exchange rate, interest rate, and commodity price derivatives we find only a weak indication of differences between founder family firms (firms in which the founder of the firm or members of his/her family are active in the management team, are present in the board of directors, and/or are shareholders of the firm) and other firms. Digging deeper into a subsample of users of foreign exchange derivatives and/or debt denominated in foreign currency, we find that founder family firms not only tend to hedge more extensively, they also tend to speculate more often than other firms. This surprising result is in line with founder families’ lack of monetary diversification and their non-pecuniary investment in the firm (hedging) and in line with strands of the behavioral finance literature that emphasizes the better-...
In this paper, we investigate the contribution of interest rate structured bonds to portfolios of... more In this paper, we investigate the contribution of interest rate structured bonds to portfolios of risk-averse retail investors. We conduct our analysis by simulating the term structure according to a multifactor no-arbitrage interest rate model and comparing the performance of a portfolio consisting of basic products (zero-coupon bonds, coupon bonds and floating rate notes) with a portfolio containing more sophisticated exotic products (like constant maturity swaps, collars, spread and volatility notes). Our analysis, performed under different market environments, as well as volatility and correlation levels, takes into account the combined effects of risk premiums required by investors and fees that they have to pay. Our results show that capital protected interest rate structured products allow investors to improve risk–return trade-off if no fees are considered. With fees, our simulations show that structured products add value to the basic portfolio in a very limited number of cases. We believe our paper contributes to understanding the role of structured products in investors portfolios also in light of the current regulatory debate on the use of complex financial products by retail investors
This paper explores the implications of a housing market bubble for three critical elements of mo... more This paper explores the implications of a housing market bubble for three critical elements of mortgage contract design: difference between term to maturity and amortization period; prepayment options; and, lender recourse in the event of default. Using an extension of classical immunization theory, this paper provides equilibrium conditions demonstrating the risk reduction benefits of shorter term to contract maturity at origination for lenders of long amortization mortgage contracts. In addition, the risks of underpricing prepayment and no recourse default options in the mortgage contract when compared with full recourse mortgage contracts having yield maintenance prepayment penalties are explored by contrasting the ability of US and Canadian mortgage funding systems to withstand a housing market bubble collapse that might occur.
Journal of Behavioral and Experimental Finance, 2018
Although the role of irrationality in trading choices has been extensively discussed in the liter... more Although the role of irrationality in trading choices has been extensively discussed in the literature, individual incidental emotions have been neglected. We investigated emotional explanatory factors and trading choices in a sample of non-professional agents who managed a virtual financial positions pretending to be traders. Using a series of daily surveys over a five-week period as well as introductive inventory surveys, we constructed measures of core affect and emotions and correlated these with subjects' financial choices. Our purpose is to test if the decision to buy or sell financial assets is affected by the emotional state of individuals, considering also gender clusters. A focus is on incidental emotions, detecting how positive emotions due to sexual activity may alter financial trading choices. Our findings suggest that agents incorrectly attribute their good mood to positive economic perspectives rather than positive emotions.
This paper provides theoretical results for the design of contracts used in the market for reside... more This paper provides theoretical results for the design of contracts used in the market for residential household mortgages and mortgage securities. Critical elements in the problem of immunizing systemic risk through efficient contract design are identified. Using an extension of classical immunization theory, this paper demonstrates that systemic risk of long amortization mortgage contracts is reduced when term to maturity of the contract at origination is significantly less than the amortization period. In addition, incorporating prepayment and limited recourse default options into the mortgage contract increases systemic risk when compared with full recourse mortgage contracts having yield maintenance prepayment penalties. The theoretical results are used to evaluate the systemic risk management problems that have plagued the US mortgage funding system.
Weather derivatives allow to hedge weather risk that is the financial gain or loss due to variabi... more Weather derivatives allow to hedge weather risk that is the financial gain or loss due to variability in climatic conditions. The market originated in 19982 when the US power community realised that the high volatility of revenues due to weather variability could be controlled and, ...
This research analyzes the relationship between the carbon and the energy market. These two marke... more This research analyzes the relationship between the carbon and the energy market. These two markets are linked together on a regulatory and on a structural basis. The energy sector is the most important industry within the European Emission Trading Scheme (EU ETS): as ...
