Quarterly publication of the Multinational Finance Society     ISSN 1096-1879

The Hedging Effectiveness of U.K. Stock Index Futures Contracts Using an Extended Mean Gini Approach: Evidence for the FTSE 100 and FTSE Mid250 Contracts
(Multinational Finance Journal, 2005, vol. 9, no. 3/4, pp. 131–160)

Darren Butterworth
Charles River Associates, London, U.K.
Phil Holmes
University of Durham, Durham, U.K.

This paper provides the first investigation of the hedging effectiveness of the FTSE 100 and FTSE Mid 250 stock index futures contracts using hedge ratios generated within an extended mean Gini framework. This framework provides a robust alternative to the standard minimum variance approach, by distinguishing between different classes of risk aversion and producing hedge ratios that are consistent with the rules of stochastic dominance. The results show that the appropriate hedge ratio varies considerably with the investor’s degree of risk aversion and that the EMG approach is capable of being utilized by all classes of risk averse investors, in contrast to the standard minimum variance approach. In addition, the results show strong evidence of a duration effect and support the use of the extended mean Gini approach when cross hedges are involved (JEL: G10).

Keywords: hedging; futures; mean-gini; risk aversion.

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The Impact of Commodity Price Risk on Firm Value - An Empirical Analysis of Corporate Commodity Price Exposures
(Multinational Finance Journal, 2005, vol. 9, no. 3/4, pp. 161–187)

Söhnke M. Bartram
Lancaster University, U.K.

Commodity prices are more volatile than exchange rates and interest rates. Hence, a priori, commodity price risk represents a more important source of risk to corporations. This paper presents a comprehensive analysis of the economic commodity price exposure of a large sample of nonfinancial firms. The results indicate that corporations exhibit net exposures with regard to several commodity prices. Even though commodity prices are highly volatile, commodity price risk is, however, not found to be of greater importance than other financial risks. The results are consistent with few cash flows being affected by commodity price movements, and with corporate hedging of commodity price risk (JEL: G3, F4, F3).

Keywords: capital markets, commodity prices, corporate finance, derivatives, exposure, risk management

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Structural Changes of the Conditional Volatility of the Portuguese Stock Market
(Multinational Finance Journal, 2005, vol. 9, no. 3/4, pp. 189–214)

Benilde Maria do Nascimento Oliveira
University of Minho, Portugal
Manuel José da Rocha Armada
University of Minho, Portugal

This paper examines the impact of the introduction of the futures market, on the volatility of the underlying Portuguese stock market. The simple analysis of variance is only the first step to a later undertaking of a much more robust methodology which involves the application of a GARCH model, with the main purpose of studying some potential changes on the structure of the conditional volatility of the Portuguese stock market. The results for the Portuguese market are not identical to those generally found internationally. The initial and simple analysis of variance seems to suggest a strong increase in the level of volatility. When a GARCH model is applied, with the main purpose of studying the evolution of the structure of the conditional volatility, a reduction in market efficiency, measured by its ability to quickly incorporate new information, is identified. The replication of the empirical procedures based upon different restricted and consecutive periods of 200 days before and 200 days after of the introduction of PSI-20 index futures market does not, with few exceptions, produce very different conclusions from our initial analysis (JEL: G14, G15).

Keywords: Index futures, conditional volatility, information, GARCH.

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The Behavior of Prices, Trades and Spreads for Canadian IPO’s
(Multinational Finance Journal, 2005, vol. 9, no. 3/4, pp. 215–236)

Lawrence Kryzanowski
Concordia University, Canada
Skander Lazrak
Brock University, Canada
Ian Rakita
Concordia University, Canada

Microstructure effects for 359 TSX listed IPO’s in the period 1984-2002 are examined. Based on first day returns, earning positive mean returns is very difficult even when most IPO’s are purchased at the offer price. Mean daily trade volume for the first five days of IPO trading is large relative to the means for the first thirty days and for longer periods. The dollar volume of sells is always significantly larger than that of buys suggesting that institutional investors are active on the sell side in the aftermarket. Liquidity as measured by quoted depth is initially large and decays rapidly over time. Gross returns are often low or negative, and average round-trip trade costs increase from 1.5% to 2.9% and 1.8% to 3.7% for more and less patient traders, respectively, over the first nine months of trading for an average IPO. Early amortized spreads are relatively large due to large initial share turnover (JEL: G10, G15).

Keywords: initial public offerings; microstructure; spreads; decimalization.

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Sector Integration and the Benefits of Global Diversification
(Multinational Finance Journal, 2005, vol. 9, no.3/4, pp. 237–269)

Mitchell Ratner
Rider University, New Jersey, USA
Ricardo P. C. Leal
COPPEAD Graduate School of Business, Brazil

One of the main reasons that investment advisors recommend international investments is that foreign stocks are not highly correlated with U.S. stocks. As world economies become increasingly interrelated, it may become more difficult for investors to achieve effective diversification. This research investigates international stock market correlation, and assesses whether global diversification on a sector basis is beneficial to U.S. investors. This analysis includes 38 developed and emerging stock markets from 1981-2000. In addition to demonstrating a potential loss of diversification benefits, this paper utilizes an optimal global asset allocation model to illustrate the effects of sector diversification on portfolio performance over time. The results indicate that although the correlation between most foreign sectors and U.S. sectors is increasing over time, there are still substantial international diversification benefits. Further, the inclusion of emerging market sectors may significantly enhance the return-to-risk performance of international portfolios (JEL: F21, F36, G11, G15).

Keywords: sectors, optimal portfolio, international diversification, co-movement.

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