Multinational Finance Journal

© Global Business Publications. All rights reserved.

Quarterly publication of the Multinational Finance Society, a non-profit corporation.   ISSN 1096-1879

Volume 1,  Number 1, March 1997

The Performance of Trading Rules on Four Asian Currency Exchange Rates
(Multinational Finance Journal, 1997, vol. 1, no. 1, pp. 1-22)

Yin-Wong Cheung
University of California Santa Cruz, U.S.A.
Clement Yuk-Pang Wong
City University of Hong Kong

This article evaluates the performance of filter rules on four Asian exchange rates against the U.S. dollar. Risk premiums derived from the choice under uncertainty model and the GARCH specification are used to construct the risk- adjusted return series. Results show that risk premiums have significant implications for the performance of filter rules. Further, even if investors can tolerate some risk, transaction costs can further eliminate most of the remaining profitable trading opportunities.

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Single and Multiple Portfolio Cross-Hedging with Currency Futures
(Multinational Finance Journal, 1997, vol. 1, no. 1, pp. 23-46)

Andrea L. DeMaskey
Villanova University, U.S.A.

This article presents empirical evidence on the effectiveness of currency futures cross-hedging with the portfolio model. Single and multiple cross-hedges for three minor European and three minor Asian currencies are examined. The performance of the cross-hedged portfolios is measured in terms of maximum possible variance reduction. Realistic simulations of cross-hedging effectiveness are used to determine how well the optimal portfolio strategy performs relative to not hedging or a naive cross-hedge. Results show that Asian currency risk cannot be minimized with single or multiple currency futures cross-hedges. Indeed, both the naive and portfolio strategies increase exchange rate risk to the hedger. Because of the diversification benefit, the multiple currency cross-hedge is superior in hedging performance to the single currency cross-hedge. However, a cross-hedge constructed with two different currency futures positions is as effective as one with five different futures contracts. While the cross-hedge ratios of the European currencies are unstable over time, cross-hedging effectiveness appears not to have been affected significantly.

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Mean and Volatility Spillover Effects in the U.S. and Pacific-Basin Stock Markets
(Multinational Finance Journal, 1997, vol. 1, no. 1, pp. 47-62)

Y. Angela Liu
National Chung Cheng University, Taiwan
Ming-Shiun Pan
Shippensburg University, U.S.A.
 
This paper investigates the mean return and volatility spillover effects from the U.S. and Japan to four Asian stock markets, including Hong Kong, Singapore, Taiwan, and Thailand. The empirical results from examining the data for the period of 1984 to 1991 suggest that the U.S. market is more influential than the Japanese market in transmitting returns and volatilities to the four Asian markets. In addition, the observed spillover effects are unstable over time in the sense that the spillovers increase substantially after the October 1987 stock market crash. Furthermore, the evidence indicates that while the cross-country stock investing hypothesis cannot by itself explain the international transmissions of return and volatility, the market contagion also plays an important role in the transmission mechanism.

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Corporate Capital Structure and Regulation of Bank Equity Holdings: Some International Evidence
(Multinational Finance Journal, 1997, vol. 1, no. 1, pp. 63-80)
 
Jan Bartholdy
University of Otago, New Zealand
Glenn W. Boyle
University of Otago, New Zealand
Roger D. Stover
Iowa State University, U.S.A.
 
Using data from six OECD countries, we examine the proposition that the costs associated with shareholder-debt holder agency conflicts can be reduced by allowing banks to hold equity in the firms to which they lend. Although the sensitivity of leverage to potential wealth expropriation is indeed significantly lower in Japan than in the U.S., no observable difference exists between the U.S. and the non-Japanese countries where banks are permitted to hold corporate equity. This "Japan effect" does not appear to be due to the Japanese keiretsu structure. We conclude that any differences in the debt-agency relationship between Japan and the U.S. are unlikely to be due to differences in restrictions on bank equity holdings.

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Volume 1,  Number 2, June 1997
 

Transaction Costs and the Pricing of Financial Assets
(Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 93-99)
 

George M. Constantinides
University of Chicago, U.S.A.
 
I would like to thank the officers of the Multinational Finance Society and the organizers of its 4th annual conference for bringing us together in the historic city of Thessaloniki to discuss research developments in finance. Specifically, I would like to recognize the President of the Society, Geoffrey Booth, President-elect, George Philippatos, Chairman of the Board of Trustees, Panayiotis Theodossiou, program Chair, Nickolaos Travlos, and Program Co-chair, Angelos Tsaklanganos. They richly deserve a round of applause. The theme of my speech is transaction costs and their impact on the pricing of financial assets. In various forms, this has been a theme of my research over the course of the past several years. Oftentimes, in models of the financial markets we abstract from market imperfections in order to keep the model tractable and hope that this abstraction does not seriously impair the realism of the model. Thus, we abstract from bid-offer spreads, brokerage fees, execution costs, borrowing and short-selling restrictions and fees, and from the absence of certain markets which are needed to insure financial risk, country risk and labor income risk. How crucial is this abstraction? This is a very broad question and I do not intend to address it in its full generality here. I will focus on just one form of market imperfection: bid-asked spreads, brokerage fees and execution costs, collectively referred to as transaction costs.

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Tax Effects in Canadian Equity Option Markets
(Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 101-122)
 

Moshe Arye Milevsky
York University, Canada
Eliezer Z. Prisman
York University, Canada
 
The Canadian Income Tax Act induces individual investors to close their short equity option positions at the end of the year and, if necessary, reopen them at the beginning of next year. This article analyzes the conditions under which it is optimal to close or leave open a short option position over the tax year boundary. The analysis shows that the latter decision depends on transaction costs, the investor's marginal tax rate, the interest rates, the initial and end-of-the-year option prices, as well as whether the option position is naked or covered. The article also examines the impact of tax regulations in Canada on the pricing of naked vs. covered call options and American vs. European options (JEL G13, H21, K34).
 
Key words: derivative securities, equity options, open interest, tax arbitrage.

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Correlation of Returns in Non-Contemporaneous Markets
(Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 123-135)
 

Emel Kahya
Rutgers University, U.S.A.
 
This article investigates the effects of non-overlapping trading hours on the correlations and cross-serial correlations of returns in non-contemporaneous stock markets and develops a simple formula for calculating contemporaneous correlation measures. The presence of these effects is illustrated empirically using stock market returns data for the U.S., Japan, and the U.K. The results indicate that daily correlations of returns in these markets are biased downward while daily cross-serial correlations of returns are biased upwards. These findings have significant implications for studies investigating the transmission mechanism of stock price innovations across national stock markets and portfolio management (JEL G15).
 
Key words: mean spillovers, contemporaneous correlations of returns.

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Co-Movements of European Equity Markets Before and After the 1987 Crash
(Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 137-152)
 

Ilhan Meric
Rider University, U.S.A.
Gulser Meric
Rowan University, U.S.A.
 
This article studies the changes in the co-movements of the twelve largest European equity markets after the 1987 international equity market crash. Tests based on Box M and principal component analysis indicate that the co-movements of these equity markets changed significantly after the crash. Low correlations among national equity markets are often presented as evidence in support of the benefits of international portfolio diversification. The findings indicate that correlations among the twelve largest European equity markets and between these equity markets and the U.S. equity market increased substantially; therefore, the benefits of international diversification with these twelve European equity markets decreased considerably after the crash (JEL G15).
 
Key words: correlation of returns, Box M analysis, European equity markets co-movements, principal component analysis.

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Pegged Exchange Rate Systems in Macau and Hong Kong
(Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 153-168)
 

Robert Haney Scott
University of Macau, Macau
California State University, Chico, U.S.A.
 
Macau pegs its currency, the pataca, to the Hong Kong dollar, which in turn is pegged to the U.S. dollar. This type of pegging order is unique in the annals of international financial arrangements. This article analyzes the structure of the pegged exchange rate systems in Macau and Hong Kong and discusses the financial and economic implications of these systems for the two territories (JEL F33, G15).
 
Key words: currency board system, currency substitution, pegged exchange rates, seigniorage.

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Volume 1,  Number 3, September 1997
 

Jump Diffusion Processes and Emerging Bond and Stock Markets: An Investigation Using Daily Data
(Multinational Finance Journal, 1997, vol. 1, no. 3, pp. 169-197)
 

Mandeep S. Chahal
Enron Capital and Trade Resources, U.S.A.
Jun Wang
SAS Institute Inc., U.S.A.
 
The underlying stochastic processes that drive returns in several emerging bond and stock markets are investigated using the pure diffusion, the jump diffusion, the ARCH pure diffusion, and the ARCH jump diffusion models. The results indicate that jump diffusion models fit the data better than pure diffusion models. Possible sources and linkages of information surprises in emerging stock and bond markets are also investigated. Bond and stock returns of the same country exhibit simultaneous jumps, indicating a possible linkage of the two markets. U.S. equity returns respond to jumps in emerging bond markets but not to jumps in emerging stock markets (JEL C51, F36, G12, G14).
 
Keywords: emerging markets, ARCH, jump diffusion, information surprises, distribution characteristics.
 
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Trading Activity, Quoted Liquidity, and Stock Volatility
(Multinational Finance Journal, 1997, vol. 3, no. 3, pp. 199-227)
 

Li Jiang
Hong Kong Baptist University, Hong Kong
Lawrence Kryzanowski
Concordia University, Canada
 
In this article, we examine dynamic relationships between volatility and various microstructure measures of trade activity and quoted liquidity for each component stock in the Toronto Stock Exchange 35 Index and for the Toronto 35 Index Participation Shares. When volatility is conditioned on number of trades and quoted liquidity, trading volume provides no incremental explanatory power. Thus, the number of trades appears to be a better proxy for information flow. Furthermore, investigation into partitioned volume suggests that the number of trades is more effective than the unexpected volume in explaining volatility. Measures of quoted liquidity also play a significant role in explaining intra day volatility. Bid-ask spreads and quote depth are positively and negatively related to volatility, respectively. Consistent with the lack of information signal, no trade outcomes are negatively related to volatility (JEL G10).
 
Keywords: volatility, volatility determinants, and market microstructure.

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Estimating the Cost of Equity and Equity Risk-Premia of Canadian Firms
(Multinational Finance Journal, 1997, vol. 1, no. 3, pp. 229-254)
 

George Athanassakos
Wilfrid Laurier University, Canada
 
This article proposes an alternative approach to estimating the required rate of return on equity, combining the bond-plus risk-premium approach and the Capital Asset Pricing Model, and tests it using Canadian data. Individual stock risk-premia are classified into groups according to the point in the business cycle, risk based on each company's bond rating, and industry groups as defined by industry classification. Group averages are calculated. We find equity risk-premia are negatively related to interest rates and bond ratings. Moreover, the higher the risk of an industry group, the higher are the equity risk-premia. However, findings regarding the risk-premia's sensitivity to the business cycle and stability across business cycles are not very conclusive (JEL G31, G12).
 
Keywords: equity risk-premia, cost of equity, CAPM, bond-plus risk-premium.

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Volume 1,  Number 4, December 1997

 
Information Flows Between Eurodollar Spot and Futures Markets
(Multinational Finance Journal, 1997, vol. 1, no. 4, pp. 255–271)

Yin-Wong Cheung
University of California-Santa Cruz, U.S.A.
Hung-Gay Fung
University of Missouri-St. Louis, U.S.A.

The pattern of information flows between Eurodollar spot and futures markets is examined using a robust two-step procedure. This procedure allows for conditional mean and variance dynamics as well as conditional heteroskedasticity. We find spot rates affect futures data and vice versa. In addition, there is evidence of volatility spillover between the two markets. Our results also indicate that information conveyed by data on futures tends to have a more persistent impact on both the mean and volatility of cash market price movements than the other way around (JEL C12, G15, G10).

Keywords: Granger causality, cointegration, Eurodollar spot and futures interest rates, information flow.

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Stock Market and Macroeconomic Policies: New Evidence from Pacific Basin Countries
(Multinational Finance Journal, 1997, vol. 1, no. 4, pp. 273–289)

Unro Lee
University of the Pacific, U.S.A.

This article investigates whether the stock markets of the Pacific Basin countries of Hong Kong, Singapore, South Korea, and Taiwan are informationally efficient with respect to macroeconomic policies. Granger causality tests are utilized in the context of a Vector Error Correction Model to test the relationship between aggregate stock prices and monetary and fiscal policies. The findings indicate that the stock markets of all four countries are not efficient with respect to both macroeconomic policies. These findings are different from those of other articles focusing on major industrialized countries. Rejection of market efficiency may be attributed to the unique structure of financial markets in these countries (JEL G14).

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Weak-form Efficiency and Causality Tests in Chinese Stock Markets
(Multinational Finance Journal, 1997, vol. 1, no. 4, pp. 291–307)

Martin Laurence
William Paterson University of New Jersey, U.S.A.
Francis Cai
William Paterson University of New Jersey, U.S.A.
Sun Qian
Nanyang Technological University, Singapore

China has two major stock exchanges, the Shanghai and the Shenzen exchanges. Each of these exchanges trades two types of shares, type “A” and type “B” shares. Type “A” shares are available to domestic investors only and type “B” shares are available to foreign investors. This article tests for the weak-form efficiency in these markets and explores the statistical relationships and causality among these Chinese stock markets with each other and with the U.S. and Hong Kong stock markets. The results indicate the existence of (1) a weak-form efficiency in the market for “A” shares but not “B” shares, (2) statistically weak linkages between the Chinese markets, (3) a weak causal effect from the Hong Kong to the four Chinese markets, and (4) a strong causal effect from U.S. stock mark to all four Chinese stock markets and the Hong Kong Stock market, particularly during the second period of the sample. These results support the assertion that the Chinese stock markets are becoming more integrated to the global economy (JEL G15).

Keywords: Chinese stock markets, Granger causality tests, Hong Kong stock market, market efficiency.

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Private Information in Bank Certification: Evidence from U.S. and Non-U.S. Bank Standby Letters of Credit
(Multinational Finance Journal, 1997, vol. 1, no. 4, pp. 309–324)

Roger D. Stover
Iowa State University, U.S.A.
Mark F. Schmitz
Rutgers University, U.S.A.

This article inquires into the factors that affect the pricing of new issues of corporate tax-exempt bonds backed by standby letter of credit of U.S. and foreign commercial banks. Previous literature suggests that U.S. banks possess superior certifying ability in this market due to their unique access to low-cost private information. This article also examines the extent to which such information is priced by the market. The results indicate that pricing of these bonds depends primarily on the quality of the commercial bank issuing the standby letter of credit irrespective of where the bank is domiciled. The quality influence on yield occurs indirectly through its significant effect on the issue's bond rating (JEL G21).

Keywords: bank certification, industrial revenue bond financing, Moody’s bond rating, standby letter of credit.

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Volume 2,  Number 1, March 1998

 
Are the Market Effects Associated with Revisions to the TSE300 Index Robust?
(Multinational Finance Journal, 1998, vol. 2, no. 1, pp. 1–36)

Richard Chung
Concordia University, Canada
Lawrence Kryzanowski
Concordia University, Canada

This article examines the stock market effects of changes in the composition of the TSE300 index over the period 1990-94. The test methodology adjusts for thin trading, pre- and post-revision abnormal performance and sample selection criterion effects. The models used to characterize returns include factors such as illiquidity and large trade activity. The positive and transitory median changes in traded volumes become insignificant when market-adjusted volumes are examined. No permanent effects on trade and analyst price behavior are identified. Traditional market-adjusted abnormal return inferences are not robust. The announcement window abnormal returns are smaller for annual versus nonannual index additions. This suggests that a longer advance notice period more than compensates for a larger number of simultaneous index revisions. The findings support the price pressure and liquidity hypotheses. Temporary changes in liquidity costs temporarily move stock prices from their equilibrium values, and announcement window abnormal returns are essentially reversed in subsequent periods (JEL G14).

Keywords: index revision, abnormal returns, liquidity, event study.

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Financial Liberalization and the Exchange-Rate Exposure of the Taiwanese Firms: A Nonparametric Analysis
(Multinational Finance Journal, 1998, vol. 2, no. 1, pp. 37–61)

Jang-Ting Guo
University of California–Riverside, U.S.A.
Rong-Chang Wu
Shin Chien University, Taiwan

This article adopts a nonparametric approach to examine the exchange-rate exposure of Taiwanese firms between December 1979 and January 1995. The evidence indicates that financial liberalization that took place in July 1987 has introduced an important structural break to firms' foreign exchange exposure. In the pre-liberalization period, no industry shows significant exposure to changes in the exchange rate. By contrast, in the post-liberalization period, exchange-rate movements exert significant contemporaneous and lagged impacts on the value of firms, particularly those with high involvement in international trade (JEL C14, F31, G18).

Keywords: financial liberalization, foreign exchange exposure effect, nonparametric econometrics.

