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Assistant Professor
Finance Department
Bentley University
VITA
CONTACT INFORMATION
175 Forest St, SMI 421
Waltham, MA 02452
Email: tsavaser at bentley dot edu
FIELDS OF SPECIALIZATION
Corporate Finance; International Finance
SELECTED PUBLICATIONS
CEO Incentives and Bank Risk Over the Business Cycle
with Steven Ongena and E. Sisli Ciamarra
Journal of Banking and Finance, 2022 (138), 106460.
We examine whether the relationship between managerial risk-taking incentives and bank risk is sensitive to the underlying macroeconomic conditions. We find that risk-taking incentives provided to bank executives are associated with higher bank riskiness during economic downturns. We attribute this finding to the increase in moral hazard during macroeconomic downturns when the perceived probability of future bailouts and government guarantees rises. This association is particularly strong for larger banks, banks that maintain lower capital ratios and banks that are managed by more powerful Chief Executive Officers (CEOs). Our findings highlight the importance of the interaction between managerial incentives and the macroeconomic environment. Boards and regulators may find it useful to consider the countercyclical nature of the relationship between risk-taking incentives and bank riskiness when designing managerial compensation. [PAPER]
Shrouding and the Foreign Exchange Trades of Global Custody Banks
with C. L. Osler
Journal of Banking and Finance, 2022 (136), 106414.
This paper identifies a new approach to shrouding, the practice of hiding supra-competitive product prices, and sheds light on an extraordinarily opaque and hitherto unexplored segment of the world's largest OTC market. The product is liquidity for FX transactions between global custody banks and their client funds, transactions in which the clients are not actively involved and cannot identify execution costs ex post. We develop a stylized model of shrouding that predicts FX dealers will shift among three pricing strategies over time within individual client relationships. We conduct an extensive econometric analysis of the complete FX trading record of a mid-sized global custody bank over one calendar year. The data provide support for all ten of the shrouding model's testable hypotheses. [PAPER]
Financial Technology in Emerging Economies: A Note on Digital Lending in Turkey
with Karaman, H.D., Tinic, M. and Tumer-Alkan, G.
Economics Letters, 2021 (207), 110012.
We examine the differences in the loan performance of fintech and bank borrowers in Turkey. Using data of 5.5 million consumer loans by the fifth-largest private commercial bank in Turkey and its fintech subsidiary, we demonstrate that fintech borrowers are on average younger, better educated, have higher income and savings levels, pay less interest and have better credit history than traditional bank borrowers. Furthermore, fintech borrowers are less likely to default. Superior performance of fintech loans is driven by the fintech firm’s ability to identify creditworthy borrowers among individuals with low-credit scores. These results contrast with the earlier evidence for developed markets where fintech borrowers are found to be more risky. [PAPER]
Managerial Performance Incentives and Firm Risk During Economic Expansions and Recessions
with E. Sisli Ciamarra
Review of Finance, 2017, 21(2), p. 911-944. [Reprinted online in 2019 in the Review of Finance special double issue on ‘Executive Compensation and Financial Literacy’]
Executive Summary - Harvard Law School Forum on Corporate Governance and Financial Regulation
We argue that the relationship between managerial pay-for-performance incentives and risk taking is procyclical. We study the relationship between incentives provided by stock-based compensation and firm risk for U.S. non-financial corporations over the two business cycles between 1992 and 2009. We show that a given level of pay-for-performance incentives results in significantly lower firm risk when the economy is in a downturn. The documented procyclical relationship between incentives and risk taking is consistent with state-dependent risk aversion. Our findings contribute to the literature on the depressive effects of performance incentives on firm risk by documenting the importance of the interaction between performance incentives and risk aversion. [PAPER]
Differential Risk Taking Implications of Performance Incentives from Stock and Stock Option Holdings
with E. Sisli Ciamarra
Journal of Financial Research, 2019 (42), 609-636.
In this paper, we show that the relationship between managerial pay-for-performance incentives and risk taking depends on the source of the incentives (stocks vs. options). We find that while performance incentives from option holdings are positively associated with firm riskiness, performance incentives from stock holdings are not. Consequently, the relationship between the total value of pay-for-performance incentives and firm risk strengthens as the relative contribution from option holdings increases. We attribute the differential impact of stock and option holdings on risk taking to the difference in the payoff structure of stocks (linear payoff) and stock options (convex payoff). [PAPER]
Time-varying Macroeconomic News Effects on Exchange Rates: Comparative Perspectives from the US and the Euro-zone Debt Crises
with W. Ben Omrane, R. Welch, and X. Zhou
North American Journal of Economics and Finance, 2019, 101001.
This paper provides a comparative analysis of the reaction of the euro-dollar returns to the US and EU macroeconomic news between 2004 and 2014. We find that the effect of macroeconomic news on currency returns is unstable not only during the US and the Euro-zone debt crises, but also outside these crisis periods. In particular, while the US news impact weakened during the US crisis, the European news’ impact strengthened during the Euro-zone debt crisis. We also document that risk conditions together with monetary policy rates are important determinants of unstable news effects, yet their impact on the US and the Euro area news response coefficients work in opposite directions. [PAPER]
Exchange Rate Volatility Response to Macroeconomic News During the Global Financial Crisis
with W. Ben Omrane
International Review of Financial Analysis, 2017, 52, p. 130-143.
