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Published Articles for Year 1997
Multinational Finance Journal, 1997, vol. 1, no. 1, pp. 1-22
Yin-Wong Cheung , University of California Santa Cruz, U.S.A.    Corresponding Author
Clement Yuk-Pang Wong , City University of Hong Kong

Abstract:
This article evaluates the performance of filter rules on four Asian exchange rates against the U.S. dollar. Risk premiums derived from the choice under uncertainty model and the GARCH specification are used to construct the risk–adjusted return series. Results show that risk premiums have significant implications for the performance of filter rules. Further, even if investors can tolerate some risk, transaction costs can further eliminate most of the remaining profitable trading opportunities.

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Multinational Finance Journal, 1997, vol. 1, no. 1, pp. 23-46
Andrea L. DeMaskey , Villanova University, U.S.A    Corresponding Author

Abstract:
This article presents empirical evidence on the effectiveness of currency futures cross-hedging with the portfolio model. Single and multiple crosshedges for three minor European and three minor Asian currencies are examined. The performance of the cross-hedged portfolios is measured in terms of maximum possible variance reduction. Realistic simulations of crosshedging effectiveness are used to determine how well the optimal portfolio strategy performs relative to not hedging or a naive cross-hedge. Results show that Asian currency risk cannot be minimized with single or multiple currency futures cross-hedges. Indeed, both the naive and portfolio strategies increase exchange rate risk to the hedger. Because of the diversification benefit, the multiple currency cross-hedge is superior in hedging performance to the single currency cross-hedge. However, a cross-hedge constructed with two different currency futures positions is as effective as one with five different futures contracts.

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Multinational Finance Journal, 1997, vol. 1, no. 1, pp. 47-62
Y. Angela Liu , National Chung Cheng University, Taiwan    Corresponding Author
Ming-Shiun Pan , Shippensburg University, U.S.A.

Abstract:
This paper investigates the mean return and volatility spillover effects from the U.S. and Japan to four Asian stock markets, including Hong Kong, Singapore, Taiwan, and Thailand. The empirical results from examining the data for the period of 1984 to 1991 suggest that the U.S. market is more influential than the Japanese market in transmitting returns and volatilities to the four Asian markets. In addition, the observed spillover effects are unstable over time in the sense that the spillovers increase substantially after the October 1987 stock market crash. Furthermore, the evidence indicates that while the cross–country stock investing hypothesis cannot by itself explain the international transmissions of return and volatility, the market contagion also plays an important role in the transmission mechanism.

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Multinational Finance Journal, 1997, vol. 1, no. 1, pp. 63-80
Jan Bartholdy , University of Otago, New Zealand    Corresponding Author
Glenn W. Boyle , University of Otago, New Zealand
Roger D. Stover , Iowa State University, U.S.A.

Abstract:
Using data from six OECD countries, we examine the proposition that the costs associated with shareholder–debtholder agency conflicts can be reduced by allowing banks to hold equity in the firms to which they lend. Although the sensitivity of leverage to potential wealth expropriation is indeed significantly lower in Japan than in the U.S., no observable difference exists between the U.S. and the non–Japanese countries where banks are permitted to hold corporate equity. This "Japan effect" does not appear to be due to the Japanese keiretsu structure. We conclude that any differences in the debt–agency relationship between Japan and the U.S. are unlikely to be due to differences in restrictions on bank equity holdings

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Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 93-99
George M. Constantinides , University of Chicago, U.S.A.    Corresponding Author

Abstract:
I would like to thank the officers of the Multinational Finance Society and the organizers of its 4th annual conference for bringing us together in the historic city of Thessaloniki to discuss research developments in finance. Specifically, I would like to recognize the President of the Society, Geoffrey Booth, President-elect, George Philippatos, Chairman of the Board of Trustees, Panayiotis Theodossiou, Program Chair, Nickolaos Travlos, and Program Cochair, Angelos Tsaklanganos. They richly deserve a round of applause.

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Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 101-122
Moshe Arye Milevsky , York University, Canada    Corresponding Author
Eliezer Z. Prisman , York University, Canada

Abstract:
The Canadian Income Tax Act induces individual investors to close their short equity option positions at the end of the year and, if necessary, reopen them at the beginning of next year. This article analyzes the conditions under which it is optimal to close or leave open a short option position over the tax year boundary. The analysis shows that the latter decision depends on transaction costs, the investor’s marginal tax rate, the interest rates, the initial and end-of-the-year option prices, as well as whether the option position is naked or covered. The article also examines the impact of tax regulations in Canada on the pricing of naked vs. covered call options and American vs. European options.