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Ownership Structure, Managerial Turnover and Takeovers: Further U.K. Evidence on the Market for Corporate Control
(Multinational Finance Journal, 1998, vol. 2, no. 1, pp. 62–83)

Jay Dahya
University of Wales College of Cardiff, U.K.
Ronan Powell
Queen's University of Belfast, Northern Ireland

This article investigates the impact that successful hostile and friendly takeovers have on the rates of top management change for U.K. target firms. The results shows that hostile takeovers are associated with a greater degree of both top executive and top team forced departure rates compared to that of friendly takeovers. Furthermore, prior to takeover, hostile targets have lower abnormal returns, lower profitability, higher debt, lower managerial ownership and a high ownership stake held by external block holders relative to friendly targets. The results give further support to the disciplining role of the hostile takeover (JEL G3).

Key words: managerial control, hostile takeover, top management turnover, friendly takeover, ownership structure

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Volume 2,  Number 2, June 1998

Regulation of Financial Markets: A Focused Approach
(Multinational Finance Journal, 1998, vol. 2, no. 2, pp. 87–99)
 

Hans R. Stoll
Vanderbilt University, U.S.A.

A new approach and a new mind-set are needed for the regulation of financial markets. Under our existing trajectory, regulation will become inefficient, unwieldy, and too costly as it attempts to deal with an ever–more complex financial system. Regulators ought to focus on what needs to be regulated, not simply on expanding regulatory oversight. Implicit in this mind-set is the idea that not everything must be regulated. A focused approach to regulation would separate what is regulated from what is not. Examples of how regulation can be more narrowly focused are given for banking, for securities markets, and for futures markets (JEL G18, G28, G38).

Keywords: bank regulation, financial regulation, offshore offerings, Security and Exchange Commission.

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Regime-Switching in Emerging Stock Market Returns
(Multinational Finance Journal, 1998, vol. 2, no. 2, pp. 101–132)
 

Kodjovi G. Assoe
Ecole des Hautes Etudes Commerciales, Canada

Many emerging markets have experienced significant changes in government policies and capital market reforms. These changes may lead to changes in their return-generating processes. Based on Markov-switching models, this paper investigates whether there is more than one regime in the return-generating processes of nine emerging markets and the specific characteristics of each regime. The results show very strong evidence of regime-switching behavior in emerging stock market returns. The two regimes through which emerging markets evolve are different whether one takes the domestic investors' perspective or that of foreign investors. For foreign investors, changes in volatility seem to be the main characteristic of emerging market regimes. The implications of these findings for the stability of emerging stock markets are discussed (JEL F21, F30, G12, G15).

Keywords: emerging markets, regime-switching, international investment.

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Efficiency of Price Discovery in Thinly Traded Stocks: Evidence from Dual Listings in Tel Aviv and the OTC
(Multinational Finance Journal, 1998, vol. 2, no. 2, pp. 133–149)
 

Shmuel Hauser
Ben Gurion Univ. of the Negeve and Israel Securities Authority, Israel
Azriel Levy
Bank of Israel and the Hebrew University, Israel

The increasing popularity of non-dealer security markets that offer automated, computer-based, continuous trading reflects the conventional wisdom that such markets are more efficient for all issues, large and small. This article uses a recent testing methodology to estimate the relative efficiency of discrete versus continuous trading regimes in the price discovery of thinly traded stocks. The empirical tests use over 9,000 transactions of dually listed stocks traded discretely on the Tel Aviv Stock Stock Exchange and continuously in the Over-The-Counter market in the U.S. It is shown that stock prices over-react to the arrival of new information and noise trading in both markets, but more so under continuous trading in the OTC market. It is also shown that continuous trading generates larger pricing errors and related return volatility. These findings suggest that a switch of thinly traded securities from discrete to continuous trading may lower the efficiency of price discovery and raise return volatility (JEL G14, G15).

Keywords: continuous trading, discrete trading, pricing efficiency, Tel Aviv Stock Exchange, trading mechanism.

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Testing of the Positive-Multinational Network Hypothesis: Wealth Effects of International Joint Ventures in Emerging Markets
(Multinational Finance Journal, 1998, vol. 2, no. 2, pp. 151–165)
 

Larry J. Prather
East Tennessee State University, U.S.A.
Jae Hoon Min
Seowon University, Korea

This article examines announcement effects of 240 international joint ventures undertaken by firms to ascertain their impact on shareholders' wealth. The positive-multinational-network hypothesis suggests that the market reaction should be related to the option value of the venture. To test the positive-multinational-network hypothesis, first the market reaction between ventures into developed and less-developed countries are contrasted. Then, the reaction between ventures that form the basis for initial operations in a country and subsequent operations are contrasted. Results indicate that venture-specific characteristics influence announcement effects and that the positive-multinational-network hypothesis is supported (JEL G14, G31, G34).

Keywords: event studies, information and market efficiency, investment policy, joint ventures.

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Volume 2,  Number 3, September 1998

Are Real Assets Priced Internationally? Evidence from the Art Market
(Multinational Finance Journal, 1998, vol. 2, no. 3, pp. 167–187)

Kenneth Wieand
University of South Florida, U.S.A.
Jeff Donaldson
Northern Kentucky University, U.S.A.
Socorro Quintero
Oklahoma City University, U.S.A.

This article investigates the relationships between the U.S. and Japanese stock market indices and the prices of modern and impressionist paintings sold at auction in New York by Christies and Sotheby. An art price index is constructed to adjust for heterogeneity of individual paintings. Time series properties of the art price index are examined in relation with the S&P500 and Topix stock market indices. The art-price index is heteroskedastic and autocorrelated. When the log-returns to art are compared to log-price returns to the S&P500 and TOPIX stock indices, a single common long-term stochastic trend in the three indices is found. In the short run, log-changes of art prices are related to current and lagged log-changes of the TOPIX index, only (JEL C22, G12, G15, L15).

Keywords: art prices, cointegration, GARCH model, hedonic price equation, S&P500 stock index, and TOPIX stock index.

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Testing Asset Pricing Models: The Case of Athens Stock Exchange
(Multinational Finance Journal, 1998, vol. 2, no. 3, pp. 189–223)

Antonis Demos
Athens University of Economics and Business, Greece
Sofia Parissi
Athens University of Economics and Business, Greece

This article applies a conditionally heteroskedastic asset pricing model to describe the time variation in the first and second moments of asset returns in an interdependent way in the emerging capital market of Greece. Depending on the observability of the factors and under the chosen parameterization it is possible to derive tests to address economically important questions that the models impose on the risk-return relationship. We apply the derived tests on the nine sectorial portfolios and the value weighted index of the Athens Stock Exchange, over the period 1985-1997. The evidence from the unconditional and conditional CAPM, with the Value Weighted Index as a benchmark portfolio, suggests the inefficiency of the Index. On the other hand, the dynamic latent factor model, considered here, describes sectorial returns in a much better way. However, there is still a shadow of doubt on the hypothesis that the price of risk is common across assets. (JEL G12)

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The Short-Run Performance of IPOs of Privately- and Publicly-Owned Firms: International Evidence
(Multinational Finance Journal, 1998, vol. 2, no. 3, pp. 225–244)

Seung-Doo Choi
Korea Telecom, Korea
Sang-Koo Nam
Korea University, Korea

This article compares the initial returns of privatization initial public offerings (IPOs) to those of privately-owned enterprises and investigates the determinants of short-run performance of privatization IPOs, using a sample of 185 privatization IPOs from 30 countries, over the period from 1981 to 1997. The evidence indicates that there is a general tendency for privatizations to be underpriced to a greater degree than the initial public offerings of privately-owned enterprises. In addition to comparing privatization IPOs to the private IPOs, the cross-sectional determinants of privatization initial returns are analyzed. The empirical results strongly support the theoretical models of Perotti (1995) and Biais and Perotti (1997). The degree of underpricing at the initial public offering is positively related to the stake sold at initial public offerings and to the degree of uncertainty in ex ante value of newly-privatized firms (JEL G32).

keywords: initial public offerings, initial return, policy uncertainty, privatization

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Volume 2, Number  4, December 1998

Information Content of Earnings in the Emerging Capital Market: Evidence from the Warsaw Stock Exchange
(Multinational Finance Journal, 1998, vol. 2, no. 4, pp. 245–267)
 

Eva K. Jermakowicz
University of Southern Indiana
Sylwia Gornik-Tomaszewski
Baldwin-Wallace College

This article investigates the association between stock returns and the annual earnings, derived from the new accounting and reporting standards, of firms listed on the Warsaw Stock Exchange between 1995 and 1997. Following a brief history of the Warsaw Stock Exchange, two major issues affecting the effectiveness of the Polish securities market are discussed. These are the transition process from public to private enterprise ownership, and the development of accounting and reporting standards compatible with the capital market requirements and the European Union regulation. The empirical results indicate significant association between stock returns and the annual earnings. Results are compared with those for more developed capital markets.

Keywords: accounting and reporting standards Poland, earnings and returns, privatization, Warsaw Stock Exchange.

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Public Utility Regulation in the US and Asymmetric Return Responses to Positive and Negative Abnormal Earnings
(Multinational Finance Journal, 1998, vol. 2, no. 4, pp. 269–293)
 

Emeka T. Nwaeze
Rutgers University, U.S.A

This article focuses on regulation and variation in rate structures to investigate asymmetric return responses to positive and negative abnormal earnings. The abnormal earnings (AE) metric is measured as the difference between the actual profit rate and the maximum allowed profit rate, scaled by the beginning-period price. The analysis is motivated by the anticipated asymmetry in the information contents of positive and negative AE induced by existing rate structures which permit utilities to recover below normal profits but allow them to retain abnormal profits. Accordingly, negative AE is expected to be largely transitory and price-irrelevant whereas positive AE is expected to persist and be price-relevant. The results reveal significant asymmetry in return responses to positive and negative AEs. Specifically, the magnitude of return responses is larger for positive than for negative AEs. The results further show variations in the magnitudes of price responses across regulatory structures.

Keywords: abnormal earnings, asymmetric return responses, egulatory structure.

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Securitizing Eastern Europe's External Bank Debt
(Multinational Finance Journal, 1998, vol. 2, no. 4, pp. 295–310)
 

Christopher Korth
Western Michigan University
Zane Swanson
Emporia State University
Robert Singer
Quincy University

Most of the Eastern European countries are burdened by heavy foreign debts. Securitization could be helpful in solving the vexing problem of servicing the debt of Eastern European countries and improving their financial situation. Three formats for securitizing the loans are broadly available. While all three formats could be used to enhance significantly the marketability of existing Eastern European debts, create a more favorable lending climate for new syndicated loans, and accelerate the development of large, integrated secondary markets, the analysis indicates that the mortgage-backed bond provides the best alternative (JEL F21,F34,G15,G21,O16).

Keywords: securitization, Eastern Europe, loans and financial
Intermediaries

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Volume 3,  Number 1, March 1999

The Value of Invoice Currency Choice in a Volatile Exchange Rate Environment
(Multinational Finance Journal, 1999, vol. 3, no. 1, pp. 1–17)
 

Pekka Ahtiala
University of Tampere, Finland
Yair E. Orgler
Tel Aviv University, Israel

The paper explores the conditions whereby an exporter can gain a competitive advantage by offering a buyer a contract with a choice of invoice currencies rather than a single currency, and determines the value of such a choice. The model incorporates accounts-payable management with exchange- risk management, taking into account the forward exchange rate and the seller's assumptions about the buyer's initial foreign exchange position, its expectations about the future spot rate, and its risk premium. It demonstrates how the value of a choice depends on these variables, as well as on the market interest rates in the two currencies, and on the implicit conversion factor that the seller uses in pricing in different currencies. Two numerical examples demonstrate that a currency choice can be equivalent to a substantial price cut with commonly observed parameter values. Since an exporter can often offer a choice at a low cost to itself, it can increase profits by raising its product price in return for a choice without hurting its competitiveness. This is particularly relevant when offering the choice to the buyer in a less common currency or when exchange rates are volatile. The results are driven by the fact that the forward exchange rate often deviates substantially from the expected future spot rate, and by transactions costs, which can be considerable for less common currencies.

Keywords: invoice currency choice, payment terms in foreign trade

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International Transmission of Information: A Study of the Relationship Between the U.S. and Greek Stock Markets
(Multinational Finance Journal, 1999, vol. 3, no. 1, pp. 19–40)
 

Nikitas Niarchos
University of Athens, Greece
Yiuman Tse
State University of New York at Binghamton, U.S.A.
Chunchi Wu
Syracuse University, U.S.A.
Allan Young
Syracuse University, U.S.A.

This article investigates the international information transmission between the U.S. and Greek stock markets using daily data from the Athens Stock Exchange (ASE) and the S&P 500 Index returns. It employs a bivariate exponential GARCH-t (EGARCH-t) that allows for both mean and variance spillovers between the two markets. It also performs cointegration tests on the long-run relation between these two markets and explores the possible common volatility feature in the spirit of Engle and Kozicki (1993). The results show no spillovers between these two markets for the conditional mean and variance. Also, the cointegration test shows that these two markets are not driven by a common trend. It appears that the U.S. and Greek stock markets are not related to each other, either in the short-run or in the long-run. Contrary to previous studies of the world's large financial markets, the evidence here shows that the U.S. market does not have a strong influence on the Greek stock market (JEL G1 G15).

Keywords: cointegration, clustering, EGARCH, heteroskedasticity, spillover

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Do Trading Rules Based upon Winners and Losers Work Across Markets? Evidence from the Pacific Basin and U.S. Markets
(Multinational Finance Journal, 1999, vol. 3, no. 1, pp. 41–70)
 

Hung-Gay Fung
University of Missouri, U.S.A.
Wai K. Leung
University of Hong Kong, Hong Kong
Gary A. Patterson
University of South Florida, U.S.A.

Numerous studies have examined trading strategies that seek to exploit price reversal behaviors in the U.S. stock market. The evidence to date suggests that taking a long position in U.S. stocks with negative returns (losers) and a short position in stocks that have positive returns (winners) may yield large profits. This article expands this line of research by applying these trading rules to Pacific Basin markets. Striking differences in the pattern of portfolio returns between most Pacific Basin markets and those in the U.S. market are found. This article demonstrates that profitable trading strategies developed in the U.S. may not be successfully transferred to other national markets (JEL C1, F3, and G1)..

Keywords: Pacific Basin and U.S. stock markets, trading rules, transaction costs

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Volume 3, Number  2, June 1999

A Multicriteria Discrimination Method for the Prediction of Financial Distress: The Case of Greece
(Multinational Finance Journal, 1999, vol. 3, no. 2, pp. 71–101)

Michael Doumpos
Technical University of Crete, Greece
Constantin Zopounidis
Technical University of Crete, Greece

Financial distress prediction is an essential issue in finance. Especially in emerging economies, predicting the future financial situation of individual corporate entities is even more significant, bearing in mind the general economic turmoil that can be caused by business failures. The research on developing quantitative financial distress prediction models has been focused on building discriminant models distinguishing healthy firms from financially distressed ones. Following this discrimination approach, this paper explores the applicability of a new non–parametric multicriteria decision aid discrimination method, called M.H.DIS, to predict financial distress using data concerning the case of Greece. A comparison with discriminant and logit analysis is performed using both a basic and a holdout sample. The results show that M.H.DIS can be considered as a new alternative tool for financial distress prediction. Its performance is superior to discriminant analysis and comparable to logit analysis (JEL G33, C61, C44, C25).

Keywords: discrimination, financial distress, mathematical programming, multi-criteria decision aid.

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An Investigation of Thai Listed Firms' Financial Distress Using Macro and Micro Variables
(Multinational Finance Journal, 1999, vol. 3, no. 2, pp. 103–125)
 

Sunti Tirapat
Chulalongkorn University, Thailand
Aekkachai Nittayagasetwat
National Institute of Development Administration, Thailand

The emergence of the economic crisis in Thailand in 1997 is an interesting case for academic studies. Internationally, it had a contagion effect, spreading to countries in Asia and in other regions. Domestically, it caused a great many industrial and corporate bankruptcies. The Thai economy had been relatively stable since 1984. The recent development in 1997, however, produced a sudden economic slump resulting in closures of many Thai corporations. Using a logit regression, this study develops a macro-related micro-crisis investigation model. The significance of the model is in its ability to bridge a firm's sensitivity to macroeconomic conditions and its financial characteristics in order to explore a firm's financial distress. The findings indicate that macroeconomic conditions are critical indicators of potential financial crisis for a firm. The article shows that the higher a firm's sensitivity to inflation, the higher the firm's exposure to financial distress.

Keywords: bankruptcy, financial distress, prediction model, and Thailand crisis.

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Using Financial Information to Differentiate Failed vs. Surviving Finance Companies in Thailand: An Implication for Emerging Economies
(Multinational Finance Journal, 1999, vol. 3, no. 2, pp. 127–145)

Obeua S. Persons
Rider University, U.S.A.

