International Review of Financial Analysis

Published by Elsevier
Online ISSN: 1057-5219
Publications
Article
September 11 attacks matter, and why not? Given that globalization has integrated financial markets, the magnitudes of the effect of the September 11 attacks on global markets are expected to be pervasive. We used data from 53 equity markets to investigate the short term impact of the September 11 attacks on markets' returns and volatility. Our empirical findings indicate that the impact of the attacks resulted in significant increases in volatility across regions and over the study period. However, stock returns experienced significant negative returns in the short-run but recovered quickly afterwards. Nevertheless, we find that the impact of the attacks on financial markets varied across regions. The implication here is that the less integrated regions (e.g., Middle East and North Africa) are with the international economy, the less exposed they are to shocks.
 
Article
This paper explores empirical relationships that involves the five quantity theories variables: rates of change in money supply, velocity, real output, inflation and also short-term nominal interest rate. Unlike, earlier studies that employ, primarily, regression methods to identify statistical relationships, this study uses the two-side exponentially weighted moving average methodology. This method smooths the original data to various degrees depending on the values of a given weight parameter to exclude as much noise as possible and, thus identifies probable trends. Using intermediate-terms and long-term data sets, some much analyzed quantity theoretic relationships are reconfirmed, some new ones are proposed and finally, some less known, are reemphasized.
 
Article
It is documented in the literature that U.S. and many international stock returns series are sensitive to U.S. monetary policy. Using monthly data, this empirical study examines the short-term sensitivity of six international stock indices (the Standard & Poor 500 [S&P] Stock Index, the Morgan Stanley Capital International [MSCI] European Stock Index, the MSCI Pacific Stock Index, and three MSCI country stock indices: Germany, Japan, and the United Kingdom) to two major groups of U.S. monetary policy indicators. These two groups, which have been suggested by recent research to influence stock returns, are based on the U.S. discount rate and the federal funds rate. The first group focuses on two binary variables designed to indicate the stance in monetary policy. The second group of monetary indicators involves the federal funds rate and includes the average federal funds rate, the change in the federal funds rate, and the spread of the federal funds rate to 10-year Treasury note yield. Dividing the sample period (1970–2001) into three monetary operating regimes, we find that not all policy indicators influence international stock returns during all U.S. monetary operating periods or regimes. Our results imply that the operating procedure and/or target vehicle used by the Federal Reserve Board (Fed) influences the efficacy of the policy indicator. We suggest caution in using any monetary policy variable to explain and possibly forecast U.S. and international stock returns in all monetary conditions.
 
Article
We examine the stability of correlations and the benefits of international portfolio diversification through investment in Argentina, Brazil, Chile and Mexico, the four largest Latin American markets, from the point of view of a U.S. investor. Three 44-month periods are examined characterized by closed markets (February 1984–September 1987, Period I), opening initiatives (November 1987–June 1991, Period II), and open markets with large portfolio inflows (July 1991–February 1995, Period III). The 1987 market crash is used as a break point because it was the only event before 1995 to have affected many emerging markets simultaneously. Our findings indicate that correlations are rising in time and that there are no significant gains to a domestically well diversified U.S. investor from holding a well diversified portfolio of Latin stocks in the most recent sample periods. Investment in Latin America probably should be made through a careful selection of countries and securities instead of the purchasing of a broad index of Latin American stocks.
 
Article
This paper examines several seasonal regularities in stock returns before and after the international crash of October 1987. The analysis investigates the day of the week, pre- and post-holiday, turn of the year, turn of the month, and month of the year effects in Pacific Rim and U.S. equity markets. The incidence of return regularities decreases significantly in the period following the crash. We posit that an alteration of the returns generating process in these markets is the most likely cause of the change in the trading patterns.
 
Article
We examine the relationship between the Irish, German, UK and US equity markets. Our main finding is that the Irish equity market depends heavily on trading activity in the other markets but not vice versa. Significant return and volatility spillover effects occur in the direction of, but not from the Irish market. We also find that dual listing in the form of ADRs has an important role to play in these spillover effects. Our findings obtain throughout the sample, but are strongest for the period after the ERM crises and before the introduction of the euro.
 
