Showing papers in "Applied Financial Economics in 2001"
TL;DR: In this article, the determinants of Tunisian banks' performance during the period 1980-1995 were investigated, and the principal determinants were labour productivity, bank portofolio composition, capital productivity, and bank capitalization.
Abstract: This paper investigates the determinants of the Tunisian banks' performances during the period 1980–1995. Results show that the principal determinants of a bank's performance are by order of importance: labour productivity, bank portofolio composition, capital productivity and bank capitalization.
214 citations
TL;DR: In this paper, the authors used a panel data sample covering the main UK banks over the period 1984 to 1995 to investigate relative efficiencies within the sector and to analyse productivity change in UK banking over the sample period.
Abstract: Despite substantial structural change and a significant intensification of competition in the UK financial services sector in recent years, the UK banking sector remains relatively under researched. This paper uses a panel data sample covering the main UK banks over the period 1984 to 1995 to investigate relative efficiencies within the sector and to analyse productivity change in UK banking over the sample period. The results provide important insights into the size-efficiency relationship in UK banking and offer a perspective on the evolving structure and competitive environment within which banks are currently operating.
191 citations
TL;DR: In this paper, the authors investigated the factors which determine whether a household is likely to be rejected or discouraged from applying for credit and second, which factors explain the amount of debt which a household demands.
Abstract: This paper investigates first the factors which determine whether a household is likely to be rejected or discouraged from applying for credit and second, which factors explain the amount of debt which a household demands. All of the published papers which have addressed the first question have used data relating to the period 1978–1983 or, in one case only, 1984–1989. All the papers which have investigated the second question have used data for the earlier period only. In this paper data for 1990–1995 from the latest version of the Survey of Consumer Finance are used. A univariate probit model with standard errors corrected for sampling weights is used to shed light on the first question and a bivariate probit model followed by a two stage least squares selection model to estimate the demand for debt. Results are found which are similar to those for the earlier years and some new ones. In common with earlier results it is found that a household demands less debt when the head of the household is aged ove...
151 citations
Abstract: This paper examines the price and volatility behaviour of two similar commodities (Brent Crude Oil and West Texas Intermediate) and attempts to identify the variables that affect their relative price differential Price spreads and convenience yields are estimated in an effort to test a number of hypotheses relating to market segmentation, seasonality and maturity effect Cash and futures price data covering the period 1991–1995 reveal that: convenience yields are significant and about 25% of cash prices on the average; convenience yields exhibit strong yearly and monthly seasonalities due to supply/demand imbalances; convenience yield is a negative function of the level of stocks and behaves like a call option; as maturity of futures contracts nears, their convenience yields get smaller, an indication that the maturity effect exists in futures prices, and crude oil price spreads are affected by convenience yields which act as surrogates for demand/supply conditions and market price behaviour
106 citations
TL;DR: In this paper, the authors estimate Levy-stable (fractal) distributions that can accurately account for skewness, kurtosis, and fat tails of the returns.
Abstract: It is argued that the study of the correct specification of returns distributions has attractive implications in financial economics. This study estimates Levy-stable (fractal) distributions that can accurately account for skewness, kurtosis, and fat tails. The Levy-stable family distributions are parametrized by the Levy index (α), 0 < (α), ≤ 2, and include the normal distribution as a special case (α = 2). The Levy index, α, is the fractal dimension of the probability space. The unique feature of Levy-stable family distributions is the existence of a relationship between the fractal dimension of the probability space andthe fractal dimensionof the time series. This relationshipis simply expressed in terms of Hurst exponent (H), i.e. α = 1/ H. In addition, Hurst exponent is related to long-memory effects. Thus, estimating the Levy index allows us to determine long-memory effects. The immediate practical implication of the present work is that on the one hand we estimate the shape of returns distributions...
96 citations
TL;DR: In this paper, the GARCH class of models of conditional volatility are considered in the context of the four emerging markets of Central Europe relevant to the econometric modelling of financial time series by modelling volatility in these markets.
