Frontiers in Finance and Economics is a UGC APPROVED International Journal of Research

Showing posts with label Research Papers. Show all posts
Showing posts with label Research Papers. Show all posts

The Effect of Price Limits on Unconditional Volatility:The Case of CASE

Medhat Hassanein  Eskandar A. Tooma
This nonparametric policy-shift event study examines the relationship between symmetric price limit mechanisms and stock market volatility. We investigate price dynamics on the Cairo and Alexandria Stock Exchange (CASE), where three different limit regimes were in place between 1994 and 2004. We find when price limits are made tighter (looser) by regulators stock market volatility is usually not lower (higher).    These results contradict the widely held view among regulators that restrictive price limits can moderate volatility.  We attribute the source of higher volatility that the CASE experienced, during the tightest limit regime, to volatility on subsequent trading days increasing as limits prevent large one-day price changes. Previous research has referred to this phenomenon as the “volatility spillover” of daily price limits.
Keywords: Price Limits, Circuit Breakers, Stock Market Volatility, Egyptian Stock Exchange.
JEL Classifications: G14, G15, G18

The Information Content of Cross-sectional Volatility for Future Market Volatility: Evidence from Australian Equity Returns

Md. Arifur Rahman
This paper presents research into the information content of firm-level and industry-level cross-sectional volatility (CSV) of daily equity returns for future market-level volatility in Australia. Using a conditional volatility framework that allows for commonly observed excess kurtosis in asset returns, we find that CSV does contain information beyond what is already contained in the lagged market-level return shocks and has a significant positive relationship with the conditional market volatility. Our analysis gives new empirical evidence that the effect of CSV is stronger in relatively stable market conditions than in more volatile market conditions. We also examine how the information content of stock turnover and aggregate company announcements compares with that of CSV, and take a novel data-driven approach to verify whether CSV captures any information about multiple common factor shocks in asset returns. The explanatory power of CSV for future market volatility remains robust even after controlling for the effects of stock turnover, company announcements and omitted factor shocks in returns.
Keywords: Incremental information, Conditional market volatility, Cross-sectional volatility, Stock turnover, Multiple common factor shocks
JEL Classification: G12, G14

Multicriteria Framework for the Prediction of Corporate Failure in the UK

Constantin Zopounidis Michael Doumpos,Fotios Pasiouras
This study investigates the efficiency of two multicriteria decision aid methods, namely UTADIS and MHDIS in the development of business failure prediction models in the UK, as opposed to models developed with discriminant analysis and logistic regression. The dataset consists of 200 manufacturing UK firms out of which 100 failed during the period 2001-2003. The models are developed and validated using 10-fold cross validation. The results show that UTADIS and MHDIS achieve satisfactory classification accuracies, while both outperform logistic regression and discriminant analysis. Thus, the developed MCDA models could be of particular interest to creditors, investors, auditors and regulators in the UK
Keywords: Bankruptcy, Failure, Multicriteria decision aid, Prediction, UK. 
JEL codes: G33, C63

Call and Put Implied Volatilities and the Derivation of Option Implied Trees

  1. Moriggia S. Muzzioli C. Torricelli
Resting on the stylized fact that call and put prices imply different volatilities, the present paper proposes a methodology for the derivation of  an arbitrage free implied tree that takes into account the information in both option classes. Specifically, we derive an implied tree that is characterised by interval values for the stock prices and we endogenously imply the corresponding artificial probabilities based on the risk neutral valuation argument. The implied tree obtained is then calibrated to market option prices by means of a non-linear optimisation routine. The methodology proposed is tested both in and out of sample using DAX index options data. Numerical results are benchmarked to the Derman and Kani’s approach. The comparison suggests that the methodology proposed in this paper, by taking into account the informational content of both call and put prices, highly improves both the in sample fitting and the out of sample performance.
Keywords: Implied Binomial Tree, Smile Effect, Interval Tree.
JEL classification: G13, G14.