ABSTRACT In this paper we investigate the contribution of structured bonds to the efficient front... more ABSTRACT In this paper we investigate the contribution of structured bonds to the efficient frontier. We conduct our analysis by simulating the term structure according to a no-arbitrage multifactor model (G2 ) and comparing the performance of basic products (like zero-coupon bond, coupon bond and floating rate notes) with respect to more sophisticated products (like cms, collars, spread and volatility notes). In particular, our analysis considers different initial market environment like interest rate term structure shapes, as well as volatility and correlation in its changes and takes into account how the combined effect of risk-premium required by investors and fees that they have to pay can change the portfolio allocation respect to the one made only of basic securities. Our simulation results show that structured products can be an interesting investment only under particular scenarios. However, in general the return net of the fees in these securities is in average lower than the return in basic securities.
Journal of Multinational Financial Management, 2005
... They find that Finnish funds fees decrease over time and that they are higher for bank manage... more ... They find that Finnish funds fees decrease over time and that they are higher for bank managed funds and older funds. ... As far as fund type is concerned, two different funds classifications are used in Italy: the Bank of Italy and the Assogestioni 5 classifications. ...
Journal of International Financial Markets, Institutions and Money, 2010
European electricity markets have been subject to a broad deregulation process in the last few de... more European electricity markets have been subject to a broad deregulation process in the last few decades. We analyse hedging policies implemented through different hedge ratios estimation. More specifically we compare naïve, ordinary least squares, and GARCH conditional variance and correlations models to test if GARCH models lead to higher variance reduction in a context of high time varying volatility as the case of electricity markets. Our results show that the choice of the hedge ratio estimation model is central on determining the effectiveness of futures hedging to reduce the portfolio volatility.
PurposeThe purpose of this study is to explore the influence of founder families in medium‐sized ... more PurposeThe purpose of this study is to explore the influence of founder families in medium‐sized manufacturing firms and to investigate the impact of such influence on risk management – more specifically foreign exchange hedging and speculation.Design/methodology/approachThis empirical study uses survey data and publicly available data for descriptive analysis and ordinary least squares/ordered regression analysis.FindingsThe authors find that two thirds of medium‐sized manufacturing firms are founder family firms in which the founder of the firm or members of his/her family are active in the management team, are members of the board of directors, and/or are shareholders of the firm. The study finds no difference between such founder family firms and other firms in terms of the use/non‐use decision related to foreign exchange derivatives but a marked difference in terms of the extent decision. Thus, founder family firms tend not only to hedge but also to speculate more extensively t...
Concentration of family-based ownership and recent development of private equity companies in Con... more Concentration of family-based ownership and recent development of private equity companies in Continental Europe suggest that the motivations and results of publicto-private (PTP) deals may differ from well-studied cases in the USA and the UK. We overview the PTP market and measure the cumulative abnormal returns (CARs) of 106 PTP deals concluded in Continental Europe from 2000 to 2005, introducing a model to explain the abnormal returns. Our results partially confirm findings of previous studies, namely, that undervalued and smaller firms register higher CARs. We additionally find that deals promoted by family owners register higher abnormal returns, whereas financial investors and private operating firms show no impact.
This paper investigates the cross-market price linkages in actively traded, major agricultural an... more This paper investigates the cross-market price linkages in actively traded, major agricultural and energy commodities, impacted by three global episodes over the 1971-2018 time frame. As episodes, we identify the rapid increase of prices during the 1970's, the commodity depression of the 1990's, the credit crunch and sovereign debt crisis in the 2000's. We find that during the rapid price increase in 1970's, all the major agricultural commodity are influenced by a series of events, including the Soviet Union's unexpected purchase of a large amount of grain in the global markets. During the commodity depression, a negative relationship is shown by all the agricultural commodities. The credit crunch and sovereign debt shows a positive impact for only wheat whereas oats show a negative relationship. We also investigate these three episodes on non-agricultural commodity sectors (wood and animal, precious metal and energy sector). The paper demonstrates the increase in the energy prices supporting the cross-market linkages between the stock and crude oil markets as a result of the financialization of commodities.
Although the role of irrationality in the trading choice has been extensively discussed in the li... more Although the role of irrationality in the trading choice has been extensively discussed in the literature, individual characteristics, which are equally crucial, have been neglected. The purpose of this paper is to add a different way of looking with finance by focusing on individuals’ emotions. In particular, this work emphasizes the role of social life in emotional states. We investigated several possible links between psychological factors and trading choices in a sample of non professional agents, which managed a virtual portfolio pretending to be traders. Using a series of daily surveys over a seven week period as well as introductive inventory surveys, we constructed measures of personality traits and emotional moods and correlate these with subjects’ financial choices. Our aim is to find some evidence of the contribution of emotional state to the way to invest, indicating the added value of using an emotional intelligence measure beyond the classic economic theory. JEL classi...
