Journal of International Financial Markets Institutions and Money

Published by Elsevier
Online ISSN: 1042-4431
Publications
Article
This paper examines the ability of the forward premium to provide an unbiased estimate of the future spot rate allowing for potential asymmetries. Extant evidence suggests that forward rates provide a biased predictor of future spot rates. Examining the forward premium for 16 countries, only for 2 countries does the linear expectations hypothesis holds. For the remaining countries, results generally support the view that the larger the forward premium the better a predictor for future spot rates it is, however, this result is not unique across all countries. Furthermore, although the asymmetric model improves data fit over the linear model, only in four cases does the model support an unbiased predictor interpretation. Further research is therefore required to understand the nature of this relationship, not least given the importance of correctly priced forward and long rates in terms of expected returns to future investments and the conduct of monetary policy.
 
Article
In this paper, we apply a range of univariate unit root tests including the Lagrangian multiplier (LM) univariate and panel unit root tests to examine PPP for 16 OECD countries. In addition to incorporating structural breaks in the univariate exchange rate series, we also incorporate structural breaks in the panel exchange rate models. Our main finding from univariate tests, with and without structural breaks and panel LM test with one break, is that real exchange rates are not stationary, inconsistent with PPP hypothesis. However, when we incorporate two structural breaks in the univariate LM test, for most countries we find that real exchange rates are stationary. Moreover, we obtain overwhelming support for PPP when we apply panel LM unit root tests with two structural breaks.
 
Evolution of the price indexes (1874-1998).
Results from unit root tests with two breaks
Evolution of the inflation rates (1874-1998).
Tau T ( 1 ) statistic for checking stability. CRVAL is the critical value at 5% tabulated by Ploberger et al. (1989).
Article
This paper studies the relationship among Italian, Spanish and United Kingdom prices over the period 1874-1998, for most of which the currencies of these three countries maintained a floating exchange rate regime. By using cointegration techniques with broken linear trends, we find a single vector for the period 1874-1935 and two vectors and, consequently, a single common trend for the period 1940-1998. Therefore, this paper provides new evidence of no long-run monetary independence under floating regimes. Furthermore, the price differential dynamics captured by deterministic trends in the period 1940-1998, as well as agreeing with the evidence of long-run transmission of interest rates in the floating post-Bretton Woods era, fit in perfectly with the new de facto taxonomies on exchange rates.
 
Article
The Barings crises of 1890 and 1995 ensure Barings place in banking history. In the crisis of 1890, the liquidity problems experienced by Barings in London were the result of its heavy investment in Argentina. The massive sale of American securities by London was a desperate attempt to save Barings from illiquidity. This, in turn, led to bank failures in the United States, creating a domino effect. These failures could not have been prevented by a lender of last resort, since the problems which brought down American banks were not liquidity but solvency problems. Barings eventually failed 105 years later in the 1995 crisis. Its insolvency was caused by Leeson's heavy speculative trading in financial derivatives, which was, in turn, facilitated by a lack of proper internal and external controls. Several reasons ultimately prevented domino effects in the 1995 crisis. After both banking crises, new supervisory rules were introduced.
 
Article
This paper reexamines the forward rate unbiasedness hypothesis (FRUH) during the 1920s and it contributes to the literature as follows: first, it utilizes a database that includes currencies not studied before, as well as the 3 month forward rates; second, it applies three different approaches to test for cointegration and it shows that the choice of the technique is not of crucial importance; third, it tests for the temporal stability of the cointegration results; finally, it tests for the existence of the FRUH in the short run, by means of error correction models, whereas previous studies focused on cointegrated vectors only. Our analysis shows that for countries that did not undergo major financial turmoil during that period, there exists more favorable evidence for the FRUH.
 