This article combines qualitative and quantitative information from financial statements and auditors' reports with logistic models to differentiate failed from surviving finance companies in Thailand. Failed companies are those that were forced to suspend their operations in mid-1997. The results indicate that auditors' reports from the 1996 financial statements did not differentiate failed from surviving finance companies. On the other hand, the logistic regression models indicate that failed finance companies had lower profitability, lower foreign borrowing possibly due to their poorer credit rating, lower management quality, and smaller size. These models have relatively high predictive ability for failed finance companies and low expected costs of misclassification (JEL G21, M41).

Keywords: CAMEL, emerging economies, financial failure, logistic model, Thailand.

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Volume 3, Number 3, September 1999

Technical Analysis in the Foreign Exchange Market: A Cointegration-Based Approach
(Multinational Finance Journal, 1999, vol. 3, no. 3, pp. 147–172)
 

Norbert Fiess
University of Strathclyde, U.K.
Ronald MacDonald
University of Strathclyde, U.K.

Most technical analysis studies are concerned with the profitability of technical trading rules and almost all of them focus exclusively on trend- following patterns. In this paper we examine a different kind of technical indicator which suggests a structural relationship between High, Low, and Close prices of daily exchange rates. Since, for a given exchange rate, it can be shown that these prices have different time series properties, it is possible to explore the structural relationships between them using multivariate cointegration methods. This methodology facilitates the construction of dynamic structural econometric models, which are used to derive dynamic out-of-sample forecasts over different time horizons. Compared to standard benchmarks, it turns out that these models have extremely good forecasting properties, even when allowance has been made for transactions costs and risk premia (JEL: F31, G12).

Keywords: exchange rates forecasting, technical analysis

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Dynamic and Stochastic Instability and the Unbiased Forward Rate Hypothesis: A Variable Mean Response Approach
(Multinational Finance Journal, 1999, vol. 3, no. 3, pp. 173–221)
 

Winston T. Lin
State University of New York at Buffalo, U.S.A.

Since the mid-1970's, the unbiased forward rate hypothesis (UFRH) of forward and spot exchange rates has been intensively studied and tested with inconclusive and contradictory results. On the basis of the hypothesis, this paper provides variable mean response (VMR) random coefficients models to capture the time-varying and stochastic behavior of the slope coefficient to be referred to as the currency beta, and offers more explicit information concerning the nature of the random disturbance, the specification of the heteroscedastic error, and the existence of linear and quadratic trends. The joint application of several novel statistical and econometric techniques leads to a successful attempt to simultaneously test the behavior of currency betas with respect to randomness, nonstationarity, and shifts in the mean and variance. We find that the UFRH is confirmed when the time horizon is short (one month), but becomes increasingly unreliable when the time horizon is longer (three-month, six-month, and twelve-month), that the currency beta displays randomness and nonstationarity with mean and variance shifts through time, and that the properties of the underlying variation and stochastic patterns of the currency beta differ from currency to currency. The impact of the dynamic and stochastic instability of currency betas on the forecasting of future spot rates is substantial. The VMR variants which account for such instability are capable of generating better forecasts of future spot rates than the original UFRH, especially when the time horizon is longer than one month. The implications for the UFRH as a model of forecasting the future spot rate are discussed in detail (JEL F31, F37, F47, G15).

Keywords: currency betas, five special tests, four-step generalized least squares, mean and variance shifts, the unbiasedness hypothesis, variable-mean-response random coefficients models.

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Volume 3, Number 4, December 1999

Financial Crisis and Changes in Determinants of Risk and Return: An Empirical Investigation of an Emerging Market (ISE)
(Multinational Finance Journal, 1999, vol. 3, no. 4, pp. 223-252)
 

Gulnur Muradoglu
University of Manchester, U.K.
Hakan Berument
Bilkent University, Turkey
Kivilcim Metin
Bilkent University, Turkey

This paper examines how determinants of volatility and stock returns change with financial crisis. The contributions of the paper are twofold. First, using a GARCH-M framework, risk and return are jointly modeled by using macroeconomic variables both in the variance and the mean equations. The conditional variance equation is specified by including macro-economic variables, a relevant information set for emerging economies, that is often overlooked in various GARCH specifications. Second, determinants of risk and return are investigated before during and after a major financial crisis at ISE. We show that, both the determinants of risk and the risk-return relationship change as the economy switches from one regime to the other (JEL: G1,G2,C5).

Keywords: emerging markets, financial crisis, GARCH-M, Istanbul Stock Exchange, macroeconomic variables, risk, stock returns

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Gambling Banks and Firm Financing in Transition Economies
(Multinational Finance Journal, 1999, vol. 3, no. 4, pp. 253-282)
 

Ranko Jelic
University of Birmingham, U.K.
Richard Briston
University of Hull, U.K.
Chris Mallin
University of Birmingham, U.K.

A transition from centrally-planned towards market-based economies in Central and Eastern European Countries (CEEC) in the early 1990's, resulted in mass privatisation programmes and the transformation of the state-controlled banks, the main (and sometimes the only) financial intermediaries in those countries. Given the unique institutional background, the focus of this paper is upon answering the following two questions: First, whether, and if so how, the emerging financial structures of firms in transition economies differ from the structures in Western financial markets? Second, what are the factors that affect bank loan supply schedules in transition economies, and to what extent do they differ between the selected countries? Results from data sets for firms in the Czech Republic, Hungary, and Poland suggest lower debt ratios than those reported for the G-7 countries. Although some evidence of improvements in bank financial intermediation has been found, the range of factors that affect the supply side of loans in selected countries indicates the importance of further institutional reforms in transition economies (JEL Classification G32, P34).

Keywords: bank lending, enterprise debt, firm financing, transition economies

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Volume 4, Numbers 1 & 2, March/June 2000

Special Issue on Initial Public Offerings
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 1-4)
 

George J. Papaioannou
Hofstra University, U.S.A.
Nickolaos G. Travlos,
Athens Laboratory of Business Administration (ALBA), Greece,
and Cardiff Business School, U.K.

Introduction Letter

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The Relationship Between Overallotment Options, Underwriting Fees and Price Stabilization For Canadian IPOs
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 5-34)
 

Richard Chung
Concordia University, Canada
Lawrence Kryzanowski
Concordia University, Canada
Ian Rakita
Concordia University, Canada

The overallotment option (OAO) gives underwriters the right to acquire additional shares from the issuing firm at the offer price (less underwriting fees) in order to meet any excess demand for an issue. Thus, underwriters can use overallotment options to stabilize market prices post-issue by increasing the supply of shares for oversold issues. Unlike IPOs in the U.S., the Canadian evidence finds that OAOs are included less frequently, that underwriting fees are positively associated with OAO inclusion, and that the OAO appears to play a minor role in market price stabilization, which is itself less detectable and appears to be limited to the very early stages of secondary market trading. These results suggest that the role of the OAO differs markedly for IPOs in Canadian versus U.S. markets (JEL G10, G15).

Keywords: initial public offerings, overallotment options, price stabilization, underwriting fees.

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Hot and Cold IPO Markets: Identification Using a Regime Switching Model
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 35-68)
 

Tim Brailsford
Australian National University, Australia
Richard Heaney
Australian National University, Australia
John Powell
University of Otago, New Zealand
Jing Shi
Australian National University, Australia

The market for unseasoned equity has the unusual and distinguishing feature of periods of concentrated activity in terms of both volume and underpricing. This paper formally documents the existence of such periods using a regime-switching model that dates transitions between hot and cold states. A number of hot periods are identified over a 20-year period using a variety of IPO activity measures that capture different aspects of new issue volume, proceeds and underpricing. The study further documents a leading relationship between underpricing and IPO volume of up to six months. This relationship supports the contention that the decision to issue is a function of current underpricing. Various reasons are hypothesised for this result and the paper finds supportive evidence through a VAR analysis that reveals the influence of stock market and business conditions. The results have implications for the information contained in current market conditions and the role of issuers, underwriters and investors (JEL G12, G14, G32).

Keywords: hot issues, IPOs, regime-switching, stock market, unseasoned issues.

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Privatization versus Private Sector Initial Public Offerings in Poland
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 69-99)
 

Wolfgang Aussenegg
Vienna University of Technology, Austria

This article compares the characteristics and the price behavior of case-by-case privatization initial public offerings and private sector initial public offerings in Poland over the first nine years after the reopening of the Warsaw Stock Exchange in April 1991. There is evidence that the Polish government is market-oriented, trying to build up reputation for its privatization policy over time by underpricing, selling a high fraction at the initial offer and underpricing more when selling to domestic retail investors. In the long run privatization initial public offerings experience neither an under- nor an overperformance. A lower political influence has no effect on the long-run performance of privatized companies (JEL G12, G18, G38).

Keywords: initial public offerings, long-run performance, privatization, underpricing.

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The Predictability of Management Forecast Error: A Study of Australian IPO Disclosures
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 101-132)
 

Neil Hartnett
The University of Newcastle, Australia
Jennifer Römcke
The University of Newcastle, Australia

Contemporaneous evidence of corporate revenue and profit forecasting error is provided in a different institutional context, Australian sharemarket initial public offerings. This article extends the literature on company forecast risk by incorporating new proxies for forecasting error (float motive, subscription price premium, range of activities and internationalisation) and by refining others. The study investigates the association between earnings forecast risk and conventional ex-ante uncertainty proxies used to explain IPO underpricing. Ex-ante and ex-post explanatory variables are distinguished and a forecast error prediction model is tested. The results show revenue forecast errors were smaller and less sensitive than those for profit. Strong associations are reported between forecast error and float motive, audit quality and unanticipated industry activity. The link between earnings forecast error and proxies for initial public offering underpricing is observed. Predictability was poor regarding individual company forecast error, but improved for portfolio average forecasting error (JEL D80, G14, M41, N27).

Keywords: error, forecast, IPO, prediction, profit, underpricing.

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An Analysis of Factors Affecting Investor Demand for Initial Public Offerings in Singapore
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 133-153)
 

Li Li Eng
The National University of Singapore, Singapore
Hwee Shan Aw
The National University of Singapore, Singapore

This article investigates the impact of fundamentals of initial public offering (IPO) firms on two categories of investors, large and small investors. In the decision to purchase IPOs, the demand by large investors is positively associated with earnings yield, firm size and underpricing, and negatively associated with book-to-market ratio. Large investor demand is higher for issues denominated in the local currency (Singapore dollars) than issues denominated in foreign currencies. In contrast, the demand by small investors is negatively associated with earnings yield, firm size and underpricing. Small investor demand is also lower for issues denominated in Singapore dollars than issues denominated in foreign currencies (JEL G14, G32, M41).

Keywords: initial public offerings, fundamentals, small investors, large investors.

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Volume 4, Numbers 3 & 4, September/December 2000

Special Issue on Asset Price Dynamics and Risk Management
(Multinational Finance Journal, 2000, vol. 4, no. 3&4, pp. 155-157)
 

Yin-Wong Cheung
University of California, U.S.A.

Introduction Letter

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Exchange Rate Returns Standardized by Realized Volatility are (Nearly) Gaussian
(Multinational Finance Journal, 2000, vol. 4, no. 3&4, pp. 159-179)
 

Torben G. Andersen
Northwestern University, U.S.A.
Tim Bollerslev
Duke University and NBER, U.S.A.
Francis X. Diebold
University of Pennsylvania and NBER, U.S.A.
Paul Labys
University of Pennsylvania, U.S.A.

It is well known that high-frequency asset returns are fat-tailed relative to the Gaussian distribution, and that the fat tails are typically reduced but not eliminated when returns are standardized by volatilities estimated from popular ARCH and stochastic volatility models. We consider two major dollar exchange rates, and we show that returns standardized instead by the realized volatilities of Andersen, Bollerslev, Diebold and Labys (2000a) are very nearly Gaussian. We perform both univariate and multivariate analyses, and we trace the differing effects of the different standardizations to differences in information sets (JEL C10, C22, C32, G15, G12).

Keywords: high-frequency data, integrated volatility, realized volatility, risk management.

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Information, Announcement, and Listing Effects of ADR Programs and German-U.S. Stock Market Integration
(Multinational Finance Journal, 2000, vol. 4, no. 3&4, pp. 181-200)
 

Michael Hertzel
Arizona State University, U.S.A.
Paul Lowengrub
Nathan Associates, U.S.A.
Michael Melvin
Arizona State University, U.S.A.

This article analyzes the impact on stock prices in the home market of important events associated with a U.S. listing. Events include the "filing effect" of financial statements made public by the SEC in preparation for an ADR program; the "announcement effect" of the forthcoming ADR program; and the "listing effect" of the first day of U.S. trading. The sample includes German firms that listed in the U.S. between 1991 and 1997. While German accounting standards allow firms to show profits when U.S. GAAP would show losses, we find that the reconciliation to U.S. GAAP reported in the "filing effect" is associated with positive abnormal returns. Perhaps this reflects self-selection where firms with nothing to hide list in the U.S. The announcement effects are mixed across firms. The listing effect is associated with positive abnormal returns. We also find some evidence of volume migrating from the home market to the U.S. after U.S. trading begins (JEL F3).

Keywords: ADRs, international cross-listing, international equity markets, German stocks.

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An Integrated Risk Management Method: VaR Approach
(Multinational Finance Journal, 2000, vol. 4, no. 3&4, pp. 201-219)
 

Hailiang Yang
The University of Hong Kong, Hong Kong

This article presents a simple methodology for computing Value at Risk (VaR) for a portfolio of financial instruments that is sensitive to market risk, rating change, and default risk. An integrated model for market and credit risks is developed. The Jarrow, Lando and Turnbull model (the Markov chain model) is used to represent the dynamics of the credit rating. Procedures for calculating VaR are presented. Numerical illustration results are included (JEL G10, D81).

Keywords: credit rating, default risk, integrated risk management, Markov chain, value at risk.

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Investor Recognition of Bankrputcy Costs: Evidence from the 1987 Market Crash
(Multinational Finance Journal, 2000, vol. 4, no. 3&4, pp. 221-245)
 

Cheol S. Eun
Georgia Institute of Technology, U.S.A.
H. Jonathan Jang
Inha University, Korea

In this paper, we examine the behavior of stock prices of individual firms with different bond ratings surrounding the October market crash of 1987 and therefrom make inferences about the significance of bankruptcy costs borne by stockholders. The key findings are as follows: Immediately following the crash, stock prices of firms with different bond ratings display dramatically divergent behavior. Specifically, stocks with speculative bond ratings exhibit significantly negative cumulative abnormal returns (CAR) in the wake of crash; the more speculative a firm's bond is, the more negative is the CAR of the firm's stock. Regression analysis confirms that there indeed exists a significantly negative relationship between the post-crash CARs and individual firms' bankruptcy risk proxied by their bond ratings, a variable that measures the likelihood of financial distress ex ante. These results indicate that the bankruptcy costs borne by stockholders are significant and investors recognize it as such, especially during a period of market turbulence.

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High Frequency Deutsche Mark-US Dollar Returns: FIGARCH Representations and Non Linearities
(Multinational Finance Journal, 2000, vol. 4, no. 3&4, pp. 247-267)
 

Richard T. Baillie
Michigan State University, U.S.A.
Aydin A. Cecen
Central Michigan University, U.S.A.
Young-Wook Han
Michigan State University, U.S.A.

This article considers the use of the long memory volatility process, FIGARCH, in representing Deutschemark - us dollar spot exchange rate returns for both high and low frequency returns data. The FIGARCH model is found to be the preferred specification for both high frequency and daily returns data, with similar values of the long memory volatility parameter across frequencies, which is indicative of returns being generated by a self similar process. The BDS test for non-linearity is applied to the residuals of the model for the high frequency returns. No evidence is found to suggest that the procedure for filtering the high frequency returns to remove the intraday periodicity has induced any non-linearities in the residuals; and the FIGARCH specification is found to be adequate (JEL C22, F31).

Keywords: BDS test, correlation dimension, FIGARCH, high frequency data, intra day periodicity, volatility.

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Diagnosing Shocks in Stock Market Returns of Greater China
(Multinational Finance Journal, 2000, vol. 4, no. 3&4, pp. 269-288)
 

W.C. Lo
Open University of Hong Kong, Hong Kong
W.S. Chan
The University of Hong Kong, Hong Kong

Using a modified outlier identification procedure by Chen and Liu (1993), this article studies the large shocks of the Greater China stock markets. We find that while large shocks are typical in all the markets and more outliers appear in the Chinese stock markets than in the other markets. We also find that most of the outliers identified in the Hong Kong market cluster in the periods of the 1997 Asian financial crisis and after the government's market intervention in August 1998. With the exception of Hong Kong, most outliers seem to be driven by local events (JEL C52, G14, G15).

Keywords: Greater China stock markets, large shocks, time series outliers.