Abstract: This paper adds evidence from the four emerging markets of Central Europe relevant to the econometric modelling of financial time series by modelling volatility in these markets. Our sample has all the previously documented characteristics of the unconditional distribution of stock returns normally used to justify the use of the GARCH class of models of conditional volatility. Both univariate and multivariate models are considered. Strong GARCH effects are apparent in all series examined. The estimates of asymmetric models of conditional volatility show rather weak evidence of asymmetries in the markets. The results of the multivariate specifications of volatility have implication for understanding the pattern of information flow between the markets. The constant correlation specification indicates significant conditional correlations between two pairs of countries: Hungary and Poland, and Hungary and Czech Republic. The BEKK model of multivariate volatility shows evidence of return volatility spillovers from Hungary to Poland, but no volatility spillover effects are found in the opposite direction.
95 citations
TL;DR: In this paper, the authors present evidence that positive feedback trading activity is also present in emerging capital markets but mostly during market declines, indicating that feedback trading may be partially responsible for stock return autocorrelations becoming negative and volatility rises.
Abstract: Positive feedback trading can induce autocorrelation in stock returns and increase volatility. If large numbers of market participants engage in positive feedback trading strategies asset prices may deviate substantially and persistently from fundamental values. Recent studies show evidence of positive feedback trading (i.e. selling during market declines and buying during market advances) in developed stock markets. The paper presents evidence that positive feedback trading activity is also present in emerging capital markets but mostly during market declines. During such periods stock return autocorrelations become negative and volatility rises. Volatility is in all cases higher during market declines suggesting that feedback trading may be partially responsible.
87 citations
TL;DR: In this article, the authors examined the long-term relationship between stock returns and monetary variables in an emerging market through time by using the cointegration technique and found that overall results should not be used in formulating investment strategies because they can be misleading.
Abstract: Literature that provides empirical evidence about the long-term relationship between stock returns and monetary variables in emerging markets is limited. In those markets, unlike in mature ones, market participants and the availability of information as well as its quality, change rapidly through time. The purpose of this study is to examine the long-term relationship between stock returns and monetary variables in an emerging market through time by using the cointegration technique. The database is set up at daily frequency of variables that are customarily used by the ®nancial media as determinants of stock investments and the cointegration technique enables us to consider changes in long-run steady-state properties of the equilibrium relationship between the non-stationary stock prices and monetary variables. The ®ndings of this study indicate that, overall results should not be used in formulating investment strategies because they can be misleading in the sense that the variables that explain stock prices might change through time. In the case of ISE, as the
81 citations
TL;DR: In this article, the authors investigated the stock market volatility in the East European emerging markets of Hungary and Poland using daily indexes and found that the results suggest the presence of non-linearity in the indexes through the BDSL statistic, while the existence of conditional heteroscedasticity is detected through LM tests.
Abstract: In this paper, stock market volatility in the East European emerging markets of Hungary and Poland is investigated using daily indexes. The results suggest the presence of non-linearity in the indexes through the BDSL statistic, while the presence of conditional heteroscedasticity is detected through LM tests. Conditional volatility is then modelled as a GARCH process; however, as measured by a GARCH-M model, this does not seems to be priced in the Hungarian and Polish stock markets. Moreover, the evidence rejects the Martingale hypothesis that future changes of stock prices in the two markets are orthogonal to past information. The well-known day-of-the-week effect, reflected in significantly positive Friday and negative Monday returns, does not seem to be present in these markets. While a marked decline in conditional volatility in the Polish market after June 1995 may be explained by appreciating Zloty exchange rates against the German Mark and increasing integration with developed markets, a similar (...
77 citations
TL;DR: In this paper, a statistical analysis of high-frequency recordings of the German share price index DAX is presented, which includes all minute-to-minute changes during trading hours at the Frankfurt Stock Exchange.
Abstract: This paper provides a statistical analysis of high-frequency recordings of the German share price index DAX. The data set extends from November 1988 to the end of the year 1995 and includes all minute-to-minute changes during trading hours at the Frankfurt Stock Exchange. The focus of this study is on the limiting behaviour characterizing the tail regions of the empirical distribution. Application of the popular Hill estimator for the tail shape yields results very similar to those of other analyses of speculative returns. However, since the reliability of tail index estimation rests on the appropriateness of the tail regions, the question of optimally choosing the sample fraction emerges. Exploiting recent advances in extreme value theory a couple of novel approaches are applied for determining the optimum cut-off value for the ‘tail’ of the empirical distribution. As it turns out, most algorithms suggest that one has to go out quite far into the tails for estimation of the extremal index. The findings o...