Article
We investigate the effects of the Reserve Bank of Australia's foreign exchange interventions on the USD/AUD market and 90-day and 10-year interest rate futures markets for the period July 1986–December 2003. Using recently released revised and updated intervention data, we investigate contemporaneous and disaggregated intervention influences and find significant evidence for (i) intervention effectiveness in moderating the contemporaneous exchange rate movements especially if interventions were cumulative and large, (ii) exchange rate volatility reducing effect with a day's lag, (iii) undesirable interest rate movements following interventions in some periods compromising monetary policy effectiveness, and (iv) a volatility reducing effect of cumulative interventions in the 90-day rate, and a volatility increasing effect of large interventions in both the 90-day and 10-year rate futures. These findings are a unique and significant contribution to the prevailing literature as they demonstrate that the RBA's interventions matter not only for the foreign exchange market but also for the debt markets.
 
Article
Forecasts are an inherent part of economic science and the quest for perfect foresight occupies economists and researchers in multiple fields. The release of economic forecasts (and its revisions) is a popular and often publicized event, with a multitude of institutions and think-tanks devoted almost exclusively to that task. The European Central Bank (ECB) also publishes its forecasts for the euro area, however ECB’s forecast accuracy is not a deeply researched theme. The ECB forecasts’ accuracy is the main point developed in this paper, which tries to contribute to understand the nature of the errors committed by the ECB forecasts and its main differences compared to other projections. What we try to infer is whether the ECB is accurate in its projections, making less errors than the others, maybe due to some informational advantage. We conclude that the ECB seems to consistently underestimate the HICP inflation rate and overestimate GDP growth. Comparing it with the others, the ECB shows a superior performance, committing almost always fewer errors. So, this signals a possible informational advantage from the ECB. Since the forecasting errors could jeopardize ECB’s credibility public criticism could be avoided if the ECB simply let forecasts for the others. Naturally, this change should be weighted against the benefits of publishing forecasts.
 
Article
We examine changes in bank equity risk following the formation of the Economic Monetary Union (EMU) in 1999. With the exception of Germany, we observe a decline in bank risk across euro-zone countries. Total risk decreased for 70% of the euro-zone banks in our sample with a statistically significant decrease in total risk observed for 51% of the sample. Similar results are found for idiosyncratic risk and systematic risk. These results are robust to financial crisis effects and test specification. Moreover, we find some evidence of a decrease in bank equity risk for a sample of neighbouring non-euro-zone European countries, consistent with the existence of some spill over effects.
 
Article
The current financial crisis has now led most major central banks to rely on quantitative easing. The unique Japanese experience of quantitative easing is the only experience which enables us to judge this therapy's effectiveness and the timing of the exit strategy. In this paper, we provide a new empirical framework to examine the effectiveness of Japanese monetary policy during the "lost†decade and quantify the effect of quantitative easing on Japan's activity and prices. We combine advantages of Markov-switching VAR methodology with those of factor analysis to establish two major findings. First, we show that the decisive change in regime occurred in two steps: it crept out from late 1995 and established itself durably in February 1999. Second, we show for the first time that quantitative easing was able not only to prevent further recession and deflation but also to provide considerable stimulation to both output and prices. This positive effect is reached through the interest rate factor. These results remain valid even when fiscal policy is simultaneously taken into account in the analysis. If Japanese experience is any guide the quantitative easing policy must be seen as a symptomatic treatment; it must be accompanied with a dramatic restructuring in the financial framework. The exit from quantitative easing must be postponed and decided within a clear program and according to clear numerical objectives.
 
Article
We study the General Motors (GM) and Ford crisis in 2005 in order to determine if the credit default swap (CDS) market is subject to contagion effects. Has the crisis spread to the whole (CDS) market? To answer this question, we study the correlations between CDS premia, by using a sample of 226 CDSs on major US and European firms. We do evidence a significant rise in correlations during the crisis episode, but little “shift-contagion” as defined by Forbes and Rigobon (2002). When using dynamic measures of correlations (EWMA and DCC-GARCH), we also show that correlations significantly increased during the crisis, especially in the first week.
 
