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Published Articles for Year 2002
Multinational Finance Journal, 2002, vol. 6, no. 1, pp. 1-27
George Athanassakos , Wilfrid Laurier University, Canada    Corresponding Author

Abstract:
This article examines whether seasonality is present in the excess returns of low risk Canadian firms in safe industries for a sample of firms that are highly scrutinized and visible and uses such tests as the foundation to empirically test competing explanations of stock market seasonality, namely, the tax-loss selling hypothesis and the gamesmanship hypothesis. The tests cover the period 1980 to 1998. For a sample of highly scrutinized and visible firms strong seasonality in excess returns is reported. However, the firms in our sample have unusually low excess returns in January and returns adjust upwards over the remainder of the year. The results hold even after we control for various risk differences among the stocks of our sample. Further, this article’s findings imply that the January effect is not as pervasive across risk classes and industry sectors as earlier studies using aggregate data have shown it to be. The disaggregated data of this study provide evidence in support of the gamesmanship hypothesis, but not the tax-loss selling hypothesis. Whenever a January effect is observed, the last quarter of the year tends to be weak for those companies in our sample that experienced a strong January. The opposite is true when a January effect is not evident, as the gamesmanship hypothesis would predict.

Keywords : firm visibility; gamesmanship hypothesis; January effect; portfolio rebalancing
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Multinational Finance Journal, 2002, vol. 6, no. 1, pp. 29-42
Bilgehan Yazici , ABN-AMRO Asset Management Turkey Istanbul, Turkey    Corresponding Author
Gülnur Muradoglu , Cass University Business School City of London, UK

Abstract:
The objective of this study is to examine whether published investment advice generates higher returns for investors. We investigate the impact of security recommendations in the financial press on common stock prices in Istanbul Stock Exchange. Recommendations of Investor Ali column of the weekly-published popular economics journal Moneymatik constitutes our sample. The column is designed to inform individual investors about company prospects and use them as the basis for its recommendations. The results show that the published investment advice in this column does not help small investors earn excess returns. On the contrary, it provides a valuable deal to its ‘preferred investors’, if any, in selecting the stocks. If one could front-run the column’s recommendations by five days he/she could earn more than 5% per week in excess of the index return. Compounded annually the excess return of a preferred investor could earn would be more than an amazing 1500% per annum.

Keywords : excess returns; insider trading; investment advice; ISE; stocks
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Multinational Finance Journal, 2002, vol. 6, no. 1, pp. 43-63
Costas Siriopoulos , University of Macedonia, Greece    Corresponding Author
Alexandros Leontitsis , University of Kent at Canterbury, U.K.

Abstract:
We analyzed six stock exchange markets through the nonlinear dynamics concept. We used daily data from the Toronto Stock Exchange, NYSE, London Stock Exchange, Hong Kong Stock Market, Tokyo Stock Exchange, and the Singapore Stock Exchange. The period studied is from January 1, 1988 to June 30, 1999. We performed Local Principal Components Analysis in order to estimate the dimension of each underlying attractor. Our main interest is the noise level estimation of each time series. The results indicate weak determinism and strong noise influence. The noise-to-signal ratio for almost all time series is above 50%. Noise is leptokurtic in the eastern stock markets, and mesokurtic in western ones.

Keywords : chaos theory; local principal components analysis; noise estimation; nonlinear dynamics
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Multinational Finance Journal, 2002, vol. 6, no. 2, pp. 65-98
Marco Corazza , University Ca’ Foscari of Venice, Italy    Corresponding Author
A. G. Malliaris , Loyola University Chicago, U.S.A.

Abstract:
Several empirical studies have shown the inadequacy of the standard Brownian motion (sBm) as a model of asset returns. To correct for this evidence some authors have conjectured that asset returns may be independently and identically Pareto-Lévy stable (PLs) distributed, whereas others have asserted that asset returns may be identically - but not independently - fractional Brownian motion (fBm) distributed with Hurst exponents, in both cases, that differ from 0.5. In this article we empirically explore such non-standard assumptions for both spot and (nearby) futures returns for five foreign currencies: the British Pound, the Canadian Dollar, the German Mark, the Swiss Franc, and the Japanese Yen.

Keywords : exponent of Hurst; fractional Brownian motion; multi-fractal market hypothesis; Pareto-Levy stable process; R/S analysis
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Multinational Finance Journal, 2002, vol. 6, no. 2, pp. 99-130
Mondher Bellalah , Université de Cergy-Pontoise, France    Corresponding Author
Marc Lavielle , Univsité Paris-Sud, France

Abstract:
The selection of an appropriate parameterization of data is a fundamental step in a majority of empirical research effort. Likewise, detecting or estimating features of non-stationarities in data sequences is a critical point in conducting credible research that uses data for inference. In this spirit, this paper presents a simple decomposition of the empirical return distributions of financial assets into the sum of various normal distributions. The decomposition is motivated by the fact that market participants expect distributions to be drawn from two or three possible scenarios. It is also motivated by the recent applications of the EM algorithm to financial data. A parametric and a nonparametric approach are proposed and applied to the empirical distribution of the CAC 40 index traded in the Paris Bourse. We estimate the parameters of the mixture and propose a decomposition into three Gaussian distributions which essentially differ by their variances. The decomposition fits the observed distribution. An alternative approach, which consists in detecting these changes and estimating the distribution of the returns between two changes is developed. The results are obtained using a segmentation method, which is applied to financial data. One of the main findings in this paper is that the two approaches show the same results and give support to the proposed decomposition. There exists three kinds of regimes in the Paris Bourse and the series of the returns jump from a regime to another one at some random instants. This work might be applied to other data sets or other data generating conditions. It can used for the valuation of standard and exotic derivatives.