Marginal Conditional Stochastic Dominance between Value and Growth

  1. Victor Chow, Bih-Shuang Huang, Ou Hu
Marginal Conditional Stochastic Dominance (MCSD) is an extension of the second order stochastic dominance that considers the joint nature of return distributions. It is a useful tool for examining marginal dominance of one asset to another conditionally to a given market return distribution for all risk-averse investors.  MCSD is superior to conventional market models in that it requires no modeling specification and is distributional free.  Although the size and value effect of equity portfolio performance has been well documented, most of analysis relies on statistical regression description and/or linear factor models.  This manuscript applies MCSD to re-exanimate the size/value effects for international equity markets.  The empirical MCSD test reveals that U.S. value stocks outperformed the market and dominated growth stocks for the post 1975 period.  However, the phenomenon of value over growth is generally insignificant in markets around the world, and it varies with different valuation criteria.
Keywords:  Value, Size, Stochastic Dominance, and Portfolio Selection.
JEL Classification:  G11, G14

Hedging of Exchange Rate Risk: A Note

Udo Broll, Stefan Schubert
Using a risk management framework, a model is presented in which currency futures markets for a less common currency, in which exports are invoiced, does not exist. However, the exporting firm can cross-hedge by using future contracts of other countries’ currencies correlated to the spot exchange rate in question. The main purpose of the study is to show the effectiveness of an optimal cross-hedge strategy of an international firm.
Keywords: exchange rate risk, currency futures markets, cross-hedge.
JEL Classification : F21, F31

Portfolio Theory and Portfolio Management:A Synthetic View

Dipasri Ghosh, Dilip K. Ghosh 
This work revisits the analysis of portfolio theory, originally brought out by Harry Markowitz and A. D. Roy, and then it takes the analytical structures beyond the Markowitz and Roy paradigms of mean-variance efficiency frontier. Selection- and revision-theoretic analysis against the backdrop of utility maximization is then presented, and comparative static exercises are performed to examine the effects of expected changes in asset prices on the optimal configuration of resultant portfolio structure. In this examination, effects of price changes are decomposed into Hicksian income effects and substitution effects. The final section shows that theoretical constructs and practitioners’ works are not really divorced from each other. In fact, it is pointed out that the practical management of portfolios is deeply rooted in the theoretical work.
Keywords: mean-variance efficiency frontier, risk aversion,  safety-first, capital market line, security market line.
JEL Classification: G11

Are Stock Markets Integrated? Evidence from a Partially Segmented ICAPM with Asymmetric Effects

Mohamed El Hedi Arouri
In this paper, I test a partially segmented ICAPM for two developed markets, two emerging markets and world market, using an asymmetric extension of the multivariate GARCH process of De Santis and Gerard (1997,1998). I find that this asymmetric process provides a significantly better fit of the data than a standard symmetric process. The evidence obtained from the whole period and sub-periods analysis supports the financial integration hypothesis and suggests that domestic risk is not a priced factor.
Keywords: International Asset Pricing, Financial Integration, Emerging Markets, Multivariate GARCH.
JEL Classification : F36; C32; G15

Has the stock market integration between the Asian and OECD countries improved after the Asian crisis?

Girijasankar Mallik
In recent years the world economy has become closely integrated due to increasing trade and financial capital flows across countries. In this study we investigate the cointegrating relationships between the stock price indices of 7 emerging Asian economies (Malaysia, South Korea, Singapore, Thailand, Taiwan, Hong Kong and the Philippines) with each of 4 OECD countries (Australia, Japan, USA and UK). We have used monthly stock price indices from September 1990 to June 2004 – subdivided into two groups (before and after the Asian crisis) – to determine the effect of the crisis. Using the Johansen ML approach, we have found that the seven Asian markets are integrated with the Australian, Japanese, US and UK markets separately. We have also found that the integration has increased after the Asian crisis.
Keywords: Asian crisis, cointegration, unit root.
JEL Classification: G15, C22, C51, C52

The long-run performance of UK rights issuers

Abdullah Iqbal, Susanne Espenlaub, Norman Strong
The long-run performance of 424 UK rights issues during 1991–95 shows that issuers outperform the market and non-issuing peers in the pre-issue period and underperform in the post-issue period.  To explain these results, we examine the timing and earnings management hypotheses and show that our results support the latter.  Specifically, we find that issuing firms use discretionary current accruals to manipulate earnings, with operating performance improving significantly before the issue but deteriorating thereafter and that discretionary current accruals in the pre-issue year predict the return underperformance in the two years post-issue.  That we find these results for rights issues where new equity is offered pro rata to existing shareholders suggests the incentives of managers or informed shareholders drive earnings management.
Keywords: earnings management, rights issues, SEOs, return performance, operating performance
JEL classification: G14; G15; G24; G32; M41

