Showing papers in "Asia-pacific Financial Markets in 2010"

Efficiency of Microfinance Institutions: A Data Envelopment Analysis

Abstract: This study examines the cost efficiency of 39 microfinance institutions across Africa, Asia and the Latin America using non-parametric data envelopment analysis. Our findings show non-governmental microfinance institutions particularly; under production approach, are the most efficient and this result is consistent with their fulfillment of dual objectives: alleviating poverty and simultaneously achieving financial sustainability. However, bank-microfinance institutions also outperform in the measure of efficiency under intermediation approach. This result reflects that banks are the financial intermediaries and have access to local capital market. It may be possible that bank-microfinance institutions may outperform the non-governmental microfinance institutions in the long run.

Comparison of Black–Scholes Formula with Fractional Black–Scholes Formula in the Foreign Exchange Option Market with Changing Volatility

Abstract: In this paper, the authors discuss the fractional option pricing with Black–Scholes formula, deduce the Fractional Black–Scholes formula, show the empirical results by using China merchants bank foreign exchange call option price, and find when the volatility is smaller, the asymptotic mean squared error of Fractional Black–Scholes is bigger than the Traditional Black–Scholes’, while the volatility is bigger—the market mechanism has a full play, the result is reverse. Namely when the market mechanism is given a full scope, the estimating effect of Fractional Black–Scholes is better than Traditional Black–Scholes’.

Environmental economics and modeling marketable permits

Abstract: This paper reviews fundamental concepts in environmental economics and explores theoretical results regarding the choice of the key policy instruments for the control of externalities: taxes, subsidies and marketable permits. The paper explains why today market mechanisms are increasingly being used as a tool for allocating unpriced rights and scarce resources. We survey how significant market imperfections, a pre-existing regulatory environment and concentration in both permit and output markets can impede the proper functioning of a permit system. The main factors that affect the effectiveness of marketable permits are then discussed. Given the importance of understanding the emission permit price formation, we overview recent attempts at developing valid price models for emission permits, taking into account banking and borrowing opportunities, pollution abatement measures, strategic trading interactions and the presence of asymmetric information in the permit market.

The Impact of Derivatives Activity on Commercial Banks: Evidence from U.S. Bank Holding Companies

Abstract: We have examined the impact of derivatives activity on commercial banks based on panel data from 18 large U.S. bank holding companies (BHC). This paper found that in general the larger the notional values of non-traded derivatives, the more derivative positions held by banks, meaning potentially better performance. The derivatives activity increased the BHCs’ overall risk level, the reason is that most US BHCs are able to take more speculative positions in derivatives contracts in the name of risk management, excluding the impact of held-for-trading positions. Additionally, we found that while participative banks took more speculative positions in derivatives contracts in the name of risk management, while dominant banks preferred to hold derivatives positions for the sake of hedging the underlying risks. Furthermore, we found that the BHCs take more speculative positions in derivatives contracts in the name of risk management before the sub-prime mortgage loan crisis than after the sub-prime mortgage loan crisis, so they assumed more risks before the sub-prime mortgage loan crisis. Overall, our findings suggest that the usage of derivatives for commercial banks is a double-edged sword. Using derivatives maybe a matter of managerial risk appetite to hedge underlying risks for commercial banks, however, it maybe also increase the commercial banks’ overall risks if the derivatives positions are used to speculate, though derivatives activity could increase the profitability of BHCs.

On the Predictability of Japanese Stock Returns Using Dividend Yield

Abstract: The aim of this paper is to provide a critical and comprehensive reexamination of empirical evidence on the ability of the dividend yield to predict Japanese stock returns. Our empirical results suggest that in general, the predictability is weak. However, (1) if the bubble economy period (1986–1998), during which dividend yields were persistently lower than the historical average, is excluded from the sample, and (2) if positive autocorrelation in monthly aggregate returns is taken into account, there is some evidence that the log dividend yield is indeed useful in forecasting future stock returns. More specifically, the log dividend yield contributes to predicting monthly stock returns in the sample after 1990 and when lagged stock returns are included simultaneously.

