Inclusion of debt claims in asset pricing models: Evidence from the CDS Index

Integration or segmentation of markets determines whether substantial advantages in risk reduction can be attained through portfolio diversification in foreign securities. In an integrated market, investors face risk from country-specific factors and factors, which are common to all countries, but price only the later, as country-specific risk is diversifiable. The aim of this study is two-fold, firstly, investigating the superiority of the Fama-French three-factor model over Capital Asset Pricing Model (CAPM) and later using the superior model to test for integration of Indian and US equity markets (a proxy for global markets). Based on a sample of Bombay Stock Exchange 500 non-financial companies for the period 2003–2019, the data suggest the superiority of Fama-French three-factor model over CAPM. Using the Non-Linear Seemingly Unrelated Regression technique, the first half of the sample period (2003–2010) shows evidence of market segmentation; however, the second sub-period (2011–2019) shows weak signs of market integration, which is supported by the Johansen test of cointegration, suggesting that Indian market is gradually getting integrated with global markets.

The authors offer evidence for low-risk effect from the Indian stock market using the top-500 liquid stocks listed on the National Stock Exchange (NSE) of India for the period from January 2004 to December 2018. Finance theory predicts a positive risk-return relationship. However, empirical studies show that low-risk stocks outperform high-risk stocks on a risk-adjusted basis, and it is called low-risk anomaly or low-risk effect. Persistence of such an anomaly is one of the biggest mysteries in modern finance. The authors find strong evidence in favor of a low-risk effect with a flat (negative) risk-return relationship based on the simple average (compounded) returns. It is documented that low-risk effect is independent of size, value, and momentum effects, and it is robust after controlling for variables like liquidity and ticket-size of stocks. It is further documented that low-risk effect is a combination of stock and sector level effects, and it cannot be captured fully by concentrated sector exposure. By integrating the momentum effect with the low-volatility effect, the performance of a low-risk investment strategy can be improved both in absolute and risk-adjusted terms. The paper contributed to the body of knowledge by offering evidence for: a) robustness of low-risk effect for liquidity and ticket-size of stocks and sector exposure, b) how one can benefit from combining momentum and low-volatility effects to create a long-only investment strategy that offers higher risk-adjusted and absolute returns than plain vanilla, long-only, low-risk investment strategy.

For the last 20 years fair value accounting has considerably extended its domain. Fair value is a probabilistic market value, which is expected to be obtained on the basis of forecasting of future events, connected with an asset sale or transfer of liabilities. The purpose of fair value is to define a price of an ordinary operation of an asset sale or transfer of liabilities between the market participants, which would have taken place by the date of measurement in the present market conditions. Market value is fair only with an active market, at which prices are determined by demand and supply. This is the reason of a discussion about the use of fair value. The opponents of fair value accounting state that exactly fair value has become a cause of financial crisis and had a negative influence on companies. However, there are many supporters of fair value accounting, who state that fair value is the indicator of financial system significant difficulties and it helps in warning financial crises. The purpose of the article is to validate the economic characteristics of fair value and to analyze its` role in a financial crisis