Article
This article examines the cointegration level, changes in the existence and directions of causality of the foreign exchange (FX) rates in the Asian and emerging markets during the 1990s financial crises. Engle and Granger's simple bivariate and Johansen's multivariate cointegrations are applied to the FX rates for the 1994 Mexican, 1997 Asian, 1998 Russian, and 1999 Brazilian crises. In addition, the article conducts the Granger causality test and impulse response analysis to examine the causality pattern in all the FX rates. The analysis shows most of the pre-Mexican causality disappears and significant numbers of new causality emerge in the 1994 Mexican crisis while the 1997 Asian crisis generates significant spillover effects into the later part of the 1998 Russian and 1999 Brazilian crises.
 
Article
The capital asset pricing model (CAPM) is tested using data of all available stocks in the Caracas Stock Exchange (CSE) from 1992 to 1998. We use a multiple regression model to test several hypotheses that lead to the validation of the CAPM. We find significant evidence to conclude that the CAPM should not be used to predict stock returns in the CSE. However, we find evidence that the model is linear and significant evidence on the existence of other factors different from b that are important to predict returns. These results are consistent with previous studies in developed markets. Also, a practitioner approach to the CAPM is presented.
 
Article
Foreign exchange (FX) pricing processes are nonstationary: Their frequency characteristics are time dependent. Most do not conform to Geometric Brownian Motion (GBM), because they exhibit a scaling law with Hurst exponents between zero and 0.5 and fractal dimensions between 1.5 and 2. Wavelet multiresolution analysis (MRA), with Haar wavelets, is used to analyze these time and scale dependencies (self-similarity) of intraday Asian currency spot exchange rates. We use the ask and bid quotes of the currencies of eight Asian countries (Japan, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Taiwan, and Thailand) and, for comparison, of Germany for the crisis period May 1, 1998–August 31, 1997, provided by Telerate (U.S. dollar is the numéraire). Their time-scale-dependent spectra, which are localized in time, are observed in wavelet scalograms. The FX increments are characterized by the irregularity of their singularities. Their degrees of irregularity are measured by homogeneous Hurst exponents. These critical exponents are used to identify the global fractal dimension, relative stability, and long-term dependence, or long-term memory, of each Asian FX series. The invariance of each identified Hurst exponent is tested by comparing it at varying time and scale (frequency) resolutions. It appears that almost all investigated FX markets show antipersistent pricing behavior. The anchor currencies of the D-mark and Japanese Yen (JPY) are ultraefficient in the sense of being most antipersistent or “fast mean-reversing.” This is a surprising result because most financial analyst either assume neutral or persistent behavior in the financial markets, based on earlier research by Granger in the 1960s. This is a pedagogical paper explaining the most rational methodology for the identification of long-term memory in financial time series.
 
Article
The early years of the 21st century have been a difficult and challenging time for the managed funds industry. The neglected history of managed funds reveals prior episodes of sustained growth, questionable practices, upheaval and inevitably, regulation. The first fully diversified managed fund appeared in Britain in 1868, and the industry remained largely a British preserve until the rise of the investment company and the mutual fund in the United States during the 1920s. This paper documents the features of the early trusts, discusses the rise of the industry and the challenges it survived in the early years, and draws parallels with facets of the finance industry of today.
 
Article
In this paper, Korean financial markets are investigated in two ways, time series and cross-sectional data analysis for the study of market microstructure of price discovery and pricing bias associated with stock index, futures and options. First, the lead–lag relationships among the KOSPI 200 stock index, the index futures, and the index options markets are explored based on minute-to-minute price data. The results explain that the KOSPI 200 stock index futures lead the index, as reported in the previous studies, and the at-the-money options lead the stock index. A symmetric lead–lag relationship is found between futures and options, except for out-of-the-money options. This paper also investigates the consistency of lead–lag relationships among the results from the different time intervals of price data. Second, the causes of the pricing bias in the index options market are analyzed. The pricing bias between the observed KOSPI stock index and implied stock index from at-the-money options are affected by market inefficiency, moneyness, and implied volatility. Time to maturity and trading volumes of call options also affect the pricing bias, while those of put options are not significant.
 
