Global Financial Challenges for the New Millennium……………………………………
Manuchehr Shahrokhi
The paper highlights
contemporary challenges in financial-economics globally and outlines new
challenges that the global financial community is faced with as the 20th
Century comes to an end. Such
challenges include global debt crises of Latin America, East Asia, and Russia.
Other challenges include the EMU and EURO, the impact of technology such as the
Internet and E-Commerce, global consolidations; mergers and acquisitions and
strategic alliances, regionalization, trading blocs and globalization of
markets and instruments especially derivatives and various forms of financial
engineering, global distribution of income, and other ecological issues with
financial implication for the global community.
Combining Foreign Exchange
Rate Forecasts Using Neural Networks . . . . . . . . . . . . .
. .
This study applies the neural network approach, a
new methodology modeling living nervous systems, to composite foreign exchange
forecasting. Using this methodology, econometric, judgmental, technical and
forward rate forecasts are combined to form composite forecasts, which are
evaluated against the forecasts of seven other forecasting models. The results
indicate that, in terms of accuracy, the neural network model performs the
best. However, in terms of correctness, it is second to the regression model.
Nonetheless, in three out of five currency cases, its forecasts have
percentages of correctness significantly better than the 50% of random guessing.
An Empirical Examination of Currency Futures
Options Under Stochastic Interest Rates
Winnie P. H. Poon and Edwin H. Duett
The
objectives of the study are to empirically examine the impact of stochastic
interest rates on currency futures option valuation and to compare the pricing
accuracy of a stochastic interest-rate model with a constant interest-rate
model in currency futures option valuation.
First, the price estimates from the Black (1976) futures option pricing
model and from the Hilliard, Madura and Tucker (1991) stochastic interest-rate
model (HMT) are compared with the actual observed currency futures option
values provided by the Records Retention Department of the Chicago Mercantile
Exchange (CME) during the period January 1, 1991 to December 31, 1992 by
paired-comparison t-tests. T-test
results indicate significant pricing errors of both the stochastic and constant
interest-rate models in estimating option values during the sample period. Second, regressions of pricing errors on
selected state variables are conducted to investigate the nature of bias. Regression results suggest the moneyness
bias, maturity bias, and volatility bias in both models. The results of the study show that the
stochastic interest-rate model does not out-perform the constant interest-rate
model in valuing call options for the overall sample. However, supporting Hilliard
et al. (1991) and Bailey (1987), the stochastic-rate model performs better
than the constant-rate alternative for long maturity calls and when the
interest rate fluctuates significantly or when the underlying asset correlates
with the interest rate as in the case of the British Pound.
Interest Rate
Swaps and Economic Exposure . . . .. . . . . .. . . .
. . . . . . . . . . . . . . . . . . . . . .
The interest rate swap market has grown
rapidly. Since the inception of the
swap market in 1981, the outstanding notional principal of interest rate swaps
has reached a level of $ 12.81 trillion in 1995. Recent surveys indicate that
interest rate swaps are the most commonly used interest rate derivative by
nonfinancial firms and that nonfinancial firms are major users of interest rate
swaps. In this paper, we provide an economic
rationale for the use of interest rate swaps by such nonfinancial firms. In a global economy, given the floating
exchange rate regime, nonfinancial firms face economic exposure in the presence
of foreign competition. Asymmetric
information about economic exposure leads to mispricing of the firms' debt, and
the firm chooses either short-term or long-term debt to minimize the cost of
debt. We show that when there is a
favorable (unfavorable) exchange rate shock, an exposed firm chooses short-term
(long-term) debt together with fixed-for-floating (floating-for-fixed) interest
rate swaps. Given interest rate
expectations, interest rate swaps enable the firm to minimize the cost of fixed
or floating rate debt.
Causal
Relations Among Stock Returns, Inflation, Real Activity, and Interest Rates: Evidence From Japan . . . . . . . . .. .
. . . . . . . . . . . . . . . . . . .