Article
We examine the nature, extent and possible causes of bank contagion in a high frequency setting. Looking at six major European banks in the summer and autumn of 2008, we model the lower coexceedances of these banks returns. We find that market microstructure, volatility (measured by range based measures) and limited general market conditions are key determinants of these coexceedances. We find some evidence that herding occurred.
 
Article
Bancassurance has received much attention from both researchers and policymakers, as it is a major step towards the creation of universal financial markets in the 21st century which are no longer segregated based on industry operations. This study is the first comprehensive study to identify and measure the determinants of bancassurance using a sample of firms from 28 developed and developing countries. Our results complement the existing literature on bancassurance demand, insurance demand, and international insurance services, while also providing additional insight in key areas. The empirical results, based on panel analysis, indicate that reduction in company risk, the size of the company, reductions in company costs and increases in company revenues, the size of the national banking industry, the level of financial deregulation within a country, and the national inflation rate all play significant roles as determinants of bancassurance.
 
Article
The effect of the initiation of e-mini stock index futures (ESIFs) on the volatility components of S&P 500 stock index futures is herein investigated. The study decomposes S&P 500 stock index-related observed volatilities into unobserved fundamental volatility and transitory noise and utilizes the decomposition to test two hypotheses: the “clientele factor hypothesis” and the “information adjustment hypothesis”. The first hypothesis proposes that the ESIFs attract more noisy traders who prefer trading the friendly-size futures contracts. The second one proposes that the innovations of ESIFs improve the information flow of the futures markets. Using a stochastic volatility model, the empirical results are consistent with both of our proposed hypotheses.
 
Article
This paper examines the positive connection between the 52-week high of a stock price and its return. In addition, other reference points including 5-day high, 20-day high, and 60-day high are considered under different stock market index levels. Using firm characteristics as proxies of preference and risk, this study employs a panel model in Taiwan and found a stronger positive connection where the stock index is greater than the 52-week average, whereas a weaker positive relationship exists where the stock market index is below the 52-week average. The results imply that a conservative investor sentiment to rising stock prices exists when the stock market index is relatively low in comparison to the 52-week average.
 
Article
The performance of industrial and 52-week high momentum strategies is compared to the conventional strategy, using a large sample of stocks drawn from multiple countries covering a quarter of century to 2007. The sample of 51,879 stocks in 51 countries removes the potential for criticism, such as data mining, and provides more generalisable findings and knowledge concerning the robustness and usefulness of return from momentum strategies. Both the industry and 52-week high strategies generate positive returns but neither is greater than the conventional momentum strategy. A new 52-week high industry momentum strategy is examined and it achieves a similar result.
 
Article
The existence of government guarantees to bail out investors and the use of official support to prevent corporate bankruptcies are commonly viewed to have largely contributed to the financial fragilities of many emerging market economies during the 1990s. This paper attempts to rationalize the existence and the duration of such policies. By using a simple model of the economy, we formalize governments’ decision on how long to provide resources to bridge the gap between the corporate sector's earnings and obligations. By considering both the costs and benefits of bail-outs in an environment where there are unfavorable productivity shocks, we show that the bail-out policy ends sooner; the higher the initial level of foreign borrowing, the lower the productivity, the lower the rate of time preference, and the higher the world interest rate. We also show that given any set of fundamentals, an unfavorable shift in market sentiments may end such policies sooner than otherwise.
 
Article
In this paper, we examine the integration of European government bond markets using daily returns over the 1998–2003 period with a set of complementary techniques to assess the time varying level of financial integration. We find evidence of strong contemporaneous and dynamic linkages between Euro zone bond markets with that of Germany. However, there is much weaker evidence outside of the Euro zone for the three accession markets of Czech Republic, Hungary and Poland, and the UK. In general, the degree of integration for these markets is weak and stable, with little evidence of further deepening despite the increased political integration associated with further enlargement of the European Union (EU).
 
Article
This study investigates the impact of EU accession on financial markets in the Czech Republic, Estonia, Hungary, Poland, Romania and Slovakia and what effect, if any, EU entry had on the cointegration relationships between these markets and developed ones. Using a VAR approach, we find an increase in the number of cointegration relationships over time. However, it appears that EU accession plays a minor direct role in the development of these links, cointegration being driven more by financial and economic factors as opposed to explicit political actions.
 
