March 2015 (Global Economy and Finance Journal)

March 2015 (Global Economy and Finance Journal)

Total Articles - 10

Pages 1-10

Author: Kian Guan Lim

Since the global financial crisis of 2008 and the European sovereign debt crisis of 2009, the banking system in EU and in the Eurozone in particular has been under-performing and weak. The EU bank stress tests were conducted for capital adequacies and to avoid systemic risks. The first test results indicated that of over 120 banks, seven banks failed the stress tests. Spain, with 27 tested banks, made up the biggest portion of the test banks. In this paper we examine using nonlinear LOGIT and PROBIT regression models, the predictability of stress test failures on the sample of Spanish banks, and identify the principal risk factors to watch out for. We find that size, returns performance, and to some extent deposit base are significantly more important than other measures that may be small such as non-interest incomes and other measures that could be fungible such as altering debt durations without materially improve asset qualities or reducing liability servicing capacities. Predictability would enable advance warning and more time for such banks to repair and shape up.

Pages 11-33

Author: Kim Cuong Ly

Motivated by liquidity risk issues from the 2007 financial crisis, this paper investigates the relationships between liquidity risk, regulation, supervision and bank performance by using a panel data of EU27 countries over 2001-2011. This study finds that liquidity risk is negatively associated with bank performance. Capital regulation, official supervision, and restriction on bank activity policies are positively related to bank performance while deposit insurance, private monitoring practices have negative relationship with bank performance. Capturing capital requirement and increasing power to official supervisors are much preferred in the market-based than in the bank-based countries.

Pages 34 - 45

Author: Ling-chi Cheng and Tsai-yen Chung

GAAP allows unusual or infrequent items to be reported as special items in order to distinguish transitory earnings from permanent earnings. However, special items have been shown to hide permanent losses. IFRS prohibits special items reporting to promote inter-company comparability. This study examines if special losses contain relevant information by using intra-industry information transfer methodology with a sample of 563 material asset impairment losses reported as special items over the period from 2001 to 2007, we find that such information is relevant but garbled due to the laxative reporting rules of GAAP. The major policy implication of this study is that IFRS and GAAP should be more conciliatory by allowing special item reporting, but at the same time requiring strict reporting and disclosure rules to enhance the relevance and reliability of earnings information.

Pages 46 - 66

Author: Vivek Rajvanshi

This study compares the performance of various daily and intraday range based estimators for crude oil futures, which is one of the most liquid futures traded at Multi Commodity Exchange India Limited (MCX) for the period from July 2005 to July 2011. Findings show that the intraday realized range based estimator performed best as compared to the daily range based and classical estimator in terms of both efficiency and bias. Results of volatility estimation and forecasting performance show that realized range based estimators seems to be more economical and efficient to estimate the ‘true’ volatility.

Pages 67 – 81

Author: Christoph Kind and Muddit Poonia

It is a well-known fact in finance that classical mean-variance optimization often leads to highly concentrated portfolios. Giving equal weights to all portfolio assets will instead allow for maximum nominal diversification. More sophisticated ways of nominal diversification are the maximum diversification approach proposed by Choueifaty & Coignard (2008) or the equal weighting of total risk contributions known as “risk parity”. Instead of looking for nominal diversification, investors may prefer a diversification of the risk factors that drive portfolio returns. In recent papers, risk factors have been modelled by principal components following Partovi & Caputo (2004). Meucci, Santangelo & Deguest (2013) show that principal components may not be the best way to model risk factors and propose “minimum torsion bets” instead. The present paper discusses these different ways of managing diversification and tries to identify the strengths and weaknesses of each strategy. For this purpose, we backtest the strategies in a multi-asset portfolio. The results show that a diversification of risk factors, when based on minimum torsion bets, leads to better risk-return characteristics than nominal diversification strategies.

Pages 82 – 91

Author: Rita Ray

This paper investigates the convergence of real GDP per-capita for three hundred and seventy and the largest fifty five metropolitan areas in the United States for the period 2001 and 2012. This paper considers the metropolitan areas for four regions in the United States and examines the similarity and difference of the nature of convergence across regions. Finally, this paper examines the convergence and the effect of non-English speaker and high school graduates on the growth of real GDP per-capita for the largest thirty one metropolitan areas for the period 2005 and 2012. This paper finds that the real GDP per-capita of three hundred and seventy and the largest fifty five metropolitan areas in the United States are diverging for the period 2001 and 2012. This paper finds that the metropolitan areas in the West are diverging and other three regions they are converging. This paper also finds that the real GDP per-capita of the largest thirty one metropolitan areas is diverging and the share of high school has positive effect on the growth.

Pages 92 – 111

Author: Chung-Hao Hsu, Syou-Ching Lai and Hung-Chih Li

Information disclosure has been a necessary device in the activities of corporate governance, especially in the era of knowledge-based economy. In this regard, we examine the factors that influence information transparency in terms of two dimensions: technology intensities and insiders’ shareholdings. We find that industries with higher technology intensities have higher information transparency. Also, the effects of technology intensities are different in different industries. High-tech firms experiencing increase in insiders’ shareholdings are negatively associated with information transparency. However, relative to high-tech firms, when R&D intensity is high, traditional firms experiencing increase in insiders’ shareholdings are positively associated with information transparency.

Pages 112 – 120

Author: H. Swint Friday and Nhieu Bo

The paper examines seasonality in returns for the Stock Exchange of Thailand (SET). We use historical returns on both SET composite and SET50 indices from 1975 through December 2013 to examine seasonality in the two indices. In a previous study, we observed the “Halloween effect” also known by the tagline “Go away in May and come back Halloween Day” in the Vietnam stock index (VN-index) during the 2000-2010 period. In this paper, we find that the “Halloween effect” appears in both the SET composite and SET50 indices but is not statistically significant. However, we find significantly higher returns for December and January for both indices.

Pages 121 – 136

Author: Yihua Zhao and Lin Zou

Prior research has documented both positive (John and Litov, 2009) and negative (Berger, Ofek, and Yermack, 1997) relationships between managerial entrenchment and the use of debt. This paper further investigates the impact of corporate governance on firm leverage by taking into account the substitution effect of different governance mechanisms. Consistent with John and Litov (2009), we find that antitakeover provisions have a positive effect on firm leverage. However, this effect disappears when we control for the interaction effect between antitakeover provisions and board power, measured by board independence. More specifically, we find that entrenched managers operate highly leveraged firms only if they are exposed to powerful boards. The result of this positive relationship between firm leverage and the interaction of board power and antitakeover provisions continues to hold even after we consider other governance variables.

Pages 137 – 149

Author: Shanuka Senarath and Richard Copp

Credit Default Swaps coupled with asset-backed financial products were heavily traded in the years preceding the Global Financial Crisis. Intended for sophisticated investors, Credit Default Swaps prima facie are in the nature of insurance contracts, although they operate outside the scope of the regulation governing insurance. This paper adopts a lexonomic approach to take an initiative to develop a regulatory framework for Credit Default Swaps in order to prevent a similar crisis. Inter alia, one solution is to regulate Credit Default Swaps together with insurable interest and an “excess” in order to minimize moral hazard. The objective behind the excess is to discourage negligent lending.

Total Articles- 10

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