The negative
relationship between common stock returns and inflation in several countries is well documented. However, the specific relationship between
stock returns and inflation as well as the direction of causality is still an
unresolved issue. Attempts to resolve this issue have included factors such as
real activity and interest rates. Utilizing state space modeling, this paper examines
causal relations among stock returns, inflation, real activity, and interest
rates for Japan during 1977-1991. Major findings are (1) inflation appears
Granger-causally prior and helps explain negative stock returns, (2) consistent
with Fama's proxy hypothesis, inflation anticipates real activity, and (3)
inflation predicts interest rates.
Lender
Identity and Borrower Returns: The
Evidence From Foreign Bank Loans to U.S. Corporations .
. . . . . . . . . . . . . . . . . . . . .
Steven S. Byers, Donald R. Fraser, and Richard L. Shockley
We confirm and extend prior
research which indicates that lender identity, particularly the credit rating
of the lender, affects borrower returns from loan agreement announcements. We find that loans to U.S. corporations by
foreign lenders result in significant increases in the value of the borrower’s
equity; contrary to prior research, however, loans by domestic lenders do
not. These results are robust to the
syndication characteristics of the loans.
Market responses also appear to be a function of the terms of the loan.
Capital Market and Political Factors Affecting Hong Kong Mergers and
Acquisitions in the U.S.: 1975-1994 .
. . . . . . . . . . . . . . . . . . . . . .
This
article examines capital market and political factors affecting the level of
acquisitions in the U.S. by firms in a much smaller country, Hong Kong. The analysis suggests that capital market
factors which can affect the cost of capital for Hong Kong-based MNCs, are
related to their acquisitions of U.S. assets:
A weaker U.S. dollar is associated with more acquisitions by Hong Kong
firms; a rising U.S. stock market encourages Hong Kong investors; and lower
interest rates in the U.S. are associated with more acquisitions in the U.S.
because of the lower costs of raising funds.
Further, increased political risk in Hong Kong is associated with
increased FDI activity in the U.S.
Finally, lagged variables are significantly associated with foreign
takeover activity, reflecting the length of the planning and negotiations that
are associated with acquiring foreign assets.
Corporate
Governance and the Fragility of Banking
Systems in Developing Countries: An
Analysis of a Credit Market in Ghana . . . . . . . . . . . . .
. . . .
Jocelyn Evans and Kofi Dadzie
The authors examine the
relationship between governance structure and credit risk at rural banks in Ghana. The results show that loan default rates
vary according to the type of manager.
Loan officers with ties to the local community have higher default rates
than outside advisors who are divorced from the local information network. Hence, less informed managers have higher
quality loan portfolios. This result
suggests that agency costs that arise from familiarity dominate any benefits
associated with higher quality information.
The management team should include at least one outside, objective
manager, who is closely linked to the Central Bank.
Another Look at Corporate Ownership in Japan .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
This
paper reexamines the structure of corporate ownership in Japan and provides
additional information beyond that provided in past research. While past
research provides valuable insight into understanding the Japanese market, the keiretsu structure is more complex than
typically presented. Past studies usually classify firms as either independent
or keiretsu affiliated. There are,
however, different types of keiretsu
structures. This study classifies Japanese firms into either horizontal keiretsu, vertical keiretsu, or an independent firm classification. Statistical tests
presented provide evidence of different ownership and corporate governance
structures across different shareholder groups and across keiretsu group affiliation status. The paper also extends previous
work through the inclusion of a "Japanese corporate amenity
potential" proxy that has not been examined in other empirical studies and
examines broader measures of shareholder control then past research, such as
aggregate affiliate ownership by both corporate and financial institution
shareholder classes.