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Volume 5, Numbers 1, March 2001

The Effect of Intervaling on the Foreign Exchange Exposure of Australian Stock Returns
(Multinational Finance Journal, 2001, vol. 5, no. 1, pp. 1-33)
 

Amalia Di Iorio
RMIT University, Australia
Robert Faff
RMIT University, Australia

This article analyzes the impact of movements in the Australian dollar/Japanese yen (AUDJPY) and the Australian dollar/US dollar (AUDUSD) exchange rates on the returns of the Australian equities market. Specifically, this paper investigates the nature of exchange rate exposure across increasing return measurement intervals, enabling an examination of both its short-term and its long-term effect on stock returns. Consistent with previous literature, considerable evidence of long-term exchange rate exposure is found. Further, it is found that in the long-term the Australian equities market in general is exposed to fluctuations in the AUDJPY, while only some Australian industries are exposed to movements in the AUDUSD. Finally, convincing evidence in terms of the determinants of foreign exchange exposure is not found (JEL G12, G15).

Keywords: Australian stock market, exchange rate risk, intervaling.

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The Adjustment of the Yule-Walker Relations in VAR Modeling: The Impact of the Euro on the Hong Kong Stock Market
(Multinational Finance Journal, 2001, vol. 5, no. 1, pp. 35-58)

Timothy J. Brailsford
The Australian National University, Australia
Jack H.W. Penm
The Australian National University, Australia
R. Deane Terrell
The Australian National University, Australia

Vector autoregressive models are increasingly being used in the analysis of relationships within and between financial markets. In such models, there are circumstances that require zero entries in the coefficient matrices. Such circumstances can be particularly relevant in the context of markets with special characteristics, such as emerging economies. This paper shows that a direct extension of the use of the Yule-Walker relations for fitting vector autoregressive models with zero-non-zero patterned coefficient matrices is inconsistent with statistical procedures as the resultant estimated variance-covariance matrix of the white noise disturbance process becomes non-symmetric. This inconsistency can cause a breakdown when testing financial theory. The paper provides a consistent adjustment which fits with the theory. The practical use of the adjustment is demonstrated in a vector system comprising variables from the Hong Kong stock market and foreign exchange markets (JEL C13, C32, C63, G10, G15).

Keywords: foreign exchange market, time series, VAR models, Yule-Walker relations.

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Can the Forecasts Generated from E/P Ratio and Bond Yield be Used to Beat Stock Markets?
(Multinational Finance Journal, 2001, vol. 5, no. 1, pp. 59-86)
 

Wing-Keung Wong
National University of Singapore, Singapore
Boon-Kiat Chew
Independent Economic Analysis (Holdings) Limited
Douglas Sikorski
National University of Singapore, Singapore

This paper tests the performance of stock market forecasts derived from technical analysis by means of a specific indicator. The indicator is computed from E/P ratios and bond yields. Several stock markets are studied over a 20-year period. Two test statistics are introduced to utilize the indicator. The results show that the forecasts generated from the indicator would enable investors to escape most of the crashes and catch most of the bull runs. The trading signals provided by the indicator can generate profits that are significantly better than the buy-and-hold strategy (JEL G14, G10).

Keywords: bond yield, E/P ratio, interest rate, standardized yield differential, yield differential.

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Volume 5, Number 2, June 2001

Shareholder Wealth Effects of Dividend Policy Changes in an Emerging Stock Market: The Case of Cyprus
(Multinational Finance Journal, 2001, vol. 5, no. 2, pp. 87-112)

Nickolaos Travlos
ALBA, Greece, and
Cardiff Business School, U.K.
Lenos Trigeorgis
University of Cyprus, Cyprus, and
University of Chicago, U.S.A.
Nikos Vafeas
University of Cyprus, Cyprus

This article examines the stock market reaction to announcements of cash dividend increases and bonus issues (stock dividends) in the emerging stock market of Cyprus. Both events elicit significantly positive abnormal returns, in line with evidence from developed stock markets. This study contends that special characteristics of the Cyprus stock market delimit applicability of most traditional explanations for cash and stock dividends in favor of an information-signaling explanation. The empirical results are generally inconsistent with these contentions (JEL G34).

Keywords: cash dividends, emerging markets, stock dividends.

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Equity Price Dynamics Before and After the Introduction of the Euro: A Note
(Multinational Finance Journal, 2001, vol. 5, no. 2, pp. 113-128)

Yin-Wong Cheung
University of California, U.S.A.
Frank Westermann
University of Munich, Germany

Daily data from the German and U.S. equity markets before and after the introduction of the Euro are used to study the effect of exchange rate regime choices on equity markets. It is found that, since the introduction of the Euro, the volatility and the persistence of the German stock index have fallen significantly relative to those of the U.S. index. However, the switch in exchange rate arrangement appears to have no significant implication for the causal relationships – both the mean and variance causalities between the two equity markets (JEL G15).

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Impact of Scheduled U.S. Macroeconomic News on Stock Market Uncertainty: A Multinational Perspecive
(Multinational Finance Journal, 2001, vol. 5, no. 2, pp. 129-148)

Jussi Nikkinen
University of Vaasa, Finland
Petri Sahlström
University of Vaasa, Finland

This study examines how the U.S. macroeconomic news releases affect uncertainty in domestic and foreign stock exchanges. For that purpose, the behavior of the implied volatilities from the U.S. and Finnish markets is investigated around the employment, producer price index (PPI) and consumer price index (CPI) reports. The results confirm the hypothesis that implied volatility increases prior to the macroeconomic news release and drops after the announcement in both markets. This implies that uncertainty associated with the U.S. macroeconomic news releases is reflected in foreign stock markets as well. Of the macroeconomic news releases, the employment report has the largest impact on uncertainty (JEL G14).

Keywords: implied volatility, index options, macroeconomic news, uncertainty.

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The Short-Run Performance of IPOs of Privately Owned and Publicly Owned Firms: A Note from Australia
(Multinational Finance Journal, 2001, vol. 5, no. 2, pp. 149-154)

Adam Steen
Monash University, Australia
Petko Kalev
Monash University, Australia
Keith Turpie
Swinburne University of Technology, Australia

This article builds on an earlier study by Choi and Nam (1998) on the initial price performance of Public Sector Initial Public Offerings PIPOs in 30 countries. They report that, in general, PIPOs are more underpriced than private sector IPOs. Our study of the Australian market suggests the opposite is the case. The difference in the underpricing between their study and the evidence presented here is most likely due to the characteristics of Australian PIPOs. These characteristics include the tender process adopted, the extensive marketing employed and the dominant position of many of the issuers (JEL G32).

Keywords: initial public offerings, initial return, privatization.

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Volume 5, Number 3, September 2001

Emerging Markets: Investing with Political Risk
(Multinational Finance Journal, 2001, vol. 5, no. 3, pp. 155-173)

Ephraim Clark
Middlesex University, U.K.
Radu Tunaru
Middlesex University, U.K.

This paper presents a model that measures the impact of political risk on portfolio investment when the political risks are multivariate and correlated across countries. The multivariate approach generalizes the single country model but retains most of its characteristics in terms of its ability to price political risk based on the stochastic process of exposure to loss and the expected frequency of loss causing events. The methodology is compatible with modern portfolio theory, straightforward to apply and can accommodate the traditional techniques in political risk assessment for the estimation of the relevant parameters (JEL D81, F23, G22, G31).

Keywords: geometric Brownian motion, insurance policy, Poisson arrival process, portfolio investment, political risk.

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Monetary Policy Rules in Practice: Evidence from New Zealand
(Multinational Finance Journal, 2001, vol. 5, no. 3, pp. 175-200)

Angela Huang
Reserve Bank of New Zealand, New Zealand
Dimitri Margaritis
University of Waikato, New Zealand
David Mayes
Bank of Finland, Finland

Ten years of inflation targeting in New Zealand is used to test whether monetary policy conforms to the simple rules that have been recommended in the literature. While a Taylor rule with the standard parameters used in the US describes New Zealand monetary policy quite well, the Reserve Bank has focused more strongly on price stability, as required by its Policy Targets Agreements. Monetary policy is better described by targeting the future inflation rate as forecast by the Bank than by current inflation as in the Taylor rule. However, restricting the description of policy to the information available at the time of setting policy does not result in a much-improved explanation. There is a ‘smoothing’ element to the Bank’s policy rather than an immediate response to every small fluctuation. There is also insufficient evidence to suggest that monetary policy has been asymmetric in treating upside inflationary pressures differently from those towards deflation (JEL E52).

Keywords: central banks, inflation-targeting, monetary policy rules.

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An Analysis of the Dynamic Relationships Between the South African Equity Market and Major World Equity Markets
(Multinational Finance Journal, 2001, vol. 5, no. 3, pp. 201-224)

Asjeet S. Lamba
The University of Melbourne, Australia
Isaac Otchere
The University of Melbourne, Australia

This paper provides the first comprehensive analysis of the dynamic relationships between the South African and major world equity markets during May 1988 - May 2000. Using a multivariate cointegration framework and vector error-correction modeling the results indicate that there is a long-run relationship between the South African market and major developed markets. Over the full sample period, the US, Canada and Australia exert the most influence on South Africa, while the influence of Japan is minimal. The sub-period analysis shows that, during the Apartheid period, a long-run equilibrium relationship between South Africa and the major developed markets did not exist. In contrast, during the post-Apartheid period, the long-run relationship has become strong and statistically significant for all the major developed markets, except Japan. Overall, the results imply that South Africa is now much more economically and financially integrated with major developed markets, and that the removal of Apartheid has played a significant role in this process (JEL F30, F36, G15).

Keywords: co-integration, emerging markets, South Africa, vector error-correction model.

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Volume 5, Number 4, December 2001

Equity Risk Factors for a Small Open Economy: A Risk Management Perspective
(Multinational Finance Journal, 2001, vol. 5, no. 4, pp. 225-257)

Hossein Asgharian
Lund University, Sweden
Björn Hansson
Lund University, Sweden

This article seeks to find factors that can account for the determinants of common variations in returns for a small open economy where the Swedish stock market serves as an example. The importance of the candidate factors is first analyzed by looking at the standard deviation of their mimicking portfolio returns, while their performance is evaluated from a risk management viewpoint. The results of the volatility analysis verify that the market, as represented by both the world market portfolio and the Swedish home market portfolio, is a crucial factor and most of the macro factors seem to be redundant. The results of the risk management exercise show that the market factor and the portfolios mimicking size and book-to-market ratio are important (JEL G310).

Keywords: multifactor models, open economy, return covariance, risk management.

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Financial Integration of Emerging Markets: An Analysis of Latin America Versus South Asia Using Individual Stocks
(Multinational Finance Journal, 2001, vol. 5, no. 4, pp. 259-301)

Cathy S. Goldberg
University of San Francisco, U.S.A.
Francisco A. Delgado
UBS Warburg, U.S.A.

This article presents an analysis of financial integration for emerging financial markets. The results indicate that for the sample of countries examined, Argentina, Chile, Mexico and Thailand’s stock markets are financially integrated. Conclusions are reached by first identifying endogeonous breaks in multiple stock return series and then constructing confidence intervals around these break dates. Further support is provided that identified breaks are due to integration by performing statistical analyses on the return series pre and post break. In general, the stocks in integrated countries become more correlated with world and industry indexes. Mean returns for these stocks decrease and become more aligned with the mean returns of their respective industry indexes. In cases where we do not find supporting evidence for financial integration, the break dates correspond to currency crises or other events that caused a shift in the return series (JEL G15, G12).

Keywords: emerging markets, financial integration, structural break tests.

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Volume 6, Number  1, March 2002

The Scrutinized-firm Effect, Portfolio Rebalancing, Stock Return Seasonality, and the Pervasiveness of the January Effect in Canada
(Multinational Finance Journal, 2002, vol. 6, no. 1, pp. 1-27)

George Athanassakos
Wilfrid Laurier University, Canada, and ALBA, Greece

This article examines whether seasonality is present in the excess returns of low risk Canadian firms in safe industries for a sample of firms that are highly scrutinized and visible and uses such tests as the foundation to empirically test competing explanations of stock market seasonality, namely, the tax-loss selling hypothesis and the gamesmanship hypothesis. The tests cover the period 1980 to 1998. For a sample of highly scrutinized and visible firms strong seasonality in excess returns is reported. However, the firms in our sample have unusually low excess returns in January and returns adjust upwards over the remainder of the year. The results hold even after we control for various risk differences among the stocks of our sample. Further, this article’s findings imply that the January effect is not as pervasive across risk classes and industry sectors as earlier studies using aggregate data have shown it to be. The disaggregated data of this study provide evidence in support of the gamesmanship hypothesis, but not the tax-loss selling hypothesis. Whenever a January effect is observed, the last quarter of the year tends to be weak for those companies in our sample that experienced a strong January. The opposite is true when a January effect is not evident, as the gamesmanship hypothesis would predict (JEL G14).

Keywords: firm visibility, gamesmanship hypothesis, January effect, portfolio rebalancing.

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Dissemination of Stock Recommendations and Small Investors: Who Benefits?
(Multinational Finance Journal, 2002, vol. 6, no. 1, pp. 29-42)

Bilgehan Yazici
ABN-AMRO Asset Management Turkey Istanbul, Turkey
Gülnur Muradoglu
Cass University Business School City of London, UK

The objective of this study is to examine whether published investment advice generates higher returns for investors. We investigate the impact of security recommendations in the financial press on common stock prices in Istanbul Stock Exchange. Recommendations of Investor Ali column of the weekly-published popular economics journal Moneymatik constitutes our sample. The column is designed to inform individual investors about company prospects and use them as the basis for its recommendations. The results show that the published investment advice in this column does not help small investors earn excess returns. On the contrary, it provides a valuable deal to its ‘preferred investors’, if any, in selecting the stocks. If one could front-run the column’s recommendations by five days he/she could earn more than 5% per week in excess of the index return. Compounded annually the excess return of a preferred investor could earn would be more than an amazing 1500% per annum (JEL G11, G12, G14, G15).

Keywords: excess returns, insider trading, investment advice, ISE, stocks.

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Nonlinear Noise Estimation in International Capital Markets
(Multinational Finance Journal, 2002, vol. 6, no. 1, pp. 43-63)

Costas Siriopoulos
University of Macedonia, Greece
Alexandros Leontitsis
University of Kent at Canterbury, U.K.

We analyzed six stock exchange markets through the nonlinear dynamics concept. We used daily data from the Toronto Stock Exchange, NYSE, London Stock Exchange, Hong Kong Stock Market, Tokyo Stock Exchange, and the Singapore Stock Exchange. The period studied is from January 1, 1988 to June 30, 1999. We performed Local Principal Components Analysis in order to estimate the dimension of each underlying attractor. Our main interest is the noise level estimation of each time series. The results indicate weak determinism and strong noise influence. The noise-to-signal ratio for almost all time series is above 50%. Noise is leptokurtic in the eastern stock markets, and mesokurtic in western ones. (JEL C22, G15).

Keywords: chaos theory, local principal components analysis, noise estimation, nonlinear dynamics.

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Volume 6,  Number 2, June 2002

Multi-Fractality in Foreign Currency Markets
(Multinational Finance Journal, 2002, vol. 6, no. 2, pp. 65-98)

Marco Corazza
University Ca’ Foscari of Venice, Italy
A. G. Malliaris
Loyola University Chicago, U.S.A.

Several empirical studies have shown the inadequacy of the standard Brownian motion (sBm) as a model of asset returns. To correct for this evidence some authors have conjectured that asset returns may be independently and identically Pareto-Lévy stable (PLs) distributed, whereas others have asserted that asset returns may be identically - but not independently - fractional Brownian motion (fBm) distributed with Hurst exponents, in both cases, that differ from 0.5. In this article we empirically explore such non-standard assumptions for both spot and (nearby) futures returns for five foreign currencies: the British Pound, the Canadian Dollar, the German Mark, the Swiss Franc, and the Japanese Yen.

Keywords: exponent of Hurst, fractional Brownian motion, multi-fractal market hypothesis, Pareto-Lévy stable process, R/S analysis.

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A Decomposition of Empirical Distributions with Applications to the Valuation of Derivative Assets
(Multinational Finance Journal, 2002, vol. 6, no. 2, pp. 99-130)

Mondher Bellalah
Université de Cergy-Pontoise, France
Marc Lavielle
Univsité Paris-Sud, France

The selection of an appropriate parameterization of data is a fundamental step in a majority of empirical research effort. Likewise, detecting or estimating features of non-stationarities in data sequences is a critical point in conducting credible research that uses data for inference. In this spirit, this paper presents a simple decomposition of the empirical return distributions of financial assets into the sum of various normal distributions. The decomposition is motivated by the fact that market participants expect distributions to be drawn from two or three possible scenarios. It is also motivated by the recent applications of the EM algorithm to financial data. A parametric and a nonparametric approach are proposed and applied to the empirical distribution of the CAC 40 index traded in the Paris Bourse. We estimate the parameters of the mixture and propose a decomposition into three Gaussian distributions which essentially differ by their variances. The decomposition fits the observed distribution. An alternative approach, which consists in detecting these changes and estimating the distribution of the returns between two changes is developed. The results are obtained using a segmentation method, which is applied to financial data. One of the main findings in this paper is that the two approaches show the same results and give support to the proposed decomposition. There exists three kinds of regimes in the Paris Bourse and the series of the returns jump from a regime to another one at some random instants. This work might be applied to other data sets or other data generating conditions. It can used for the valuation of standard and exotic derivatives (JEL G10, G12, G13).

