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Published Articles for Year 2003
Multinational Finance Journal, 2003, vol. 7, no. 1 & 2 , pp. 3-23
Anthony J. Seymour , University of Cape Town, South Africa    Corresponding Author
Daniel A. Polakow , University of Cape Town and Cadiz Holdings, South Africa

This research is aimed at a formal appraisal of recent advancements in stochastic volatility modeling and extreme-value theory to application of value-at- risk computation in particularly volatile markets. Established methods such as historical simulation are prone to underestimating value-at-risk in such developing markets. Two contemporary methods of value-at-risk calculation are tested on a representative portfolio of South African stocks. The first method incorporates extreme value theory. The second model includes both extreme value theory and volatility updating (via GARCH-type modeling). The combined GARCH-type time-series approach and extreme value theory model is found to provide significantly better results than both straightforward historical simulation as well as the extreme value model. In no instance, however, were results on these VaR methods as good as those obtained when the same methods were tested in developed markets. This research highlights noteworthy improvements to value-at-risk estimation efficacy in volatile emerging markets, and also stresses the need for further work into the estimation of value-at-risk in this context.

Keywords : backtesting; extreme value theory; GARCH, historical simulation; RiskMetrics; value-at-risk
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Multinational Finance Journal, 2003, vol. 7, no. 1&2, pp. 25-54
Kam Fong Chan , University of Queensland, Australia    Corresponding Author
Christopher Gan , Lincoln University, New Zealand
Patricia A. McGraw , Lincoln University, New Zealand

A survey on derivative usage and financial risk management in New Zealand shows that the currency forward is the most frequently used derivatives in hedging transaction exposure. This paper examines whether forwards performs better than over-the-counter option for a New Zealand exporter in hedging NZD/USD transaction exposure. This research adopts H sin, Kuo and Lee’s (1994) model of hedging effectiveness which maximizes the exporter’s expected negative exponential utility function to compare and evaluate the ex-ante hedging effectiveness of both forwards and options synthetic forwards. The results show that prior to the 1997 Asian Crisis, forwards are marginally more effective than options synthetic forwards for an ordinary risk-averse exp orter to hedge against her/his 1, 3, 6 and 12-month transaction exposures. However, during and after the 1997 Asian Crisis, options synthetic forwards are more effective than forwards for hedging exposures of 1, 3 and 6 months. The results are robust to the exporter’s degree of absolute risk aversion.

Keywords : forwards; hedging effectiveness; optimal hedge ratio; options synthetic forwards; utility maximization
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Multinational Finance Journal, 2003, vol. 7, no. 1 & 2 , pp. 55-82
Jean-Yves Datey , Comission Scolaire de Montréal, Canada    Corresponding Author
Geneviève Gauthier , HEC Montréal, Canada
Jean-Guy Simonato , HEC Montréal, Canada

An option contract now commonly encountered is the Asian quanto-basket option. This contract is useful for risk managers willing to participate to the return of an industrial sector with an international exposure without the foreign exchange risk exposition. Although the price of such contracts can be obtained very accurately using Monte Carlo simulation, market participants prefer faster but less accurate analytical approximations. This paper thus examines the precision of three different analytical approximations available to price Asian quanto-basket options. The results of a comprehensive simulation experiment performed on a large test pool of option contracts reveal that the approximations based on the reciprocal gamma and Johnson-type densities are in general the most accurate.

Keywords : analytical approximation; Asian option; basket option; option pricing; quanto option
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Multinational Finance Journal, 2003, vol. 7, no. 1&2, pp. 83-106
C. J. Adcock , The University of Sheffield, UK    Corresponding Author

This paper reports a study into the performance of currency-hedged portfolios constructed using mean-variance optimization methods. The method is to carry out optimization relative to a benchmark portfolio, which consists of the real assets, and simultaneously to determine the optimal exposures to each currency future. This is done at various levels of risk along the efficient frontier. A study into a portfolio of international stock and bond indices viewed from a US Dollar perspective indicates that, for the period studied, optimal currency hedging has the potential to add value in terms of additional expected return and excess return on a risk-adjusted basis. The results also demonstrate the superiority of strategies in which the hedge ratio is optimally determined over those with a fixed hedge ratio.

Keywords : exchange rate risk; currency hedging; mean-variance optimization
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Multinational Finance Journal, 2003, vol. 7, no. 3 & 4, pp. 107-130
Wi Saeng Kim , Hofstra University, U.S.A.    Corresponding Author
Esmeralda Lyn , Hofstra University, U.S.A.
Edward Zychowicz , Hofstra University, U.S.A.