Volume 9, Number 2, 1998
Founding
Editor, Manuchehr Shahrokhi
California
State University-Fresno
CONTENTS
International Ownership Structure and the
Firm Value
Cheol S. Eun and S. Janakiramanan
The Latin American Foreign Debt Revisited
Cluadio D. Milman
Cointegration, Forecasting and International
Stock Prices
William J. Crowder and Mark E. Wohar
Model Selection for Causal Models: The Global
Procedure with AICs and AICu
Shyan-Yuan Lee and Chih-Ling Tasai
Causal Relations Among Stock Returns and
Inflation: Persistence of International Mutual Fund Performance
Martina K. Bers
On The Relationship Between Stock Returns and
Exchange Rates: Tests of Granger Causality
Richard A. Ajay, Joseph Friedman and
Seyed M. Mehdian
A Global Perspective of P/E Ratio
Determinants: The Case of ADRs
Ehsan Nikbakht and Celaddin Polat
A Note on Accounting Exposure and the Value
of Multinational Corporations
Anna D. Martin, Jeff Madura and Aigbe
Akhigbe
Volume 10, Number 1, 1999
Nonlinear Dynamics In Foreign Exchange Rates…… . . . . . . . . . . . . . .
. . . . . . . . . . . . . . ..
This
paper investigates whether the behavior of real and nominal foreign exchange
rates as well as interest rates are governed by nonlinear dynamics; it also
explores whether observed deviations from parity conditions exhibit nonlinear
dependence. Standard statistical tests for randomness such as autocorrelation
tests, have low power against a large class of deterministic, nonlinear
processes. Discerning non-randomness of
innovations in exchange rates is important for a variety of reasons. For
example, many models of international asset pricing assume exchange rates to
follow a random walk. Furthermore, nonlinear patterns in deviations from
various exchange rate parities have implications for the existence of a time
varying foreign exchange risk premium. Using the BDS statistic and a
correlation dimension analysis, this paper’s primary findings are that a)
foreign exchange markets have become increasingly complex and therefore less
amenable to forecasting over time; b) while forward exchange risk premia are
statistically significant and display a deterministic structure, this structure
is complex and therefore, not easily discernible; and c) innovations in real
exchange rates are consistent with a PPP equilibrium.
Interest
Parity, Fractional Differencing, and the Strength of Attraction:
A
Re-examination on the Cost-of-Carry Futures Pricing Model. . . . . . . . . . . . . .
. . . . . . . .
Jau-Lian Jeng
This
article discusses the strength of attraction in the cointegration of foreign
exchange futures prices and their own cash prices under a cost-of-carry futures
pricing model. The memories of the residuals in cointegration regression are
analyzed using fractional cointegration of Cheung and Lai (1993) and the
data-tapered method of Hurvich and Ray (1995) with fractional-difference time
series models. The investigation includes the foreign exchange futures and cash
prices of Swiss franc, Japanese yen, Deutsche
mark, and British pound. Although the empirical results indicate the
existence of cointegration for the foreign exchange futures and cash prices,
the strength of attraction is relatively weak.
An Empirical Examination Of The Effect Of Dividend Taxation On Asset
Pricing And Returns In Germany. . . . . . .. . . . . . . . . . . . . . . . . . . .
. . . . . . . …………………………….
A. Murphy and C. Schlag
This research finds evidence
that required pretax returns on German stocks are unchanged as a result of the
enactment of a law in Germany providing shareholders with tax credits for
dividends received. In the most recent
time interval, higher risk‑adjusted pretax returns are discovered on high‑yielding
German stocks. These findings imply
that the effect of the tax credits has been more than offset by other factors.
Cross-Border Transmission of
Stock Price Volatility:
Evidence from the
Overlapping Trading Hours. . .
. . . . …………. . . . . . . . . . . . . . . . . . . . .
Using high frequency (five-minute returns) data, we
investigate the transmission pattern of intraday volatility among three
international stock markets, i.e., the U.S., U.K., and Canada, during their
overlapping trading hours (9:30-11:30 a.m. New York time). The major findings
are as follows. First, the conditional variance of a domestic market is
affected not only by the volatility surprises of its own market, but also by
those of foreign markets. This finding holds for the U.S. as well as for Canada
and the U.K., implying that the information contained in the volatility
surprises of each national market is clearly transmitted to other national
markets. The volatility spillover is not unidirectional. Second, the magnitude of
volatility spillover does not decrease monotonically as the lag length
increases, indicating that the impact of a foreign volatility shock on the
conditional variance of the domestic
market tends to persist.
