Search

The degree of market integration across individual country equity indices using modern cointegration techniques is analyzed.

Byline: Ian Domowitz (1) Keywords: Electronic markets; market microstructure; financial intermediation. Abstract: Relationships between trading cost, technology, and the nature of intermediation in the trading services industry are discussed. Electronic markets are linked to reductions in trading costs. Lower explicit costs are related to system development and operating costs. Electronic order book information is identified as a means of realizing implicit cost savings. The concept of liquidity management in electronic environments is introduced, and its potential is empirically illustrated. The empirical results suggest new roles for brokerage and exchange operations, and competition between the two. Competitive advantage with respect to the provision of liquidity management services is compared across types of intermediaries. Author Affiliation: (1) Electronic Market Initiatives ITG Inc., U.S.A Article History: Registration Date: 05/10/2004

Byline: Robert R. Bliss (1), Mark J. Flannery (2) Abstract: Market discipline is an article of faith among financial economists, and the use of marketdiscipline as a regulatory tool is gaining credibility. Effective market discipline involvestwo distinct components: security holders' ability to accurately assess the condition of afirm (monitoring) and their ability to cause subsequent managerial actions to reflect thoseassessments (influence). Substantial evidence supports the existence of market monitoring.However, the existing evidence about market influence involves relatively rare events suchas management turnover. This paper seeks evidence that U.S. bank holding companies'security price changes reliably influence subsequent managerial actions. Although weidentify some patterns consistent with beneficial market influences, our methodology doesnot provide strong evidence that stock or (especially) bond investors regularly influencemanagerial actions. Day-to-day market influence remains, for the moment, more a matterof faith than of empirical evidence. Author Affiliation: (1) Research Department, Federal Reserve Bank of Chicago, 230 S. LaSalle St., Chicago, IL, 60604-1413, U.S.A. (2) Department of Finance, Insurance, and Real Estate, University of Florida, Gainesville, 32611-7168, U.S.A. Article History: Registration Date: 10/10/2004

Byline: Ari Hyytinen (1), Tuomas Takalo (2) Keywords: banking; disclosure; deposit insurance; market discipline; transparency Abstract: Transparency regulation aims at reducing financial fragility by strengthening market discipline. There are, however, two elementary properties of banking that may render such regulation inefficient at best and detrimental at worst. First, an extensive financial safety net may eliminate the disciplinary effect of transparency regulation. Second, achieving transparency is costly for banks, as it dilutes their charter values, and hence also reduces their private costs of risk-taking. We consider both the direct costs of complying with disclosure requirements and the indirect transparency costs stemming from imperfect property rights governing information and particularly infer the conditions under which transparency regulation cannot reduce financial fragility. Author Affiliation: (1) The Research Institute of the Finnish Economy (ETLA), Lonnrotinkatu 4B, FIN-00120, cHelsinki, Finland (2) Research Department, Bank of Finland, P.O. Box 160, FIN-00101, Helsinki, Finland Article History: Registration Date: 10/10/2004

This article re-evaluates the authors' previous explanations for profitability momentum strategies. The authors also provide support for behavioral models that propose delayed overreactions to be the reason for momentum profits.

This article evaluates institutional corporate bond trading to estimate transaction costs for over-the-counter bond markets. The author finds that larger trades have lower trading costs, small institutions pay more than large institutions in order to trade, and large bond dealers charge less than small ones.

This article evaluates the significance of banking market structure on growth, focusing on the role of this structure on the dynamics of capital accumulation. The authors find that bank concentration promotes growth of industry sectors in most need of external finance by aiding credit access for newer firms, but also find a general depressing effect of bank concentration on all sectors.

This article evaluates aggregate market spreads, depths and trading activities to analyze liquidity in U.S. equities over an extended period of time. The authors find that liquidity plummets in down markets, volatility decreases trading activity and spreads, strong day-of-the-week effects exist, and that interest rates influence liquidity with increases in depth and trading activity just prior to macroeconomic announcements.

This article examines the decisions of strategic traders in a noisy financial market when they hold an endowment of stock. Results show that after receiving the endowment the trader reduces risk exposure by selling at decreased rates and then buying back shares.

This article examines the volatility of common stocks at the market, firm and industry levels using a disaggregated approach. Results show an increase in the firm-level volatility from 1962-1997; the correlations between individual stocks and the market model's explanatory power has declined, while the number of stocks needed for diversification have increased; finally, market volatility leads the other volatility areas.

Byline: William Poole (1), Robert H. Rasche (1) Abstract: The rational expectations revolution made clear that a complete macro model requires a specification of the government's economic policy. We argue that monetary policy should be conducted in such a way that the market can predict policy actions. An implication of market success in predicting policy actions is that interest rates move ahead of the policy actions, and such a timing relationship may appear to some as the central bank following the market instead of leading it. Another implication of the market predicting policy actions is that nominal interest rate changes provide no useful information to the central bank about the strength of aggregate demand or inflationary expectations. Finally, failure of the market to predict policy actions reflects a problem that needs to be addressed. We explore the theoretical implications of a monetary policy that is completely specified and perfectly understood by the market. We construct a bare-bones model to illustrate the key concepts. Finally, we conduct an empirical investigation of these issues, especially in the context of monetary policy since 1988, when the establishment of the federal funds future market made available well-defined market information on expectations about Fed policy actions. We find that when the intended funds rate is changed, interest rates over the maturity spectrum respond to 'news' measured by changes in the one-month-ahead funds futures yield but do not respond to the anticipated component of the change in the intended funds rate. Author Affiliation: (1) Federal Reserve Bank of St. Louis, USA Article History: Registration Date: 09/10/2004

