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

Manufacturing Labour Demand, Technological Progress and Military Expenditure

J Paul Dunne, Duncan Watson
During the Cold a major justification of high levels of military spending was the spin off of innovations to the civil sector, such as computers, which could then be exploited profitably and to the benefit of the economy and society. There is evidence that this has changed in more recent times, with the speed of consumer industry led technological change leading to ‘spin in’ to advanced weapons systems. If this is the case it has removed a major benefit of military spending. There is, however, little systematic evidence and little recent empirical work. This paper makes a contribution to the debate, analysing the impact of military spending on technological progress, and hence labour productivity and economic growth, for a number of major weapons producers. It uses data on the manufacturing sector,   for the period 1966-2002 and estimates a CES production function in which military spending is assumed to effect growth through its impact on trend technological change.
Keywords: Military spending; spin off; employment; productivity; panel, JEL Classification:H56; O30; J20

The Evolution of European and US Aerospace and Defence Markets

Vasilis Zervos
The aim of this paper is to consider the evolution of the US and European Aerospace and Defence (A&D) markets. The present industrial structure is analysed in terms of the performance of US and European major contractors in commercial and government controlled markets (defense) within an industrial economics framework. This is then compared to possible future industrial structures, where procurement policies open up the markets to overseas firms. The comparison supports the hypothesis that efficiency can be improved and points to the need for co-ordination of procurement and industrial policies within a joint US/European military industrial complex to reduce collusion between transatlantic A&D integrators.
Keywords: Aerospace, Defense, Procurement, Industry, JEL Classification: L13, F13, H53

The Product Life Cycle and The Real Option of Waiting

Óscar Gutiérrez
Standard models of real options miscalculate the option-to-invest value of projects whose returns follow the pattern of a Product Life Cycle. This paper analyzes the option of waiting to invest when profits derived from sales in the market obey a stochastic Product Life Cycle, providing analytical solutions for the optimal entry rule and for the investment opportunity value. The model helps to explain the initial size of markets that follow a Product Life Cycle. The main difference between our model and standard models of real options is the existence of a random moment in time where the evolution of market sales changes.
Keywords: Product Life Cycle, Gamma process, Optimal entry rule, Investment lag, JEL classification: D92, G31, M31.

The Kraus and Litzenberger Quadratic Characteristic Line and Event Studies

Arun J. Prakash, Suchismita Mishra, Dipasri Ghosh
Research into the efficiency of capital market has been an ongoing process, and it has given rise to two very widely-used techniques in corporate finance. They are the event study and performance evaluation techniques. Some scholars have incorporated the preference for positive skewness in the performance evaluation technique, and using the quadratic characteristic line model à la Kraus and Litzenberger they have accounted for skewness preference. However, the preference for skewness has not been explored so far in the context of evaluation of abnormal performance of securities following an event. It appears to be of interest to examine if the abnormal returns, obtained using the quadratic characteristic line (QCL),  result in an outcome different from the one obtained using the market model in event studies. The purpose of this paper is to explore a priori the theoretical conditions under which the results of an event study will be different for using the QCL in place of the market model.
Keywords: Skewness, Event Studies, Three-moment CAPM , JEL classification: G11, G14

Additional Panel Data Evidence on the Savings-Investment Relationship and Foreign Aid in LDCs

Risa Kumazawa, James E. Payne
Using several panel data estimation procedures, this study examines the impact of savings, foreign aid, the degree of capital mobility over time, and openness to international trade upon investment rates for a sample of 74 less developed countries over the time period 1980 to 2001. The results find that the estimates of capital mobility are similar to those reported in previous studies of developing economies.  Capital mobility has increased over time while foreign aid and openness both have positive and significant impacts on investment rates.
Keywords: Capital mobility, Foreign Aid, Panel Data, JEL classification : F32, F35, O16

Attitudes with Regard to Risk : Risk Aversion, Prudence and Temperance

Octave Jokung N.
Understanding the behavior of economic agents dealing with risk is reached by the way of three concepts: Risk Aversion, Prudence and Temperance. The first one has proved to be sufficient in motivating hedging within the scope of one-risk insurance. The second concept, linked to the first one, allows to follow the evolution of this demand with respect to income. Taking these three feelings into consideration simultaneously allows to justify the more chilly attitude of economic agents within the scope of several risks, and allows to guarantee the increase in the demand for hedging in relation to the one-risk situation as well as the decrease in the demand for risky assets. We give justification for this attitude of investors, more cautious than chilly, and above all, more temperate than prudent. With the concept of prudence, the mean-variance approximation of expected utility is no longer valid.
Key-words: precautionary saving, risk aversion, utility, background risk, mean-variance paradigm

Frontiers of Financially Constrained and Unconstrained Firms: a New Development in Finance