Keywords : derivatives; distributions; EM algorithm; mixture
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Multinational Finance Journal, 2002, vol. 6, no. 3&4, pp. 131-166
Larry R. Gorman , California Polytechnic State University, U.S.A.    Corresponding Author
Bjorn N. Jorgensen , Columbia University, U.S.A.

Abstract:
The observed international home bias has traditionally been viewed as an anomaly. This paper provides statistical evidence contrary to this view within a mean-variance framework. Two methods of estimating the expected return and covariance parameters are investigated: (i) the traditional Markowitz approach, and (ii) the Bayes-Stein "shrinkage" algorithm. In-sample tests reveal that neither the Markowitz tangency allocation vectors nor the Bayes-Stein tangency allocation vectors are significantly different than a 100% domestic allocation (i.e. extreme home bias). These results are robust to the shorting of equity and across foreign exchange hedge strategies. The paper also reports out-of-sample tests with a view toward investment performance. Typically, a 100% domestic allocation outperforms both the Bayes-Stein and Markowitz tangency portfolios. Overall, the theorized gains to international diversification appear difficult to capture in practice and, hence, investors exhibiting a strong home bias are not necessarily acting irrationally.

Keywords : efficient allocation; foreign exchange hedging; home bias; international allocation; portfolio
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Multinational Finance Journal, 2002, vol. 6, no. 3&4, pp. 167-195
Winston T. Lin , State University of New York at Buffalo, U.S.A.    Corresponding Author
Hong-Jen Lin , State University of New York at Buffalo, U.S.A.
Yueh H. Chen , National Sun Yat-sen University, Taiwan

Abstract:
This article examines the dynamic and stochastic behavior of the beta coefficient (to be referred to as the currency beta) of the unbiasedness hypothesis (UH) in foreign exchange markets. We argue that the dynamics and stochastics of currency betas can be attributed to the dynamic behavior of various macroeconomic variables from different sectors of an economy, in addition to the trend variable considered in previous research. Incorporating four macroeconomic variables from the financial, real, and external sectors into the currency betas of eight currencies (developed and emerging) under a logarithmic change specification used to test the UH, we attempt to simultaneously test the behavior of currency betas in terms of nonstationarity, shifts in the mean and variance, and randomness. The vast quantity of empirical tests and results strongly suggests that the changing characteristics of currency betas are readily apparent and have important implications for the reconciliation of the controversies surrounding the legitimacy of the UH, for government exchange rate policies, and for the forecasting of future spot rates, across the developed and emerging economies under study. We also find different tales from developed and developing countries.

Keywords : four-step generalized; logarithmic change specification; macroeconomic variables; unbiasedness hypothesis; variable mean response
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Multinational Finance Journal, 2002, vol. 6, no. 3&4, pp. 197-221
Rashid Al-Qenae , University of Kuwait, Kuwait    Corresponding Author
Carmen Li , University of Essex, UK
Bob Wearing , University of Essex, UK

Abstract:
This paper investigates the incremental information content of earnings and other macroeconomic variables for share prices within the ‘prices leading earnings’ framework. We find evidence supporting the phenomenon of ‘prices leading earnings’ for the Kuwait Stock Exchange (KSE) after controlling for basic macroeconomic indicators. That is, the estimated earnings response coefficient is found to be sensitive (and significant) to the leading periods and it increased when more leading periods were included. The results suggest that prices anticipate earnings and hence provide useful information to KSE investors

Keywords : earnings response coefficients; Kuwait Stock Exchange; price-leading earnings
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Multinational Finance Journal, 2002, vol. 6, no. 3&4, pp. 223-249
Simon Stevenson , University College Dublin, Ireland    Corresponding Author

Abstract:
This study examines the cross-border impact of central bank interest rate changes, using the example of the German Bundesbank. We examine the price impact of rate changes on both the general stock markets and on bank stocks in seven other European countries. The sample includes nations both within and outside of the European Union, and includes EU members who are participating in monetary union and members who obtained opt-outs. The results point to the existence of cross-border information transfers. Both non-German bank stocks and general equities react significantly to a large number of the Bundesbank rate changes. The results also indicate that European capital markets did differentiate between rate changes in terms of their relative importance. This was the case in terms of different responses between the financial institutions and the general equity markets and with regard to differing reactions between markets. In particular, those markets that were more committed to the exchange rate mechanism and the goal of monetary union generally reacted more than markets such as Denmark and UK. In addition, the importance of Bundesbank policy during the years leading up to EMU is supported by the fact that most non-German bank stocks reacted more to Bundesbank policy than to domestic rate changes and that no other country had the same level of influence on foreign equity returns.

Keywords : bank interest rate sensitivity; cross-border information transfers
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