Keywords: derivatives, distributions, EM algorithm, mixture.

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Volume 6, Numbers 3 & 4, September/December 2002

Domestic versus International Portfolio Selection: A Statistical Examination of the Home Bias
(Multinational Finance Journal, 2002, vol. 6, no. 3&4, pp. 131-166)

Larry R. Gorman
California Polytechnic State University, U.S.A.
Bjorn N. Jorgensen
Columbia University, U.S.A.

The observed international home bias has traditionally been viewed as an anomaly. This paper provides statistical evidence contrary to this view within a mean-variance framework. Two methods of estimating the expected return and covariance parameters are investigated: (i) the traditional Markowitz approach, and (ii) the Bayes-Stein "shrinkage" algorithm. In-sample tests reveal that neither the Markowitz tangency allocation vectors nor the Bayes-Stein tangency allocation vectors are significantly different than a 100% domestic allocation (i.e. extreme home bias). These results are robust to the shorting of equity and across foreign exchange hedge strategies. The paper also reports out-of-sample tests with a view toward investment performance. Typically, a 100% domestic allocation outperforms both the Bayes-Stein and Markowitz tangency portfolios. Overall, the theorized gains to international diversification appear difficult to capture in practice and, hence, investors exhibiting a strong home bias are not necessarily acting irrationally (JEL F3, G11, G12, G15).

Keywords: efficient allocation, foreign exchange hedging, home bias, international allocation, portfolio.

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The Dynamics and Stochastics of Currency Betas Based on the Unbiasedness Hypothesis in Foreign Exchange Markets
(Multinational Finance Journal, 2002, vol. 6, no. 3&4, pp. 167-195)

Winston T. Lin
State University of New York at Buffalo, U.S.A.
Hong-Jen Lin
State University of New York at Buffalo, U.S.A.
Yueh H. Chen
National Sun Yat-sen University, Taiwan

This article examines the dynamic and stochastic behavior of the beta coefficient (to be referred to as the currency beta) of the unbiasedness hypothesis (UH) in foreign exchange markets. We argue that the dynamics and stochastics of currency betas can be attributed to the dynamic behavior of various macroeconomic variables from different sectors of an economy, in addition to the trend variable considered in previous research. Incorporating four macroeconomic variables from the financial, real, and external sectors into the currency betas of eight currencies (developed and emerging) under a logarithmic change specification used to test the UH, we attempt to simultaneously test the behavior of currency betas in terms of nonstationarity, shifts in the mean and variance, and randomness. The vast quantity of empirical tests and results strongly suggests that the changing characteristics of currency betas are readily apparent and have important implications for the reconciliation of the controversies surrounding the legitimacy of the UH, for government exchange rate policies, and for the forecasting of future spot rates, across the developed and emerging economies under study. We also find different tales from developed and developing countries (JEL F31, F37, F47, G15).

Keywords: four-step generalized, logarithmic change specification, macroeconomic variables, unbiasedness hypothesis, variable mean response

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The Information Content of Earnings on Stock Prices: The Kuwait Stock Exchange
(Multinational Finance Journal, 2002, vol. 6, no. 3&4, pp. 197-221)

Rashid Al-Qenae
University of Kuwait, Kuwait
Carmen Li
University of Essex, UK
Bob Wearing
University of Essex, UK

This paper investigates the incremental information content of earnings and other macroeconomic variables for share prices within the ‘prices leading earnings’ framework. We find evidence supporting the phenomenon of ‘prices leading earnings’ for the Kuwait Stock Exchange (KSE) after controlling for basic macroeconomic indicators. That is, the estimated earnings response coefficient is found to be sensitive (and significant) to the leading periods and it increased when more leading periods were included. The results suggest that prices anticipate earnings and hence provide useful information to KSE investors (JEL G140, G150, O160).

Keywords: earnings response coefficients, Kuwait Stock Exchange, price-leading earnings.

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The Sensitivity of European Bank Stocks to German Interest Rates Changes
(Multinational Finance Journal, 2002, vol. 6, no. 3&4, pp. 223-249)

Simon Stevenson
University College Dublin, Ireland

This study examines the cross-border impact of central bank interest rate changes, using the example of the German Bundesbank. We examine the price impact of rate changes on both the general stock markets and on bank stocks in seven other European countries. The sample includes nations both within and outside of the European Union, and includes EU members who are participating in monetary union and members who obtained opt-outs. The results point to the existence of cross-border information transfers. Both non-German bank stocks and general equities react significantly to a large number of the Bundesbank rate changes. The results also indicate that European capital markets did differentiate between rate changes in terms of their relative importance. This was the case in terms of different responses between the financial institutions and the general equity markets and with regard to differing reactions between markets. In particular, those markets that were more committed to the exchange rate mechanism and the goal of monetary union generally reacted more than markets such as Denmark and UK. In addition, the importance of Bundesbank policy during the years leading up to EMU is supported by the fact that most non-German bank stocks reacted more to Bundesbank policy than to domestic rate changes and that no other country had the same level of influence on foreign equity returns (JEL E44, E58, F33, G15, G21).

Keywords: bank interest rate sensitivity, cross-border information transfers.

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Volume 7, Numbers 1 & 2, March/June 2003

A Coupling of Extreme-Value Theory and Volatility Updating with Value-at-Risk Estimation in Emerging Markets: A South African Test
(Multinational Finance Journal, 2003, vol. 7, no. 1 & 2 , pp. 3-23)

Anthony J. Seymour
University of Cape Town, South Africa
Daniel A. Polakow
University of Cape Town and
Cadiz Holdings, South Africa

This research is aimed at a formal appraisal of recent advancements in stochastic volatility modeling and extreme-value theory to application of value-at-risk computation in particularly volatile markets. Established methods such as historical simulation are prone to underestimating value-at-risk in such developing markets. Two contemporary methods of value-at-risk calculation are tested on a representative portfolio of South African stocks. The first method incorporates extreme value theory. The second model includes both extreme value theory and volatility updating (via GARCH-type modeling). The combined GARCH-type time-series approach and extreme value theory model is found to provide significantly better results than both straightforward historical simulation as well as the extreme value model. In no instance, however, were results on these VaR methods as good as those obtained when the same methods were tested in developed markets. This research highlights noteworthy improvements to value-at-risk estimation efficacy in volatile emerging markets, and also stresses the need for further work into the estimation of value-at-risk in this context (JEL D81,G10)

Keywords: backtesting, extreme value theory, GARCH, historical simulation, RiskMetrics, value-at-risk.

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A Hedging Strategy for New Zealand’s Exporters in Transaction Exposure to Currency Risk
(Multinational Finance Journal, 2003, vol. 7, no. 1 & 2 , pp. 25-54)

Kam Fong Chan
University of Queensland, Australia
Christopher Gan
Lincoln University, New Zealand
Patricia A. McGraw
Lincoln University, New Zealand

A survey on derivative usage and financial risk management in New Zealand shows that the currency forward is the most frequently used derivatives in hedging transaction exposure. This paper examines whether forwards performs better than over-the-counter option for a New Zealand exporter in hedging NZD/USD transaction exposure. This research adopts Hsin, Kuo and Lee’s (1994) model of hedging effectiveness which maximizes the exporter’s expected negative exponential utility function to compare and evaluate the ex-ante hedging effectiveness of both forwards and options synthetic forwards. The results show that prior to the 1997 Asian Crisis, forwards are marginally more effective than options synthetic forwards for an ordinary risk-averse exporter to hedge against her/his 1, 3, 6 and 12-month transaction exposures. However, during and after the 1997 Asian Crisis, options synthetic forwards are more effective than forwards for hedging exposures of 1, 3 and 6 months. The results are robust to the exporter’s degree of absolute risk aversion (JEL G1, G11).

Keywords: forwards, hedging effectiveness, optimal hedge ratio, options synthetic forwards, utility maximization.

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The Performance of Analytical Approximations for the Computation of Asian Quanto-Basket Option Prices
(Multinational Finance Journal, 2003, vol. 7, no. 1 & 2 , pp. 55-82)

Jean-Yves Datey
Comission Scolaire de Montréal, Canada
Geneviève Gauthier
HEC Montréal, Canada
Jean-Guy Simonato
HEC Montréal, Canada

An option contract now commonly encountered is the Asian quanto-basket option. This contract is useful for risk managers willing to participate to the return of an industrial sector with an international exposure without the foreign exchange risk exposition. Although the price of such contracts can be obtained very accurately using Monte Carlo simulation, market participants prefer faster but less accurate analytical approximations. This paper thus examines the precision of three different analytical approximations available to price Asian quanto-basket options. The results of a comprehensive simulation experiment performed on a large test pool of option contracts reveal that the approximations based on the reciprocal gamma and Johnson-type densities are in general the most accurate.

Keywords: analytical approximation, Asian option, basket option, option pricing, quanto option.

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An Empirical Study of Portfolio Selection for Optimally Hedged Portfolios
(Multinational Finance Journal, 2003, vol. 7, no. 1 & 2 , pp. 83-106)

C. J. Adcock
The University of Sheffield, UK

This paper reports a study into the performance of currency-hedged portfolios constructed using mean-variance optimization methods. The method is to carry out optimization relative to a benchmark portfolio, which consists of the real assets, and simultaneously to determine the optimal exposures to each currency future. This is done at various levels of risk along the efficient frontier. A study into a portfolio of international stock and bond indices viewed from a US Dollar perspective indicates that, for the period studied, optimal currency hedging has the potential to add value in terms of additional expected return and excess return on a risk-adjusted basis. The results also demonstrate the superiority of strategies in which the hedge ratio is optimally determined over those with a fixed hedge ratio (JEL G11).

Keywords: exchange rate risk, currency hedging, mean-variance o

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Volume 7, Numbers 3 & 4, September/December 2003

Is the Source of FDI Important to Emerging Market Economies? Evidence from Japanese and U.S. FDI

(Multinational Finance Journal, 2003, vol. 7, no. 3 & 4, pp. 107–130)

Wi Saeng Kim

Hofstra University, U.S.A.

Esmeralda Lyn

Hofstra University, U.S.A.

Edward Zychowicz

Hofstra University, U.S.A.

This paper takes the position that technology transfers associated with foreign direct investment inflows (FDI) are an important determinant of economic growth in developing countries. The paper also posits that technology transfers, ceteris paribus, depend on the attributes of FDI providers, particularly as they relate to the degree of technological advancement and the behavioral aspects of the technology transfer. Japan and the U.S. are two important sources of FDI where multinational corporations domiciled in the two nations exhibit distinct variation in these attributes. Consistent with earlier research, the findings of this paper lend support for a positive role of FDI inflows from the advanced countries in increasing the economic growth of developing countries. The paper further finds some evidence that the relationship between the economic growth of the host countries and FDI inflows is stronger for U.S. originated FDI than that of Japanese originated FDI. This finding is consistent with the notion that U.S. multinational firms are more effective in generating technology transfers and spillovers to developing countries than do Japanese multinational firms (JEL F210, F430, O000).

Keywords: emerging market economies, foreign direct investments, economic development, technology transfer.

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Use of Different Trading Environments Around Interim Earnings Announcements on the Helsinki Stock Exchange

(Multinational Finance Journal, 2003, vol. 7, no. 3 & 4, pp. 131–152)

Markku Vieru

University of Oulu, Finland

This paper tests the hypothesis that an anticipated information event affects the use of trading venues. Data from the Helsinki Stock Exchange are used where an upstairs market co–exists with a downstairs market. Trades are classified also as in-house trades and externalized trades. This paper suggests that interim earnings announcement affects where trades are executed. The results indicate that an anticipated announcement increases downstairs trading before the announcement event. Correspondingly trades in the upstairs market tend to decrease before the announcement. After the announcement upstairs trading recovers. Furthermore, the empirical findings suggest that the in-house trades in the upstairs market are positively related to the liquidity and volatility during the pre-announcement period. After the announcement the volatility association changes resulting in increased downstairs trading with high volatility. The results suggest that after the announcement trades are more information-motivated and high volatility is associated with a larger proportion of downstairs trading (JEL D23, D82, G18).

Keywords:  event study, information asymmetry, accounting disclosure, thin securities markets, trading behavior.

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The Release of Nelson Mandela: Effect on the Johannesburg Securities Exchange

(Multinational Finance Journal, 2003, vol. 7, no. 3 & 4, pp. 153–175)

Costas M. Stephanou

University of South Africa, S.A

Gawie S. du Toit

University of South Africa, S.A

Marius J. Maritz

University of South Africa, S.A

What determined the value of South African assets after the unbanning of the African National Congress (ANC) and the release of Nelson Mandela? Economic or political events? This paper employs a dynamic version of the APT model for the period from 1991 to 1998 to determine whether the increase in volatility on the JSE changed the specification of the APT model as it applied to the Financial & Industrial Index of the Johannesburg Securities Exchange (JSE). The finding is that political events in late 1991, and economic events in mid 1994, changed APTM’s specification. This would indicate that during periods of profound political change, political events drive stock market prices (JEL G310).

Keywords:  arbitrage pricing theory model, Johannesburg Securities Exchange, political events, economic events.

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Comparing Conditional Variance Models: Theory and Empirical Evidence

(Multinational Finance Journal, 2003, vol. 7, no. 3 & 4, pp. 177–206)

Paolo Girardello

University of Verona, Italy

Orietta Nicolis

University of Bergamo, Italy

Giovanni Tondini

University of Verona, Italy

The aim of this paper is to identify whether the GARCH or the SV based models provide the best goodness of fit to financial time-series data. To investigate the issue, three different formulations for each type (i.e., the standard model, the fat-tailed model, and the asymmetric model) are examined. The models are first compared on theoretical grounds, then estimated using the daily returns from four market indices, and finally subjected to some diagnostic tests. The results demonstrate that for the standard formulation, the SV model fits data better than the GARCH model, while the fat-tailed and the asymmetric models roughly equivalent in describing the key features of returns. The results provide a preliminary analysis for selecting the best model with which to forecast the volatility of financial returns (JEL G0,G1).

Keywords:  GARCH models, stochastic volatility models, QML estimation, financial time series

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The Role of Financial Instruments in Integrated Catastrophic Flood Management

(Multinational Finance Journal, 2003, vol. 7, no. 3 & 4, pp. 207–230)

Tatiana Ermolieva

International Institute for Applied Systems Analysis, Austria

Yuri Ermoliev

International Institute for Applied Systems Analysis, Austria

Guenther Fischer

International Institute for Applied Systems Analysis, Austria

Istvan Galambos

VITUKI Consult, Hungary

The main goal of this paper is to develop a flood management model that takes into account the specifics of catastrophic risk management: highly mutually dependent losses, the lack of information, the need for long-term perspectives and explicit analyses of spatial and temporal heterogeneities of various agents such as individuals, governments, and insurers. We use modified data from a pilot region of the Upper Tisza river, Hungary, to illustrate the evaluation of a public multipillar flood loss-spreading program involving partial compensation to flood victims by the central government, the pooling of risks through a mandatory public catastrophe insurance on the basis of location-specific exposures, and the demand for a contingent ex-ante credit to reinsure the insurance’s liabilities. GIS-based catastrophe models and stochastic optimization methods are used to guide policy analysis with respect to location-specific risk exposures. We use economically sound risk indicators leading to convex stochastic optimization problems strongly connected with nonconvex insolvency constraint, VaR and CVaR (JEL G22, G28, C61).

Keywords: flood risk, catastrophe modeling, insurance, stochastic optimization, insolvency, contingent credit, CvaR.

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Volume 8, Numbers 1 & 2, March/June 2004

Price and Volume Effects Associated with Changes in the Danish Blue-Chip Index: The KFX Index

(Multinational Finance Journal, 2004, vol. 8, no. 1 & 2, pp. 3–34)

Ken L. Bechmann

Copenhagen Business School, Denmark

This paper considers the effects of changes in the composition of the Danish blue-chip KFX index for the period of 1989-2001. Consistent with the selection criterion used for the index, there is no evidence for a stock price effect at the announcement of a change in the index. However, deleted stocks experience an abnormal return averaging –13% in a six-month period before the deletion and a decrease in trading volume and efficiency of stock prices following the deletion. For added stocks, the average abnormal return is 8% and there is no significant change in trading volume or efficiency. These long-run effects are best explained by the imperfect substitutes hypothesis or the information costs/liquidity hypothesis, suggesting that stocks in the KFX Index are exposed to a higher demand or more attention and a lower cost of trading than stocks outside the index. However, the results do not rule out the possibility that part of the stock price effect is due to the selection criterion used for the KFX Index. All in all, this paper documents that the selection criterion for and the size of an index as well as the size of the related stock market are relevant when explaining the stock market effects of index revisions (JEL: G11, G14).