Article
This paper analyses underpricing and short-run underperformance of the Chinese A-share IPOs from Mar, 2001 to 2005 when the new approval system was adopted. We find that the average market adjusted first-day return is 93.49% in this period, a more reasonable level when compared with those in previous periods in China. The findings show that underpricing in this period is significantly affected by offering mechanisms and inequality of demand and supply of IPOs. The effect of shareholder's structure is tested in the model and state-owned share's weight is shown to increase the degree of underpricing. Meanwhile, this paper analyses IPOs' short-run underpricing on their 10th, 20th, 30th trading days. It is found that most IPOs' underpricing shrinks and the degree of shrinking degrees is different across the groups categorized by offering mechanisms. Further, the underperformance of IPOs which are underwritten by more prestigious underwriters shows a comparatively lower range and is less severe in the short-run.
 
Article
Using data from fourteen equity markets, this study empirically examines the impact of the 2008 short-selling bans on market quality. Evidence indicates that restrictions on short-selling lead to artificially inflated prices, indicated by positive abnormal returns. This is consistent with Miller's (1977) overvaluation theory, and suggests that the bans are effective in temporarily stabilizing prices in struggling financial stocks. Market quality is reduced during the restrictions, as evidenced by wider bid-ask spreads, increased price volatility and reduced trading activity. While these effects are strong, regulators may view the deterioration in market quality as a necessary by-product of the bans to maintain prices and protect investors.
 
Article
Academic research has highlighted the inherent flaws within the RiskMetrics model and demonstrated the superiority of the GARCH approach in-sample. However, these results do not necessarily extend to forecasting performance. This paper seeks answer to the question of whether RiskMetrics volatility forecasts are adequate in comparison to those obtained from GARCH models. To answer the question stock index data is taken from 31 international markets and subjected to two exercises, a straightforward volatility forecasting exercise and a Value-at-Risk exceptions forecasting competition. Our results provide some simple answers to the above question. When forecasting volatility of the G7 stock markets the APARCH model, in particular, provides superior forecasts that are significantly different from the RiskMetrics models in over half the cases. This result also extends to the European markets with the APARCH model typically preferred. For the Asian markets the RiskMetrics model performs well, and is only significantly dominated by the GARCH models for one market, although there is evidence that the APARCH model provides a better forecast for the larger Asian markets. Regarding the Value-at-Risk exercise, when forecasting the 1% VaR the RiskMetrics model does a poor job and is typically the worst performing model, again the APARCH model does well. However, forecasting the 5% VaR then the RiskMetrics model does provide an adequate performance. In short, the RiskMetrics model only performs well in forecasting the volatility of small emerging markets and for broader VaR measures.
 
Article
The addition of antitakeover provisions to corporate charters restricts the options of shareholders in the disposition of the firm's ownership. At the state level, previous research has produced mixed findings regarding stockholder wealth effects. The purpose of this study is to investigate the wealth effects of Pennsylvania Act 36 on banking firms. This study is different from previous work in this field in that it is postulated that the passage of the Pennsylvania legislation affected not only the wealth of shareholders whose banking firms are headquartered in the state, but also affected the wealth of shareholders of banking corporations headquartered in states with whom Pennsylvania has a reciprocal banking arrangement. The results indicate that Pennsylvania banking firms experience significantly negative abnormal returns as a consequence of the legislation. For banking firms in states with reciprocal arrangements, the results were also significantly negative, reflecting the existence of a contamination effect.
 
Article
This paper empirically contributes to the existing trading rule literature by providing a methodology for the calculation of Point and Figure charts using ultra-high-frequency data and tests trading rules using eight objective, pre-defined trading rules on S&P 500 futures contracts traded between 1990 and 1998. To assess the robustness of reported profits, a bootstrapping adjustment was conducted to determine the forecasting power of the PF trading rules. The results producing mixed statistical significance with some rules proving significant while many others were not.
 
Article
This paper investigates the price discovery function in three S&P 500 index markets: the spot index, index futures, and S&P Depositary Receipts markets. Four hypotheses regarding market structure and security design are proposed to differentiate the price discovery function performed by the three index instruments. Using matched synchronous intraday trading data, Johansen's maximum likelihood estimator is employed to disclose the cointegration relationships among the three markets. Results indicate that the three price series are a cointegrated system with one long-run stochastic trend. Estimated coefficients of the vector error correction model suggest that price adjustment takes place in the spot index market and for SPDRs, but not in the futures market. When the common stochastic trend is decomposed, it is found that the futures market serves the dominant price discovery function. The leverage hypothesis and the uptick rule hypothesis explain its superior price discovery function.
 