Keywords : derivative securities, equity options, open interest, tax arbitrage
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Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 123-135
Emel Kahya , Rutgers University, U.S.A.    Corresponding Author

Abstract:
This article investigates the effects of non-overlapping trading hours on the correlations and cross-serial correlations of returns in non-contemporaneous stock markets and develops a simple formula for calculating contemporaneous correlation measures. The presence of these effects is illustrated empirically using stock market returns data for the U.S., Japan, and the U.K. The results indicate that daily correlations of returns in these markets are biased downward while daily cross-serial correlations of returns are biased upwards. These findings have significant implications for studies investigating the transmission mechanism of stock price innovations across national stock markets and portfolio management.

Keywords : mean spillovers; contemporaneous correlations of returns
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Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 137-152
Ilhan Meric , Rider University, U.S.A.    Corresponding Author
Gulser Meric , Rowan University, U.S.A.

Abstract:
This article studies the changes in the co-movements of the twelve largest European equity markets after the 1987 international equity market crash. Tests based on Box M and principal component analysis indicate that the comovements of these equity markets changed significantly after the crash. Low correlations among national equity markets are often presented as evidence in support of the benefits of international portfolio diversification. The findings indicate that correlations among the twelve largest European equity markets and between these equity markets and the U.S. equity market increased substantially; therefore, the benefits of international diversification with these twelve European equity markets decreased considerably after the crash

Keywords : correlation of returns; Box M analysis; European equity markets co-movements; principal component analysis
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Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 153-168
Robert Haney Scott , University of Macau, Macau    Corresponding Author

Abstract:
Macau pegs its currency, the pataca, to the Hong Kong dollar, which in turn is pegged to the U.S. dollar. This type of pegging order is unique in the annals of international financial arrangements. This article analyzes the structure of the pegged exchange rate systems in Macau and Hong Kong and discusses the financial and economic implications of these systems for the two territories

Keywords : currency board system; currency substitution; pegged exchange rates; seigniorage
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Multinational Finance Journal, 1997, vol. 1, no. 3, pp. 169-197
Mandeep S. Chahal , Enron Capital and Trade Resources, U.S.A    Corresponding Author
Jun Wang , SAS Institute Inc., U.S.A

Abstract:
The underlying stochastic processes that drive returns in several emerging bond and stock markets are investigated using the pure diffusion, the jump diffusion, the ARCH pure diffusion, and the ARCH jump diffusion models. The results indicate that jump diffusion models fit the data better than pure diffusion models. Possible sources and linkages of information surprises in emerging stock and bond markets are also investigated. Bond and stock returns of the same country exhibit simultaneous jumps, indicating a possible linkage of the two markets. U.S. equity returns respond to jumps in emerging bond markets but not to jumps in emerging stock markets

Keywords : emerging markets; ARCH; jump diffusion; information surprises; distribution characteristics
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Multinational Finance Journal, 1997, vol.1, no. 3, pp. 199-227
Li Jiang , Hong Kong Baptist University, Hong Kong    Corresponding Author
Lawrence Kryzanowski , Concordia University, Canada

Abstract:
In this article, we examine dynamic relationships between volatility and various microstructure measures of trade activity and quoted liquidity for each component stock in the Toronto Stock Exchange 35 Index and for the Toronto 35 Index Participation Shares. When volatility is conditioned on number of trades and quoted liquidity, trading volume provides no incremental explanatory power. Thus, the number of trades appears to be a better proxy for information flow. Furthermore, investigation into partitioned volume suggests that the number of trades is more effective than the unexpected volume in explaining volatility. Measures of quoted liquidity also play a significant role in explaining intra day volatility. Bid-ask spreads and quote depth are positively and negatively related to volatility, respectively. Consistent with the lack of information signal, no trade outcomes are negatively related to volatility

Keywords : volatility; volatility determinants; and market microstructure
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Multinational Finance Journal, 1997, vol. 1, no. 3, pp. 229-254
George Athanassakos , Wilfrid Laurier University, Canada    Corresponding Author

