Volume 12, Number 1, 2001
Arie Dekker, Kunal Sen and Martin Young
This
study provides an empirical analysis of the linkages between markets, and the
efficiency with which innovations between markets are transmitted in the Asia
Pacific region, using two competing methodologies. Specifically, this study
compares the generalized approach to forecast error variance decomposition and
impulse response analysis to the more traditional orthogonalized approach. The
findings of this study confirm earlier studies that show the Asia Pacific
region to be characterized by informationally efficient equity markets, with a
number of these markets showing strong linkages. More significantly, the
generalized VAR approach is shown to give more realistic results, particularly
for those markets with the closest geographical and economic links.
Attempts have been made to detect chaotic behavior
in financial markets data using techniques which require large, clean data
sets. Although such data is common in
the physical sciences where these tests were developed, financial returns data
typically do not conform. The close
returns test is a recent innovation in the literature and is better suited to
testing for chaos in financial markets.
This paper tests for the presence of chaos in a wide range of major
national stock market indices using the close returns test. The results indicate that the data are not
chaotic, although considerable non-linearities are present. The commonly used BDS test is also applied
to the data and in comparison, the close returns test provides substantially
more evidence of non-linearity compared to the BDS test.
This study examines the
Mixed Distribution Hypothesis (MDH) using five-minute interval stock returns of
the Taiwan Stock Index(TSI). Startlingly enough, the persistence of stock volatility
remains dominant after the stochastic mixing variable is include in the
variance equation. It implies that the MDH cannot explain away the ARCH
phenomenon. We have found that the composition of participants (approximately
92% of participants are individual investors) in TSI is a major contributing
factor to the persistent volatility. In addition, the existence of limits on
price changes, to some extent, accounts for the persistence phenomenon. Similar
results are also found for individual stocks in the sample. Interestingly
enough, the explanatory power of trading volume exhibits a U-shaped pattern in
explaining return volatility in Taiwan Stock Market.
Ling T. He
This
study examines continuous time variation paths of sensitivities of the Hong
Kong and South Korea stock markets to the U.S. stock market and bond market
(proxied by long-term interest rates) by using the Flexible Least Squares (FLS)
estimation technique. The FLS findings suggest that changes in both the U.S.
stock market and U.S. long-term interest rates may simultaneously have
significant effects on the Hong Kong stock market in some time periods. In
other periods, neither may have significant effects on the Hong Kong stock
market. The results also indicate that the South Korea stock market are overall
insensitive to changes in the U.S. capital markets. However, it becomes more
sensitive in the 1990s. Some macroeconomic variables may explain changes in the
sensitivities of the Hong Kong and South Korea stock markets to changes in the
U.S. capital markets.
Price and Volatility
Spillovers Between Interest Rate and Exchange Value of the US Dollar.
Raymond
W. So
In this paper, the dynamic relationships
between interest rate and exchange value of the U.S. dollar are studied via a
multivariate Exponential Generalised Autoregressive Conditional
Heteroskedascity (EGARCH) model. In terms of price changes, movements of
interest rates have positive effects on movements of exchange rates. However,
changes in exchange rates do not explain changes in interest rates.
Nevertheless, there exists volatility spillovers between the two markets,
indicating that their second moments are related. Overall evidence suggests
that these two markets have short-term dynamic interactions. The existence of
volatility spillovers also suggests that the relationships between these two
economic variables are not necessarily linear.
US Exports and Time Varying
Volatility of Real Exchange Rate. . .
.. . . . . . . . . . . . . . . .
Abdul-Hamid Sukar and Seid Hassan
The effect of exchange rate volatility on trade is
a controversial issue in international economics. Despite a widespread view that an increase in exchange rates
volatility reduces trade, there is no real consensus on the direction or the
size of the exchange rate volatility-trade level linkages. This paper investigates the relationship between
U.S. trade volume and exchange rate volatility using cointegration and error
correction models. We use conditional
variances of the real effective exchange rate series modeled as a generalized
autoregressive conditional heteroskedastic (GARCH) process to measure the
exchange rate volatility. The
Cointegration results indicate a significant negative relationship between U.S.
export volume and exchange rate volatility. The short run dynamics of the
relationship, however, show that the effects of both real exchange rates and
exchange rate volatility are insignificant.
International Transmission
of Inflation Under Alternative Exchange Rate Regimes: Empirical Evidence and
Its Implications
Jin-Gil Jeong and Youngho Lee
This
is a study of the transmission pattern of inflation under alternative exchange
rate regimes, fixed and flexible, among G-7 countries and their subsets,
including four members of the European Union and two countries from North
America. Our key empirical findings are as follows. The price levels of several
countries, we found, move together as a co-integrated system, forming an
equilibrium relationship under both fixed and flexible exchange regimes.
Second, the speed of adjustment estimates shows that transmission of inflationary
disturbances across countries is less pronounced under the flexible exchange
rate regime than under the fixed exchange rate regime. Third, the U.S. was
found to be a main producer of inflationary innovations among G-7 countries
whereas the U.K. was found to be a main producer of inflationary innovations
among the European Union countries, regardless of exchange rate regime.
An Examination of Nonlinear
Dependence in Exchange Rates, Using Recent Methods From Chaos Theory. . . . . . .
.. . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Interest
in the relevance of nonlinear dynamics to finance and economics has spurred the
evolution of new ways to analyze time series data. Tests for chaos, based on a
metric approach which measures spatial correlations, led to the development of
the correlation dimension test for chaos and the BDS test for
non-linearity. More recently, a
topological method has been introduced into the scientific literature which
employs a simple qualitative test for chaos that is adaptable to the
characteristics of financial data. A
quantitative version is also presented here.