Monica H. Maestro,  Alberto de Miguel,  Julio Pindado
This paper presents a new development in Finance that could be used to know whether a firm suffers from financial constrains. Our method consists of, first, developing a financial constraints model that objectively separates over 50% of all firms. The results of this first stage are then used to classify the remaining firms by using logit analysis. Our methodology yields classification results in agreement with the financial development of the economic areas studied (the US, Japan and the EU). Furthermore, the suggested methodology substantially improves the classification of firms, since whatever the correct classification percentage yielded by logit analysis, previous application of our Financial Constraints Model allows the researcher to obtain a good final classification.
Keywords: Firms’ investment, Financial constraints, Logit analysis,  JEL classification: G31

Parametric and Non-Parametric Measures of Volatility: Risk Estimation via the Gini Decomposition and Comparison with the Value-at-Risk

Stéphane Mussard, Virginie Terraza
In this paper we make an analogy between inequality ratios and financial risk measures. Value-at-Risk is one of the most popular risk index. It gauges the potential losses included in the tail of the distribution. Its parametric estimation yields a risk decomposition using the additive property of separability. This property permits one to transform portfolio’s VaRs into component VaRs and to define VaR metrics. However, it is based on the restrictive normality hypothesis. Then, we define a non-parametric risk measure from the Gini ratio that is assimilated to a volatility index under conditions. Using the property of decomposability, the Gini risk index can be decomposed to define new risk measures. An application on the French stock market yields comparisons between the methods.
Keywords: Component Value-at-Risk, Decomposition, Gini, Marginal Value-at-Risk, Volatility.

Real Options, Uncertainty and Firm Value

Gema Pastor Agustín, Manuel Espitia Escuer
Real options capture the value of managerial flexibility to adapt previous strategies in response to unexpected market developments. This flexibility enables managers to leverage uncertainty and limit downside risk. From this perspective, uncertainty would positively affect the valuation of a particular asset if there were real options on it. In this paper we analyse this view and we propose a model in which the possession of real options by a firm affects its market value in a twofold manner. On the one hand, the real options may constitute a valuable asset by themselves. On the other, they may alter the view that agents have about the uncertainty. To test this we carried out an empirical analysis on a sample of monthly time series of Spanish firms listed on the continuous market between 1993 and 1999 and for which there were call options on their shares. Through this analysis we conclude that real options generates value for the firm. Moreover, we also observe that the agents modify their perception of the industrial uncertainty that a firm supports if it possesses real options.
JEL Classification : C12, C23, D81, G12
Keywords : Real options, uncertainty, firm value, panel data

An Empirical Analysis of Kenyan Daily Returns Using EGARCH Models

Georges Ogum, Francisca M. Beer, Genevieve Nouyrigat
This paper offers a comprehensive view of four time properties that emerge from the empirical time series literature on asset returns. It examines: (1) the predictability of returns from past observations; (2) the auto-regressive behavior of conditional volatility; (3) the asymmetric response of conditional volatility to innovations; (4) and the conditional variance risk premium. One emerging market previously under-researched in this respect is considered: Kenya (NSE index). The paper employs exponential GARCH (EGARCH) framework for the analyses. The results indicate that asymmetric volatility found in the U.S. and other developed markets does not appear to be a universal phenomenon. In Kenya, the asymmetric volatility coefficient is significant positive, suggesting that positive shocks increase volatility more than negative shocks of an equal magnitude. NSE (Kenya) returns series report negative but insignificant risk-premium parameters. The results also show that expected returns are predictable, the auto-regressive return parameter (Ø1) is significant. Finally, the GARCH parameter (b) is statistically significant indicating that volatility persistence is present in Kenya
Keywords : Emerging market, ARCH, Conditional volatility, hedictability of returns
JEL Classification : G15, G14, C14

Parametric and Non-Parametric Analysis of Performance Persistence in Spanish Investment funds

Luis Ferruz,  José L. Sarto,  María Vargas
This paper describes a financial study of performance persistence in Spanish short-term fixed-interest funds. It is a completely new study and the database is free of survivorship bias.Performance is analysed using a novel index based on Sharpe’s original that provides consistent rankings for the whole sample.The performance persistence phenomenon is analysed using two methodologies. The first of these is a non-parametric methodology (contingency tables) in which the statistical tests of Malkiel (1995), Brown and Goetzmann (1995), and Kahn and Rudd (1995) are applied to establish the robustness of the phenomenon studied, while the second is parametric (regression analysis).We can confirm that the phenomenon of persistence is present to a significant degree in the database used in the study. Our research also shows that the availability of a greater volume of historical information does not necessarily imply any increase in the level of persistence.
Keywords : Persistence, contingency tables, regressions, investment funds.

Canadian Mutual Fund Flows and Capital Market Movements

Roger B. Atindéhou, Jean-Pierre Gueyié
The causality relationship between Canadian capital market returns and mutual fund financial flows is analyzed over the period 1991-1999, using Granger causality tests. Our results indicate that in Canada, capital market returns cause mutual fund financial flows. Conversely, mutual fund flows have an impact on bond market returns, but not on stock market returns. These results generally confirm those found in US studies (i.e., a causality from returns to mutual fund flows, and a lack of causality from flows to returns), with the exception that in Canada, mutual fund flows cause bond returns. They suggest that while there are some institutional differences between Canadian and US capital markets, they generally behave in the same way.
Keywords : Granger causality, mutual funds flows, capital markets returns, Canada, United States.