Article
The East Asian financial crisis indicated that one of the factors that played a critical role in affecting the exchange rate of a country was its current account balance. This paper attempts to investigate this hypothesis. The Singaporean dollar (SD) and the Malaysian ringgit (RM) against the yen are taken as case studies. Our analysis is based on the recent cointegration method and we examine two issues. First, whether the exchange rates are cointegrated with the fundamentals as predicted by economic theory. Our focus was to investigate whether the exchange rate movements are affected by the economic fundamentals, particularly the current account balance. Our findings suggest that the model fits the data well. Secondly, we wanted to test the validity of our model for forecasting future exchange rates. The findings show that the model does produce good in-sample as well as out-of-sample forecasts.
 
Article
This paper provides an introduction to alternative models of uncertain commodity prices. A model of commodity price movements is the engine around which any valuation methodology for commodity production projects is built, whether discounted cash flow (DCF) models or the recently developed modern asset pricing (MAP) methods. The accuracy of the valuation is in part dependent on the quality of the engine employed. This paper provides an overview of several basic commodity price models and explains the essential differences among them. We also show how futures prices can be used to discriminate among the models and to estimate better key parameters of the model chosen.
 
Article
We analyze the accuracy of the Lee/Ready (1991) trade classification algorithm and the tick test. Our definition of true trade classification is based on whether the Makler (the equivalent of the specialist on the Frankfurt Stock Exchange) bought or sold shares. The Lee/Ready method classifies 72.8% of the transactions correctly. The simpler tick test performs almost equally well. We document that misclassification of trades may systematically bias the results of empirical microstructure research. Finally, we show that estimation of the bid–ask spread from transaction data results in a reasonably accurate estimate of the relative liquidity of our sample stocks. This is an important finding because quote data for the German stock market is not available on a regular basis.
 
Article
This paper presents evidence on the accuracy of press reports regarding the foreign exchange market interventions conducted by the Bank of Japan (BoJ) between January 1995 and December 1999. We find that the reports of interventions in the financial press are a relatively inaccurate indicator for the actual interventions of the BoJ. We also find that the accuracy of press reports of BoJ interventions is higher for those interventions that were carried out jointly by the BoJ and the Federal Reserve.
 
Cumulative abnormal returns surrounding bank merger announcements between Canadian Schedule I banks. 
Cumulative abnormal returns surrounding industry-wide events (average of all banks). 
Canadian bank events by target location and target industry
Cumulative abnormal returns, wealth management targets. 
Cumulative abnormal returns of retail bank targets excluding RBC / BoM and TDB / CIBC announcements. 
Article
In 1998, two pairs of the largest Canadian banks proposed combining their activities in order to become internationally more competitive. The Canadian government's disapproval of these mergers prevented the banks from growing through consolidation within the domestic banking industry. Subsequently, between January 1998 and June 2001, Canadian banks engaged in 26 cross-border and 17 domestic acquisitions of other financial services firms. In this paper, we investigate the stock market reactions to these merger announcements. Our findings indicate that foreign acquisitions in the wealth management and retail banking sectors created value, while foreign acquisitions in the insurance sector did not. The opposite was true of domestic acquisitions. This result raises questions about the effect of the initial regulatory decision for the efficiency of the Canadian financial system.
 
Article
This study examines the relevance of exchange rate risk in the context of cross-border acquisitions. Using a sample of 156 foreign acquisitions of US firms, we find a reduction in exchange rate exposure following acquisition announcements. We also compare the valuation effects generated by a single-factor market model to those of a two-factor model that controls for the exchange rate effect. Our results show that, on average, abnormal returns generated by the two-factor model are significantly lower than those of the single-factor market model.
 