Byline: Martina K. Bers (1), Jeff Madura (1) Keywords: mutual funds; closed-end funds; mutual fund performance; performance persistence Abstract: This study extends the research on closed-end fund performance persistence by investigating whether the persistence of both net asset value (NAV) and market price returns of U.S. registered closed-end funds is related to various fund characteristics. The sample consists of 505 closed-end funds, which are investigated over the period from January 1976 to December 1996. The analysis tests whether persistence is related to the fund characteristics size, goal, management fees, turnover, fund family membership, fund experience, and the exchange on which a fund is traded. The results vary across holding periods used to calculate persistence but are similar with respect to the NAV and market price returns. Funds with lower expense ratios and funds traded on the NYSE show more persistence of strong NAV and market price performance. Author Affiliation: (1) Florida Atlantic University, USA Article History: Registration Date: 09/10/2004

Research presented concerns the economic impact of stock market liberalization, or a country's policy to allow foreign purchasing of stocks. Findings suggest that the country that liberalizes it's stock market can lower the cost of equity capital by promoting risk-sharing between foreign and domestic agents.

Using data on Asian equity markets, we observe that during periods of financial turmoil, deviations from the mean-variance framework become more severe, resulting in periods with additional downside risk to investors. Current risk management techniques failing to take this additional downside risk into account will underestimate the true Value-at-Risk with greater severity during periods of financial turmoil. We provide a conditional approach to the Value-at-Risk methodology, known as conditional VaR-x, which to capture the time variation of non-normalities allows for additional tail fatness in the distribution of expected returns. These conditional VaR-x estimates are then compared to those based on the RiskMetrics methodology from J. P. Morgan, where we find that the model provides improved forecasts of the Value-at-Risk. We are therefore able to show that our conditional VaR-x estimates are better able to capture the name of downside risk, particularly crucial in times of financial crises.

Byline: Ferdinand A. Gul (1), Burch T. Kealey (2) Keywords: Korean markets; corporate policies; growth opportunities; contracting; Chaebol Abstract: This paper examines explanations for the association between Korean Chaebol, which are giant conglomerates supported by various government initiatives, and corporate debt and dividend policies. Unlike in the US, the Korean corporate sector is dominated by the Chaebol which are characterized by concentrated family ownership, political affiliation and bank ownership. These institutional arrangements are likely to encourage more debt financing. In addition, the study also investigates whether firms with more growth options measured in terms of the investment opportunity set (IOS) have lower leverage and dividends. Results using observations from 411 Korean firms showed that for a fixed level of growth opportunities, Chaebol carry higher levels of debt. Results also show that growth options were negatively associated with leverage and dividends. No association, however, was found between Chaebol and dividends. Author Affiliation: (1) Department of Accountancy, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon Tong, Hong Kong (2) Department of Accountancy, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon Tong, Hong Kong Article History: Registration Date: 30/09/2004

Byline: Pradipkumar Ramanlal (1) Keywords: liquidity trading; market microstructure Abstract: Liquidity trading is an important component of market microstructure models. In most cases, its role is primarily to ensure existence of equilibrium and therefore that trading occurs among asymmetrically informed agents. While most market microstructure models allege that agents trade based upon rational expectations, the rationality of the type of liquidity trading assumed in these models remains to be verified. Specifically, liquidity traders are often assumed to submit price-inelastic orders for reasons exogenous to the model at hand. But whether price-inelastic trading is consistent with rational utility maximizing behavior remains to be shown. Author Affiliation: (1) College of Business, Department of Finance, University of Central Florida, Orlando, FL, 32816, U.S.A Article History: Registration Date: 30/09/2004

Byline: Thomas C. Chiang (1), Jeanette Jin Chiang (2) Keywords: Euro currency; nonlinear models; error correction model; term structure of interest rates Abstract: This paper presents a coherent nonlinear interest rate model that incorporates the dynamics of the error correction specification into the traditional term structure model. The joint tests based on six Euro-Currency rates indicate that the linear specification should be rejected. The estimated equation suggests that the linear components--the change of the long-term interest rate and the error correcting term are highly significant. The nonlinear components involving the higher order of the independent variables, the cross products, the lagged error squares, and/or the ARCH effect also present significant explanatory power for predicting short-term Euro-Currency rate changes, confirming the non-linear specifications. Author Affiliation: (1) Marshall M. Austin, Drexel University, USA (2) PV International, USA Article History: Registration Date: 21/10/2004

Byline: Raj Aggarwal (1), Mbodja Mougoue (2) Abstract: This study documents that daily changes in Asian exchange rates are significantly non-normal, serially correlated, non-stationary, and have unit roots. Further, accounting for these time series properties and using a longer time horizon than other similar studies of exchange rates, this study also documents cointegration between the Japanese Yen and two sets of Asian currencies, i.e., currencies of the 'Tigers', Hong Kong, South Korea, Singapore, and Taiwan and currencies of the ASEANs, Malaysia, Philippines, Thailand, and Singapore. These findings of cointegration among Asian exchange rates are in contrast to the findings for the major currencies, and are evidence of nascent Yen blocs in Asia. The results presented here have important implications for understanding Asian financial integration and the international role of the Japanese yen and should be useful for developing asset allocation, currency overlay, value at risk (VAR), and hedging strategies for investments in these often illiquid Asian currencies. Author Affiliation: (1) The Edward J. and Louise E. Mellen Chair in Finance, John Carroll University, Cleveland, Ohio, 44118 (2) School of Business Administration, Wayne State University, Detroit, MI, 48202 Article History: Registration Date: 06/10/2004

Research shows that analystsE target prices information produces a significant market reaction, both unconditionally and conditional based on earnings forecast revisions and recommendations on contemporaneously issued stock. Target prices projected one year ahead tend to be 28% higher than current market prices.