76 citations
TL;DR: In this article, a nonlinear GARCH(1,1) model was used to identify and model the day-of-the-week effect of the Kuwait stock exchange index.
Abstract: The Kuwait stock exchange index is examined for evidence of a day-of-the-week effect. A nonlinear GARCH(1,1) model provides a good explanation of the data and allows identification and modelling of the day-of-the-week effect.
TL;DR: In this paper, the authors introduce multivariate generalizations of the univariate Dickey-Fuller likelihood ratio tests to the class of Seemingly Unrelated Regressions, to investigate empirically the stock price efficiency of ASE.
Abstract: Market efficiency tests in developing markets display mixed evidence, in contrast to evidence on developed markets where the null hypothesis seems to be supported. Specifically, previous tests for market efficiency on the index and on samples of stocks traded in the Athens Stock Exchange (ASE) are broadly not supportive of the efficient market hypothesis. This paper introduces multivariate generalizations of the univariate Dickey-Fuller likelihood ratio tests to the class of Seemingly Unrelated Regressions, to investigate empirically the stock price efficiency of ASE. The method takes into account the contemporaneous correlation between stocks in the ASE, and avoids the sample biases which may result by considering only subsets of stocks listed in the exchange. Conclusively, the results confirm that the ASE is informationally inefficient, implying that past stock prices contain some information as to future price movements which investors may act on.
TL;DR: In this article, the authors examined the relation between price volatility, trading volume and open interest for the Nikkei 225 stock index futures traded on the Osaka Securities Exchange (OSE) using the method developed by Bessembinder and Seguin (1993).
Abstract: This article examines the relation between price volatility, trading volume and open interest for the Nikkei 225 stock index futures traded on the Osaka Securities Exchange (OSE) using the method developed by Bessembinder and Seguin (1993). The OSE regulation for trading of the Nikkei 225 futures decreased beginning 14 February 1994. Results for the period beginning 14 February 1994 confirm the findings by Bessembinder and Seguin (1993) of a significant positive relation between volatility and unexpected volume and a significant negative relation between volatility and expected open interest. However, no relation between price volatility, volume and open interest is found for the period prior to 14 February 1994, when the regulation increased gradually. This result provides evidence that the relation between price volatility, volume and open interest may vary with the regulation.
TL;DR: In this paper, the authors examined the long-term persistence of returns, expense ratios, and turnover rates for 151 equity mutual funds that operated over the full two decades from 1971 to 1990.
Abstract: This study tests persistence of mutual fund returns, turnover rates, and expense ratios over the 20-year period from 1971 to 1990. Multivariate models also are developed to examine synergies among persistence of returns, expense ratios and turnover rates. Potential long-run economies of scale are analysed by determining whether or not there is a significant relationship between asset size and these other operating characteristics. Tests are developed to contrast the decade of the 1970s with the decade of the 1980s and to examine persistence between consecutive years. The results indicate that there was no long-term persistence of returns, expenses, or turnover rates for 151 equity mutual funds that operated over the full two decades from 1971 to 1990. Tests of short-term performance persistence show strong persistence of good performance for periods of one, two and three years. For a four-year time period, there is no significant persistence of returns. The tests for consecutive years in contrast to tests...
TL;DR: This article examined the predictive power of the monetary model of exchange rate determination for the Australian dollar vis-a-vis the US dollar exchange rate using a cointegration-based error-correction model and found that an unrestricted dynamic monetary model outperforms the random walk model at all forecasting horizons, with the degree of improvement increasing as the forecasting horizon is extended.
Abstract: This study examines the predictive power of the monetary model of exchange rate determination for the Australian dollar vis-a-vis the US dollar exchange rate. Using a cointegration-based error-correction model, it is found that an unrestricted dynamic monetary model outperforms the random walk model at all forecasting horizons, with the degree of improvement increasing as the forecasting horizon is extended.