Abstract:
This article proposes an alternative approach to estimating the required rate of return on equity, combining the bond-plus risk-premium approach and the Capital Asset Pricing Model, and tests it using Canadian data. Individual stock risk-premia are classified into groups according to the point in the business cycle, risk based on each company’s bond rating, and industry groups as defined by industry classification. Group averages are calculated. We find equity risk-premia are negatively related to interest rates and bond ratings. Moreover, the higher the risk of an industry group, the higher are the equity risk-premia. However, findings regarding the risk-premia’s sensitivity to the business cycle and stability across business cycles are not very conclusive

Keywords : equity risk-premia; cost of equity; CAPM; bond-plus riskpremium
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Multinational Finance Journal, 1997, vol. 1, no. 4, pp. 255-271
Yin-Wong Cheung , University of California Santa Cruz, U.S.A.    Corresponding Author
Hung-Gay Fung , University of Missouri-St. Louis, U.S.A.

Abstract:
The pattern of information flows between Eurodollar spot and futures markets is examined using a robust two-step procedure. This procedure allows for conditional mean and variance dynamics as well as conditional heteroskedasticity. We find spot rates affect futures data and vice versa. In addition, there is evidence of volatility spillover between the two markets. Our results also indicate that information conveyed by data on futures tends to have a more persistent impact on both the mean and volatility of cash market price movements than the other way around

Keywords : Granger causality; cointegration; Eurodollar spot and futures interest rates; information flow
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Multinational Finance Journal, 1997, vol. 1, no. 4, pp. 273-289
Unro Lee , University of the Pacific, U.S.A.    Corresponding Author

Abstract:
This article investigates whether the stock markets of the Pacific Basin countries of Hong Kong, Singapore, South Korea, and Taiwan are informationally efficient with respect to macroeconomic policies. Granger causality tests are utilized in the context of a Vector Error Correction Model to test the relationship between aggregate stock prices and monetary and fiscal policies. The findings indicate that the stock markets of all four countries are not efficient with respect to both macroeconomic policies. These findings are different from those of other articles focusing on major industrialized countries. Rejection of market efficiency may be attributed to the unique structure of financial markets in these countries.

Keywords : Pacific Basin countries; stock returns; macroeconomic policies; informational efficiency
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Multinational Finance Journal, 1997, vol. 1, no. 4, pp. 291-307
Martin Laurence , William Paterson University of New Jersey, U.S.A.    Corresponding Author
Francis Cai , William Paterson University of New Jersey, U.S.A.
Sun Qian , Nanyang Technological University, Singapore

Abstract:
China has two major stock exchanges, the Shanghai and the Shenzen exchanges. Each of these exchanges trades two types of shares, type “A” and type “B” shares. Type “A” shares are available to domestic investors only and type “B” shares are available to foreign investors. This article tests for the weak-form efficiency in these markets and explores the statistical relationships and causality among these Chinese stock markets with each other and with the U.S. and Hong Kong stock markets. The results indicate the existence of (1) a weak-form efficiency in the market for “A” shares but not “B” shares, (2) statistically weak linkages between the Chinese markets, (3) a weak causal effect from the Hong Kong to the four Chinese markets, and (4) a strong causal effect from U.S. stock mark to all four Chinese stock markets and the Hong Kong Stock market, particularly during the second period of the sample. These results support the assertion that the Chinese stock markets are becoming more integrated to the global economy.

Keywords : Chinese stock markets; Granger causality tests; Hong Kong stock market; market efficiency
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Multinational Finance Journal, 1997, vol. 1, no. 4, pp. 309-324
Roger D. Stover , Iowa State University, U.S.A.    Corresponding Author
Mark F. Schmitz , Rutgers University, U.S.A.

Abstract:
This article inquires into the factors that affect the pricing of new issues of corporate tax-exempt bonds backed by standby letter of credit of U.S. and foreign commercial banks. Previous literature suggests that U.S. banks possess superior certifying ability in this market due to their unique access to low-cost private information. This article also examines the extent to which such information is priced by the market. The results indicate that pricing of these bonds depends primarily on the quality of the commercial bank issuing the standby letter of credit irrespective of where the bank is domiciled. The quality influence on yield occurs indirectly through its significant effect on the issue’s bond rating

Keywords : bank certification; industrial revenue bond financing; Moody?s bond rating; standby letter of credit
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