Expected Bias in the Uncorrected Variance as a Fraction of the Variances of ARj and
Tests of the Differences Between the Rejection Rates of the Uncorrected and Corrected Statistics.
Frequencies at the 5 % Significance Level Using a loo-Day Estimation Period When Abnormal Performance is Added to the Event Period Return. Percentage of IOOOportfolios where the null
Article
The usual test of cumulative abnormal returns for multiple-day periods assumes that abnormal returns are serially independent. The assumption imparts an upward bias to test statistics even when raw returns are serially independent. In simulation, the usual test rejects true null hypotheses too frequently in the longest cumulation periods and in shorter periods when events are clustered in calendar time. Excessively frequent rejection implies that the nominal significance level understates the actual significance level. A corrected statistic, derived without the serial independence assumption, rejects true null hypotheses with a frequency less than or equal to the nominal significance level. However, the corrected test is not very powerful in the longest event periods.
 
Article
This empirical study examines whether the optimistic forecasts of analysts explain the long-run abnormal return following initial public offerings (IPOs). Consistent with prior research, this paper concludes that the analysis of earning forecasts for firms going public has an upward bias. While the usually calculated buy-and-hold abnormal return is not significantly negative on average, a proper control for risk confirms the long-run underperformance hypothesis for the 1-year period following IPOs. The risk-adjusted return is positively correlated to the surprise effect and earning forecast revisions, and appears to be the response to new information about the true earnings perspectives.
 
Article
This paper uses a sequential bargaining model to analyze bankruptcy reorganizations. It is shown that deviations from absolute priority rules are rational responses by bondholders and the courts to management bargaining power engendered by the formal reorganization process. It is proved that even solvent firms may find it optimal to initiate bankruptcy proceedings. The factors that determine the extent of the deviations are also analyzed.
 
Article
Ederington (1979) proposed an effectiveness measure for futures hedging. Since then, this measure has been widely adopted in the literature to compare different hedge ratios against the OLS (ordinary least squares) hedge ratio. This note attempts to demonstrate this application is inappropriate. Ederington hedging effectiveness is only useful for measuring the risk reduction effect of the OLS hedge ratio. It does not apply to other hedge ratios and therefore should not serve as a criterion to compare different hedge strategies against the OLS strategy. A strict application of this measure almost always leads to an incorrect conclusion stating that the OLS hedge ratio is the best hedging strategy.
 
Article
This is a condensed and edited version of two roundtable discussions titled “Post-Modern Finance,” that took place at the EFA, and FMA 1997 meetings, respectively. Both the editing and the condensation were made for the sake of contextual clarity and continuity. Utmost effort was made to preserve the content of what was said during these two events.Data are not information. Information is not knowledge. Knowledge is not truth. Truth is not reality.
 
Article
This paper provides new evidence on how the relationship in time between stock returns and accounting earnings affects the observed Finnish returns-earnings relation in two subperiods, the boom in 1988–1990 and the recession in 1991–1993. Similar to the earlier U.S. results, we find that stock returns lead accounting earnings rather than vice versa. When taking into account this lead-lag structure between stock returns and accounting earnings, we find that the estimated returns-earnings relation is significantly weaker in the recession period than in the boom period. After controlling for the different valuation impact of accounting losses and profits, the explanatory power of accounting earnings on stock prices is similar between the two periods. These findings are consistent with the hypothesis that investors perceive losses as temporary, being not reflected in future cash flows.
 
Article
This study investigates the motives of UK listed companies when reporting high and low quality accounting disclosures. It also examines the relation between the quality of published financial statements and earnings management practises, for example, low quality accounting disclosures might be linked to earnings management. The paper further studies the relation between financial reporting quality and the timely disclosure of losses and difficult-to-verify accounting items, i.e. conservatism. The focus here is on conditional and unconditional conservatism, their association and the variables that influence the asymmetric disclosure of losses. The findings indicate that firms that display high quality accounting disclosures generally exhibit higher size, profitability and liquidity measures. Firms that experience a change in management or are audited by a Big-4 auditor also tend to report high quality disclosures. High quality disclosers tend to display higher capital needs and to engage less in earnings management. The study shows that they display greater conditional conservatism and less unconditional conservatism. The findings demonstrate that the conditional form of conservatism is negatively related to unconditional conservatism, as the former tends to enhance contracting efficiency, while the latter might facilitate managerial opportunism. The study provides evidence of asymmetric disclosure of losses for firms with high leverage. The same holds for high quality disclosers that display bad news. In contrast, firms that are in a growth phase are found to provide less conservative and less difficult-to-verify accounting information in order to influence their growth prospects.
 