Article
This paper adopts a novel FIVECM-BEKK GARCH approach to examine the bilateral relationships among the A-share and B-share stock markets in China and the Hong Kong stock market. The evidence shows that these stock markets are fractionally cointegrated. Analyses of the spillover effects across these markets indicate that the A-share markets are most influential. The relaxation of government restrictions on the purchase of B shares by domestic residents accelerates the market integration process of A-share markets with the B-share and Hong Kong markets. The effects of the Asian crisis on the stock-return dynamic correlations vary across these markets.
 
Article
This paper investigates the extent of swap curve dynamics across USD and HKD markets. We find that US Treasury curve invokes significant positive responses on HKD swap curve due to the existence of the currency peg system. Our work also indicates that Hong Kong swap curve itself contains rich information over and above that provided by the sovereign yield curve and the standard measure of market liquidity, Libor-type interest rates. Hence, using sovereign yield curves and concentrating only on the risk premium associated with the breakdown of the currency peg is not sufficient for policy making. Swap spreads and swap curves should be carefully monitored to evaluate economy wide risks and to conduct macroeconomic policy, especially in a private sector dominated economy, such as Hong Kong.
 
Article
Share prices for the technology, media, and telecommunication (TMT) sector experienced phenomenal growth and decline at the turn of this century in the U.S. and many other OECD economies. We investigate whether contagion occurred from the U.S. to other international stock markets after the Nasdaq bubble collapsed. Results document a significant structural break in comovements between the international TMT sectors, and suggest that the collapse of the stock market in more than a dozen countries is tied to close sectoral links (particularly in TMT), and cannot be attributed to widespread contagion. We also show the importance of modeling the intrinsic heteroskedasticity in the data using a GARCH framework for inferences on contagion.
 
Article
This study investigates returns and volatilities transmission across Greater China’s four emerging stock markets and three developed international markets, Tokyo, London, and New York. Using daily open and close price data from 1994 to 2001, we provide empirical evidence that the overnight returns on all the Greater China stock indices can be estimated by using information from at least one of the three developed markets’ daytime returns. The contemporaneous return spillovers are in general unidirectional from more advanced major international markets to the Chinese markets. However, split-sample analysis suggests that there is also evidence of bi-directional return spillovers after the 1997 Asian financial crisis. We also find that there are no one-period lagged return spillover effects from the three advanced markets to the Chinese markets, except for Taiwan. Finally, Mainland China’s two stock markets are not affected by contemporaneous nor delayed “bad news”.
 
Article
This paper investigates the determinants of the international interbank market, a significant component of international trade in financial services. The sample encompasses both monthly and quarterly data from 1983 to 1993. The superiority of the monthly results suggest that the interbank market should be modelled within a short-term framework. This data interval captures the short-term movement of funds between currencies, Eurobonds, the nonbank market and the domestic banking market by banks to maximize returns. Moreover, the interbank market does not necessarily move in line with fundamental trade and income variables. Rather, the market is sensitive to return differentials, the relative cost of capital, the yield curve and international nonbank assets. The empirical results also indicate that nationality remains important in interbank trading because of the advantages it imparts on the home country in dealing in its home currency, particularly if that currency is a vehicle currency.
 
Article
In this paper, we investigate whether the level of derivative activities of Asia-Pacific banks is associated with the market's perception of their interest rate and exchange rate risks. The results suggest that the level of derivative activities (especially interest rate derivatives) is positively associated with long-term interest rate exposure (LTIR) but negatively associated with short-term interest rate exposure (STIR). Further investigations reveal that the positive LTIR exposures are driven by banks with extensive derivative activities. We do not find any significant association between banks' derivative activities and exchange rate exposure. The significant positive association between the level of derivative activities and LTIR suggests the need for better management of banks' internal control systems and/or greater derivative disclosure requirements to bring stronger market discipline to banks, particularly for banks with extensive derivative activities.
 
