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Volume 13, Numbers 3 & 4 / September/December 2009 , Pages 155-321
Multinational Finance Journal, 2009, vol. 13, no. 3/4, pp. 155-188
Daniella Acker , University of Bristol, U.K.    Corresponding Author
Nigel W. Duck , University of Bristol, U.K.

Abstract:
We investigate the effects of bull and bear markets on correlations between developed and emerging country equity returns, and on the benefits of combining international markets in a portfolio. Contrary to most other studies we find that correlations fall in both bull and bear markets, although far more in the former; that emerging markets provide both additional diversification benefits for investors in developed markets and, especially, some protection during bear markets.

Keywords : International equity markets; correlations; portfolio choice
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Multinational Finance Journal, 2009, vol. 13, no. 3/4, pp. 189-208
Ariful Hoque , Curtin University of Technology, Australia    Corresponding Author
Felix Chan , Curtin University of Technology, Australia
Meher Manzur , Curtin University of Technology, Australia

Abstract:
This paper presents a general optimization framework to forecast put and call option prices by exploiting the volatility of the options prices. The approach is flexible in that different objective functions for predicting the underlying volatility can be modified and adapted in the proposed framework. The framework is implemented empirically for four major currencies, including Euro. The forecast performance of this framework is compared with those of the Multiplicative Error Model (MEM) of implied volatility and the GARCH(1,1). The results indicate that the proposed framework is capable of producing reasonable accurate forecasts for put and call prices.

Keywords : Foreign currency options; implied volatility; optimal volatility; multiplicative error model; GARCH model
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Multinational Finance Journal, 2009, vol. 13, no. 3/4, pp. 209-228
Isaac T. Tabner , University of Stirling, U.K.    Corresponding Author

Abstract:
Identifying a suitable benchmark is essential when testing asset pricing models, measuring the performance of active investors, or providing market proxy portfolios for passive investors. Concern that increased domination of capitalization weighted stock indices by a few large firms will lead to inefficient portfolio diversification is leading some investors and researchers to argue that index providers should adjust their weighting methods to limit concentration. This study tests and rejects the hypothesis that concentration arising as a result of capitalization weights in the FTSE 100 Index increases risk, either during normal market conditions or during negative tail events in the return distribution. On the contrary, during the left tail of the return distribution, the equally weighted portfolio of FTSE 100 Index constituents exhibits higher risk and lower returns than the capitalization weighted FTSE 100 Index portfolio, a finding consistent with variations of the CAPM that allow for time varying risk premia.

Keywords : stock index benchmarks; incremental returns; incremental standard deviation; portfolio diversification; capitalization weights; index concentration; performance measurement
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Multinational Finance Journal, 2009, vol. 13, no. 3/4, pp. 229-264
Frieda Rikkers , Tilburg University, Netherlands    Corresponding Author
André E. Thibeault , Vlerick Leuven Gent Management School, Belgium

Abstract:
The objective of this research is to develop a structural form probability of default model for small and medium-sized enterprises, dealing with the methodological issues which arise in the modelling of small commercial loan portfolios. Other motivations are to provide an extensive overview of the characteristics of SMEs, and to provide a list of characteristics for an SME PD model, e.g. time and cost efficiency, broad applicability, limited data requirements, and powerful in predicting default. The structural form model is developed and tested on a unique dataset of private firm’s bank loans of a Dutch bank. The results are promising; the model output differs significantly between defaulted and non-defaulted firms. The structural form model can be used on its own, or as an additional variable in a credit risk model. A second PD model is developed using logistic regression with a number of financial ratios, including the structural form measure. This variable is significant in default prediction of SMEs and has some additional predictive power, next to the popular financial ratios. Overall, the results indicate that the structural form model is a good indicator for default of SMEs.

Keywords : SME; probability of default; structural form credit risk model; Basel II
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Multinational Finance Journal, 2009, vol. 13, no. 3/4, pp. 265-292
James Clunie , Scottish Widows Investment Partnership, U.K.    Corresponding Author
Peter Moles , University of Edinburgh Business School, U.K.
Tatiana Pyatigorskaya , Merrill Lynch Wealth Management, U.K.

Abstract:
This study fills an important gap in the literature on loss realization aversion. It shows how a ‘sophisticated’ sub-set of investors, namely short-sellers, react to losses. Using daily data on stock lending, we estimate the average price at which short positions were initiated, thus permitting a study of short-sellers’ responses to their own book losses. We find that short-sellers close their positions in response to losses and not simply in response to rising share prices. This is a key result and a distinction from findings in related research. We conclude that short-sellers do not exhibit an aversion to realizing losses, but instead accept their losses or ‘mistakes’ systematically.

Keywords : n/a
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Multinational Finance Journal, 2009, vol. 13, no. 3/4, pp. 293-321
James B. McDonald , Brigham Young University, USA    Corresponding Author
Richard A. Michelfelder , Rutgers University, USA
Panayiotis Theodossiou , Cyprus University of Technology, Cyprus

Abstract:
Robust estimation techniques based on symmetric probability distributions are often substituted for OLS to obtain efficient regression parameters with thick-tail distributed data. The empirical, simulation and theoretical results in this paper show that with skewed distributed data, symmetric robust estimation techniques produce biased regression intercepts. This paper evaluates robust methods in estimating the capital asset pricing model and shows skewed stock returns data used with symmetric robust estimation techniques produce biased alphas. The results support the recommendation that robust estimation using the skewed generalized T family of distributions may be used to obtain more efficient and unbiased estimates with skewness.

Keywords : CAPM; quasi-maximum likelihood estimator; robust estimator; skewed generalized T
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