Stock Market Reaction to Unexpected Changes in Interest Rates

Gitit G. Gershgoren, Shmuel Hauser
Most studies on monetary policy of central banks in many countries have focused primarily on price stability in the long-run. In this study, we investigate the short-term (within days) effect of that policy on the stock market. We employ the Vector Error Correction Models to estimate the relationship between interest rates, share prices and other macroeconomic variables to estimate the expected and unexpected interest rates announced by the Central Bank, and the GARCH model to characterize stock prices volatility. Based on these estimates, we use an event study methodology to investigate the immediate effects of unexpected announcement of interest rates by the Central Bank on share prices and their volatility. Using a unique data set obtained from the Bank of Israel we find that despite of its success in achieving the goal of price stability in the long-run, the impact on the stock market in the short-run was unwarranted, as it often generated superfluous share prices fluctuations.
Keywords: stock market, interest rates
JEL classification: E44, G14

Zelig and the Art of Measuring Excess Profit

Carlo Alberto Magni
This paper tells the story of a student of economics and finance who meets a couple of alleged psychopaths, suffering from the ‘syndrome of Zelig’, so that they think of themselves to be experts of economic and financial issues. While speaking, they come across the concept of excess profit. The student tells them that the formal way to translate excess profit is to apply Stewart’s (1991) EVA model and shows that this model is equivalent to Peccati’s (1987, 1991, 1992) decomposition model of a project’s Net Present (Final) Value. The ‘Zeligs’ listen to him carefully, then try to apply themselves the EVA model: Unfortunately, both She-Zelig and He-Zelig seem to feel uneasy with basic mathematics, so they make some mistakes. Consequently, each of them miscalculates the excess profit. Strangely enough, they make different mistakes but both get to the (correct) Net Final Value of the project and, in addition, their excess profits do coincide. Further, the (biased) models presented by the Zeligs, though different from the EVA model, seem to bear strong relations to the latter. The student is rather surprised.I give my version of this event, arguing that the Zeligs are offering us a rational way of measuring excess profit, alternative to EVA but equally valuable. As I see it, they are only adopting a different cognitive interpretation of the concept of excess profit, which is based on a counterfactual conditional that differs from Stewart’s and Peccati’s.
Keywords: Excess profit, Economic Value Added, Net Final Value, Systemic Value Added, Counterfactual, JEL Classification: G00, G30, G31.

Crisis Anticipation at a Micro-Level: Mexico 1995-1996

Karen Watkins
The following study is concerned with the anticipation of the 1995-1996 Mexican crisis.  It uses data from the balance sheets of 73 private, non-financial companies.  The results indicate that firms were not able to foresee the coming crisis. This conclusion is robust to using one year, three, two, and one quarters lags as the anticipation period. In addition, there is no significant difference in the outcome when considering the industry and size of firms.
Keywords: crisis anticipation, firm-level data, event study, JEL Classification: G3, G14

Interdependence of Asean Business Cycles

Hway-Boon Ong, Chin-Hong Puah, Muzafar Shah Habibullah
This paper examines the interdependent relationship of five ASEAN business cycles, namely, Indonesia, Malaysia, Philippines, Singapore and Thailand. We conducted an augmented VAR of Granger non-causality test and discovered that there is strong interdependence among the ASEAN countries under study.  Our empirical findings revealed the existence of bi-directional causality among ASEAN countries, especially Malaysia and Singapore. That is to say, economic shocks or policy implementation by any neighbouring countries may be easily transmitted to another.
Keywords: Granger non-causality, augmented-VAR, MWald test, business cycles, ASEAN.

International Portfolio Formation, Skewness & the Role of Gold

Brian M Lucey, Valerio Poti, Edel Tully
This paper examines the optimal allocation of assets in well diversified equity based portfolio where the investor is concerned not only with mean and variance but also with the skewness of the returns. Beginning with an analysis of the rationale for concerning with skewness, the paper then discusses previous attempts to model multi-objective portfolio problems. The second part of the paper outlines the attractive nature of the gold asset in equity portfolios. The paper then integrates the two elements, showing the changes in portfolio composition that arise when not only skewness but gold are concerned.
Keywords: Portfolio Allocation, Skewness, Gold, JEL Classification: C61, G11

Exchange Rate Determination from Monetary Fundamentals: an Aggregation Theoretic Approach