Article
This study provides new evidence on the relationship between market-to-book and earnings-to-book equity ratios in the NYSE in 1975–1990. By investigating this relationship, it is possible to study how current profitability is reflected in investors' cash flow expectations. The results suggest that the two ratios are not significantly positively related if accounting earnings are negative. For positive earnings, however, the positive relationship exists for the largest and least levered firms. These findings support the hypothesis that investors regard accounting losses as temporary, not reflecting future cash flow expectations. Profits are considered more persistent, especially for large and least levered firms.
 
Article
This paper focuses on the disclosure of accounting information in the financial statements of UK firms. The primary objective of the study is to analyse the financial characteristics of firms that provide extensive disclosures, and assess the financial impact of their motives, such as for example the need to raise equity finance. The study examines the financial attributes of firms that disclose information about key accounting issues including risk exposure, changes in accounting policies, use of international financial reporting standards and hedging practices. Firms are inclined to disclose accounting information in order to assure the market participants that their accounting policies are consistent with the accounting regulation and meet the information needs of their stakeholders. The study shows that in order to raise finance in the capital and debt markets, firms tend to provide extensive accounting disclosures. Firms that provide informative accounting disclosures appear to display higher size, growth and leverage measures. The findings also show that the disclosure of sensitive accounting information has not adversely affected firms' profitability. In fact, firms that provide detailed accounting disclosures tend to exhibit higher profitability. The implementation of international financial reporting standards enhances the quality and the comparability of financial statements; hence it promotes consistency and reliability in financial reporting and facilitates companies in raising capital internationally.
 
Article
In this study, we examine financial reporting lags, the incidence of late filing, and the relationship between reporting lags, firm performance and the degree of capital market scrutiny. We use a large sample of firms spanning 22 countries over a eleven-year period. A focal point of our analysis is whether the incidence of late filing, and the relations between reporting days and other variables, differ systematically between common and code law countries. Relative to U.S. firms, we report that the time taken and allowed for filing is usually longer in other countries and that the statutory requirement is more frequently violated. Timely filing is found to be less frequent in code law countries. Poor firm performance and longer reporting lags are more strongly linked in common law countries. We also find that whereas greater capital market scrutiny and more timely filing are related, there is less support for a relationship between the level of debt financing and timely filing in code law countries.
 
Article
This study examines whether multivariate models using published financial data have predictive accuracy to successfully identify targets, thereby earning excess stock market returns. Although it was found that in the estimation period the important factors affecting the likelihood of a bid were stockholder profitability combined with poor sales growth, these variables were unable to successfully identify targets in the holdout sample. The empirical study also investigated whether the predictions are affected by the choice of statistical estimating technique and data form. It found that they were and that the choice depended upon the statistical assumptions of the models. The results also showed that raw financial ratios and IRRs based on the same underlying data generated significantly different forecasts using the same statistical technique.
 
Article
This study examines acquisitions of foreign divested assets by U.S. firms. The results indicate that the excess returns to these acquisitions is a significant 0.48%, suggesting that capital markets perceive potential synergies from the effective utilization and strategic management of these assets by U.S. companies. The wealth effects to divestors of these foreign assets is 0.65%, significant at the 1% level, indicating that firms benefit from reducing their geographic scope of operations. We further examine excess returns to acquirers, and we find that several firm-specific characteristics foster anticipation of positive performance gains resulting from the acquisition of divested assets in foreign countries. Similar results are observed for the divesting firms also. Analysis of long horizon performance provides weak indication that performance of divesting firms improves subsequent to the divestment.
 