Conflicting evidence exists about the presence of chaotic behavior in
exchange-rate data. The qualitative
topological test does not support evidence of a chaotic generating mechanism in
these series. The quantitative form
finds nonlinear dependence and is a useful diagnostic to determine the adequacy
of ARCH-type models for this nonlinear structure.
Volume 12, Number 2, 2001
This paper investigates the
sensitivity of equity returns on Australian industry portfolios to an exchange
rate factor for the period 1988 to 1998.
Specifically, using daily data, we (i) analyse the exchange rate
exposure of the Australian equities market by implementing a basic augmented
market model using relevant bilateral exchange rates; (ii) investigate the
intertemporal stability of the exchange rate exposure by using a dummy variable
specification; and (iii) attempt to establish the determinants of the exchange
rate exposure of Australian industries by undertaking a cross-sectional
analysis. A further empirical issue
addressed by our study is that of whether the sensitivity is contemporaneous or
lagged. We find (a) some evidence of
exchange rate exposure; (b) some evidence of intertemporal sensitivity; and (c)
a greater sensitivity to movements in the Australian dollar/US dollar exchange
rate factor than to movements in the Australian dollar/Japanese yen. Further, we observe a significant lagged
effect when employing the basic augmented model. This difference in the response of the industry portfolio returns
is not observed, however, in our intertemporal stability investigation. Finally, we do not find significant evidence
in terms of the cross-sectional determinants of foreign exchange exposure.
e-Finance: Promises Kept,
Promises Unfulfilled and Implications for Policy and Research. .
Anthony F. Herbst
Growth of
electronic, Internet based commerce, or e-commerce, has been truly
explosive. However, innovations and
growth of e-finance have lagged those of e-commerce in general. E-cash has stumbled along but not lived up
to its early promise or its current potential.
This paper discusses the current status of e-finance, some of the
problems that have stood in the way of its growth and development, and
implications for government policy and research. Lengthy, detailed discussion of such ancillary issues as
encryption technology, e-cash algorithms and other technical detail at the
micro level of implementation is avoided.
Real
exchange rate changes reflect terms of trade changes and macroeconomic shocks
in productivity, aggregate demand, and interest rates. We show that German,
Japanese, and U.S. excess stock returns vary directly with changes in the real
terms of trade as well as with exchange rate changes induced by the
macroeconomic factors. These results suggest that economic exposure is a global
phenomenon. Although German, Japanese, and U.S. firms appear to adjust costs
and productivity in response to economic exposure there are indications that
firms in all three countries suffer from hysteresis, an effect persisting after
the initial cause is removed.
Performance
Persistence of International Mutual Funds . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
William Droms and David A. Walker
This
study applies the winner-winner, winner-loser methodology developed by
Goetzmann and Ibbotson, Brown and Goetzmann and Malkiel to test for short-term
performance persistence in international equity mutual funds over the 20-year
period from 1977 to 1996. Persistence
tests are applied to a database consisting of all international equity funds in
existence during this period, varying from a low of 11 (1977) to a high of 473
(1996) funds, reflecting the extremely rapid growth of this asset class over
the last 20 years.
Parameter
Shifts When Measuring Wealth Effects in Cross-Borders Mergers. . . . . . . .
Halil Kiymaz and Tarun K.
Mukherjee
The most critical assumption
in applying the market model in event studies is that estimated parameters are
unaffected by the event. This assumption may not necessarily hold for mergers
and acquisitions as they may alter the operating and/or financial risks, and therefore, the betas of
acquiring firms. The potential for beta reduction may be even higher for a firm
acquiring abroad since cross-border mergers provide additional risk reduction
opportunities. Measuring wealth effects without considering potential changes
in betas may result in biased interpretation of results. In this paper we
examine if parameters change in response to U.S. firms announcements of
cross-border acquisitions occurring during 1982-1991. The results indicate that
U.S. bidders experience statistically significant beta reduction in the post-estimation
period. Also, betas decline irrespective of the location of the target,
although the degree of decline and its level of significance vary across
countries. The abnormal returns based on pre-announcement and post-announcement
parameters lead at times to different conclusions regarding wealth effects.
Tobins Q, Agency Conflicts
& Differential Wealth Effects of International l Joint Ventures
This article examines announcement effects of 240
International Joint Ventures (IJVs) undertaken by U.S. firms to ascertain their
impact on shareholders' wealth. The
objective is to ascertain whether the mixed results of announcement effects
reported in the literature can be explained.
Theory suggests that IJVs would result in differential stock price
reactions due to firm-specific characteristics. Therefore, it is hypothesized that IJVs would elicit a positive
stock price reaction, on average. Also,
it is hypothesized that this reaction should be greater for high Tobins q
firms and for low free cash flow firms.
Empirical analysis reveals that firm specific characteristics do
influence announcement effects and suggests that these factors may explain the
mixed announcement effects documented in the literature.
The
purpose of this paper is to demonstrate that industrial structure is an
important determinant of the exchange-rate exposure of industry portfolio
returns. A time series regression is
conducted on the sample of industries by regressing the rate of change of a
trade-weighted U.S. dollar index on the industry portfolio return while
controlling for the U.S. market. The
regression was conducted using monthly data over a three year period
(1995-1997). The results indicate that
industries that are classified as being globally competitive and those that
primarily serve the consumer sector of the economy have significant levels of
exposure. The paper also provides some
evidence on market efficiency as it pertains to changes in the value of the
dollar.
This
study examines the long run trend between the prices of gold and silver futures
contracts traded on the Tokyo Commodity Exchange and concludes that the stable
relationship between gold and silver prices has disappeared in the 1990s. The
underlying causes and implications of this finding are discussed.