The purpose of this study is to investigate whether current economic
activities in Korea can explain stock market returns using a cointegration
test, and a Granger causality test from a vector error correction model. This
study finds that the Korean stock market reflects macroeconomic variables on
stock price indices. The co-integration test and the vector error correction
model illustrate that stock price indices are cointegrated with a set of
macroeconomic variables, i.e., the production index, exchange rate, trade
balance, and money supply, which provides a direct long-run equilibrium
relationship with each stock price index. However, the stock price indices are
not a leading indicator for economic variables which is inconsistent with the
previous findings that the stock market rationally signals changes in real
activities.
The No-Arbitrage Condition and Financial Markets with Transaction Costs
and Heterogeneous Information: The Bid-Ask Spread . . . . . . . . . . . . . .
. . .
Kavous Ardalan
This paper investigates the implications of the
no-arbitrage (NA) condition in markets with transaction costs and heterogeneous
information. Dermody and Prisman (1993) have shown that in financial markets
with increasing marginal transaction costs the NA condition is equivalent to
the existence of a valuation operator. They explore the exact dependence of
this operator on the structure of transaction costs. They show that equilibrium
prices in the “corresponding” perfect markets plus a certain factor determine
the valuation operator in markets with increasing marginal transaction costs.
This paper emphasizes that their result is applicable to financial markets with
decreasing marginal transaction costs. Furthermore, this paper shows that in
financial markets with transaction costs and heterogeneous information, the NA
condition imposes a constraint on the bid-ask spread.
Seasonality In Returns On The Chinese Stock Markets:
The Case Of Shanghai And
Shenzhen…………………
. . . . . . . . . . . . . . . . . . . . . . .
This paper investigates seasonal patterns in stock
returns on the Shanghai and Shenzhen stock markets. The paper documents several interesting findings. First, unlike studies for other stock
markets the highest daily returns on both exchanges occur on Thursday rather
than Friday. Second, price change
limits exert an effect on the observed daily pattern of returns. Third, daily stock returns appear to be
positively correlated with risk. This
result is at odds with the majority of findings for other stock exchanges
around the world. Finally, the paper
documents other differences in seasonal patterns on the two exchanges.
Competitiveness
and The Convergence of International Business Practice: North American Evidence
After NAFTA……………………………
. . . . . . . . . . . . . . . . . .
Gary P. Braun and Patrick A.
Traichal
One of the economic implications of
globalization is increased competition.
As competition in product markets increases, inefficient strategies are
eliminated and successful practices are imitated by competitors. A source of
globalization pressure is the reduction of trade barriers which previously
protected some domestic sectors. In
addition, globalization has also coincided with investors becoming more aware
of foreign investment opportunities which directly compete with domestic
demands for capital used in production.
The increased global competition in both product and financial markets
thus has the effect of defining “good” business practices as those that survive
and prosper in the global economy. The
hypothesis of a trend toward commonality of business practices is tested. As international competition in both product
and financial markets increases, business practices should converge in the
sense that acceptable deviations from the (unobservable) optimum decrease. Empirically, operating ratios, such as total
asset turnover and inventory turnover, profitability ratios such as return on
equity, and growth opportunities should converge to a common level. Using a sample of North American firms over
the 1990 to 1995 period, evidence of convergence in real asset management is
presented. In addition there is no
difference in profitability by country which supports capital market
integration. This result suggests that
1) the NAFTA accord has economic substance, and 2) gains to corporate
international diversification within North America are decreasing.
Volume 10, Number 2, 1999
Anandi P. Sahu, Joseph H. Callaghan and Robert T.
Kleiman
Initial
public and seasoned equity offerings of ADRs yield significantly positive
market-adjusted returns both in early trading and over the longer run. This is in sharp contrast with the long-term
performance of IPOs and SEOs of common stocks in general. In addition, ADRs
from emerging markets outperform those originating from developed countries,
and those listed on the New York Stock Exchange generate higher after market
returns than those trading on the AMEX or NASDAQ.