Key words:  index composition; selection criterion; price and liquidity effects.

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Takeover Prediction Models and Portfolio Strategies: A Multinomial Approach

(Multinational Finance Journal, 2004, vol. 8, no. 1 & 2, pp. 35–72)

Ronan G. Powell

University of New South Wales, Australia

This paper uses a multinomial framework to develop several takeover prediction models. The motivation for this approach lies with Morck, Shleifer and Vishny (1988), who note that separate considerations are appropriate for predicting which firms are subject to hostile (disciplinary) and friendly (synergistic) takeovers in the USA. In a typical binomial setting, in which takeover targets are treated as belonging to one homogenous group, differences between hostile and friendly targets are ignored. This may result in biased takeover probabilities and poor predictive performance. Using UK data, the results from this paper show that the characteristics of hostile and friendly targets do differ, particularly in terms of firm size. The multinomial models also have higher significance and explanatory power when compared to the binomial models. Furthermore, when the models are tested in an investment portfolio setting, the results suggest that a strategy of predicting hostile targets only, beats a benchmark control portfolio of firms of a similar size and market-to-book (JEL G14, G34).

Keywords:  multinomial logit, takeover prediction, abnormal returns, size effect

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Performance Consequences of Privatizing Egyptian State-Owned Enterprises: The Effect of Post-Privatization Ownership Structure on Firm Performance

(Multinational Finance Journal, 2004, vol. 8, no. 1 & 2, pp. 73–114)

Mohammed Omran

Arab Academy for Science & Technology, Egypt and Arab Monetary Fund, U.A.E.

This paper evaluates the financial and operating performance of newly privatized Egyptian state-owned enterprises and determines whether such performance differs across firms according to their new ownership structure. The Egyptian privatization program provides unique post-privatization data on different ownership structures. Since most studies do not distinguish between the types of ownership, this paper provides new insight into the impact that post-privatization ownership structure has on firm performance. The study covers 69 firms, which were privatized between 1994 and 1998. For these newly privatized firms, this study documents significant increases in profitability, operating efficiency, capital expenditures, and dividends. Conversely, significant decreases in employment, leverage, and risk are found, although output shows an insignificant decrease following privatization. The empirical results also show that Egyptian state-owned enterprises, which were sold to anchor-investors and employee shareholder associations, seem to outperform other types of privatization, such as minority and majority initial public offerings (JEL: G32, L33).

Keywords:  privatization, SOEs, Egypt, and ownership structure.

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Share Price Reaction to Dividend Announcements: Empirical Evidence on the Signaling Model from the Oslo Stock Exchange

(Multinational Finance Journal, 2004, vol.8, no.1 & 2, pp. 115–139)

John Capstaff

University of Strathclyde, U.K.

Audun Klæboe

Nordea Bank, Norway

Andrew P. Marshall

University of Strathclyde, U.K.

This study tests the signaling theory of dividends by investigating the stock price reaction to dividend announcements on the Oslo Stock Exchange (OSE), and subsequent changes in the cash flows of the firms involved. This paper adds to existing evidence by examining the role of dividends in a market where the corporate ownership structure is notably different from the U.S. and the U.K., and where the motivation to use dividends as a signaling mechanism appears to be stronger. The results indicate significant abnormal stock returns are associated with announcements of dividend changes. The results are robust to alternative models of dividend expectations, after controlling for the impact of earnings announcements, and are consistent across sub-periods in the sample. The stock market reaction is most pronounced for large, positive dividend announcements that are followed by permanent cash flow increases. This evidence provides modest support for the signaling theory of dividends in Norway, but it does not support the proposition that corporate ownership structure is an important influence on the use of dividends as a signaling mechanism (JEL: G32; G35).

Keywords: dividend announcements, Oslo stock exchange, signaling.

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Volume 8, Numbers 3 & 4, September/December 2004

Macroeconomic Stability, Bank Soundness, and Designing Optimum Regulatory Structures

(Multinational Finance Journal, 2004, vol. 8, no. 3 & 4, pp. 141-171)

George Kaufman

Loyola University of Chicago, U.S.A.

and Federal Reserve Bank of Chicago, U.S.A.

This paper focuses on the strong links between macroeconomic stability and bank soundness and argues that if the first is not achieved the second is not likely either with serious adverse consequences. Instability in banking is most often the result of actions by governments directed at the macroeconomy and banks to achieve short-run goals with little consideration for unintended immediate or longer-term consequences. Without government interference, there is little evidence that the banking system is unstable. This paper develops a framework for designing optimum regulatory structures that, if adopted by countries, will help to reduce instability in their banking systems and thereby also in their macroeconomies (E44, G21,G28).

Keywords: macroeconomic stability, bank soundness, designing optimum regulatory structures.

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Testing for Multiple Types of Marginal Investor in Ex-Day Pricing

(Multinational Finance Journal, 2004, vol. 8, no. 3 & 4, pp. 173–209)

Jan Bartholdy

Aarhus School of Business, Denmark

Kate Brown

University of Otago, New Zealand

The observed changes in share prices at the ex-dividend day have led researchers to look for a single marginal investor, either a long or a short term trader with different tax status, dominating all trades to explain the ex-day pricing in different markets. This paper provides a model which extends this research in three directions. One, it allows for the possibility that different types of traders may influence different stocks, thereby generating a separating equilibrium. Two, it identifies an additional marginal investor who has the option of being taxed as a short term or long term trader. Three, it explicitly models the fact that it can take a considerable time from when a dividend based trade is made until taxes have to be paid on that trade. A unique data set from New Zealand is used for the empirical analysis. Evidence of a separating equilibrium with at least two types of marginal investors is found (JEL: G10, G35).

Keywords: dividends, ex-day pricing, taxation.

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Shareholders Wealth Effects of Joint Venture Strategies

(Multinational Finance Journal, 2004, vol. 8, no. 3 & 4, pp. 211–225)

Gertjan Schut

IBM Business Consulting Services, Netherlands

Ruud van Frederikslust

Erasmus University Rotterdam, Netherlands

We investigate the shareholder wealth effects of 233 joint venture announcements of Dutch public companies in the period 1987 till 1998. The research shows that, on average, establishing joint ventures has a positive effect on the market value of Dutch companies. Using the strategic characteristics of joint ventures it is possible to explain and understand these wealth effects. Our research shows that the factors of strategic intention, the context in which the strategy is unfolded and the extent to which the company has control over the implementation strongly explains the extent to which a joint venture can create value (JEL G14, G15, G34 , F23).

Keywords: joint venture strategy, event studies, shareholders value.

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Public Information Arrival and Emerging Markets Returns and Volatility

(Multinational Finance Journal, 2004, vol. 8, no. 3 & 4, pp. 227–245)

Ali M. Kutan

Southern Illinois University-Edwardsville, U.S.A.

Tansu Aksoy

Southern Illinois University-Edwardsville, U.S.A.

Recent findings have heightened the debate about the usefulness of public information in asset markets. Using daily composite and sector index returns, this paper examines the role of public information arrival in an emerging, high-inflation economy like Turkey. The findings reveal that real GDP and industrial production announcements have the most important impact on stock returns. Regarding inflation, nominal stock returns increase in response to unfavorable inflation announcements, but only for the financials sector and partially. Market volatility is more sensitive to news about real GNP, balance of trade, tourism and construction. Implications of the findings for market participants are discussed (JEL E6, F3, G2).

Keywords: emerging markets, GARCH models, stock market volatility.

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Impact of ADR Listing on the Trading Volume and Volatility in the Domestic Market

(Multinational Finance Journal, 2004, vol. 8, no. 3 & 4, pp. 247–274)

Demissew Diro Ejara

Fairleigh Dickinson University, U.S.A.

Chinmoy Ghosh

University of Connecticut, U.S.A.

This paper investigates the impact of ADR listing on the trading volume and volatility of the domestic market. Existing theories indicate that trading shifts to a market with lower transaction costs, and the level of volatility is directly related to the level of trading activity. The analyses provide empirical evidence showing increase in both trading volume and price volatility in the domestic market after ADR listing. The increase in volatility is attributed to noise resulting from public information as opposed to from increased trading friction. This suggests improvement in liquidity following ADR listing. Comparison across country groups indicates marginally higher gain for emerging market stocks although the difference is not statistically significant. Auction type markets gain more in terms of increase in trading volume than dealer type markets (JEL: G15, N20).

Keywords: ADR, cross listing, market segmentation, market liquidity., transparency.

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Volume 9, Numbers 1 & 2, March/June 2005

Special Issue on Banking, Edited by Professor Antony Saunders

Technical Efficiency of Large Bank Production in Asia and the Pacific

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Volume 9, Numbers 3 & 4, September/December 2005

The Hedging Effectiveness of U.K. Stock Index Futures Contracts Using an Extended Mean Gini Approach: Evidence for the FTSE 100 and FTSE Mid250 Contracts

Keywords: hedging; futures; mean-gini; risk aversion.

Volume 10, Numbers 1 & 2, March/June 2006

The Determinants of Foreign Currency Hedging by U.K. Non-Financial Firms
(Multinational Finance Journal, 2006, vol. 10, no. 1/2, pp. 1–41)
 

Amrit Judge
Middlesex University, U.K.

For 366 large non-financial U.K. firms, this paper reports the factors that are important in determining their decision to hedge foreign currency exposure. The results provide strong evidence of a relationship between expected financial distress costs and the foreign currency hedging decision and more significantly the foreign currency only hedging decision. These findings seem stronger than those found in similar studies using U.S. data. The paper argues that this might be due to the fact that several U.S. studies include in their non-hedging sample other hedging firms, such as firms using non-derivative methods for currency hedging and interest rate only hedgers, which might bias the results against the a priori expectations. However, it might also be due to a country specific institutional factor, that is, U.K. firms face higher expected costs of financial distress due to differences in the bankruptcy codes in the two countries (JEL:F30, G32, G33).

Keywords: corporate hedging, foreign currency hedging, derivatives, financial distress, foreign currency debt, bankruptcy codes.

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Australian On-Market Buy-backs: An Examination of Valuation Issues
(Multinational Finance Journal, 2006, vol. 10, no. 1/2, pp. 43–79)
 

Jason Mitchell
University of Michigan Business School, U.S.A.
H. Y. Izan
University of Western Australia, Australia
Roslinda Lim
Macquarie University, Australia

A compelling reason for engaging in on-market buy-backs is that it provides a signal about the undervaluation of the company. In this paper an alternative, accounting based, method of determining fundamental value and undervaluation is used, namely the Ohlson residual income valuation framework. It is found that prior to the announcement buy-back companies are significantly undervalued relative to comparable non-buy-back companies. This undervaluation is largely but not totally removed in the period immediately following the on-market buy-back implying on-market buy-backs are predominantly an effective signaling mechanism. Where the firm cites undervaluation as a specific motive for the buy-back then, in fact, a higher degree of undervaluation prior to the buy-back is evident. The results provide evidence that management can, and does, identify undervaluation and reduces this through the signaling mechanism of on-market buy-backs (JEL: G34, G35, G38).
 

Keywords: buy-backs, undervaluation, fundamental value.

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Defining and Dating Bull and Bear Markets: Two Centuries of Evidence
(Multinational Finance Journal, 2006, vol. 10, no. 1/2, pp. 81–116)
 

Liliana Gonzalez
University of Rhode Island, USA
Philip Hoang
Australian National University, Australia
John G. Powell
Massey University, New Zealand
Jing Shi
Jiangxi University of Finance and Economics, China
The Australian National University, Australia

Despite widespread media interest in bull and bear markets, academic research that seeks to formally define bull markets is almost non-existent. This paper defines bull and bear markets in relation to a simple model of mean return regimes, and implements the definition using two formal turning point detection methods to demonstrate that two centuries of stock index returns can be separated into economically and statistically significant bull and bear market states. In-sample analysis of the turning points identified by the detection procedures is consistent with a two-state mean return model, a result that has important implications for capital asset pricing theory. The paper also examines the distinct return characteristics and the persistent duration of the bull and bear market states that are identified, and tests the superior out of sample performance of ex-ante trading rules developed from the turning point detection procedures (JEL: E32; G12; E44; C22).

Keywords: stock market, bulls and bears, turning point dating.

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Does Total Risk Matter? The Case of Emerging Markets
(Multinational Finance Journal, 2006, vol.10, no. 1/2, pp. 117–151)
 

Eric Girard
Siena College, U.S.A.
Amit Sinha
Indiana State University, U.S.A.

This paper examines the relationships between market risk premiums, time-varying variance and covariance in forty-eight emerging, and seven developed capital markets. We allow each market’s risk premium generating process to be state-dependent by accounting for negative and positive market price of variance and covariance risk. We find that half of the emerging markets exhibit reward to world variance while for the other half are only sensitive to local risk factors. We also find evidence of a negative relationship between reward to local risk and reward to world risk. Accordingly, the relative importance of one reward versus the other depends on the ever-changing correlation with the world market. Finally, we show that correlation is not a factor that explains reward to local risk in few segmented capital markets (JEL: G12; G15).

Keywords: reward to risk, conditional risk, market price of risk, multivariate GARCH.

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Volume 10, Numbers 3 & 4, September/December 2006

The Equivalence of Causality Detection in VAR and VECM Modeling with Applications to Exchange Rates
(Multinational Finance Journal, 2006, vol. 10, no. 3/4, pp. 153–177)
 

T.J. Brailsford
UQ Business School, University of Queensland, Australia
J. H.W. Penm
The Australian National University, Australia
R.D. Terrell
The Australian National University, Australia

Vector error-correction models (VECM) are increasingly being used to capture dynamic relationships between financial variables. Estimation and interpretation of such models can be enhanced if zero restrictions are allowed in the coefficient matrices. Specifically, in tests of indirect causality and/or Granger non-causality in a VECM, the efficiency of the causality detection is crucially dependent upon finding zero coefficient entries where the true structure does indeed include zero entries. Such a VECM is referred to as a zero-non-zero (ZNZ) patterned VECM and includes full-order models. Recent advances have shown how ZNZ patterns can be explicitly recognized in a VECM and used to provide an effective means of detecting Granger-causality, Granger non-causality and indirect causality. This paper develops a general approach and framework for I(d) integrated systems. We show that causality detection in an I(d) system can be discovered identically from the ZNZ patterned VECM’s or the equivalent VAR models (JEL: C10, C63, F30, G10).

Keywords: error correction models, VAR, granger causality, purchasing power parity.
 

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Risk Management in Emerging Markets: Practical Methodologies and Empirical Tests
(Multinational Finance Journal, 2006, vol. 10, no. 3/4, pp. 179–221)
 

Marios Nerouppos
Cyprus International Institute of Management, Cyprus
David Saunders
University of Waterloo, Canada
Costas Xiouros
University of Southern California, U.S.A.
Stavros A. Zenios
University of Cyprus, Cyprus

Risk management has undergone a remarkable transformation over the past fifteen years, with most new methods having been designed for the concerns of large institutions operating in well-developed financial markets. This paper addresses a problem faced by smaller institutions operating in emerging markets, namely the significant lack of data. As many risk management techniques are data intensive, this problem may seem insurmountable. This paper introduces a new method, enriched historical simulation, which supplements the data in an emerging market with data from other markets. The principle behind this methodology is that when many markets are considered, the essence of emerging market economies comes to the fore, with local idiosyncrasies being washed out. This principle is illustrated on the problem of estimating Value-at-Risk on the Cyprus and Athens Stock Exchanges. Numerical tests show that standard models underestimate risks, but that estimates are improved significantly with the use of external data (JEL: C10, C80, G10, G15).

Keywords: risk management, historical simulation, value-at-risk, emerging markets.
 

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The Long-Run Stock Performance of Privatization IPOs
(Multinational Finance Journal, 2006, vol. 10, no. 3/4, pp. 223–250)
 

Seung-Doo Choi
Dongeui University, Korea
Sang-Koo Nam
Korea University, Korea

This paper compares the long-run buy-and-hold returns of privatization initial public offerings (IPOs) to those of the domestic stock markets of respective countries using a sample of 241 privatization IPOs from 41 countries. The evidence indicates that the privatization IPOs significantly outperform their domestic stock markets if the returns are equally-weighted while value-weighted returns show a sharp reduction in performance. However, there are substantial variations in the long-run performance of privatization IPOs across industries, issuing countries, issue period, and the origin of commercial law of the country. This paper also analyzes the cross-sectional determinants of the long-run buy-and-hold returns of privatization shares. The results indicate that the long-run performance of privatization IPOs is significantly related to the proxies of policy uncertainty, consistent with the signaling models of Perotti (1995). Such effects appear to be overwhelming in the earlier post-IPO period, while the traditional market factors become more important as the policy uncertainty disappears over time. The institutional features of the country such as accounting standards, origin of commercial law, and corporate governance scheme also affect the return performance of privatization issues (JEL: G32).