Comparing Firm Failure Predictions Between Logit, KMV, and ZPP Models: Evidence from Taiwan's Electronics Industry

Abstract: This paper applies the Taiwan electronics industry data to detect the discriminatory powers of Logit, KMV, and zero-price probability (ZPP) models that represent respectively the regressive fitting model, the option-based pricing model, and the GARCH time series simulation model. In our circumstances, according to cumulative accuracy profile, receiver operating characteristic, and even Brier score, the KMV performs the worst. The disadvantages for KMV are that the equity market exists some nonlinear characteristics, the unknown market value of asset affected by the change of capital structure is not exogenous, and the failure point is difficult to be estimated correctly. Besides, KMV is however too simple to model the fluctuation of the equity value as the GARCH does. On the other hand, the Logit performs above average. To preclude over-fitting and keep model parsimonious, two significant factors are extracted from as many as forty financial variables for the logistic regression on binary failure data. The result of Logit training has perfect discrimination. However, for the post-sample data, the fitting to categorical but not ordinal data makes Logit have the divergent failure predicted probabilities and highest Briser Score. In practical, ZPP GARCHNorm uses just equity value to predict firm failure but it performs remarkably well supposing that downward price trend or volatility persistence in stock price changes is appropriately caught. It implies that the distorted signals such as overreaction of traders and insider trading would definitely impair the ZPP GARCHNorm. Nevertheless, the larger type I error than type II error in all models indicates that the prediction of non-failed firms should be more examined further than that of failed firms.

Modelling Co-movements and Tail Dependency in the International Stock Market via Copulae

Abstract: This paper examines international equity market co-movements using time-varying copulae. We examine distributions from the class of Symmetric Generalized Hyperbolic (SGH) distributions for modelling univariate marginals of equity index returns. We show based on the goodness-of-fit testing that the SGH class outperforms the normal distribution, and that the Student-t assumption on marginals leads to the best performance, and thus, can be used to fit multivariate copula for the joint distribution of equity index returns. We show in our study that the Student-t copula is not only superior to the Gaussian copula, where the dependence structure relates to the multivariate normal distribution, but also outperforms some alternative mixture copula models which allow to reflect asymmetric dependencies in the tails of the distribution. The Student-t copula with Student-t marginals allows to model realistically simultaneous co-movements and to capture tail dependency in the equity index returns. From the point of view of risk management, it is a good candidate for modelling the returns arising in an international equity index portfolio where the extreme losses are known to have a tendency to occur simultaneously. We apply copulae to the estimation of the Value-at-Risk and the Expected Shortfall, and show that the Student-t copula with Student-t marginals is superior to the alternative copula models investigated, as well the Riskmetics approach.

The Value of Principles-Based Governance Practices and the Attenuation of Information Asymmetry

Abstract: This paper focuses on the value of principles-based governance practices. Using the sample of Thai listed firms, we investigate whether firms that comply with the principles of good corporate governance incur lower financing cost and have stronger financial standing. The overall results suggest that the firms on average have significant improvements in major areas of corporate governance practices such as disclosure and transparency, the equitable treatment of shareholders, and the responsibilities of the board. Furthermore, the firms that have better governance practices enjoy lower cost of capital and are more financially viable; suggesting that good governance probably reduces the destabilizing behavior of investors as they become better informed, and mitigates agency problems between controlling shareholders and managers on one hand, and minority shareholders and other stakeholders on the other. Therefore, the guidelines for good governance practices introduced by the Stock Exchange of Thailand should serve as an important tool to bridge information gap between investors and firms, to help overall investors learn more about which firms need to be closely monitored or should be invested in, and to level the playing field for the investors.

Remarks on the Nonlinear Black-Scholes Equations with the Effect of Transaction Costs

Abstract: We deal with the solvability and a weak formulation of nonlinear partial differential equations of Black-Scholes type for the pricing of options in the presence of transaction costs. Examples include the Hoggard–Whalley–Wilmott equation, which is introduced to model portfolios of European type options with transaction costs based on the idea of Leland. The cost structure gives rise to nonlinear terms. We show the existence and the uniqueness of solutions both in the classical and the weak sense, where the notion of weak solutions is introduced.

Reforms in the Korean Financial Reporting Systems and Earnings Quality

Abstract: This study examines the effect of reforms in the Korean financial reporting systems on earnings quality through an investigation of two sample periods: (1) prior to, and (2) after the 1997 financial crisis in Korea. The results indicate that financial sector reforms have reduced the opacity of Korean firms’ earnings reports.