Article
Cross-country integration of banking in Europe typically has been analyzed from the perspective of particular markets for financial products. We extend this research to consider the potential effects of market integration on the portfolio choices and financial structure of banks in seven European countries, 1994–2002. Our evidence rejects a hypothesis that banks in different countries have common activities. Distinct portfolio choices are more evident among small banks, as opposed to big banks, are more evident in Italy and are less evident in the UK and Spain. We conclude that integration of financial markets in Europe, to the extent that it has occurred, has not imposed a uniform mix of activities on European banks.
 
Article
This paper examines intraday stock price and trading volume effects caused by ad hoc disclosures in Germany. The evidence suggests that the stock prices react within 30 min after the ad hoc disclosures. The adjustment of the trading volume needs even more time. We find no evidence for abnormal high price nor trading volume reactions in the five transactions before ad hoc disclosures. The bigger the company, which announces an ad hoc disclosure, the less severe the abnormal price effect, following the announcement, is. The higher the trading volume at the last trading day before the announcement, the higher the price and trading volume effects, after the ad hoc disclosures, are.
 
Article
This paper reexamines the linkage of real interest rates between the US and Canada. After examining the existence of a one-to-one long-run relationship between these two interest rates, we assess the degree of departure from the long-run relationship and the speed of adjustment to it following an exogenous shock in one of the markets. Our empirical results, based on data from approximately two decades, indicate that: (i) there exists a one-to-one long-run relationship and (ii) the extent of departure is small compared with the magnitude of a shock and the departure decays within a reasonably small number of periods.
 
Article
This paper examines the nature of correlation in the major currency markets from 1980–1996, after adjusting for risk. Currency correlations are found to have an autoregressive structure, similar to that for variance. However, evidence for a link between volatility and correlation, asymmetry in correlation and cross-market effects in volatility is unconvincing on a risk-adjusted basis. The study finds that complex multivariate specifications designed to capture such effects are of dubious value. More parsimonious specifications generally perform best, provided that they capture volatility clustering. The implications for asset allocation and hedging decisions are also examined.
 
Article
Intervention studies using stock models do not produce robust results across currencies and over time. Perhaps we should consider a different approach such as stock adjustment. Stock adjustment has several advantages over stock models. Stock adjustment explains profits from simple trading rules and why intervention can be effective when it is so small relative to the stock of financial assets. Stock adjustment solves the ‘secrecy puzzle’ and avoids the dubious signaling channel. Stock adjustment produces robust results across currencies and over time. Here, for the first time, I use two tests to discriminate between stock and stock adjustment. Both tests avoid simultaneity. One test uses the behavior of intervention when a central bank holds exchange rates constant. Those results favor stock adjustment over a stock approach. The other test analyzes changes in exchange rates under different types of intervention. Those results support stock adjustment and reject a stock approach.
 
Article
This study tests for asymmetries in the adjustment mechanism towards real interest parity using monthly data over the period 1973–2004 for the U.S. and a sample of other OECD economies. There is stronger evidence of long-run cointegrating relationships when an explicit distinction is made between decreasing and increasing deviations from equilibrium. The speed of mean-reversion tends to be fastest when momentum gathers for increasing rather than decreasing deviations. This evidence is consistent with asymmetric monetary policy responses where close linkages with respect to the U.S. are likely to be less prevalent in a regime of rising nominal interest rates and falling inflation.
 
Article
The aim of this paper is to investigate the effects of technological change on stock market dynamics. We develop an intertemporal optimising model, the central innovation of which is the distinction between the non-perishables and perishables sectors. We discuss the conditions likely to lead to cyclical stock market behaviour in response to technological shocks. Furthermore, we show that one-off technological advances may have persistent effects giving the country a permanent growth advantage. This gives an alternative mechanism for explaining differential growth rates to that already established in the endogenous growth literature.
 