Keywords: privatization, IPO, policy uncertainty, CAR, BHAR
 

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Closed-End Country Funds and International Diversification
(Multinational Finance Journal, 2006, vol. 10, no. 3/4, pp. 251–276)
 

Andreas Charitou
University of Cyprus, Cyprus
Andreas Makris
University of Cyprus, Cyprus
George P. Nishiotis
University of Cyprus, Cyprus

Using data from 1993 to 2002 for eight developed and fifteen emerging markets, we find that return correlations, mean-variance spanning, and Sharpe ratio tests support that closed-end country funds (CECF) can mimic their corresponding foreign indices, and that they are more heavily influenced by their corresponding local markets instead of the U.S. market. This implies that U.S. investors, by investing in CECF, can achieve similar international diversification benefits to those achieved by investing directly in the foreign indices. We also document increased correlation between the U.S. market and foreign markets during this period and find no compelling evidence of economically and statistically significant international diversification benefits, as opposed to a pre 1993 period. These findings could be associated with the financial market liberalization that was prevalent during the period (JEL: G15).

Keywords: closed-end country funds, international diversification, emerging markets, liberalization, spanning tests.
 

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The Valuation of Options on Bonds with Default Risk
(Multinational Finance Journal, 2006, vol. 10, no. 3/4, pp. 277–305)
 

Riadh Belhaj
Conservatoire National des Arts et Métiers, France

In this paper we present a model for valuing European and American options, which incorporates both default and interest rate risks. We develop a framework that permits evaluation of three kinds of options: (i) options issued by default-free counterparties on risky bonds, (ii) options issued by risky counterparties on default-free bonds and (iii) options issued by risky counterparties on risky bonds — a case where default risk enters at both levels. We show that the price of a put option on a risky discount bond is hump shaped for a European put and monotone increasing for an American put. We also find that the price impact of default risk is less for an American put option than for a European one (JEL: G13).

Keywords: option pricing, default risk, defaultable bonds, vulnerable options.

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Volume 11, Numbers 1 & 2, March/June 2007

Factors Determining Mergers of Banks in Malaysia’s Banking Sector Reform
(Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 1–31)
 

Rubi Ahmad
University of Malaya, Malaysia
Mohamed Ariff
Bond University, Australia
Michael Skully
Monash University, Australia

What was termed government-guided merger was a unique banking sector reform implemented in 2002 by the central bank of Malaysia guiding a larger number of depository institutions to form 10 large banks. This paper identifies the factors entering this massive merger exercise. Similar to the finding in bank merger literature, we find larger banks became acquirers. Also, low risk banks had higher probability of becoming an acquiring bank while high-risk banks became targets for takeover. Surprisingly managerial performance—financial ratios and changes in productivity reported as significant factors in prior market-based merger studies—was not significant in this study. Banks closely connected to government had greater chance of becoming acquiring banks while the reverse is true of target banks. These findings have not been reported in other studies of mergers, and are likely to be useful to central banks considering similar reforms (JEL: G21, G34).

Keywords: bank mergers, acquiring banks, managerial performance, government connections.
 

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Are Failure Prediction Models Widely Usable? An Empirical Study Using a Belgian Dataset
(Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 33–76)
 

Hubert Ooghe
Vlerick Leuven Gent Management School and Ghent University, Belgium
Sofie Balcaen
Ghent University, Belgium

Faced with the question as to whether failure prediction models can easily be transferred and applied to a new data setting, this study examines the performance of seven models on a dataset of Belgian company failures after re-estimation of the coefficients. The validation results indicate that some models are widely usable: they are strongly predictive when applied to the new data set. The Gloubos-Grammatikos models and Keasey-McGuinness appear among the best performing models, and also Ooghe-Joos-De Vos and Zavgren seem to be widely usable, respectively for failure prediction 1 and 3 years prior to failure. At the same time, the Altman and Bilderbeek models show very poor results when applied to the Belgian dataset. The best performing models seem to combine the right variables in an intuitively right sense and it appears that the combination of some types of variables generally leads to good predictive results. On the contrary, the estimation technique, complexity and number of variables do not explain the predictive performances (JEL: G33,M49).

Keywords: failure prediction model, international comparison, validation, annual accounts, re-estimation.

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Simulating Firm-Specific Corporate Marginal Tax Rates in a Canadian Context
(Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 77–96)
 

Amin Mawani
York University, Toronto, Canada

This paper illustrates a methodology for estimating corporate marginal tax rates in the presence of tax losses, and within the context of Canadian tax law (JEL: G3, H25, M4).

Keywords: taxation; marginal tax rates; tax losses; corporate tax rates.

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U.K. Stock Market Inefficiencies and the Risk Premium
(Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp. 97–122)
 

Antonis Demos
Athens University of Economics and Business, Greece
George Vasillelis
Imperial College and Dresdner-Kleinwort-Benson Bank, U.K.

The stock market predictability has been a favorite topic of scholars and practitioners alike. It seems that some small predictability is present in all major stock markets worldwide. This predictability can be attributed to the risk premium structure and/or to inefficiencies present in the markets. This paper investigates the predictability of returns of some major shares listed in the London Stock exchange, using economic as well as accounting variables. We first measure the predictability of these variables by regressing individual stock returns on their corresponding accounting variables and the economic ones. Second, we estimate for the returns a seasonal latent factor model with time varying volatility. Provided that our measure of risk is an adequate one, the residuals of this estimation are free of the predictability of risk premium, and consequently one expects that any accounting and factor economic variables would have no predictive power. An LM-type test is developed and employed to indicate that indeed the U.K. stock market predictability is due to the risk premium structure, and the explanatory power of the variables considered here is due to them being an approximation of risk. However, when we perform the test jointly for all assets, we reject the zero predictability hypothesis at 5% but not at 1% (JEL: G12, G14, C10).

Keywords: conditional heteroskedastic latent factor, LM test, stock returns.
 

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Mispricing Persistence and the Effectiveness of Arbitrage Trading
(Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp.123–156)
 

Pascal Alphonse
Lille School of Management, University of Lille 2, France

This article examines whether mean reversion in stock index basis changes is actually induced by arbitrage trading, using intra-day arbitrage trade data. The empirical evidence suggests that arbitrage trading alone cannot account for all of the mean reversion in basis changes, even when infrequent trading is controlled for. This general mean reversion is consistent with mean reversion in liquidity and partial adjustment in the cash market. The behavior of arbitrageurs appears highly competitive. We find that on average the net arbitrage profit is at the competitive level of zero. Furthermore, it is suggested that some mispricing persistence may be related to time-varying liquidity. Accordingly, the results indicate that arbitrageurs pay attention to the depth of the market and value the early unwinding option (JEL: G13, G14).

Keywords: market microstructure, arbitrage trading, liquidity, stock index futures, market efficiency.

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Volume 11, Numbers 3 & 4, September/December 2007

Timing Decisions in a Multinational Context: Implementing the Amin/Bodurtha Framework
(Multinational Finance Journal, 2007, vol. 11, no. 3/4, pp. 157–178)
 

Manfred Frühwirth
Vienna University of Economics and Business Administration, Austria
Paul Schneider
Vienna University of Economics and Business Administration, Austria
Markus S. Schwaiger
Austrian Central Bank and Vienna University of Economics and Business Administration, Austria

The Amin/Bodurtha framework was developed for the valuation of American-style financial instruments driven by three sources of uncertainty— domestic interest rate risk, foreign interest rate risk and exchange rate risk. The model is not only appropriate for pricing a number of financial derivatives, but also, as we show, for valuing foreign investment projects in the presence of real options. In this paper we propose the most natural directly implementable specification within the Amin/Bodurtha framework that permits all combinations of up and down moves of these three risk factors without restricting volatility functions of the factors or correlations between them. By use of the depth-first algorithm, we can show that this specification is implementable at reasonable computation times (JEL: G13, G31, F30).

Keywords: American-style derivatives, multinational timing decisions, depth-first algorithm.

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Asymmetric Return and Volatility Responses to Composite News from Stock Markets
(Multinational Finance Journal, 2007, vol. 11, no. 3/4, pp. 179–210)
 

Thomas C. Chiang
Drexel University, U.S.A.
Cathy W.S. Chen
Feng Chia University, Taiwan
Mike K.P. So
The Hong Kong University of Science and Technology, China

This paper examines the hypothesis that both stock returns and volatility are asymmetric functions of past information derived from domestic and U.S. stock-market news. The results show the presence of negative autocorrelation, which is consistent with the dominance of positive-feedback trading behavior. By employing a double-threshold autoregressive GARCH model to investigate four major index-return series, the study finds significant evidence to sustain the asymmetric hypothesis of stock returns. Specifically, this paper finds that negative news will cause a decline in national stock returns that is larger than the gain caused by good news of an equivalent magnitude. This also holds true for the conditional variance. The return appears to be more volatile and persistent when bad news hits the market than when good news does (JEL: C15,
C22, G12).

Keywords: asymmetry, threshold GARCH, volatility, Bayesian estimation, posterior-odds ratio.

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Ownership-Control Discrepancy and Firm Value: Evidence from France
(Multinational Finance Journal, 2007, vol. 11, no. 3/4, pp. 211–252)
 

Sabri Boubaker
Université Paris XII, Val de Marne, France

The purpose of this study is to provide an empirical analysis of the relationship between ownership structure of French firms and their value. Using data for 510 French publicly traded firms, the current study provides evidence in support of the entrenchment hypothesis. The results show that large controlling shareholders maintaining grip on control while holding only small fraction of cash flow rights are inclined to expropriate minority shareholders, which in turn detrimentally affects the firm’s valuation. The evidence also indicates that pyramiding is the main device set to unduly entrench the large controlling shareholder. Additional analysis reveals that the identity of the second largest controlling shareholder matters. Sharing control with a family constrains the largest controlling shareholder to steer clear of self-serving behavior. However sharing control with a widely held firm or with a financial institution fosters this self-serving behavior (JEL: G32, G34).

Keywords: ownership structure, corporate governance, minority expropriation.

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Swedish Stock Recommendations: Information Content or Price Pressure?
(Multinational Finance Journal, 2007, vol. 11, no. 3/4, pp. 253–285)
 

Erik R. Lidén
Göteborg University, Sweden

The paper analyzes stock-price reactions to stock recommendations published in printed Swedish media and also trading volumes at and around the publication day, bid/ask spreads, and the post publication drift in recommended stocks for the period 1995 – 2000. Its small size and limited number of actors makes the Swedish stock market an interesting comparison to the U.S. stock markets. The positive publication-day effect for buy recommendations was almost fully reversed after 20 days, supporting the price pressure hypothesis, and the effect for sell recommendations was negative and prices continued to drift down, supporting the information hypothesis. Analysts seem to hand their information to clients before publication, whereas no such information leaking pattern was observed for journalists. The impact to recommendations from journalists was significantly larger than analyst recommendations, implying a tradeoff between the size of pre-publication cumulative abnormal returns and the publication-day effect (JEL: G10, G14, G20).

Keywords: price pressure hypothesis, information hypothesis, journalists, analysts.

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Stationary Component in Stock Prices: A Reappraisal of Empirical Findings
(Multinational Finance Journal, 2007, vol. 11, no. 3/4, pp. 287–322)
 

Haitham A. Al-Zoubi
United Arab Emirates University, UAE
Aktham Maghyereh
United Arab Emirates University, UAE

This paper re-examines the issue of mean reversion in stock prices by incorporating the structural break effect in the long horizon regression. Before adjusting for structural break, the paper finds that previous studies understate the evidence of mean-reversion. The understatement is mainly due to the clustering heteroskedasticity and autocorrelation in the overlapping returns. After adjusting for structural break(s), no evidence of predictability for value-weighted returns has been documented. However, stronger evidence of mean reversion in stock prices is documented for equally-weighted portfolios. The reverse effect of structural break can be explained by the switch to mean aversion in the last subperiod of value-weighted portfolios while no such switch in equally weighted portfolios (JEL: G1, C22).

Keywords: moving blocks bootstrap, mean reversion, structural change, long-horizon regressions.

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Volume 12, Numbers 1 & 2, March/June 2008

Are Forward Exchange Rates Rational Forecasts of Future Spot Rates? An Improved Econometric Analysis for the Major Currencies
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 1–20)
 

Raj Aggarwal
University of Akron, U.S.A.
Winston T. Lin
The State University of New York at Buffalo, U.S.A.
Sunil K. Mohanty
University of St. Thomas, Minneapolis, U.S.A.

It has been suggested that prior studies that have puzzlingly found forward rates to be inefficient and biased forecasts of future spot rates may be limited by inadequate statistical methodologies. Using an improved statistical methodology that accounts for both non-stationarity and non-normality in exchange rates, we unfortunately reconfirm that U.S. dollar forward rates for horizons ranging from one to twelve months for the British pound, Japanese yen, Swiss franc, and the German mark over the period 1973–1998 are generally not efficient or rational forecasts of future spot rates. However, as one bright spot, we cannot reject efficiency and rationality for the U.S. dollar forward rate for the Canadian dollar (JEL: F31, G14, F47, G15).

Keywords: forward rates, rational forecasts.

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Firm Investments and Corporate Governance in Asian Emerging Markets
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 21–44)
 

Tanweer Hasan
Roosevelt University, U.S.A.
Palani-Rajan Kadapakkam
University of Texas at San Antonio, U.S.A.
P. C. Kumar
American University, U.S.A.

The quality of corporate governance has been shown to have wide-ranging implications, e.g., on the performance of stock markets and on exchange rates. This study investigates whether the quality of corporate governance in a country impacts investment decisions made at the micro level of the firm. The study focuses on Asian emerging markets since they have widely varying standards of corporate governance. Based on eight measures of corporate governance, four aggregate indices of corporate governance (business environment, legal environment, investor rights, and an overall measure) are developed for seven countries in the sample drawing on data from published sources. The results indicate that improvements in corporate governance mitigate the dependency of firm investments on their internal resources and facilitate access by firms to capital markets (JEL: G15, G30, G31).

Keywords: corporate governance, firm investments, emerging markets, investment-cashflow sensitivity.

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A Liquidity Motivated Algorithm for Discerning Trade Direction
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 45–66)
David Michayluk
University of Technology, Australia
Laurie Prather
Bond University, Australia

Most exchanges do not report trade direction thus researchers and traders must deduce whether a trade is buyer or seller initiated since this information is required to evaluate models of bid-ask spread components and to understand the market for immediacy. Algorithms that assign trade direction based on the proximity to bid or ask quotes are easily implemented but ignore information readily discernable from orders, changes in the quoted depth and subsequent price movements. Using the New York Stock Exchange Trades, Orders and Quotes database, systematic biases in existing trade direction algorithms are documented that can be rectified by recognizing that the impact on liquidity is the fundamental characteristic underlying order placement. Although this liquidity-based method is difficult to implement, it more closely captures the actual behavior of market participants (JEL : G10, G14).

Keywords: liquidity, trade direction algorithm, TORQ database, order placement
 

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Value-at-Risk for Greek Stocks
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 67–104)
 

Timotheos Angelidis
University of Peloponnese, Greece
Alexandros Benos
National Bank of Greece, Greece

This paper analyses the application of several volatility models to forecast daily Value-at-Risk (VaR) both for single assets and portfolios. We calculate the VaR number for 4 Greek stocks, 2 portfolios based on these securities and for the Athens Stock Exchange General Index. We model VaR for long and short trading positions by employing non-parametric methods, such as historical and filtered historical simulation, as well as parametric ones. Especially for the later techniques we use a collection of ARCH models (GARCH, EGARCH and TARCH) based on three distributional assumptions (Normal, Student-T and Skewed Student-T), while we combine the Extreme Value Theory with a volatility updating technique (via GARCH type-modeling). In order to choose one model among the various forecasting methods, we employ a two-stage backtesting procedure. In the first one, we implement two backtesting criteria (unconditional and conditional coverage) to test the statistical accuracy of the models. In the second stage, we employ standard forecast evaluation methods in order to examine whether any differences between models that have converged are statistica lly significant (JEL: C22; C52; C53; G15).

Keywords: value-at-risk, GARCH, historical simulation, backtesting.

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Equity Market Price Interactions Between China and the Other Markets Within the Chinese States Equity Markets
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 105–126)
 

Gary Gang Tian
University of Wollongong, Australia

This study examines the cointegrating and long-term causal relationships of equity market prices in equity markets of Chinese states namely, Shanghai, Shenzhen, Hong Kong, Taiwan and Singapore. I cover the period between October 5, 1992 and March 20, 2006, taking into account both the Asian financial crisis and the opening-up of China’s equity markets in recent years. First, I analysis the cointegration by utilizing Johansen’s (1988) cointegration tests. I find that a long-term equilibrium relationship measured by cointegration has been established among Shanghai, Shenzhen, Hong Kong and Taiwanese markets and, to a lesser degree, between these markets and the Singapore market since 1998. Secondly, this study examines causality by exploring the bootstrapped Toda-Yamamoto non-causality tests. I find that there is strong evidence of a bi-directional causality between Shanghai and Shenzhen markets after 1998. Furthermore, I also find that there are more causal linkages between the Chinese states equity markets: two mainland Chinese markets, Hong Kong, Taiwan, and Singapore became more dependent on each other. The robustness of the above findings is confirmed by the use of a bootstrap test employed to test the validity of my results.