TL;DR: In this article, the authors apply the non parametric contingency table methodology to the year on year raw returns of a sample of Australian rollover funds as a means of gauging which of these survivorship bias hypotheses has greater support.
Abstract: There are two competing views regarding the potential effect of survivorship bias on the assessed persistence in performance of managed fund returns. On the one hand Brown et al. (Review of Financial Studies, 5, 1992) argue that spurious persistence will be induced, while alternatively Grinblatt and Titman (Journal of Finance, 47, 1992) argue the converse case, namely, that performance reversals or nonpersistence is more likely. The current study applies the non parametric contingency table methodology to the year on year raw returns of a sample of Australian Rollover funds as a means of gauging which of these survivorship bias hypotheses has greater support. Generally, the results show that although there is some evidence of persistence, the dominant pattern is one of reversals in performance, thus supporting the Grinblatt and Titman view.
TL;DR: In this paper, a modified measure to examine bank efficiency is proposed and it is found that banks' X-inefficiency has substantially dropped off in Taiwan over the last 10 years, falling from an average Xinefficiency magnitude of 3.9% in 1988 to 2.0% in 1997.
Abstract: This paper employs data envelopment analysis to investigate the effects of X-inefficiency on Taiwan's banking industry. A modified measure to examine bank efficiency is proposed and it is found that banks' X-inefficiency has substantially dropped off in Taiwan over the last 10 years, falling from an average X-inefficiency magnitude of 3.9% in 1988 to 2.0% in 1997. Banks did improve their relative abilities to both maximize outputs and minimize inputs between ex post and ex ante of 1990s. The results obtained in this research may affirm the validity of banking deregulation policy in Taiwan.
TL;DR: The authors indirectly addressed the issue of potential nonlinearities in real exchange rate adjustment for 18 OECD economies 1973-1998 using recent developments in the theory of nonparametric cointegration.
Abstract: This study indirectly addresses the issue of potential nonlinearities in real exchange rate adjustment for 18 OECD economies 1973–1998 using recent developments in the theory of nonparametric cointegration. While the standard Johansen tests yield mixed evidence, the results from a new nonparametric approach are clearly supportive of real exchange rate stationarity. Since the latter approach allows for a relatively general data-generating process, the findings are consistent with nonlinear mean reversion.
TL;DR: In this paper, the risk-return relationship in the Hong Kong stock market is examined using the conditional method based on the work of Pettengill et al., which takes into consideration the dominating ex-post negative excess market returns found in the HK stock market.
Abstract: Published results of empirical tests over the past two decades indicate that the risk-return relation in the Hong Kong stock market is negative. Such findings refute the positive risk-returnrelation stipulatedinthe traditional CAPM. However, traditional CAPM invokes expected or ex-ante returns while empirical tests have used ex-post returns as an imperfect proxy. Thus, in this paper, the risk-return relationship in the Hong Kong stock market is examined using the conditional method based on the work of Pettengill et al., which takes into consideration the dominating ex-post negative excess market returns found in the Hong Kong stock market. Under the conditional Pettengill et al. method, test results demonstrate a strong conditional positive and negative risk-return relationships in the Hong Kong stock market. The results show that the estimated risk premiums in both up and down markets are insignificantly different from the corresponding expected risk premiums. But the estimated risk premiums of the up a...
TL;DR: In this article, the first investigation of the hedging effectiveness of the FTSEMid250 stock index futures contract is provided, where the portfolios to be hedged are actual diversified portfolios in the form of investment trust companies (ITCs).
Abstract: This study provides the first investigation of the hedging effectiveness of the FTSEMid250 stock index futures contract. In contrast to previous studies, the portfolios to be hedged are actual diversified portfolios in the form of investment trust companies (ITCs). Furthermore, in addition to using the well established hedging strategies, consideration is also given to hedge ratios estimated on the basis of the Least Trimmed Squares approach. Despite relatively thin trading, the FTSE-Mid250 contract is shown to be an important additional hedging instrument. Surprisingly, the new contract is more effective for hedging ITCs than is the established FTSE-100 contract. The study also demonstrates that previous studies overstate the hedging effectiveness of UK stock index futures, in that they assume the portfolio to be hedged is one which underlies a broad market index.
