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Published Articles for Year 2006
Multinational Finance Journal, 2006, vol. 10, no. 1/2, pp. 1-41
Amrit Judge , Middlesex University, U.K.    Corresponding Author

Abstract:
For 366 large non-financial U.K. firms, this paper reports the factors that are important in determining their decision to hedge foreign currency exposure. The results provide strong evidence of a relationship between expected financial distress costs and the foreign currency hedging decision and more significantly the foreign currency only hedging decision. These findings seem stronger than those found in similar studies using U.S. data. The paper argues that this might be due to the fact that several U.S. studies include in their non-hedging sample other hedging firms, such as firms using non-derivative methods for currency hedging and interest rate only hedgers, which might bias the results against the a priori expectations. However, it might also be due to a country specific institutional factor, that is, U.K. firms face higher expected costs of financial distress due to differences in the bankruptcy codes in the two countries

Keywords : corporate hedging; foreign currency hedging; derivatives, financial distress; foreign currency debt; bankruptcy codes
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Multinational Finance Journal, 2006, vol. 10, no. 1/2, pp. 43-79
Jason Mitchell , University of Michigan Business School, U.S.A    Corresponding Author
H. Y. Izan , University of Western Australia, Australia
Roslinda Lim , Macquarie University, Australia

Abstract:
A compelling reason for engaging in on-market buy-backs is that it provides a signal about the undervaluation of the company. In this paper an alternative, accounting based, method of determining fundamental value and undervaluation is used, namely the Ohlson residual income valuation framework. It is found that prior to the announcement buy-back companies are significantly undervalued relative to comparable non-buy-back companies. This undervaluation is largely but not totally removed in the period immediately following the on-market buy-back implying on-market buy-backs are predominantly an effective signaling mechanism. Where the firm cites undervaluation as a specific motive for the buy-back then, in fact, a higher degree of undervaluation prior to the buy-back is evident. The results provide evidence that management can, and does, identify undervaluation and reduces this through the signaling mechanism of on-market buy-backs.

Keywords : buy-backs; undervaluation; fundamental value
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Multinational Finance Journal, 2006, vol. 10, no. 1/2, pp. 81-116
Liliana Gonzalez , University of Rhode Island, USA    Corresponding Author
Philip Hoang , Australian National University, Australia
John G. Powell Massey , University, New Zealand
Jing Shi , Jiangxi University of Finance and Economics, China and The Australian National University, Australia

Abstract:
A compelling reason for engaging in on-market buy-backs is that it provides a signal about the undervaluation of the company. In this paper an alternative, accounting based, method of determining fundamental value and undervaluation is used, namely the Ohlson residual income valuation framework. It is found that prior to the announcement buy-back companies are significantly undervalued relative to comparable non-buy-back companies. This undervaluation is largely but not totally removed in the period immediately following the on-market buy-back implying on-market buy-backs are predominantly an effective signaling mechanism. Where the firm cites undervaluation as a specific motive for the buy-back then, in fact, a higher degree of undervaluation prior to the buy-back is evident. The results provide evidence that management can, and does, identify undervaluation and reduces this through the signaling mechanism of on-market buy-backs.

Keywords : stock market; bulls and bears; turning point dating
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Multinational Finance Journal, 2006, vol.10, no. 1/2, pp. 117-151
Eric Girard , Siena College, U.S.A.    Corresponding Author
Amit Sinha , Indiana State University, U.S.A.

Abstract:
This paper examines the relationships between market risk premiums, time-varying variance and covariance in forty-eight emerging, and seven developed capital markets. We allow each market’s risk premium generating process to be state-dependent by accounting for negative and positive market price of variance and covariance risk. We find that half of the emerging markets exhibit reward to world variance while for the other half are only sensitive to local risk factors. We also find evidence of a negative relationship between reward to local risk and reward to world risk. Accordingly, the relative importance of one reward versus the other depends on the ever-changing correlation with the world market. Finally, we show that correlation is not a factor that explains reward to local risk in few segmented capital markets

Keywords : reward to risk; conditional risk; market price of risk; multivariate GARCH
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Multinational Finance Journal, 2006, vol. 10, no. 3/4, pp. 153-177
T.J. Brailsford , UQ Business School, University of Queensland, Australia    Corresponding Author
J. H.W. Penm , The Australian National University, Australia
R.D. Terrell , The Australian National University, Australia

Abstract:
Vector error-correction models (VECM) are increasingly being used to capture dynamic relationships between financial variables. Estimation and interpretation of such models can be enhanced if zero restrictions are allowed in the coefficient matrices. Specifically, in tests of indirect causality and/or Granger non-causality in a VECM, the efficiency of the causality detection is crucially dependent upon finding zero coefficient entries where the true structure does indeed include zero entries. Such a VECM is referred to as a zero-non-zero (ZNZ) patterned VECM and includes full-order models. Recent advances have shown how ZNZ patterns can be explicitly recognized in a VECM and used to provide an effective means of detecting Granger-causality, Granger non-causality and indirect causality. This paper develops a general approach and framework for I(d) integrated systems. We show that causality detection in an I(d) system can be discovered identically from the ZNZ patterned VECM’s or the equivalent VAR models.