List of independent variables
Correct Classifications (Average results over 10 replications)
Article
In this paper we develop classification models for the identification of acquisition targets in the EU banking industry, incorporating financial variables that are mostly unique to the banking industry and originate from the CAMEL approach. A sample of 168 non-acquired banks matched with 168 acquired banks is used over the period 1998–2002, covering 15 EU countries. We compare and evaluate the relative efficiency of three multicriteria approaches, namely MHDIS, PAIRCLAS, and UTADIS, with all models developed and tested using a 10-fold cross validation approach. We find that the importance of the variables differs across the models. However, on the basis of univariate test and the results of the models we could state that in general after adjusting for the country where banks operate, acquired banks are less well capitalized and less cost and profit efficient. The results show that the developed models can achieve higher classification accuracies than a naïve model based on random assignments. Nevertheless, there is fair amount of misclassification that is hard to avoid given the nature of the problem, showing that as in previous studies for non-financial firms, the identification of acquisitions targets in banking is a difficult task.
 
Article
The “new” economic and business climate in Latin America, fostered by multilateral trade agreements such as NAFTA, MERCOSUR, and the ANDEAN Pact, suggests that Latin American (LA) firms must become more aggressive and competitive in order to survive. Foreign direct investment in the form of mergers and acquisitions (M&A) is often an effective way of competing in a tough global environment. Using transactions data collected from Security Data Company's Worldwide Merger and Acquisition database, this paper analyzes the relative involvement of firms from five LA countries (Argentina, Brazil, Chile, Mexico, and Venezuela) in acquiring targets in the United States of America. Transaction characteristics examined and summarized include the annual distribution (1985–1998) of the deals, the industrial sector of the target firm, the form of acquisition method used, and the form of ownership of the target firm. The trends are analyzed, and implications for managers are indicated.
 
Article
In this article, we test wealth effects of international acquisitions using a sample of foreign acquisitions by Dutch firms during the period 1990–96. We find weak evidence that cross-border acquisitions are wealth-creating corporate activities, especially for acquisitions in the U.S. We observe further that for the West European acquisitions, benefits from internalization are larger for companies having relatively less international exposure and making acquisitions outside of their main activities.
 
Article
In this paper we empirically investigate bidders' performance managed by overconfident and non-overconfident managers in high and low market valuation periods. Using a sample of UK acquisitions in the period 1990–2005, we provide evidence that the interaction between market valuation and different behavioral traits of managers is a determinant of bidders' returns. In contrast to overconfident managers, non-overconfident managers conduct value-creative acquisition deals in all valuation periods. In addition, when we control for acquirer and deal characteristics, we find that bidders with non-overconfident managers gain the most in high valuation periods, while firms are better off without overconfident managers in any type of market conditions.
 
Article
We investigate return and volatility spillovers across the currency futures markets utilizing recently developed frequency domain tests. Our analysis permits to differentiate between permanent and transitory linkages between the markets by examining high and low frequency dynamics. We identify significant informational dependencies between the euro, yen, Swiss franc and pound futures markets, which should be important for market participants and policy makers. (C) 2011 Published by Elsevier Inc.
 
Article
Our research focuses on multifactor asset pricing models that investigate the importance of economic factors in the pricing of assets beyond the scope of the stock market. We present a Bayesian learning model of asset pricing across financial markets in which unobserved components are estimated using a Kalman filter (KF). Economic factors serve to drive the pricing of risk in the market, and agents update expectations recursively, as new information becomes available. We generally find that the Kalman filter provides superior performance and that economic factors like industrial production and unanticipated inflation provide consistent implications across financial markets.
 
Article
This paper examines price and volatility spillovers across North American, European and Asian stock markets. The return spillover is modeled through VAR(15) in which fifteen world indices, representative of their stock market are considered. The effect of same day return in explaining the return spillover is also analyzed using VAR and AR with exogenous variables. Volatility spillover is modeled through AR-GARCH incorporating the same day effect. In both return and volatility spillover, it is found that a particular index is mostly affected by the indices which open/close just before it. It is also found that there is a greater regional influence among Asian and European stock markets. Our paper contributes to the literature by including markets that span the whole time line and also modeling the same day effect with simultaneity preserved where required. Given the evidence, the results can be generalized for the other markets that were not included.
 