TL;DR: In this paper, a study of point spread patterns in the 2264 regular season National Football League (NFL) games over the 1981-;1995 seasons was conducted to investigate the overreaction bias of bettors.
Abstract: A tendency for individuals to overweigh recent information and underweigh prior data has been discovered by researchers in financial markets, economic forecasting, security analysis and other areas. A study of point spread patterns in the 2264 regular season National Football League (NFL) games over the 1981–;1995 seasons was conducted to investigate the overreaction bias of bettors. Results indicated that bettors tend to overweigh outstanding positive performance when measured over the previous game, over the previous two to five games or over the previous season. In general, the more outstanding the performance, the greater the overreaction. However, bettors did not overreact to unusual negative performance over the same periods. This result is congruent with the tendency for heavy favourites to cover the point spread less than half the time over the 1969–;1995 seasons. The overreaction bias in the NFL betting market provides another example of a violation of the weak form of the Efficient Markets Hypot...
TL;DR: The authors evaluated the rationality and uselfulness of the price (GDP implicit deflator) forecasts made by the International Monetary Fund (IMF) for the G7 countries and concluded that year ahead forecasts are less good than near term forecasts, because there is no evidence that longer term price forecasts are valuable for the United States, Japan, France, Italy and Canada.
Abstract: Tests of direction are used to evaluate the rationality and uselfulness of the price (GDP implicit deflator) forecasts made by the International Monetary Fund (IMF) for the G7 countries. Two procedures are employed to determine whether that price forecasts could be useful to users. This tests are based on Merton's (1981) and Henriksson and Merton's (1981) method for determining the conditions under which a market-timing forecast is useful to investors. The results indicate that year ahead forecasts are less good than near term forecasts, because there is no evidence that longer term price forecasts are valuable for the United States, Japan, France, Italy and Canada.
TL;DR: This paper examined the question of whether recent positive findings with regard to purchasing power parity carry over to the monetary approach to exchange rates using Canadian-US dollar data and found that the evidence provided strong support for the long-run monetary model of exchange rates.
Abstract: Using Canadian-US dollar data this paper examines the question of whether recent positive findings with regard to purchasing power parity carry over to the monetary approach to exchange rates. The evidence provides strong support for the long-run monetary model of exchange rates. At the same time, it provides indirect evidence in favour of long-run purchasing power parity between the US dollar and the Canadian dollar during the sample period.
TL;DR: In this paper, the authors examined the lead/lag relationship between the FTSE100 stock market index and its related futures and options contracts, and also the interrelation between the derivatives markets.
Abstract: This paper examines the lead/lag relationships between the FTSE100 stock market index and its related futures and options contracts, and also the interrelation between the derivatives markets. Both the index futures and index options contracts are found to lead the cash index as predicted. However, the call option market appears to marginally lead both the index futures and the put option market. In the only previous paper to examine the inter-market relationships between a stock index and related futures and options contracts, Fleming et al (Journal of Futures Markets, 16, 353-387, 1996) maintain that relative trading costs determine which market leads. As the trading costs of calls and puts are similar, other factors must be driving the relationships observed in this paper. We hypothesize that informed traders with bullish expectations wishing to gain leverage from the options market will buy calls or, with greater risk, sell puts. As market sentiment was bullish for most of the sample period examined, ...
TL;DR: In this paper, the authors developed and tested a model that explores the relationship between bond yield spreads for various industries, as represented by the spread between corporate and equivalent government bond yields, and the business cycle/economic environment while at the same time controlling for default risk, tax implications and issue traits, such as liquidity, callability and the existence of sinking fund.
