Quarterly Publication of Multinational Finance Society • ISSN 1096-1879

Transaction Costs and the Pricing of Financial Assets
(Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 93-99)

George M. Constantinides
University of Chicago, U.S.A.

I would like to thank the officers of the Multinational Finance Society and the organizers of its 4th annual conference for bringing us together in the historic city of Thessaloniki to discuss research developments in finance. Specifically, I would like to recognize the President of the Society, Geoffrey Booth, President-elect, George Philippatos, Chairman of the Board of Trustees, Panayiotis Theodossiou, program Chair, Nickolaos Travlos, and Program Co-chair, Angelos Tsaklanganos. They richly deserve a round of applause.
The theme of my speech is transaction costs and their impact on the pricing of financial assets. In various forms, this has been a theme of my research over the course of the past several years. Oftentimes, in models of the financial markets we abstract from market imperfections in order to keep the model tractable and hope that this abstraction does not seriously impair the realism of the model. Thus, we abstract from bid-offer spreads, brokerage fees, execution costs, borrowing and short-selling restrictions and fees, and from the absence of certain markets which are needed to insure financial risk, country risk and labor income risk. How crucial is this abstraction? This is a very broad question and I do not intend to address it in its full generality here. I will focus on just one form of market imperfection: bid-asked spreads, brokerage fees and execution costs, collectively referred to as transaction costs.

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Tax Effects in Canadian Equity Option Markets
(Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 101-122)

Moshe Arye Milevsky
York University, Canada
Eliezer Z. Prisman
York University, Canada

The Canadian Income Tax Act induces individual investors to close their short equity option positions at the end of the year and, if necessary, reopen them at the beginning of next year. This article analyzes the conditions under which it is optimal to close or leave open a short option position over the tax year boundary. The analysis shows that the latter decision depends on transaction costs, the investor's marginal tax rate, the interest rates, the initial and end-of-the-year option prices, as well as whether the option position is naked or covered. The article also examines the impact of tax regulations in Canada on the pricing of naked vs. covered call options and American vs. European options (JEL G13, H21, K34).

Key words: derivative securities, equity options, open interest, tax arbitrage.

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Correlation of Returns in Non-Contemporaneous Markets
(Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 123-135)

Emel Kahya
Rutgers University, U.S.A.

This article investigates the effects of non-overlapping trading hours on the correlations and cross-serial correlations of returns in non-contemporaneous stock markets and develops a simple formula for calculating contemporaneous correlation measures. The presence of these effects is illustrated empirically using stock market returns data for the U.S., Japan, and the U.K. The results indicate that daily correlations of returns in these markets are biased downward while daily cross-serial correlations of returns are biased upwards. These findings have significant implications for studies investigating the transmission mechanism of stock price innovations across national stock markets and portfolio management (JEL G15).

Key words: mean spillovers, contemporaneous correlations of returns.

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Co-Movements of European Equity Markets Before and After the 1987 Crash
(Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 137-152)

Ilhan Meric
Rider University, U.S.A.
Gulser Meric
Rowan University, U.S.A.

This article studies the changes in the co-movements of the twelve largest European equity markets after the 1987 international equity market crash. Tests based on Box M and principal component analysis indicate that the co-movements of these equity markets changed significantly after the crash. Low correlations among national equity markets are often presented as evidence in support of the benefits of international portfolio diversification. The findings indicate that correlations among the twelve largest European equity markets and between these equity markets and the U.S. equity market increased substantially; therefore, the benefits of international diversification with these twelve European equity markets decreased considerably after the crash (JEL G15).

Key words: correlation of returns, Box M analysis, European equity markets co-movements, principal component analysis.

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Pegged Exchange Rate Systems in Macau and Hong Kong
(Multinational Finance Journal, 1997, vol. 1, no. 2, pp. 153-168)

Robert Haney Scott
University of Macau, Macau 
California State University, Chico, U.S.A.

Macau pegs its currency, the pataca, to the Hong Kong dollar, which in turn is pegged to the U.S. dollar. This type of pegging order is unique in the annals of international financial arrangements. This article analyzes the structure of the pegged exchange rate systems in Macau and Hong Kong and discusses the financial and economic implications of these systems for the two territories (JEL F33, G15).

Key words: currency board system, currency substitution, pegged exchange rates, seigniorage.

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