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Published Articles for Year 2008
Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 1-20
Raj Aggarwal , University of Akron, U.S.A.    Corresponding Author
Winston T. Lin , The State University of New York at Buffalo, U.S.A.
Sunil K. Mohanty , University of St. Thomas, Minneapolis, U.S.A.

Abstract:
It has been suggested that prior studies that have puzzlingly found forward rates to be inefficient and biased forecasts of future spot rates may be limited by inadequate statistical methodologies. Using an improved statistical methodology that accounts for both non-stationarity and non-normality in exchange rates, we unfortunately reconfirm that U.S. dollar forward rates for horizons ranging from one to twelve months for the British pound, Japanese yen, Swiss franc, and the German mark over the period 1973–1998 are generally not efficient or rational forecasts of future spot rates. However, as one bright spot, we cannot reject efficiency and rationality for the U.S. dollar forward rate for the Canadian dollar.

Keywords : forward rates; rational forecasts
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Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 21-44
Tanweer Hasan , Roosevelt University, U.S.A.    Corresponding Author
Palani-Rajan Kadapakkam , University of Texas at San Antonio, U.S.A.
P. C. Kumar , American University, U.S.A.

Abstract:
The quality of corporate governance has been shown to have wide-ranging implications, e.g., on the performance of stock markets and on exchange rates. This study investigates whether the quality of corporate governance in a country impacts investment decisions made at the micro level of the firm. The study focuses on Asian emerging markets since they have widely varying standards of corporate governance. Based on eight measures of corporate governance, four aggregate indices of corporate governance (business environment, legal environment, investor rights, and an overall measure) are developed for seven countries in the sample drawing on data from published sources. The results indicate that improvements in corporate governance mitigate the dependency of firm investments on their internal resources and facilitate access by firms to capital markets.

Keywords : corporate governance; firm investments; emerging markets; investment-cashflow sensitivity
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Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 45-66
David Michayluk , University of Technology Sydney, Australia    Corresponding Author
Laurie Prather , Bond University, Australia

Abstract:
Most exchanges do not report trade direction thus researchers and traders must deduce whether a trade is buyer or seller initiated since this information is required to evaluate models of bid-ask spread components and to understand the market for immediacy. Algorithms that assign trade direction based on the proximity to bid or ask quotes are easily implemented but ignore information readily discernable from orders, changes in the quoted depth and subsequent price movements. Using the New York Stock Exchange Trades, Orders and Quotes database, systematic biases in existing trade direction algorithms are documented that can be rectified by recognizing that the impact on liquidity is the fundamental characteristic underlying order placement. Although this liquidity-based method is difficult to implement, it more closely captures the actual behavior of market participants.

Keywords : liquidity; trade direction algorithm; TORQ database; order placement
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Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 67-104
Timotheos Angelidis , University of Peloponnese, Greece    Corresponding Author
Alexandros Benos , National Bank of Greece, Greece

Abstract:
This paper analyses the application of several volatility models to forecast daily Value-at-Risk (VaR) both for single assets and portfolios. We calculate the VaR number for 4 Greek stocks, 2 portfolios based on these securities and for the Athens Stock Exchange General Index. We model VaR for long and short trading positions by employing non-parametric methods, such as historical and filtered historical simulation, as well as parametric ones. Especially for the later techniques we use a collection of ARCH models (GARCH, EGARCH and TARCH) based on three distributional assumptions (Normal, Student-T and Skewed Student-T), while we combine the Extreme Value Theory with a volatility updating technique (via GARCH type-modeling). In order to choose one model among the various forecasting methods, we employ a two-stage backtesting procedure. In the first one, we implement two backtesting criteria (unconditional and conditional coverage) to test the statistical accuracy of the models.

Keywords : value-at-risk,; GARCH; historical simulation; backtesting
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Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 105-126
Gary Tian Gang , Tian University of Wollongong, Australia    Corresponding Author

Abstract:
This study examines the cointegrating and long-term causal relationships of equity market prices in equity markets of Chinese states namely, Shanghai, Shenzhen, Hong Kong, Taiwan and Singapore. I cover the period between October 5, 1992 and March 20, 2006, taking into account both the Asian financial crisis and the opening-up of China’s equity markets in recent years. First, I analysis the cointegration by utilizing Johansen’s (1988) cointegration tests. I find that a long-term equilibrium relationship measured by cointegration has been established among Shanghai, Shenzhen, Hong Kong and Taiwanese markets and, to a lesser degree, between these markets and the Singapore market since 1998. Secondly, this study examines causality by exploring the bootstrapped Toda-Yamamoto non-causality tests. I find that there is strong evidence of a bi-directional causality between Shanghai and Shenzhen markets after 1998. Furthermore, I also find that there are more causal linkages between the Chinese states equity markets: two mainland Chinese markets, Hong Kong, Taiwan, and Singapore became more dependent on each other. The robustness of the above findings is confirmed by the use of a bootstrap test employed to test the validity of my results.

Keywords : international financial markets; causality testing in VaRs with bootstrapping; cointegration
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Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 127-155
Kirt C. Butler , Michigan State University, U.S.A.    Corresponding Author
Katsushi Okada , Michigan State University, U.S.A.