This paper takes the position that technology transfers associated with foreign direct investment inflows (FDI) are an important determinant of economic growth in developing countries. The paper also posits that technology transfers, ceteris paribus, depend on the attributes of FDI providers, particularly as they relate to the degree of technological advancement and the behavioral aspects of the technology transfer. Japan and the U.S. are two important sources of FDI where multinational corporations domiciled in the two nations exhibit distinct variation in these attributes. Consistent with earlier research, the findings of this paper lend support for a positive role of FDI inflows from the advanced countries in increasing the economic growth of developing countries. The paper further finds some evidence that the relationship between the economic growth of the host countries and FDI inflows is stronger for U.S. originated FDI than that of Japanese originated FDI. This finding is consistent with the notion that U.S. multinational firms are more effective in generating technology transfers and spillovers to developing countries than do Japanese multinational firms.

Keywords : emerging market economies; foreign direct investments; economic development; technology transfer
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Multinational Finance Journal, 2003, vol. 7, no. 3 & 4, pp. 131-152
Markku Vieru , University of Oulu, Finland    Corresponding Author

This paper tests the hypothesis that an anticipated information event affects the use of trading venues. Data from the Helsinki Stock Exchange are used where an upstairs market co–exists with a downstairs market. Trades are classified also as in-house trades and externalized trades. This paper suggests that interim earnings announcement affects where trades are executed. The results indicate that an anticipated announcement increases downstairs trading before the announcement event. Correspondingly trades in the upstairs market tend to decrease before the announcement. After the announcement upstairs trading recovers. Furthermore, the empirical findings suggest that the in-house trades in the upstairs market are positively related to the liquidity and volatility during the pre-announcement period. After the announcement the volatility association changes resulting in increased downstairs trading with high volatility. The results suggest that after the announcement trades are more information-motivated and high volatility is associated with a larger proportion of downstairs trading.

Keywords : event study; information asymmetry; accounting disclosure; thin securities markets; trading behavior
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Multinational Finance Journal, 2003, vol. 7, no. 3 & 4, pp. 153-175
Costas M. Stephanou , University of South Africa, S.A    Corresponding Author
Gawie S. du Toit , University of South Africa, S.A
Marius J. Maritz , University of South Africa, S.A

What determined the value of South African assets after the unbanning of the African National Congress (ANC) and the release of Nelson Mandela? Economic or political events? This paper employs a dynamic version of the APT model for the period from 1991 to 1998 to determine whether the increase in volatility on the JSE changed the specification of the APT model as it applied to the Financial & Industrial Index of the Johannesburg Securities Exchange (JSE). The finding is that political events in late 1991, and economic events in mid 1994, changed APTM’s specification. This would indicate that during periods of profound political change, political events drive stock market prices.

Keywords : arbitrage pricing theory model; Johannesburg Securities Exchange; political events; economic events
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Multinational Finance Journal, 2003, vol. 7, no. 3 & 4, pp. 177-206
Paolo Girardello , University of Verona, Italy    Corresponding Author
Orietta Nicolis , University of Bergamo, Italy
Giovanni Tondini , University of Verona, Italy

The aim of this paper is to identify whether the GARCH or the SV based models provide the best goodness of fit to financial time-series data. To investigate the issue, three different formulations for each type (i.e., the standard model, the fat-tailed model, and the asymmetric model) are examined. The models are first compared on theoretical grounds, then estimated using the daily returns from four market indices, and finally subjected to some diagnostic tests. The results demonstrate that for the standard formulation, the SV model fits data better than the GARCH model, while the fat-tailed and the asymmetric models roughly equivalent in describing the key features of returns. The results provide a preliminary analysis for selecting the best model with which to forecast the volatility of financial returns.

Keywords : GARCH models; stochastic volatility models; QML estimation; financial time series
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Multinational Finance Journal, 2003, vol. 7, no. 3 & 4, pp. 207-230
Tatiana Ermolieva , International Institute for Applied Systems Analysis, Austria    Corresponding Author
Yuri Ermoliev , International Institute for Applied Systems Analysis, Austria
Guenther Fischer , International Institute for Applied Systems Analysis, Austria
Istvan Galambos , VITUKI Consult, Hungary

The main goal of this paper is to develop a flood management model that takes into account the specifics of catastrophic risk management: highly mutually dependent losses, the lack of information, the need for long-term perspectives and explicit analyses of spatial and temporal heterogeneities of various agents such as individuals, governments, and insurers. We use modified data from a pilot region of the Upper Tisza river, Hungary, to illustrate the evaluation of a public multipillar flood loss-spreading program involving partial compensation to flood victims by the central government, the pooling of risks through a mandatory public catastrophe insurance on the basis of location-specific exposures, and the demand for a contingent ex-ante credit to reinsure the insurance’s liabilities. GIS-based catastrophe models and stochastic optimization methods are used to guide policy analysis with respect to location-specific risk exposures.

Keywords : flood risk; catastrophe modeling; insurance; stochastic optimization; insolvency; contingent credit,; CvaR
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