Keywords : error correction models; VAR; granger causality; purchasing power parity
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Multinational Finance Journal, 2006, vol. 10, no. 3/4, pp. 179-221
Marios Nerouppos , Cyprus International Institute of Management, Cyprus    Corresponding Author
David Saunders , University of Waterloo, Canada
Costas Xiouros , University of Southern California, U.S.A.
Stavros A. Zenios , University of Cyprus, Cyprus

Abstract:
Risk management has undergone a remarkable transformation over the past fifteen years, with most new methods having been designed for the concerns of large institutions operating in well-developed financial markets. This paper addresses a problem faced by smaller institutions operating in emerging markets, namely the significant lack of data. As many risk management techniques are data intensive, this problem may seem insurmountable. This paper introduces a new method, enriched historical simulation, which supplements the data in an emerging market with data from other markets. The principle behind this methodology is that when many markets are considered, the essence of emerging market economies comes to the fore, with local idiosyncrasies being washed out. This principle is illustrated on the problem of estimating Value-at-Risk on the Cyprus and Athens Stock Exchanges.

Keywords : risk management; historical simulation; value-at-risk; emerging markets
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Multinational Finance Journal, 2006, vol. 10, no. 3/4, pp. 223-250
Seung-Doo Choi , Dongeui University, Korea    Corresponding Author
Sang-Koo Nam , Korea University, Korea

Abstract:
This paper compares the long-run buy-and-hold returns of privatization initial public offerings (IPOs) to those of the domestic stock markets of respective countries using a sample of 241 privatization IPOs from 41 countries. The evidence indicates that the privatization IPOs significantly outperform their domestic stock markets if the returns are equally-weighted while value-weighted returns show a sharp reduction in performance. However, there are substantial variations in the long-run performance of privatization IPOs across industries, issuing countries, issue period, and the origin of commercial law of the country. This paper also analyzes the cross-sectional determinants of the long-run buy-and-hold returns of privatization shares. The results indicate that the long-run performance of privatization IPOs is significantly related to the proxies of policy uncertainty, consistent with the signaling models of Perotti (1995). Such effects appear to be overwhelming in the earlier post-IPO period, while the traditional market factors become more important as the policy uncertainty disappears over time. The institutional features of the country such as accounting standards, origin of commercial law, and corporate governance scheme also affect the return performance of privatization issues.

Keywords : privatization; IPO; policy uncertainty;CAR; BHAR
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Multinational Finance Journal, 2006, vol. 10, no. 3/4, pp. 251-276
Andreas Charitou , University of Cyprus, Cyprus    Corresponding Author
Andreas Makris , University of Cyprus, Cyprus
George P. Nishiotis , University of Cyprus, Cyprus

Abstract:
Using data from 1993 to 2002 for eight developed and fifteen emerging markets, we find that return correlations, mean-variance spanning, and Sharpe ratio tests support that closed-end country funds (CECF) can mimic their corresponding foreign indices, and that they are more heavily influenced by their corresponding local markets instead of the U.S. market. This implies that U.S. investors, by investing in CECF, can achieve similar international diversification benefits to those achieved by investing directly in the foreign indices. We also document increased correlation between the U.S. market and foreign markets during this period and find no compelling evidence of economically and statistically significant international diversification benefits, as opposed to a pre 1993 period. These findings could be associated with the financial market liberalization that was prevalent during the period

Keywords : closed-end country funds; international diversification; emerging markets; liberalization; spanning tests
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Multinational Finance Journal, 2006, vol.10, no.3/4, pp. 277-305
Riadh Belhaj , Conservatoire National des Arts et Métiers, France    Corresponding Author

Abstract:
In this paper we present a model for valuing European and American options, which incorporates both default and interest rate risks. We develop a framework that permits evaluation of three kinds of options: (i) options issued by default-free counterparties on risky bonds, (ii) options issued by risky counterparties on default-free bonds and (iii) options issued by risky counterparties on risky bonds — a case where default risk enters at both levels. We show that the price of a put option on a risky discount bond is hump shaped for a European put and monotone increasing for an American put. We also find that the price impact of default risk is less for an American put option than for a European one.

Keywords : option pricing; default risk; defaultable bonds; vulnerable options
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