William A. Barnet, Chang Ho Kwag
We incorporate aggregation and index number theory into monetary models of exchange rate determination in a manner that is internally consistent with money market equilibrium. Divisia monetary aggregates and user-cost concepts are used for money supply and opportunity-cost variables in the monetary models. We estimate a flexible price monetary model, a sticky price monetary model, and the Hooper and Morton (1982) model for the US dollar/UK pound exchange rate. We compare forecast results using mean square error, direction of change, and Diebold-Mariano statistics.  We find that models with Divisia indexes are better than the random walk assumption in explaining the exchange rate fluctuations.  Our results are consistent with the relevant theory and the “Barnett critique.”
Keywords: Exchange rate, forecasts, vector error correction, aggregation theory, index number theory, Divisia index number, JEL Classification: C43, F31, F37

Option Pricing with Long-Short Spreads

Pengguo Wang
This paper addresses no-arbitrage pricing of options in a market with long-short spreads. First, it characterizes the term structure of no-arbitrage valuation in a frictional capital market. It shows that no arbitrage opportunities imply, and are implied by, the existence of an equivalent probability measure, under which the discounted long prices of traded securities are supermartingales, and the discounted short prices are submartingales. Second, the classic option-pricing model is generalized to a more realistic and imperfect capital market. It is shown that, in the absence of arbitrage opportunities, the equilibrium price of a call or put option must lie within an arbitrage-band. Two general partial differential equations (PDEs), which long and short prices of a contingent claim must satisfy, are identified. Third, it shows that the long-short spreads in option-pricing have important implications for portfolio hedging.
Keywords: option pricing, no-arbitrage, long-short spreads, martingale measure, hedging

What Lies Beneath? Who Owns British Defence Contractors And Does It Matter?

Derek Braddon, Jonathan Bradley
This paper presents the findings of research into the distribution of the rewards from capital used in defence production. Much existing research has examined the supply chain in the production of defence goods, but there have been few attempts to look at the ownership of suppliers. First, the paper examines two theoretical issues: why the identity of shareholders in defence contractors should have any economic or political significance, and whether the use of capital in defence industries should in principle be expected to be the same as that in any other industry. It then investigates the identity and ownership of the contractors concerned in 2003-4, using several case studies.  It finds that many of the largest suppliers to the UK government are foreign-owned or controlled, and it finds evidence of a surprising degree of American equity participation in major British contractors.
Keywords :Defence, corporate ownership, supply base; industry structure and conduct, JEL classification : D2, D4, L1, L2, L64.

Revolution in the Defense Electronics Markets?An Economic Analysis of Sect oral Change

Paul Dowdall, Derek Braddon
Within the defence sector there have been marked changes in the nature of the composite industries. This is particularly true of the electronics industry which continues to grow in importance, with electronic components built into nearly every weapons system and piece of equipment. Given the “Revolution in Military Affairs” (RMA) it seems certain that this growth will continue, impacting on both product and process. The result, however, may not be the contestable open market many expect (and hope for) as Network Enabled Warfare may result in new entrants, such as IT specialist and increased competition.  Alternatively the nature of the market may continue to benefit the incumbents. This paper presents an analysis of the changes taking place in the industry using firm-level, primary, survey-based, qualitative data on corporate conduct. The results suggest that in practice the incumbents do seem to be in a strong position. The new demands of the customer require much more than mere technical capability. Specialists who do not have established industry relationships, who do not understand industry “protocols” and who cannot communicate effectively with the customer are unlikely to survive. This suggests that rather than new entrants, there may in fact be exits from the industry and further consolidation.
Keywords: Defence, Electronics, Industry structure, Conduct, Contestability, JEL Classification: D2, D4, L1, L2, L63, O3

Military Spending and Economic Growth in Greece, Portugal and Spain

Paul Dunne,  Eftychia Nikolaidou
Analysing the relationship between military spending and growth has been an important area of empirical research. Early studies focussed on large cross sections of countries, but criticisms of these led to a focus on case studies of individual countries and studies of groups of relatively homogeneous countries. Granger causality methods have also become common techniques for such analyses, both as single equation analyses and more recently, within a cointegrating VAR framework. This paper does two things. First it provides an empirical analysis the relation between military spending and growth of three of the EU’s poorest, peripheral economies, namely Greece, Portugal and Spain. Second, it considers the range of available techniques and compares their results. It finds that the results differ across the methods used, indicating the problems with earlier studies, and across the countries, indicating the problems of drawing inferences across even relatively homogeneous economies.
Keywords : Military expenditure;  growth; causality, JEL classification O40; H56