We investigate the effect of founder family influence on hedging and speculation in medium-sized,... more We investigate the effect of founder family influence on hedging and speculation in medium-sized, manufacturing firms in Denmark. On a crude measure of use / non-use of foreign exchange rate, interest rate, and commodity price derivatives we find only a weak indication of differences between founder family firms (firms in which the founder of the firm or members of his/her family are active in the management team, are present in the board of directors, and/or are shareholders of the firm) and other firms. Digging deeper into a subsample of users of foreign exchange derivatives and/or debt denominated in foreign currency, we find that founder family firms not only tend to hedge more extensively, they also tend to speculate more often than other firms. This surprising result is in line with founder families’ lack of monetary diversification and their non-pecuniary investment in the firm (hedging) and in line with strands of the behavioral finance literature that emphasizes the better-...
In this paper, we investigate the contribution of interest rate structured bonds to portfolios of... more In this paper, we investigate the contribution of interest rate structured bonds to portfolios of risk-averse retail investors. We conduct our analysis by simulating the term structure according to a multifactor no-arbitrage interest rate model and comparing the performance of a portfolio consisting of basic products (zero-coupon bonds, coupon bonds and floating rate notes) with a portfolio containing more sophisticated exotic products (like constant maturity swaps, collars, spread and volatility notes). Our analysis, performed under different market environments, as well as volatility and correlation levels, takes into account the combined effects of risk premiums required by investors and fees that they have to pay. Our results show that capital protected interest rate structured products allow investors to improve risk–return trade-off if no fees are considered. With fees, our simulations show that structured products add value to the basic portfolio in a very limited number of cases. We believe our paper contributes to understanding the role of structured products in investors portfolios also in light of the current regulatory debate on the use of complex financial products by retail investors
This paper explores the implications of a housing market bubble for three critical elements of mo... more This paper explores the implications of a housing market bubble for three critical elements of mortgage contract design: difference between term to maturity and amortization period; prepayment options; and, lender recourse in the event of default. Using an extension of classical immunization theory, this paper provides equilibrium conditions demonstrating the risk reduction benefits of shorter term to contract maturity at origination for lenders of long amortization mortgage contracts. In addition, the risks of underpricing prepayment and no recourse default options in the mortgage contract when compared with full recourse mortgage contracts having yield maintenance prepayment penalties are explored by contrasting the ability of US and Canadian mortgage funding systems to withstand a housing market bubble collapse that might occur.
Journal of Behavioral and Experimental Finance, 2018
Although the role of irrationality in trading choices has been extensively discussed in the liter... more Although the role of irrationality in trading choices has been extensively discussed in the literature, individual incidental emotions have been neglected. We investigated emotional explanatory factors and trading choices in a sample of non-professional agents who managed a virtual financial positions pretending to be traders. Using a series of daily surveys over a five-week period as well as introductive inventory surveys, we constructed measures of core affect and emotions and correlated these with subjects' financial choices. Our purpose is to test if the decision to buy or sell financial assets is affected by the emotional state of individuals, considering also gender clusters. A focus is on incidental emotions, detecting how positive emotions due to sexual activity may alter financial trading choices. Our findings suggest that agents incorrectly attribute their good mood to positive economic perspectives rather than positive emotions.
This paper provides theoretical results for the design of contracts used in the market for reside... more This paper provides theoretical results for the design of contracts used in the market for residential household mortgages and mortgage securities. Critical elements in the problem of immunizing systemic risk through efficient contract design are identified. Using an extension of classical immunization theory, this paper demonstrates that systemic risk of long amortization mortgage contracts is reduced when term to maturity of the contract at origination is significantly less than the amortization period. In addition, incorporating prepayment and limited recourse default options into the mortgage contract increases systemic risk when compared with full recourse mortgage contracts having yield maintenance prepayment penalties. The theoretical results are used to evaluate the systemic risk management problems that have plagued the US mortgage funding system.
Weather derivatives allow to hedge weather risk that is the financial gain or loss due to variabi... more Weather derivatives allow to hedge weather risk that is the financial gain or loss due to variability in climatic conditions. The market originated in 19982 when the US power community realised that the high volatility of revenues due to weather variability could be controlled and, ...