The Impact of Listing Latin American ADRs on the Risk and Return of the Underlying Shares
Terrence F. Martell, Luis Rodriguez
Jr., and Gwendolyn P. Webb
This paper examines the risks and returns of Latin
American stocks following American Depository Receipt (ADR) listings in US
equity markets, and finds no systematic change in their volatility. This
finding differs from previous results for ADR introduction on European and
Asian stocks, although it is consistent with several prior findings on international
stock listings. Importantly, it
supports the predictions of Domowitz, Glen and Madhavan's (1998) model of
international cross-listings. This
model predicts that the effects of such listings will differ across stocks
because the net effect reflects the specific trade-off for each individual
stock between benefits of enhanced inter-market competition and costs stemming
from diversion of information-linked orders out of the domestic market.
Common
stochastic Trends and Volatility in Asian Pacific Equity Markets .
. . . . . . . . . .
This paper uses Johansen's cointegration test and a
modified cointegration test with GARCH effects to examine linkages between the
U.S. and five Asian-Pacific stock markets (Australia, Hong Kong, Japan,
Malaysia, and Singapore) during 1988-1994.
The modified cointegration test with GARCH effects is used to assess
whether these stock price series share common time-varying volatility. The results indicate that the six stock markets
are highly integrated through the second moments of stock returns, but not the
first moments.
The Determinants of Secondary Market Prices For
Developing Country Loans: The Impact of Country Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . .
With better-defined
variables based on the Euromoney country risk data as explanatory variables, we
estimate the determinants of the prices of LDCs’ debts in the secondary market.
Using cross section data on 27 countries for the years 1992, 1993 and 1994, the
regression results indicate that sovereign credit ratings is the most important
variable influencing prices; other significant variables include the level of
external indebtedness and the amount of debt in default. Separate results have
been obtained for each of the two categories of countries grouped according to
the level of economic development. These results are more meaningful than those
of the previous studies because the model includes, in addition to debt
servicing capacity, other variables that best explain the prices of LDCs’ debt
within the context of a risky debt instrument
Empirical
Analysis of Real and Financial Volatilities on Stock Excess Returns: Evidence
from Taiwan Industrial Data . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Thomas C. Chiang, Shuh-Chyi Doong
This paper tests the
relationship between stock excess returns and risk factors measured by
volatility. The sources of the volatility are based on the volatility of
macroeconomic factors and time series volatility. To modeling the macroeconomic
fundamentals, we divide the risk into real and financial volatilities pertinent
to Taiwan’s economic environment. By
examining the data of industry excess returns and market excess returns, we
find evidence to reject the hypothesis that the stock excess returns are
independent of the real and financial volatilities
Re-examining the Small-Cap Myth: Problems in the Portfolio Formation
& Liquidation
This study investigates the
realizable returns on portfolios at the turn-of-the-year. Using an intra-day simulation that accounts
for the volumes offered/wanted at market bid-ask prices, large‑capitalization
securities significantly outperform small-capitalization securities by 2.4
percent and 6.5 percent, depending on whether the portfolios were formed on the
last day of the taxation year or were formed over the last month of the trading
year. In no one year, could the
small-capitalization portfolio be completely divested by the end of the holding
period suggesting that investors are not remunerated for the illiquidity in
this portfolio. Results based upon
returns calculated using the mean of the bid‑ask spread show that the
results are not derived solely from transaction costs.
Overreaction
in the Hong Kong Stock Market. . . . . . . . . . . . .
. . . . . . . . . . . . . .
Alexander Kwok-Wah Fung
Overreaction reported in the
equity markets of the U.S., Spain and Brazil is also observed in the Hong Kong
stock market. The “loser” portfolios of the 33 stocks in the Hang Seng Index
(HSI), on average, outperform the “winner” portfolios by 9.9% one year after
the formation periods. Besides the importance of the Hong Kong market in
international investment, this paper is unique in some special features related
to the overreaction study. Hong Kong has markets for index futures and stock
futures. Only three stocks are used in the portfolios. All the stocks in the
HSI have large market capitalization, liquidity, and can be shorted with no
up-tick rule. Unlike other studies in international stock markets, the
“arbitrage” portfolio of buying the loser portfolio and shorting the winner
portfolio can actually be formed with minimum cost and easy execution. These
make the overreaction phenomena in this study very powerful.