Abstract: This study develops and tests a model that explores the relationship between bond yield spreads for various industries, as represented by the spread between corporate and equivalent government bond yields, and the business cycle/economic environment while at the same time controlling for default risk, tax implications and issue traits, such as liquidity, callability and the existence of sinking fund. The overall sample consists of over 50000 quarterly observations for individual corporate bonds in the industrial, utilities and transportation sectors over the period September 1990 to March 1996. The results confirm the typical direct relationship between default risk and yield spreads. More importantly, it is found that the impact of the business cycle (macro economy) on the yield spread of a corporate bond depends on the industry sector to which the issuer of the bond belongs. Thus, while in the industrial sector, bond yield premia are generally higher during recessionary periods (periods of lower industr...
TL;DR: In this paper, the authors examined the behavior of volatility for intraday high frequency returns of the ASX equity index and found that volatility of the Australian equities follows an L-shaped curve over the trading day.
Abstract: The behaviour of volatility for intraday high frequency returns of the ASX equity index is examined. It is found that volatility of the Australian equities follows an L-shaped curve over the trading day that is distinct from the U-shaped pattern commonly documented by previous studies on other markets. While GARCH model remains useful in capturing volatility clustering for high frequency returns, the intraday deterministic volatility seasonals need to be carefully accounted for before carrying out an analysis of the volatility dynamics. Moreover, the frequently documented asymmetric effect of positive and negative shocks to volatility disappears for returns recorded at higher frequencies.
TL;DR: This paper showed that the most optimistic and most pessimistic forecasts are usually too optimistic and too pessimistic, and that the forecast accuracy can be improved by shrinking them towards the mean, which may explain the success of contrarian investment strategies.
Abstract: Analysts’ earnings forecasts are not perfectly correlated with actual earnings. One statistical consequence is that the most optimistic and most pessimistic forecasts are usually too optimistic and too pessimistic. The forecasts’ accuracy can be improved by shrinking them towards the mean. Insufficient appreciation of this statistical principle may partly explain the success of contrarian investment strategies, in particular why stocks with the most optimistic earnings forecasts underperform those with the most pessimistic forecasts.
TL;DR: In this paper, the authors investigated the risk transmission between the spot and forward foreign exchange markets, in particular the effect of innovation basis and signs of shocks in both markets, and found that the spot market is less predictable when the forward markets have experienced shocks of opposite signs.
Abstract: This study investigates the risk transmission between the spot and forward foreign exchange markets. In particular, the effect of innovation basis and signs of shocks in both markets are assessed. The market is less predictable when the spot and forward markets have experienced shocks of opposite signs. The spot market and the forward market are less predictable when both the spot and forward markets have experienced higher uncertainty in the previous periods, but the forward market is influenced more by the uncertainty of its own.
TL;DR: In this paper, the expiration-day effect neither exists on the whole expiration day nor in the last trading time of the expiration day before the market closes in the Hong Kong stock market.
Abstract: By employing high-frequency data, a series of minute-by-minute HSI data, this paper examines whether the expiration-day effect exists in the last trading period before the market closes in the Hong Kong stock market. Contrary to the previous findings in the well-developed US markets, this paper finds that the expiration-day effect neither exists on the whole expiration day nor in the last trading time of the expiration day before the market closes. This study suggests that the expiration-day effects are not unavoidable by-products of the creation of index futures in the stock market.
TL;DR: In this article, the elasticity of fund expenses with respect to fund size does not differ across individual mutual fund size categories, and the analysis of fund-specific expense-size elasticities is shown to differ in a statistically significant manner across mutual fund investment objective categories.
Abstract: For shareholders of a mutual fund, the expense percentage represents the only factor whose daily effect on the change in the value of their portfolio is known in advance. Expense percentages may be used in an assessment of the variation in efficiency levels across various mutual fund size groupings when either individual mutual funds or mutual fund families are used as the unit of investigation. The study reveals that the elasticity of fund expenses with respect to fund size does not differ across individual mutual fund size categories. Corroborating evidence of a stable elasticity was found when the dollar size of fund families was utilized as the base unit of analysis. Additional corroboration was found in the analysis of fund-specific expense-size elasticities, where variation in fund-specific elasticities was not explained by fund size. However, mutual fund expense-size elasticities are shown to differ in a statistically significant manner across mutual fund investment objective categories. For shareh...