Article
By linking two main strands of equilibrium exchange rate research, this paper models and forecasts exchange rate movements around a time-varying equilibrium using both linear and non-linear techniques. Our results support evidence of linear and non-linear (ESTR) stationary behaviour around a time-varying equilibrium, particularly when using a trade based price index. The latter results are largely robust across a break due to the Plaza Accord. Forecasts of both the equilibrium deviations and exchange rates themselves are largely supportive of the ESTR model over several alternatives. This is notably so across most measures with respect to the equilibrium deviations and over the sign based measures for the exchange rate forecasts. Overall, our results suggest that short-run changes in exchange rates are forecastable when allowing for a time-varying equilibrium rate and using an appropriate price index. Such a result has important implications for researchers, policy-makers and goods and financial market participants. For example, policy-makers need to be cognisant of a changing equilibrium level and not necessarily conduct policy in such a manner as to restore a previous equilibrium. Similarly, those engaged in hedging need to be aware that equilibrium rates are time varying but, beneficially, movements around equilibrium appear predictable.
 
Article
Intradaily volatility is related to the speed of adjustment of prices towards their intrinsic values. The decomposition of volatility into intrinsic and noise related components is demonstrated to be impacted by speeds of adjustment. Intradaily speeds of adjustment are estimated for U.K. index data and some empirical evidence of overreaction at the open and underreaction at the close of the trading day found for the FTSE100 index. The major result that we report in this paper is that differential intradaily volatilities at the index level are related to differential speeds of adjustment, thus providing insights into the similar results reported in U.S. index studies, such as [Gerety, M., Mulherin, J., 1994. Price formation on stock exchanges: the evolution of trading within the day. The Review of Financial Studies 7, 609–629].
 
Article
In this paper we argue that more complete modeling of foreign exchange intervention and sterilization dynamics is necessary when there are adjustment costs to changing private portfolios and/or the central bank attempts to balance longer-run monetary control against short-term exchange rate objectives. We show that measured correlations between domestic credit and foreign asset changes, often interpreted as ‘sterilization coefficients’, may be misleading because they vary with the pattern of disturbances as well as private agent and central bank behavior. We assess the empirical significance of this issue by estimating vector error correction models of the domestic and foreign asset components of the monetary base for Japan and Germany. In both countries, we find that that the impact of foreign exchange intervention on domestic credit falls markedly after several months, implying that the degree of sterilization decreases over time. However, the monetary base remained largely insulated as foreign asset positions were subsequently ‘unwound.’
 
Article
The standard macroeconomic view links the equilibrium level of foreign exchange rates to the state of the macroeconomic fundamentals. Any deviation from the equilibrium level is viewed as temporary since there are forces ensuring quickly mean-reverting dynamics. The aim of this article is to investigate whether the empirical observation of the real exchange rate misalignments in five European countries over the period 1979–1999 was consistent with the hypothesis of temporary deviations from the fundamentals, or whether they must be associated with significant persistent dynamics. We depart from the traditional framework of linear cointegration by using fractional cointegration or non-linear cointegration. Therefore, we will try to discriminate between linear long memory dynamics and non-linear short memory dynamics.
 
Article
This study investigates the determinants of discounts and premiums on the prices of American depository receipts (ADR). The study examines 74 ADRs from nine countries and covers the time period between 1996 and 2003. Using a fixed-effects panel data approach, we find that ADRs with higher transactions costs and lower dividend payments are more likely to exhibit higher price disparity. Furthermore, we find that the price deviation is more severe in times of higher T-bill interest rates. Lastly, we find that both, the price of the ADRs, as well as, the price of the underlying assets are more driven by U.S. consumer sentiment rather than the consumer sentiment of the country of origin.
 
Article
The purpose of this paper is to empirically investigate the effects of cross-ownership among Italian banks on competition in the national banking sector. This aim is pursued by measuring and comparing the degree of competition between banks involved in the web of cross-ownership and banks that are not involved. The bank's degree of competition is measured by applying the methodology developed by [Panzar, J.C., Rosse, J.N., 1987. Testing for monopoly equilibrium. Journal of Industrial Economics 35, 443–456.] The econometric results provide empirical evidence that, in the period 1996–2000, Italian banks involved in cross-ownership were less competitive than the other national credit firms, thus supporting the view that cross-ownership may represent an obstacle to industrial competition.
 