Article
The primary objective of this article is to investigate volatility transmission across three parallel markets operating on the Sydney Futures Exchange (SFE), both within and out of sample. Half-hourly observations are sampled from transaction data for the share price index (SPI) futures, SPI futures options, and 90-day bank accepted bill (BAB) futures markets, and the analysis is carried out using the simultaneous volatility (SVL) system of equations as well as competing volatility models. The results confirm the poor ability of GARCH models to fit intraday data. This study also applies an artificial nesting procedure to evaluate the out-of-sample volatility forecasts. Implied volatility has very limited (if any) predictive power when evaluated in isolation, whereas the SVL model with implied volatility embedded provides incremental information relative to competing model forecasts.
 
Article
This paper explores the relationships between changes in the value of the Australian dollar and the trading activities of the Reserve Bank of Australia over the ten year period December 1983 through December 1993. In particular, it identifies the existence or otherwise of Granger-causality between returns and trading activity at various sampling intervals. The following results are obtained: knowledge of the daily trading activities of the Reserve Bank improves the prediction of the daily returns gained by holding the Australian dollar. On the other hand, if weekly data is used, the direction of ‘causality’ is reversed: knowledge of weekly returns improves the prediction of the weekly trading activities of the Reserve Bank. The analysis of monthly data finds no evidence of Granger-causality in either direction: knowledge of monthly returns does not improve the prediction of Reserve Bank trading activities, and knowledge of the monthly trading activities does not improve the prediction of monthly returns gained from holding the Australian dollar. An attempt is made to infer Reserve Bank trading policy and its effectiveness. Although a case can be made that the Bank uses weekly movements in the value of the dollar as an input into its trading decisions, our analysis suggests that Reserve Bank trading affects the movement of the dollar on a short (daily) time scale only; ultimately, market forces prevail over longer time periods.
 
Article
The results of a comparison of international banks using a three-factor multi-index model and a modified value-at-risk (VaR) analysis indicate that the use of options increases the interest rate beta for all banks, while both interest rate and currency swaps generally reduce risk. The results are the strongest and the most consistent for U.S. dealer banks, followed by European banks, and then Japanese banks. Furthermore, the evidence suggests that the VaR approach to risk management can effectively be used by both domestic as well as international banks, although the results appear to be somewhat sensitive to the regulatory environment in which the bank operates.
 
Article
From a financial analysis perspective, proportionate consolidation of significant influence equity investments is often presumed to provide more useful information than equity method accounting. Surprisingly, Kothavala [Kothavala, K., 2003, Proportional consolidation versus the equity method: A risk measurement perspective on reporting interests in joint ventures, Journal of Accounting and Public Policy 22, 517–538.] finds that financial statement measures based on the equity method are more relevant for bond ratings than are similar measures based on proportionate consolidation. This study provides additional evidence regarding this issue. Using a sample of manufacturing firms with significant influence equity investments accounted for under U.S. GAAP, the results indicate that pro forma proportionately consolidated financial statements have greater relevance than equity method statements for explaining bond ratings.
 
Article
This research makes two contributions: (i) to price analytically put option and extension premium embedded in a borrower-extendible commitment, and (ii) to compute the ‘fair’ capital charge that corresponds to the commitment ‘true’ credit risk. In doing so, the procedure replaces the BIS accounting-based concepts of credit-conversion factor, principal-risk factor, and initial term to maturity of irrevocable commitments with the market-based concepts of exercise-cum-takedown proportion and put value implicit in the borrower-extendible commitment, respectively. Finally, the approach is developed one step further to account for the borrowers' risk ratings by public credit agencies; this results in a two-dimensional (time-state of nature) risk-weighting system that applies to all commitment types.
 
Article
Derived from the general ARMA (p, q) class of short-term dependent models, the Autoregressive Fractionally Integrated Moving Average (ARFIMA) specification provides a means of modelling long-term dependence in time-series data. In financial and economic time-series, the application of the ARFIMA model has been predominantly by the Maximum Likelihood (ML) methods, and the Geweke and Porter-Hudak (GPH) two step procedure. Extending the application of the classical rescaled adjusted range to long-term dependent ARFIMA (p, d, q) processes, estimates of the fractional differencing parameter (d) may also be derived by the Hurst exponent.
 
Article
This study examines whether superior investment returns can be earned by using neural network modeling procedures to perform forecasts based on a set of financial ratios reflecting traditional value based investment strategies. The study covers a 20-year period. We find that the value ratio provides useful information that permits the selection of portfolios that provide investment returns superior to the DJIA and the S&P 500, and a group of randomly selected securities. The risk-adjusted returns for the portfolios selected by the neural network are greater than those achieved using other forecasting methods.
 