We examine the state-dependent volatility reaction to macroeconomic news in the euro-dollar, pound-dollar and yen-dollar markets between 2005 and 2009. Unlike the traditional event studies that define economic states based on exogenously determined thresholds, we employ the smooth transition regression model, which allows for the possibility of a gradual as well as an instantaneous regime change. Our results suggest that, on average, for about 40 percent of the major news indicators, the volatility reaction to macroeconomic news is larger in expansions compared to the recession period in the three currency markets. Non-farm payroll employment, GDP advance release, retail sales, trade deficit and CPI announcements are consistently associated with larger volatility response in expansions. New home sales and the Fed funds rate announcements, on the other hand, generate larger market reactions in the recession period. We attribute the pattern associated with new home sales and the Fed funds rate to the unique role the real estate and credit markets played in the 2008 recession. We show that different types of macroeconomic news indicators generate different shapes of transition functions. Specifically, the estimated transition function based on the housing starts data indicates a more gradual regime change compared to other indicators. [PAPER]
The Sign Switch Effect of Macroeconomic News in Foreign Exchange Markets
with W. Ben Omrane
Journal of International Financial Markets, Institutions & Money, 2016, 45, p. 96-114.
We examine an unusual episode in the behavior of the euro, pound and yen exchange rate markets when the dollar appreciated (depreciated) against the three major currencies, in response to unfavorable (favorable) US growth news during the global financial crisis. Contrary to the previous findings, we show that, for each currency pair, only a small subset (about a third) of the most significant macro news effects reversed sign, primarily announcements regarding consumption, credit, labor and housing markets. Our results reveal that announcement chronology within a month matters, in that specifically the earliest releases within an indicator category exhibit sign asymmetry. We explore possible sources of the switch in the exchange rate reaction during this period and find that fluctuations in market risk and carry trade returns explain most of the variation in the news response coefficient signs. [PAPER]
Exchange Rate Response to Macronews: Through the Lens of Microstructure
Journal of International Financial Markets, Institutions & Money, 2011, 21, p. 107-126.
This study investigates the microeffects of macronews using customer price-contingent orders (i.e. stop-loss and take-profit orders) data from a large foreign exchange dealing bank in the pound/dollar market. Results reveal that price-contingent order placement intensifies 3-5 h prior to the news events. I examine the link between this surge in order placement and the exchangerate jump following the announcement. I find that price-contingent orders can enhance our ability to explain post-release exchangerate returns by half. Furthermore, the estimated effect of orders is orthogonal to the news surprises. This implies that there may be a component of the news response that purely reflects institutional features such as order types and not necessarily the content of the public information itself. [PAPER]
Extreme Returns: The Case of Currencies
with C. L. Osler
Journal of Banking and Finance, 2011, 35(11), p. 2868-2880.
What triggers extreme returns in financial markets? In standard theoretical models news is the only trigger, but in foreign exchange and equity markets extreme returns often occur in the absence of news. This paper investigates how the distribution of currency returns, and in particular the frequency of extreme returns, is influenced by price-contingent trading, a category that includes most technical trading, algorithmic trading, and dynamic option hedging. In so doing it suggests that extreme exchange-rate returns and (more generally) high return kurtosis are statistically inevitable even in the absence of news. Using data on price-contingent currency orders we identify four microstructural sources of return kurtosis: (1) high kurtosis in the size distribution of price-contingent orders; (2) clustering of price-contingent order executions at certain times of day; (3) clustering of order executions at certain price levels; and (4) the feedback from returns to trades. When each factor operates in isolation, kurtosis in the order-size distribution contributes the most to return kurtosis. When the factors operate simultaneously, however, their interactions prove far more important than any single one. Together, these features of price-contingent trading can account for a substantial fraction of observed kurtosis in exchange-rate returns. [PAPER]
WORKING PAPERS
The Not So Uniform Effects of Trade Secret Protection on Business Entry
with A. Leblebicioglu
We explore the consequences of trade secret protection for new business formation in the U.S. We find the states that adopt the Uniform Trade Secrets Act (UTSA), which enhances intellectual property rights, experience an overall decline in business entry rates. This result is driven by the reduction in small establishment entry rates. The negative effect is more pronounced in industries that are knowledge and trade secret intensive. By contrast, the law promotes the entry of medium and large establishments. Our findings highlight the important relationship between the regulatory environment governing intellectual property protection and business formation in the U.S. [PAPER]
Information shocks and the cross-section of expected returns
with M. Tinic
This paper examines the risk premium associated with the information shocks in equity markets. For all stocks traded in Borsa Istanbul between March 2005 and December 2020, we calculate information shocks as the unanticipated information asymmetry by focusing on the changes in the proportion of the effective spread attributable to adverse selection. Our results indicate a significant return premium for the information shock strategy. Specifically, the return premium associated with the zero-investment information shock portfolios is 72 bps. We further document a significant predictive relationship between information shocks and future returns after controlling for several factors. The predictive power and the return premium associated with the information shock strategy are stronger after the BISTECH trading system, which enabled heterogeneity across investors vis-à-vis trade execution latency. These results suggest that risks associated with information shocks can become systematically important for the cost of equity after the introduction of fast trading. [PAPER]
Proprietary Trading of Market Intermediaries and Adverse Selection Costs
with M. Tinic and A. Salih
We examine whether brokers in order-driven markets possess an information advantage over their customers. We compare the price impact of proprietary trades to customer trades in Borsa Istanbul. We find an asymmetric effect: While proprietary buy trades lead to a significant price response (triple the magnitude of customer trades), sales do not. Net proprietary buy trades increase returns and future volatility but reduce liquidity, deteriorating overall market quality. Brokers’ access to order flow is a potential source of their information advantage. These results may help regulators improve the governance of equity markets given the increasing prevalence of intermediaries in emerging economies. [PAPER]
WORK IN PROGRESS
Cybersecurity Awareness in US Public Corporations (with E. Sisli Ciamarra).
Market Power in Product and Labor Markets and Average Stock Returns (with S. Alpanda and M. Tinic).
Macroeconomic News and Cryptocurrency Markets: An Intraday Analysis of Volatility Reaction (with W. Ben Omrane).
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