Article
We investigate the yield spread between the sovereign bonds issued in international markets by major Asia-Pacific issuers (China, Korea, Malaysia, Philippines and Thailand) and matched with near maturity benchmark U.S. Treasury bonds (2, 5, 10 year maturities) to determine the extent that various factors affect changes in credit spreads. The results suggest that the credit spreads of these sovereign bonds tend to be negatively related to changes in interest rates on U.S. benchmark bonds and positively related to changes in the slope of the yield curve. The asset and exchange rate variables were only significant for spreads on Philippine bonds where it was negatively related to changes in the local stock market index, and positively to changes in the exchange rate. The complex dynamics of these processes highlight concerns for portfolio mangers when constructing portfolios of sovereign Asian bonds by aggregating bonds of different credit ratings.
 
Article
Prior to President de Klerk's historic announcement on 2 February 1990, South Africa was the subject of extreme economic and political isolation. As a result of this announcement, it would be expected that South Africa's financial markets transformed from a state of segmentation to a degree of integration in world markets. One means of assessing the possible effects of this major political change is by investigating stock market volatility. Specifically, we would expect that the post-announcement volatility would behave more like that observed in other developed markets. Accordingly, in this paper, we investigate the applicability of the ARCH family of models to South African stock return data, over the period 20 March 1986 to 23 February 1996. Our results support the applicability of ARCH models. Furthermore, more complex volatility models can be supported in the post-announcement period, suggesting greater international integration of the Johannesburg Stock Exchange in the post-1990s period.
 
Article
Dealers trading in a limit order market must choose both the order aggressiveness and the quantity for their orders. Since little research has considered how dealers make this trade-off, we empirically investigate how dealers jointly make these decisions in the foreign exchange market using a unique simultaneous equations model. Our model uses an ordered probit model to account for the discrete nature of order aggressiveness and a censored regression model to capture the quantity decision recognizing the clustering of orders at the smallest available quantity, $1 million. Using two currency pairs with very different trading characteristics, we find evidence of a trade-off between order aggressiveness and quantity. We also find a significant role being played by factors related to the levels of information asymmetry and liquidity in the dealers’ choices of both the order aggressiveness and quantity.
 
Article
This paper examines the bilateral clearing agreement established in response to the separation of Czechoslovakia. The theoretical characteristics of bilateral clearing systems are identified and a model is applied to the agreement's netting, valuation and credit mechanisms. For each country, the utility of the bilateral arrangement depended on its ability to (1) maintain bilateral imports and (2) preserve convertible currency resources. Because adherence to the Czech and Slovak Clearing Agreement (CSCA) was asymmetric, the ability of bilateral arrangements to deter unilateral measures is questionable. The CSCA experience may also explain the lack of a wider use of bilateralism to deal with the transition in eastern Europe.
 
Article
This research investigates that the price relationship between a stock index and its associated nearby futures markets can be explained by the cost-of-carry model using the concordance correlation (CC) coefficient in the US financial markets. The main purpose of this research is to confirm that the CC coefficient is an appropriate methodology to determine ex post arbitrage opportunities and to maximize ex ante arbitrage profits through the analysis of the price relationship derived from the cost-of-carry model. To increase the robustness of the results and to enable us to generalize our conclusions, this analysis is carried out in consideration of external uncertainty, including the marking-to-market procedure of futures contracts and the transaction cost on the stock index and its futures markets, under several assumptions related to the conditions of transactions. Examining transaction price data on the S&P 500 stock index and its futures markets shows that the CC coefficient gives a good result for ex ante arbitrage profits and is appropriate for analyzing the relationship between the observed stock index futures market price and its theoretical price derived from the cost-of-carry model.
 
Top-cited authors
Sophocles Brissimis
  • University of Piraeus
Manthos D. Delis
  • University of Surrey
Paresh Kumar Narayan
  • Monash University (Australia)
Shawkat M. Hammoudeh
  • Drexel University
Dirk Baur
  • University of Western Australia