Article
This paper deals with a particular version of the debt-overhang problem. The paper models the debt renegotiation process between a sovereign borrower and a commercial lender in a game-theoretic framework. The objective of the paper is to model and examine how a neutral third party (such as the IMF) can help to resolve conflicts between the international borrower and lender and can credibly enforce a Pareto superior solution. The relationship between the actions of the two parties: new money by the lender and adjustment policies of the borrower—is the basis for the model. The parameters of this relationship are established by the third party. The relevant decisions in the model are second best solutions that take into account the interdependence of the actions of the borrower and the lender.
 
Article
Using classical and modified rescaled range analyses (R/S analysis), this study examined the equity markets of Japan, Australia, Hong Kong, Singapore, Korea, and Taiwan. Using the classical rescaled-range method of analysis, we documented the presence of a long-range nonlinear deterministic structure in the returns of the Japanese, Singaporean, Korean, and Taiwanese indices, ranging from 3 to 4 years in duration. However, after correcting for short-range dependence using Lo's (1991) modified R/S analysis technique, all evidence of long-term memory disappeared. The absence of long-range dependence is consistent with market efficiency, and these findings call into question patterns in other asset streams documented using the classical method of rescaled range analysis. These findings also raise the general specter of significant sensitivity of empirical findings to the choice of method of analysis.
 
Event descriptions: the outbreak days when currency crashed during 1990s
continued)
Article
This study analyzes American depository receipts (ADR) performance surrounding the outbreak of major currency crises during the past decade. By employing event–study methodologies and multifactor pricing models, we find that the outbreak of a currency crisis is accompanied by a negatively significant abnormal return for the corresponding ADRs, even after controlling for variations in exchange rates. We also find significant upward shifts in the exchange rate exposure of ADRs when the home currency is switched from a “pegging” to a “floating” exchange rate regime. In addition, ADR-originating firms with larger sizes, greater proportions of U.S. market activities, and greater market liquidity have relatively less negative abnormal returns (ARs) and less significant upward shifts in currency exposure, implying that such firms are relatively better hedged against currency crises.
 
Article
Within a marking-to-model framework, this research computes the bank's capital charge for credit and operational risks of loan commitments at Basel-2 fixed audit date. This is done in three steps. The first one prices commitment credit risk as a Gram-Charlier put value and determines the commitment forward-funding proportion. In the second one, put value and funding proportion are combined to compute Basel-2 'fair' capital charge for credit and operational risks. By producing a moderate total capital charge, marking-to-model offers substantial capital relief with respect to the corresponding charge computed with Basel-2 simplified approach. Both charges are however larger than the corresponding nil charge arrived at in Basel-1. In the third step, marking-to-model reveals its flexibility by showing how banks can determine the cost of their exposure to borrowers' credit-rating downgrades and how they can also hedge any exposure to commitment default risk.
 
Article
Prior studies provide inconclusive evidence on the wealth effects of international joint ventures (IJVs) on the firm's market value. While some studies document that IJVs benefit shareholders of firms that engage in such activities, others reveal conflicting results. This study provides additional evidence on this issue. On average, shareholders of U.S. multinationals that engage in IJVs benefit from such activities. Specifically, shareholders benefit more from IJVs when their firms possess a higher degree of ownership advantages. This study also finds that higher returns are associated with IJVs with developed countries than with developing countries by U.S. multinationals.
 
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The aim of our paper is to examine whether Exchange Traded Funds (ETFs) diversify away the private information of informed traders. We apply the spread decomposition models of Glosten and Harris (1998) and Madhavan, Richardson and Roomans (1997) to a sample of ETFs and their control securities. Our results indicate that ETFs have significantly lower adverse selection costs than their control securities. This suggests that private information is diversified away for these securities. Our results therefore offer one explanation for the rapid growth in the ETF market.
 
Top-cited authors
Brian M. Lucey
  • Trinity College Dublin
Larisa Yarovaya
  • University of Southampton
Elie Bouri
  • Lebanese American University
Andrew Urquhart
  • University of Southampton
David Roubaud
  • Montpellier Business School