This research analyzes the relationship between the carbon and the energy market. These two marke... more This research analyzes the relationship between the carbon and the energy market. These two markets are linked together on a regulatory and on a structural basis. The energy sector is the most important industry within the European Emission Trading Scheme (EU ETS): as ...
ABSTRACT In this paper we investigate the contribution of structured bonds to the efficient front... more ABSTRACT In this paper we investigate the contribution of structured bonds to the efficient frontier. We conduct our analysis by simulating the term structure according to a no-arbitrage multifactor model (G2 ) and comparing the performance of basic products (like zero-coupon bond, coupon bond and floating rate notes) with respect to more sophisticated products (like cms, collars, spread and volatility notes). In particular, our analysis considers different initial market environment like interest rate term structure shapes, as well as volatility and correlation in its changes and takes into account how the combined effect of risk-premium required by investors and fees that they have to pay can change the portfolio allocation respect to the one made only of basic securities. Our simulation results show that structured products can be an interesting investment only under particular scenarios. However, in general the return net of the fees in these securities is in average lower than the return in basic securities.
Journal of Multinational Financial Management, 2005
... They find that Finnish funds fees decrease over time and that they are higher for bank manage... more ... They find that Finnish funds fees decrease over time and that they are higher for bank managed funds and older funds. ... As far as fund type is concerned, two different funds classifications are used in Italy: the Bank of Italy and the Assogestioni 5 classifications. ...
Journal of International Financial Markets, Institutions and Money, 2010
European electricity markets have been subject to a broad deregulation process in the last few de... more European electricity markets have been subject to a broad deregulation process in the last few decades. We analyse hedging policies implemented through different hedge ratios estimation. More specifically we compare naïve, ordinary least squares, and GARCH conditional variance and correlations models to test if GARCH models lead to higher variance reduction in a context of high time varying volatility as the case of electricity markets. Our results show that the choice of the hedge ratio estimation model is central on determining the effectiveness of futures hedging to reduce the portfolio volatility.
PurposeThe purpose of this study is to explore the influence of founder families in medium‐sized ... more PurposeThe purpose of this study is to explore the influence of founder families in medium‐sized manufacturing firms and to investigate the impact of such influence on risk management – more specifically foreign exchange hedging and speculation.Design/methodology/approachThis empirical study uses survey data and publicly available data for descriptive analysis and ordinary least squares/ordered regression analysis.FindingsThe authors find that two thirds of medium‐sized manufacturing firms are founder family firms in which the founder of the firm or members of his/her family are active in the management team, are members of the board of directors, and/or are shareholders of the firm. The study finds no difference between such founder family firms and other firms in terms of the use/non‐use decision related to foreign exchange derivatives but a marked difference in terms of the extent decision. Thus, founder family firms tend not only to hedge but also to speculate more extensively t...
Concentration of family-based ownership and recent development of private equity companies in Con... more Concentration of family-based ownership and recent development of private equity companies in Continental Europe suggest that the motivations and results of publicto-private (PTP) deals may differ from well-studied cases in the USA and the UK. We overview the PTP market and measure the cumulative abnormal returns (CARs) of 106 PTP deals concluded in Continental Europe from 2000 to 2005, introducing a model to explain the abnormal returns. Our results partially confirm findings of previous studies, namely, that undervalued and smaller firms register higher CARs. We additionally find that deals promoted by family owners register higher abnormal returns, whereas financial investors and private operating firms show no impact.
This paper investigates the cross-market price linkages in actively traded, major agricultural an... more This paper investigates the cross-market price linkages in actively traded, major agricultural and energy commodities, impacted by three global episodes over the 1971-2018 time frame. As episodes, we identify the rapid increase of prices during the 1970's, the commodity depression of the 1990's, the credit crunch and sovereign debt crisis in the 2000's. We find that during the rapid price increase in 1970's, all the major agricultural commodity are influenced by a series of events, including the Soviet Union's unexpected purchase of a large amount of grain in the global markets. During the commodity depression, a negative relationship is shown by all the agricultural commodities. The credit crunch and sovereign debt shows a positive impact for only wheat whereas oats show a negative relationship. We also investigate these three episodes on non-agricultural commodity sectors (wood and animal, precious metal and energy sector). The paper demonstrates the increase in the energy prices supporting the cross-market linkages between the stock and crude oil markets as a result of the financialization of commodities.
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Papers by Giovanna Zanotti