Quarterly publication of the Multinational Finance Society, a non-profit corporation     ISSN 1096-1879

Are Forward Exchange Rates Rational Forecasts of Future Spot Rates? An Improved Econometric Analysis for the Major Currencies
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 1–20)

Raj Aggarwal
University of Akron, U.S.A.
Winston T. Lin
The State University of New York at Buffalo, U.S.A.
Sunil K. Mohanty
University of St. Thomas, Minneapolis, U.S.A.

It has been suggested that prior studies that have puzzlingly found forward rates to be inefficient and biased forecasts of future spot rates may be limited by inadequate statistical methodologies. Using an improved statistical methodology that accounts for both non-stationarity and non-normality in exchange rates, we unfortunately reconfirm that U.S. dollar forward rates for horizons ranging from one to twelve months for the British pound, Japanese yen, Swiss franc, and the German mark over the period 1973–1998 are generally not efficient or rational forecasts of future spot rates. However, as one bright spot, we cannot reject efficiency and rationality for the U.S. dollar forward rate for the Canadian dollar (JEL: F31, G14, F47, G15).

Keywords: forward rates, rational forecasts.

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Firm Investments and Corporate Governance in Asian Emerging Markets
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 21–44)

Tanweer Hasan
Roosevelt University, U.S.A.
Palani-Rajan Kadapakkam
University of Texas at San Antonio, U.S.A.
P. C. Kumar
American University, U.S.A.

The quality of corporate governance has been shown to have wide-ranging implications, e.g., on the performance of stock markets and on exchange rates. This study investigates whether the quality of corporate governance in a country impacts investment decisions made at the micro level of the firm. The study focuses on Asian emerging markets since they have widely varying standards of corporate governance. Based on eight measures of corporate governance, four aggregate indices of corporate governance (business environment, legal environment, investor rights, and an overall measure) are developed for seven countries in the sample drawing on data from published sources. The results indicate that improvements in corporate governance mitigate the dependency of firm investments on their internal resources and facilitate access by firms to capital markets (JEL: G15, G30, G31).

Keywords: corporate governance, firm investments, emerging markets, investment-cashflow sensitivity.

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A Liquidity Motivated Algorithm for Discerning Trade Direction
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 45–66)

David Michayluk
University of Technology Sydney, Australia
Laurie Prather
Bond University, Australia

Most exchanges do not report trade direction thus researchers and traders must deduce whether a trade is buyer or seller initiated since this information is required to evaluate models of bid-ask spread components and to understand the market for immediacy. Algorithms that assign trade direction based on the proximity to bid or ask quotes are easily implemented but ignore information readily discernable from orders, changes in the quoted depth and subsequent price movements. Using the New York Stock Exchange Trades, Orders and Quotes database, systematic biases in existing trade direction algorithms are documented that can be rectified by recognizing that the impact on liquidity is the fundamental characteristic underlying order placement. Although this liquidity-based method is difficult to implement, it more closely captures the actual behavior of market participants (JEL : G10, G14).

Keywords: liquidity, trade direction algorithm, TORQ database, order placement.

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Value-at-Risk for Greek Stocks
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 67–105)

Timotheos Angelidis
University of Peloponnese, Greece
Alexandros Benos
National Bank of Greece, Greece

This paper analyses the application of several volatility models to forecast daily Value-at-Risk (VaR) both for single assets and portfolios. We calculate the VaR number for 4 Greek stocks, 2 portfolios based on these securities and for the Athens Stock Exchange General Index. We model VaR for long and short trading positions by employing non-parametric methods, such as historical and filtered historical simulation, as well as parametric ones. Especially for the later techniques we use a collection of ARCH models (GARCH, EGARCH and TARCH) based on three distributional assumptions (Normal, Student-T and Skewed Student-T), while we combine the Extreme Value Theory with a volatility updating technique (via GARCH type-modeling). In order to choose one model among the various forecasting methods, we employ a two-stage backtesting procedure. In the first one, we implement two backtesting criteria (unconditional and conditional coverage) to test the statistical accuracy of the models. In the second stage, we employ standard forecast evaluation methods in order to examine whether any differences between models that have converged are statistica lly significant (JEL: C22; C52; C53; G15).

Keywords: value-at-risk, GARCH, historical simulation, backtesting.

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Equity Market Price Interactions Between China and the Other Markets Within the Chinese States Equity Markets
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 105–126)

Gary Gang Tian
University of Wollongong, Australia

This study examines the cointegrating and long-term causal relationships of equity market prices in equity markets of Chinese states namely, Shanghai, Shenzhen, Hong Kong, Taiwan and Singapore. I cover the period between October 5, 1992 and March 20, 2006, taking into account both the Asian financial crisis and the opening-up of China’s equity markets in recent years. First, I analysis the cointegration by utilizing Johansen’s (1988) cointegration tests. I find that a long-term equilibrium relationship measured by cointegration has been established among Shanghai, Shenzhen, Hong Kong and Taiwanese markets and, to a lesser degree, between these markets and the Singapore market since 1998. Secondly, this study examines causality by exploring the bootstrapped Toda-Yamamoto non-causality tests. I find that there is strong evidence of a bi-directional causality between Shanghai and Shenzhen markets after 1998. Furthermore, I also find that there are more causal linkages between the Chinese states equity markets: two mainland Chinese markets, Hong Kong, Taiwan, and Singapore became more dependent on each other. The robustness of the above findings is confirmed by the use of a bootstrap test employed to test the validity of my results.

Keywords: international financial markets; causality testing in VaRs with bootstrapping, cointegration

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Higher-Order Terms in Bivariate Returns to International Stock Market Indices
(Multinational Finance Journal, 2008, vol. 12, no. 1/2, pp. 127–155)

Kirt C. Butler
Michigan State University, U.S.A.
Katsushi Okada
Michigan State University, U.S.A.

This article documents the stochastic properties of bivariate returns to international stock market indices. In particular, the article searches for the best fit among a class of higher-order VARMA(u,v)-EGARCH(p,q) models with normal errors and a constant conditional correlation using MSCI domestic and world-ex-domestic index pairs for the Emu, Japan, the United Kingdom, and the United States. Although a first-order VAR or VMA specification is sufficient to accommodate the conditional means, second-order EGARCH terms are necessary in two of the four bivariate series (JEL: G15 G11 C15 C34).

Keywords: higher-order, bivariate, international diversification, EGARCH, VARMA.

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