Strategic Conduct And Access Discrimination, In The Semi-Liberalized Electricity Sector In Mexico

Alejandro Ibarra-Yunez
Regulatory reform in the energy, and specifically the electricity sector, has ranged from full unbundling, liberalization, and privatization, to partial deregulation and liberalization, with little or no unbundling and non-privatization. The Mexican case originated from a need for full restructuring but recently has adjusted downwards to lukewarm deregulation in the generation segment, where the parastatal incumbent arguably will stay integrated and private generation will be promoted. A model of duopoly, with an integrated parastatal incumbent and residual private firms sheds light on potential access discrimination to residual private firms under the “Mexican model.”
JEL Classification : L12, L13, L94
Keywords: Duopoly, incumbent parastatals, electricity generation.

Credit Exposure & Sovereign Risk Analysis:The Case of South America

Elena Kalotychou, Sotiris K. Staikouras
This study makes use of a panel data framework to identify the economic signals that shape the debt repayment behaviour of the South American region. The paper employs a logit estimator with the endogenous variable based on country specific thresholds of default. A stepwise general to specific methodology is applied to identify the set of economic variables employed. The results indicate the stronger influence of domestic, rather than international, financial factors in determining default. The forecasting ability of the proposed estimator is evaluated through a cumulative three-year rolling prediction. Although the performance of the model seems satisfactory, the empirical findings indicate an upward bias signalling a possible type II error.
JEL Classification: F34, G15, G21
Keywords: Financial crises, Sovereign default, Logit modelling, Forecasting credit risk.

Random Walk As A Universal Test Of Weak-Form Foreign Exchange Market Efficiency: A Proof

Edward E. Ghartey
The paper proves that the domestic or national value of foreign exchange earnings from holding foreign assets (bonds and bank deposits accounts) follows a martingale process. It then employs the martingale process and the definition of rational expectation to prove that the pure random walk spot exchange rate is an adequate means to universally test weak-form foreign exchange market efficiency. This makes it possible for countries without forward markets to test for weak-form efficiency of their foreign exchange markets.
JEL Classification : F3 and C1.
Keywords: Martingale, rational expectation, random walk, and weak-form foreign exchange market efficiency.

The Effects of Decision Flexibility In the Hierarchical Investment Decision Process

Winfried Hallerbach, Haikun Ning, Jaap Spronk
Large institutional investors allocate their funds over a number of classes (e.g. equity, fixed income, real estate and cash), various geographical regions and different industries.
In practice, these allocation decisions are usually made in a hierarchical (top-down), consecutive way. At the higher decision level, the allocation is made on the basis of benchmark portfolios (indexes). Such indexes are then set as targets for the lower levels. For example, at the top level the allocation decision is made on the basis of asset class benchmark indexes, on the second level the decisions are made on the basis of sector benchmark indexes, etc. Obviously, the lower levels have considerable flexibility to deviate from these targets. That is the reason why targets often come with limits on the maximally allowed deviation (or ‘tracking error’) from these targets. The potential consequences of deviations from the benchmark portfolios have received very little attention in the literature.
In this paper, we discuss and illustrate this influence. The lower level tracking errors with respect to the benchmark indexes propagate to the top level. As a result the risk-return characteristics of the actual aggregate portfolio will be different from those of the initial benchmark-based portfolio. We illustrate this effect for a two level process to allocate funds over individual US stocks and sectors. We show that the benchmark allocation approaches used in practice yield inferior solutions when compared to a non-hierarchical approach where full information about individual lower level investment opportunities is available. Our results reveal that even small deviations from the benchmark portfolios can cause large shifts in the top-level risk-return space. This implies that the incorporation of lower level information in the initial top-level decision process will lead to a different (possibly better) allocation.
JEL Classification : C61, G2, G11
Keywords : multi-level decision process, decisison flexibility , tracking error analysis, portfolio management

Corporate Governance, Market Valuation and Dividend Policy in Brazil

André Carvalhal-da-Silva, Ricardo Leal
This study investigates the effects of the corporate governance structure on market valuation and dividend payout of Brazilian companies. The empirical results indicate a high degree of ownership and control concentration. We can also note a significant difference between the voting and total capital owned by the largest shareholders, mainly through the existence of non-voting shares, pyramidal structures, and shareholding agreements. These mechanisms seem to be used by controlling shareholders to keep the firm’s control without having to own 50% of the total capital. The evidence also reveals that there is a relationship between governance structure, market valuation, and dividend policy in Brazil.
JEL Classification: G30, G32
Keywords: Ownership structure; corporate control; agency costs; Brazil