Mean Reversion and the Forecasting of Country Betas: A Note .
. . . . . . . . . . . . . . . . . . . .
Blume (1971 & 1975)
found individual equity betas to have a “regression” tendency towards the grand
mean of unity. His original results
have been widely accepted to the extent that a literature has developed on
applying Bayesian techniques to beta estimation so as to adjust for mean
reversion. The more recent literature
has focused on risk estimation and the applicability of asset pricing models in
the international finance setting where the focus has been on the aggregate
country level risk. Given the
increasing popularity of country beta models an interesting but, as yet,
unexplored issue is whether aggregate country betas display mean reversion
tendencies similar to that found for individual company betas. The examination of this issue is the central
aim of the current paper. In short, this analysis reveals strong evidence of
mean reversion of country betas, similar to that documented in the single
country setting in the existing literature.
Volume 11, Number 1-2 2000
Founding
Editor
MANUCHEHR SHAHROKHI
California State University,
Fresno
Yin-Ching Jan, Peter Shyan-Rong Chou,
Mao-Wei Hung
Integration of Libor and Treasury Bill Yields Over Different Monetary
Regimes
John M. Clinebell, Douglas R. Kahl, Jerry L. Stevens
The
Determination and International Transmission of Stock Market Volatility
Colm Kearney
Johnathan C. Mun, Geraldo M.
Vasconcellos, Richard Kish
Market
Efficiency, the Mexican Peso Crisis and U.S. Bank Stock Returns: An Application
of the Event Parameter Method
Osman Kilic, M.Kabir Hassan, David
R. Tufte
Long-Run Purchasing Power
Parity, Prices and Exchange Rates in Transition: The Case of Six Central and
East European Countries
Rohan Christie-David,
Mukesh Chaudhry
Yin-Hua
Yeh, Tsun-Siou Lee
Published in cooperation with Craig School of
Business
California State University-Fresno by
ELSEVIER SCIENCE B.V.
Volume
11, June 2000
In this paper, we follow Harvey (1991) to
investigate whether rates of return on Pacific Basin stock markets can be
explained by conditional version of International Capital Asset Pricing Model
(ICAPM), which allows for time-varying expected returns, variances and
covariances. The results show that most individual Pacific Basin markets can be
described by the conditional ICAPM. However, the multiple markets’ tests do
support the conditional ICAPM formulation, and the estimates of world reward to
risk ratio are not the same across these markets. Furthermore, the Ghysels and
Hall (1990a, b) test shows that the estimates of parameter are also unstable in
the conditional ICAPM formulation. This implies that it is difficult to use
world return to describe the relationship between expected return and risk for
the Pacific Basin stock markets.
Integration of Libor and Treasury Bill Yields Over Different Monetary
Regimes………..
In this paper tests are conducted for cointegration
and Granger’s causalilty relationships between monthly yields on 90-day
maturities for LIBOR and Treasury bills.
Unlike prior studies, there is no evidence of increased integration
between LIBOR and Treasury bill yields over time. Findings in this study suggest that tests of integration of
global dollar markets are sensitive to sample periods and different monetary
regimes. Integration relationships are
strongest under interest rate target regimes and weakest under non-borrowed
reserve regimes, as predicted. Under
the current regime of borrowed reserve targets, a hybrid of money supply and
interest rate targeting, LIBOR and Treasury bill yields are integrated to a
lesser extent than under the interest rate target regime prior to 1979.
The
Determination and International Transmission of Stock Market Volatility………
This paper extends the literature on low-frequency
analysis of the causes and transmission of stock market volatility. It uses end-monthly data on stock market
returns, interest rates, exchange rates, inflation and industrial production
for 5 countries (Britain, France, Germany, Japan and the United States) from
July 1973 to December 1994. Efficient
portfolios of world, European, and Japanese / US equity are first constructed,
the existence of multivariate cointegrating relationships between them is
demonstrated, and the transmission of conditional volatility between them is
described. The transmission of
conditional volatility from world equity markets and national business cycle
variables to national stock markets is then modeled. Amongst the main findings are; first, world equity market volatility is caused mostly by
volatility in Japanese / US markets and transmitted to European markets, and second, changes in the volatility of
inflation are associated with changes of the opposite sign in stock market
volatility in all markets where a significant effect is found to exist. To the extent that the volatility of
inflation is positively related to its level, this implies that low inflation
tends to be associated with high stock market volatility.