Keywords: international financial markets; causality testing in VaRs with bootstrapping, cointegration

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Higher-Order Terms in Bivariate Returns to International Stock Market Indices
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 127–155)
 

Kirt C. Butler
Michigan State University, U.S.A.
Katsushi Okada
Michigan State University, U.S.A.

This article documents the stochastic properties of bivariate returns to international stock market indices. In particular, the article searches for the best fit among a class of higher-order VARMA(u,v)-EGARCH(p,q) models with normal errors and a constant conditional correlation using MSCI domestic and world-ex-domestic index pairs for the Emu, Japan, the United Kingdom, and the United States. Although a first-order VAR or VMA specification is sufficient to accommodate the conditional means, second-order EGARCH terms are necessary in two of the four bivariate series (JEL: G15 G11 C15 C34).

Keywords: higher-order, bivariate, international diversification, EGARCH, VARMA.

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Volume 12, Numbers 3 & 4, September/December 2008

The Separation of Banking from Insurance: Evidence from Europe
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 157–184)

Mohamed Nurullah
Glasgow Caledonian University, U.K.
Sotiris K. Staikouras
Cass Business School, U.K.

The European market of banks and insurance companies has traditionally no exact boundaries between insurance and banking activities. Such business arena poses distinctive challenges to both banking and insurance industries. The paper statistically evaluates the feasibility of a hybrid portfolio integrating banking and insurance services. It examines the risk-return effects of European banks’ diversification into life and non-life insurance underwriting, as well as into insurance broking businesses. More specifically, it focuses on financial data and analyzes changes in profitability, return volatility and creditworthiness of those financial institutions. The empirical results indicate that diversification by European banks into life and non-life insurance underwriting activities increases banks’ risk. Unlike the non-life insurance sector, the return on life assurance underwriting increases significantly. On the other hand, insurance broking returns increase as well, while volatility and possible bankruptcy remain insignificant. This suggests that the interface of banks and insurance broking activities could be further explored (JEL: G21, G22, G28, G34).

Keywords: Bancassurance, Financial institutions, Bank diversification, Insurance activities, Risk-return analysis.
 

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Conditional Risk Premia in International Government Bond Markets
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 185–204)

Joëlle Miffre
EDHEC Business School, France

The paper estimates conditional pricing models for 11 international government bonds and shows that, while local instruments capture the change in the bonds’ risks, global instruments model the variation in the factor risk premia. Altogether the changes in the factor risk premium capture 78.25% of the bonds’ predictability, while the dynamics in the betas account for less than 1%. One cannot conclude however that the conditional models are well-specified as parameter instability and relatively large mean squared errors were uncovered. These results extend for the first time some of the evidence from the equity market of Ferson and Harvey (1993), Harvey (1995) and Ghysels (1998) to the bond market (JEL : G12, G15).

Keywords: international government bonds, conditional asset pricing models, variance ratio, mean squared errors, parameter stability.
 

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Estimation of VaR Using Copula and Extreme Value Theory
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 205–218)

L. K. Hotta
State University of Campinas, Campinas SP, Brazil
E. C. Lucas
ESAMC, Campinas SP, Brazil
H. P. Palaro
State University of Campinas, Campinas SP, Brazil and Cass Business School, U.K.

This paper proposes a method for estimating the VaR of a portfolio based on copula and extreme value theory. Each return is modeled by ARMA-GARCH models with the joint distribution of innovations modeled by copula. The marginal distributions are modeled by the generalized Pareto distribution in the left tail (large loss) and empirical distribution otherwise. The copula is estimated by an estimator which gives more weight to observations with large loss. The method is applied to a two-asset portfolio and compared to other traditional methods (JEL: C15, D81,G10).

Keywords: conditional copula, risk measures, VaR, extreme value theory.
 

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The Impact of the Announcement of Acquisition of Divested Assets on Buyers’ Wealth - Asset Fit and Disclosure of Funds Used: Evidence from the U.K.
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 219–240)

Balasingham Balachandran
Monash University, Australia
Robert Faff
Monash University, Australia
Roger Love
Monash University, Australia
Andrew Menon
Monash University, Australia

This study examines the effects of announcements of acquisition of assets on shareholder wealth of buyers over the period January 2000 to December 2002 in the U.K. Significant positive announcement period abnormal returns for ‘fit’ acquisitions of divested assets that disclosed the “sources of funds” are documented. Multivariate regression analysis shows that announcement period abnormal returns are significantly related to pre-announcement period abnormal returns, relative size of the acquisitions and disclosure of sources of funds. Overall, there is little or no support for the asset fit hypothesis. However, there is strong support for “Fund Source Disclosure”, “Fund Source Pecking-Order” and “Relative Size of Acquisition” Hypotheses (JEL: G34).

Keywords: divested asset acquisition; buyers; price reaction; fit and non-fit; fund source
 

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Behavioral Biases in Forward Rates as Forecasts of Future Exchange Rates: Evidence of Systematic Pessimism and Under-Reaction
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 241–277)

Raj Aggarwal
University of Akron, U.S.A.
Sijing Zong
California State University-Stanislaus, U.S.A.

Even though the forward-spot relationship in currency markets is very important for policy makers and for corporate and investment managers, it remains a theoretical and empirical puzzle. In theory the forward rate should be an unbiased forecast of the future spot rate, but this hypothesis has little empirical support. For the currencies of the nine major industrialized countries, this paper documents that in spite of the very high trading volumes in currency markets, consistent with evidence for other asset markets, revisions in the forward rate forecasts of the future spot exchange rate reflect systematic pessimism and under-reaction to new information (JEL: F31, G14, F47, G15).

Keywords: exchange rates, forward bias, market rationality, under-reaction
 

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The Microstructure of the Irish Stock Market
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 279–311)

Patricia Chelley-Steeley
University of Aston, U.K.
Brian Lucey
Trinity College Dublin, Ireland

This is the first paper to examine the microstructure of the Irish Stock Market empirically and is motivated by the adoption, on June 7th of Xetra the modern pan European auction trading system. Prior to this the exchange utilized an antiquated floor based system. This change was an important event for the market as a rich literature exists to suggest that the trading system exerts a strong influence over the behavior of security returns. We apply the ICSS algorithm of Inclan and Tiao (1994) to discover whether the change to the trading system caused a shift in unconditional volatility at the time Xetra was introduced. Because the trading mechanism can influence volatility in a number of ways we also estimate the partial adjustment coefficients of the Amihud and Mendelson (1987) model prior and subsequent to the introduction of Xetra. Although we find no evidence of volatility changes associated with the introduction of Xetra we do find evidence of an increased in the speed of adjustment (JEL: G15).

Keywords: trading systems, adjustment speed, cross listing, microstructure.

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Volume 13, Numbers 1 & 2, March/June 2009

An Admissible Macro-Finance Model of the US Treasury Market.
(Multinational Finance Journal, 2009, vol. 13, no. 1/2, pp. 1–38)

Peter Spencer
University of York, U.K.

This paper develops a macro-finance model of the yield curve and uses this to explain the behavior of the US Treasury market. Unlike previous macro-finance models which assume a homoscedastic error process and suppose that the one-period return is directly observable, I develop a general affine model which relaxes these assumptions. My empirical specification uses a single conditioning factor and is thus the macro-finance analogue of the EA1(N) specification of the mainstream finance literature. This model provides a decisive rejection of the standard EA0(N) macro-finance specification. The resulting specification provides a flexible 10-factor explanation of the behavior of the US yield curve, keying it in to the behavior of the macroeconomy. (JEL: C13, C32, E30, E44, E52)
 

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European Put-Call Parity and the Early Exercise Premium for American Currency Options
(Multinational Finance Journal, 2009, vol. 13, no. 1/2, pp. 39–54)

Geoffrey Poitras
Simon Fraser University, Canada
Chris Veld
University of Stirling, U.K.
Yuriy Zabolotnyuk
Carleton University, Canada

The European put-call parity condition is used to estimate the early exercise premium for American currency options traded on the Philadelphia Stock Exchange. Using a sample of 331 pairs of call and put options with the same exercise price and time to expiration, evidence is provided for early exercise premiums that average 5.03% for put options and 4.60% for call options. The premiums for both call and put options are strongly related to the interest rate differential and time to expiration. These results have implications for the use of European option pricing models in the valuation of American options. (JEL: G10, G12, G13, G14)

Keywords: European put-call parity; currency options; early exercise premium
 

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The Risks in CDO-Squared Structures
(Multinational Finance Journal, 2009, vol. 13, no. 1/2, pp. 55–74)

Andrew Adams
University of Edinburgh Business School, U.K.
Rajiv Bhatt
Deloitte Touche Tohmatsu India Pvt. Ltd., India
James Clunie
Scottish Widows Investment Partnership, U.K.

The recent sub-prime debacle has brought ‘innovative’ structured credit products such as collateralized debt obligations under severe criticism. The complexity of some structured finance securities and difficulties in understanding their risks has been a common theme. This paper argues that CDO-squared structures can be so complex as to make risk assessment difficult. By modeling a simplified CDO-squared structure using Monte Carlo simulation, two of the risks unique to such structures are examined: default location risk and overlap risk. Failure to take account of these risks during a distressed credit environment will result in greater than anticipated losses among senior CDO-squared tranches.(JEL: G11, G15, G24)

Keywords: collateralized debt obligation; CDO-squared; default location risk; overlap risk; Monte Carlo simulation
 

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The Effect of Extreme Markets on the Benefits of International Portfolio Diversification
(Multinational Finance Journal, 2009, vol. 13, no. 1/2, pp. 75–108)

Daniella Acker
University of Bristol, U.K.
Nigel W. Duck
University of Bristol, U.K.

We investigate the effects of bull and bear markets on correlations between developed and emerging country equity returns, and on the benefits of combining international markets in a portfolio. Contrary to most other studies we find that correlations fall in both bull and bear markets, although far more in the former; that emerging markets provide both additional diversification benefits for investors in developed markets and, especially, some protection during bear markets.(JEL: F3, G1, G10, G11, G15)

Keywords: International equity markets, correlations, portfolio choice.
 

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Towards Decoding Currency Volatilities
(Multinational Finance Journal, 2009, vol. 13, no. 1/2, pp. 109–140)

D. Johannes Jüttner
Macquarie University, Sydney
Wayne Leung
Macquarie University, Sydney

This study examines on the basis of economic theory the determinants of exchange rate volatilities for a large number of currencies. We relate daily changes in GARCH(1,1) volatilities of exchange rates to the volatility changes of several of their presumed fundamental economic determinants in the context of a portfolio balance model. The use of high-frequency data limits the choice of the explanatory economic variables that can be included in empirical estimates. The first differences of GARCH(1,1) volatilities of share and bond price indices reflect portfolio trading decisions in corresponding markets for both assets. In the same vein, first differences of the gold price volatility, as an additional determinant, are related to exchange rate volatilities of two commodity currencies in the sample. The panel data estimates, using the Seemingly Unrelated Regression technique, produce coefficients with the expected signs and statistical significance. The results of our study enhance our understanding of high-frequency currency volatility changes for 19 currencies beyond the purview of announcement effects in the event studies framework (JEL: F31, G154, C22)

Keywords: Exchange rate volatilities, volatility relationships, GARCH modelling
 

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Taxation, Dividend Payments and Ex-Day Price-Changes
(Multinational Finance Journal, 2009, vol. 13, no. 1/2, pp. 141–160)

Sven-Olov Daunfeldt
The Ratio Institute, Sweden
Carina Selander
Umeå University, Sweden
Magnus Wikström
Umeå University, Sweden

The purpose of the paper is to study the effect of taxation on dividend payments and ex-dividend price-changes in Sweden during 1991-1995. Tax changes in Sweden during the 1990s were implemented in such a way that they provide an opportunity to include direct measures of the tax-treatment of dividends and capital gains in the empirical analysis, in contrast to previous studies. The results indicate that tax-reforms can have large effects on dividend payments, while the effects on ex-dividend price-changes are less conclusive.(JEL: G12, G35)

Keywords: censoring, dividend, ex-dividend, taxation.
 

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Benchmark Concentration: Capitalization Weights Versus Equal Weights in the FTSE 100 Index
(Multinational Finance Journal, 2009, vol. 13, no. 1/2, pp. 161–180)

Isaac T. Tabner
University of Stirling, U.K.

Identifying a suitable benchmark is essential when testing asset pricing models, measuring the performance of active investors, or providing market proxy portfolios for passive investors. Concern that increased domination of capitalization weighted stock indices by a few large firms will lead to inefficient portfolio diversification is leading some investors and researchers to argue that index providers should adjust their weighting methods to limit concentration. This study tests and rejects the hypothesis that concentration arising as a result of capitalization weights in the FTSE 100 Index increases risk, either during normal market conditions or during negative tail events in the return distribution. On the contrary, during the left tail of the return distribution, the equally weighted portfolio of FTSE 100 Index constituents exhibits higher risk and lower returns than the capitalization weighted FTSE 100 Index portfolio, a finding consistent with variations of the CAPM that allow for time varying risk premia.(JEL: G11, G12, G14)

Keywords: stock index benchmarks, incremental returns, incremental standard deviation, portfolio diversification, capitalization weights, index concentration, performance measurement.
 

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Modeling Volatility in Foreign Currency Option Pricing
(Multinational Finance Journal, 2009, vol. 13, no. 1/2, pp. 181–200)

Ariful Hoque
Curtin University of Technology, Australia
Felix Chan
Curtin University of Technology, Australia
Meher Manzur
Curtin University of Technology, Australia

This paper presents a general optimization framework to forecast put and call option prices by exploiting the volatility of the options prices. The approach is flexible in that different objective functions for predicting the underlying volatility can be modified and adapted in the proposed framework. The framework is implemented empirically for four major currencies, including Euro. The forecast performance of this framework is compared with those of the Multiplicative Error Model (MEM) of implied volatility and the GARCH(1,1). The results indicate that the proposed framework is capable of producing reasonable accurate forecasts for put and call prices.(JEL: G12, G13)

Keywords: Foreign currency options, implied volatility, optimal volatility, multiplicative error model, GARCH model
 

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Merging Activity as a Rational Explanation for the Long-Run Underperformance of IPO
(Multinational Finance Journal, 2009, vol. 13, no. 1/2, pp. 201–228)

Patrick Sentis
University Montpellier, France

The phenomena of IPO underpricing and underperformance are examined in the same rational model. In this model, underpricing is caused by the presence of uninformed investors. Low-type firms carry out an IPO under the same conditions as high-type firms. Instead of investing by themselves, the latter prefer to merge with a bidder, which entails their delisting from the market. The behavior of these firms provides a rational explanation for the underperformance phenomenon since only low-type firms remain on the market. Initial preliminary findings are consistent with the basic idea of the model. We show that when mergers occur, the monthly average return of the remaining firms is significantly negative, whereas the monthly average return is not significantly different from zero for the months without mergers. This result suggests that mergers induce a depreciation effect on the remaining firms and could be a source of underperformance.(JEL: G32, G34)

Keywords: initial public offerings, underpricing, underperformance, delisted, takeover, merger.
 

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A Structural form Default Prediction Model for SMEs, Evidence from the Dutch Market
(Multinational Finance Journal, 2009, vol. 13, no. 1/2, pp. 229–264)

Frieda Rikkers
Tilburg University, Netherlands
André E. Thibeault
Vlerick Leuven Gent Management School, Belgium

The objective of this research is to develop a structural form probability of default model for small and medium-sized enterprises, dealing with the methodological issues which arise in the modelling of small commercial loan portfolios, and to test the applicability of the model in practice. Other motivations are to provide an extensive overview of the characteristics of SMEs, and to provide a list of characteristics that a PD model for SMEs should contain, e.g. time and cost efficiency, broad applicability, limited data requirements, and powerful in predicting default. The structural form model is developed and tested on a unique dataset of private firm’s bank loans of a Dutch bank. The results are promising; the model output differs significantly between defaulted and non-defaulted firms. The structural form model can be used on its own, or as an additional variable in a credit risk model. A second PD model is developed using logistic regression with a number of financial ratios, including the structural form measure. This variable is significant in default prediction of SMEs and has some additional predictive power, next to the popular financial ratios. Overall, the results indicate that the structural form model is a good indicator for default of SMEs. (JEL: C51, C52, G21, G28, G33)

Keywords: SME, probability of default, structural form credit risk model, Basel II

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