Coefficients of Asymptotic Expansions of SDE with Jumps

Abstract: A new methodology for the problem of contingent claim valuation is proposed by Yoshida (Journal of Japanese Statistical Society, 22(2): 139–159, 1992, Stochastic Processes Application, 107(1): 53–81, 2003), and Takahashi and Kunitomo (2003). They used the asymptotic expansion theorem of Watanabe. Their method is applicable to various problems of contingent claim valuation. The author has obtained the asymptotic expansion formula for European call option of pure jump models (2008). In this paper, we determine the coefficients of the asymptotic expansion formula in order to test this formula numerically.

Assessments of 'Greenhouse Insurance': A Methodological Review

Abstract: In this paper I review methodologies to assess strategies of greenhouse gas emissions reduction by installing existing technologies and by investing in research and development of advanced technologies, expressed as ‘greenhouse insurance’ by Manne and Richels (Buying greenhouse insurance: the economic costs of CO2 emissionlimits. The MIT Press, Cambridge, 1992), under several sorts of uncertainty. While the authors of some advanced studies have applied exogenous and endogenous stochastic processes to deal with the uncertainty in their mathematical models on the economic assessment of climate change, this review points out some room for improving these approaches in ways that will result in more reasonable hedging strategies to cope with uncertain climate change, taking into account up-to-date research trends.

Utility Indifference Hedging with Exponential Additive Processes

Abstract: We determine the exponential utility indifference price and hedging strategy for contingent claims written on returns given by exponential additive processes. We proceed by linking the pricing measure to a certain second-order semi-linear Integro-PDE. As main application, we study the problem of hedging with basis risk.

The Instantaneous Volatility and the Implied Volatility Surface for a Generalized Black–Scholes Model

Abstract: Takaoka (Asia–Pacific Financial Markets 11:431–444, 2004) proposed a generalization of the Black–Scholes stock price model by taking a weighted average of geometric Brownian motions of different variance parameters. The model can be classified as a local volatility model, though its local volatility function is not explicitly given. In the present paper, we prove some properties concerning the instantaneous volatility process, the implied volatility curve, and the local volatility function of the generalized model. Some numerical computations are also carried out to confirm our results.

Dominance of a Class of Stein type Estimators for Optimal Portfolio Weights When the Covariance Matrix is Unknown

Abstract: For the estimation problem of mean-variance optimal portfolio weights, several previous studies have proposed applying Stein type estimators. However, few studies have addressed this problem analytically. Since the form of the loss function used in this problem is not of the quadratic type commonly used in statistical studies, there have been some difficulties in showing analytically the general dominance results. However, dominance results are given here of a class of Stein type estimators for the mean-variance optimal portfolio weights when the covariance matrix is unknown and is estimated. The class of estimators is broader than the one given in a previous study. The results we have obtained enable us to clarify conditions for some previously proposed estimators in finance to have smaller risks than the estimator which we obtain by plugging in the sample estimates.

Valuation of a Repriceable Executive Stock Option

Abstract: We introduce a path-dependent executive stock option. The exercise price might be reduced when both the firm’s stock price and a stock market index fall greatly. The repriceable executive stock option has a simple payoff that may be used for realistic executive rewards. We show the valuation formula, and compute the probability of the repriceable executive stock option expiring in-the-money. Both price and probability are important pieces of quantitative information when choosing an executive compensation package.

An Empirical Analysis of Growth Options of Japanese Electronics Firms

Abstract: This paper provides some empirical support of real option models of corporate flexibility based on the analysis of the panel of Japanese electronics firms covering fiscal years 1999–2008. I apply random effect regression techniques and explain market value of firms’ growth options using several uncertainty proxies and firm-specific variables. Important contribution of the current study lies in empirical examining of the critical parameters of real option analysis of determinants of a firm’s investment behavior based on simple but effective structural model of multiple American-type options.

Solutions and Simulations of Some One-Dimensional Stochastic Differential Equations

Abstract: We consider a one dimensional SDE dX t = μ(X t )dt + σ(X t )dB t . We give a new general formula for solutions that involves solving an associated ordinary differential equation. Explicit solutions are obtained in cases where the ODE has such. This recovers linear case but also some non-linear cases. In any case our approach leads to a new simulation scheme that returns positive values for processes on $${{\hskip 0.02in \hbox{\rm I}\hskip -.02in \hbox{\rm R}{^+}}}$$ , which is advantageous when modelling prices or rates.