Abstract:
This article documents the stochastic properties of bivariate returns to international stock market indices. In particular, the article searches for the best fit among a class of higher-order VARMA(u,v)-EGARCH(p,q) models with normal errors and a constant conditional correlation using MSCI domestic and world-ex-domestic index pairs for the Emu, Japan, the United Kingdom, and the United States. Although a first-order VAR or VMA specification is sufficient to accommodate the conditional means, second-order EGARCH terms are necessary in two of the four bivariate series

Keywords : higher-order; bivariate; international diversification; EGARCH; VARMA
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Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 157-184
Mohamed Nurullah , Glasgow Caledonian University, U.K.    Corresponding Author
Sotiris K. Staikouras , Cass Business School, U.K.

Abstract:
The European market of banks and insurance companies has traditionally no exact boundaries between insurance and banking activities. Such business arena poses distinctive challenges to both banking and insurance industries. The paper statistically evaluates the feasibility of a hybrid portfolio integrating banking and insurance services. It examines the risk-return effects of European banks’ diversification into life and non-life insurance underwriting, as well as into insurance broking businesses. More specifically, it focuses on financial data and analyzes changes in profitability, return volatility and creditworthiness of those financial institutions. The empirical results indicate that diversification by European banks into life and non-life insurance underwriting activities increases banks’ risk. Unlike the non-life insurance sector, the return on life assurance underwriting increases significantly. On the other hand, insurance broking returns increase as well, while volatility and possible bankruptcy remain insignificant. This suggests that the interface of banks and insurance broking activities could be further explored.

Keywords : Bancassurance; Financial institutions; Bank diversification; Insurance activities; Risk-return analysis
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Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 185-204
Joëlle Miffre , EDHEC Business School, France    Corresponding Author

Abstract:
The paper estimates conditional pricing models for 11 international government bonds and shows that, while local instruments capture the change in the bonds’ risks, global instruments model the variation in the factor risk premia. Altogether the changes in the factor risk premium capture 78.25% of the bonds’ predictability, while the dynamics in the betas account for less than 1%. One cannot conclude however that the conditional models are well-specified as parameter instability and relatively large mean squared errors were uncovered. These results extend for the first time some of the evidence from the equity market of Ferson and Harvey (1993), Harvey (1995) and Ghysels (1998) to the bond market.

Keywords : international government bonds; conditional asset pricing models; variance ratio; mean squared errors; parameter stability
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Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 205-218
L. K. Hotta , State University of Campinas, Campinas SP, Brazil    Corresponding Author
E. C. Lucas , ESAMC, Campinas SP, Brazil
H. P Palaro , State University of Campinas, Campinas SP, Brazil and Cass Business School, U.K.

Abstract:
This paper proposes a method for estimating the VaR of a portfolio based on copula and extreme value theory. Each return is modeled by ARMA-GARCH models with the joint distribution of innovations modeled by copula. The marginal distributions are modeled by the generalized Pareto distribution in the left tail (large loss) and empirical distribution otherwise. The copula is estimated by an estimator which gives more weight to observations with large loss. The method is applied to a two-asset portfolio and compared to other traditional methods.

Keywords : conditional copula; risk measures; VaR, extreme value theory
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Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 219-240
Balasingham Balachandran , Monash University, Australia    Corresponding Author
Robert Faff , Monash University, Australia
Roger Love , Monash University, Australia
Andrew Menon , Monash University, Australia

Abstract:
This study examines the effects of announcements of acquisition of assets on shareholder wealth of buyers over the period January 2000 to December 2002 in the U.K. Significant positive announcement period abnormal returns for ‘fit’ acquisitions of divested assets that disclosed the “sources of funds” are documented. Multivariate regression analysis shows that announcement period abnormal returns are significantly related to pre-announcement period abnormal returns, relative size of the acquisitions and disclosure of sources of funds. Overall, there is little or no support for the asset fit hypothesis. However, there is strong support for “Fund Source Disclosure”, “Fund Source Pecking-Order” and “Relative Size of Acquisition” Hypotheses .

Keywords : divested asset acquisition; buyers; price reaction; fit and non-fit; fund source
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Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 241-277
Raj Aggarwal , University of Akron, U.S.A.    Corresponding Author
Sijing Zong , California State University-Stanislaus, U.S.A.

Abstract:
Even though the forward-spot relationship in currency markets is very important for policy makers and for corporate and investment managers, it remains a theoretical and empirical puzzle. In theory the forward rate should be an unbiased forecast of the future spot rate, but this hypothesis has little empirical support. For the currencies of the nine major industrialized countries, this paper documents that in spite of the very high trading volumes in currency markets, consistent with evidence for other asset markets, revisions in the forward rate forecasts of the future spot exchange rate reflect systematic pessimism and under-reaction to new information.

Keywords : exchange rates; forward bias; market rationality; under-reaction
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Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 279-311
Patricia Chelley Steeley , University of Aston, U.K.    Corresponding Author
Brian Lucey , Trinity College Dublin, Ireland

Abstract:
This is the first paper to examine the microstructure of the Irish Stock Market empirically and is motivated by the adoption, on June 7th of Xetra the modern pan European auction trading system. Prior to this the exchange utilized an antiquated floor based system. This change was an important event for the market as a rich literature exists to suggest that the trading system exerts a strong influence over the behavior of security returns. We apply the ICSS algorithm of Inclan and Tiao (1994) to discover whether the change to the trading system caused a shift in unconditional volatility at the time Xetra was introduced. Because the trading mechanism can influence volatility in a number of ways we also estimate the partial adjustment coefficients of the Amihud and Mendelson (1987) model prior and subsequent to the introduction of Xetra. Although we find no evidence of volatility changes associated with the introduction of Xetra we do find evidence of an increase in the speed of adjustment.

Keywords : trading systems; adjustment speed; cross listing; microstructure
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