Market
Efficiency, the Mexican Peso Crisis & U.S. Bank Stock Returns: An
Application
This paper examines the impact
of the 1994 Mexican Peso Crisis on the U.S. bank returns using an event
parameter approach. The event parameter approach explicitly predicts the
stochastic return generating process on the occurrence or non-occurrence of
specific events. The event parameter method assumes that only the intercept
term vary between the estimation and analysis periods. Specifically, this study
will examine two pairs of hypotheses, new information versus
information-leakage and rational-pricing versus investor-contagion, in the
context of the 1994 Mexican Peso and banking crisis. The empirical results
support the new-information hypothesis, which states that the U.S. stock prices
reacted quickly to events related to the Mexican peso crisis. This research has
also found evidence for bank contagion, although these did not spill over to
other banks. The U.S. government and the international agencies acted promptly
to contain the effect of the Mexican Peso and banking crisis spreading to the
U.S. and to other Latin American countries.
Long-Run Purchasing Power
Parity, Prices and Exchange Rates in Transition:
The Case of Six
………………….
Atanas Christev and Abbas Noorbakhsh
This paper presents empirical results on the hypothesis of long-run purchasing power parity (PPP) with respect to the exchange-rate regimes in six Central and East European countries. The analysis employs cointegration theory to examine the movements of prices and exchange rates in transition to a market economy. Our results are based on system estimation procedures developed by Stock and Watson (1993) and Johansen (1991). We find moderate evidence to support long-run equilibria, however, the cointegrating vector values do not yield to easy interpretation and violate the symmetry and proportionality conditions suggested by PPP. We provide an explanation for such behavior and find that it is consistent with the existing literature on transition and foreign exchange markets.
Anand krishnamoorthy
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.
Yin-Hua Yeh, Tsun-Siou Lee
The response of investors to unexpected returns and the
information transmission in the stock markets of the Greater China area are
investigated in this study. Firstly, we analyze the asymmetric reaction of
return volatility to good and bad news by utilizing GARCH model. We find that
the impact of bad news (negative unexpected return) on future volatility is
greater than the impact of good news (positive unexpected return) of the same
magnitude in Taiwan and Hong Kong, consistent with the previous literature. However,
just the opposite is found in the Shanghai and Shenzhen markets, implying good
news chasing behavior of the investors. This phenomenon also indicates the
behaviors of the investors in Mainland China may be inclined to support the
trading noise hypothesis. Further, this study examines information transmission
of contemporaneous and cross period by exploring the interaction of unexpected
return among these four markets. The results of a near-VAR model reveal that
the Hong Kong stock market plays a most influential role (regional force) among
the Taiwan, Shanghai and Shenzhen B-Share stock markets. Finally, the stock
returns in the Taiwan market, which has been quite independent of the Mainland
China stock markets, became negatively correlated with the Shanghai B-Share
market during the Taiwan Strait Crisis period. The interaction between
financial markets seems to be strengthened by political incidents.
GLOBAL FINANCE JOURNAL
Volume 12, Number 2, 2001
Craig
School of Business - California State University-Fresno
______________________________________________________________________________
Anand Krishnamoorthy
Wayne Y. Lee and Michael E. Solt
Cetin Ciner
e-Finance: Promises Kept,
Promises Unfulfilled and Implications for Policy and Research
Anthony
F. Herbst
Parameter Shifts when Measuring Wealth Effects in
Cross-Borders Mergers
Halil Kiymaz and Tarun K. Mukherjee
Tobin’s Q, Agency Conflicts
and Differential Wealth Effects of International Joint Ventures
GLOBAL FINANCE JOURNAL
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. . . …….. . . . . . . . . . . . . . . .