Quarterly publication of the Multinational Finance Society     ISSN 1096-1879

The Determinants of Foreign Currency Hedging by U.K. Non-Financial Firms
(Multinational Finance Journal, 2006, vol. 10, no. 1/2, pp. 1–41)

Amrit Judge
Middlesex University, U.K.

For 366 large non-financial U.K. firms, this paper reports the factors that are important in determining their decision to hedge foreign currency exposure. The results provide strong evidence of a relationship between expected financial distress costs and the foreign currency hedging decision and more significantly the foreign currency only hedging decision. These findings seem stronger than those found in similar studies using U.S. data. The paper argues that this might be due to the fact that several U.S. studies include in their non-hedging sample other hedging firms, such as firms using non-derivative methods for currency hedging and interest rate only hedgers, which might bias the results against the a priori expectations. However, it might also be due to a country specific institutional factor, that is, U.K. firms face higher expected costs of financial distress due to differences in the bankruptcy codes in the two countries (JEL:F30, G32, G33).

Keywords: corporate hedging, foreign currency hedging, derivatives, financial distress, foreign currency debt, bankruptcy codes.

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Australian On-Market Buy-backs: An Examination of Valuation Issues
(Multinational Finance Journal, 2006, vol. 10, no. 1/2, pp. 43–79)

Jason Mitchell
University of Michigan Business School, U.S.A.
H. Y. Izan
University of Western Australia, Australia
Roslinda Lim
Macquarie University, Australia

A compelling reason for engaging in on-market buy-backs is that it provides a signal about the undervaluation of the company. In this paper an alternative,  accounting based, method of determining fundamental value and undervaluation is used, namely the Ohlson residual income valuation framework. It is found that prior to the announcement buy-back companies are significantly undervalued relative to comparable non-buy-back companies. This undervaluation is largely but not totally removed in the period immediately following the on-market buy-back implying on-market buy-backs are predominantly an effective signaling mechanism. Where the firm cites undervaluation as a specific motive for the buy-back then, in fact, a higher degree of undervaluation prior to the buy-back is evident. The results provide evidence that management can, and does, identify undervaluation and reduces this through the signaling mechanism of on-market buy-backs (JEL: G34, G35, G38).

Keywords: buy-backs, undervaluation, fundamental value.

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Defining and Dating Bull and Bear Markets: Two Centuries of Evidence
(Multinational Finance Journal, 2006, vol. 10, no. 1/2, pp. 81–116)

Liliana Gonzalez
University of Rhode Island, USA
Philip Hoang
Australian National University, Australia
John G. Powell
Massey University, New Zealand
Jing Shi
Jiangxi University of Finance and Economics, China and The Australian National University, Australia

Despite widespread media interest in bull and bear markets, academic research that seeks to formally define bull markets is almost non-existent. This paper defines bull and bear markets in relation to a simple model of mean return regimes, and implements the definition using two formal turning point detection methods to demonstrate that two centuries of stock index returns can be separated into economically and statistically significant bull and bear market states. In-sample analysis of the turning points identified by the detection procedures is consistent with a two-state mean return model, a result that has important implications for capital asset pricing theory. The paper also examines the distinct return characteristics and the persistent duration of the bull and bear market states that are identified, and tests the superior out of sample performance of ex-ante trading rules developed from the turning point detection procedures (JEL: E32; G12; E44; C22).

Keywords: stock market, bulls and bears, turning point dating.

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Does Total Risk Matter? The Case of Emerging Markets
(Multinational Finance Journal, 2006, vol.10, no. 1/2, pp. 117–151)

Eric Girard
Siena College, U.S.A.
Amit Sinha
Indiana State University, U.S.A.

This paper examines the relationships between market risk premiums, time-varying variance and covariance in forty-eight emerging, and seven developed capital markets. We allow each market’s risk premium generating process to be state-dependent by accounting for negative and positive market price of variance and covariance risk. We find that half of the emerging markets exhibit reward to world variance while for the other half are only sensitive to local risk factors. We also find evidence of a negative relationship between reward to local risk and reward to world risk. Accordingly, the relative importance of one reward versus the other depends on the ever-changing correlation with the world market. Finally, we show that correlation is not a factor that explains reward to local risk in few segmented capital markets (JEL: G12; G15).

Keywords: reward to risk, conditional risk, market price of risk, multivariate GARCH.

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