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

The Separation of Banking from Insurance: Evidence from Europe
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 157–184)

Mohamed Nurullah
Glasgow Caledonian University, U.K.
Sotiris K. Staikouras
Cass Business School, U.K.

The European market of banks and insurance companies has traditionally no exact boundaries between insurance and banking activities. Such business arena poses distinctive challenges to both banking and insurance industries. The paper statistically evaluates the feasibility of a hybrid portfolio integrating banking and insurance services. It examines the risk-return effects of European banks’ diversification into life and non-life insurance underwriting, as well as into insurance broking businesses. More specifically, it focuses on financial data and analyzes changes in profitability, return volatility and creditworthiness of those financial institutions. The empirical results indicate that diversification by European banks into life and non-life insurance underwriting activities increases banks’ risk. Unlike the non-life insurance sector, the return on life assurance underwriting increases significantly. On the other hand, insurance broking returns increase as well, while volatility and possible bankruptcy remain insignificant. This suggests that the interface of banks and insurance broking activities could be further explored (JEL: G21, G22, G28, G34).

Keywords: Bancassurance, Financial institutions, Bank diversification, Insurance activities, Risk-return analysis.

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Conditional Risk Premia in International Government Bond Markets
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 185–204)

Joëlle Miffre
EDHEC Business School, France

The paper estimates conditional pricing models for 11 international government bonds and shows that, while local instruments capture the change in the bonds’ risks, global instruments model the variation in the factor risk premia. Altogether the changes in the factor risk premium capture 78.25% of the bonds’ predictability, while the dynamics in the betas account for less than 1%. One cannot conclude however that the conditional models are well-specified as parameter instability and relatively large mean squared errors were uncovered. These results extend for the first time some of the evidence from the equity market of Ferson and Harvey (1993), Harvey (1995) and Ghysels (1998) to the bond market (JEL : G12, G15).

Keywords: international government bonds, conditional asset pricing models, variance ratio, mean squared errors, parameter stability.

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Estimation of VaR Using Copula and Extreme Value Theory
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 205–218)

L. K. Hotta
State University of Campinas, Campinas SP, Brazil
E. C. Lucas
ESAMC, Campinas SP, Brazil
H. P. Palaro
State University of Campinas, Campinas SP, Brazil and Cass Business School, U.K.

This paper proposes a method for estimating the VaR of a portfolio based on copula and extreme value theory. Each return is modeled by ARMA-GARCH models with the joint distribution of innovations modeled by copula. The marginal distributions are modeled by the generalized Pareto distribution in the left tail (large loss) and empirical distribution otherwise. The copula is estimated by an estimator which gives more weight to observations with large loss. The method is applied to a two-asset portfolio and compared to other traditional methods (JEL: C15, D81,G10).

Keywords: conditional copula, risk measures, VaR, extreme value theory.

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The Impact of the Announcement of Acquisition of Divested Assets on Buyers’ Wealth - Asset Fit and Disclosure of Funds Used: Evidence from the U.K.
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 219–240)

Balasingham Balachandran
Monash University, Australia
Robert Faff
Monash University, Australia
Roger Love
Monash University, Australia
Andrew Menon
Monash University, Australia

This study examines the effects of announcements of acquisition of assets on shareholder wealth of buyers over the period January 2000 to December 2002 in the U.K. Significant positive announcement period abnormal returns for ‘fit’ acquisitions of divested assets that disclosed the “sources of funds” are documented. Multivariate regression analysis shows that announcement period abnormal returns are significantly related to pre-announcement period abnormal returns, relative size of the acquisitions and disclosure of sources of funds. Overall, there is little or no support for the asset fit hypothesis. However, there is strong support for “Fund Source Disclosure”, “Fund Source Pecking-Order” and “Relative Size of Acquisition” Hypotheses (JEL: G34).

Keywords: divested asset acquisition; buyers; price reaction; fit and non-fit; fund source

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Behavioral Biases in Forward Rates as Forecasts of Future Exchange Rates: Evidence of Systematic Pessimism and Under-Reaction
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 241–277)

Raj Aggarwal
University of Akron, U.S.A.
Sijing Zong
California State University-Stanislaus, U.S.A.

Even though the forward-spot relationship in currency markets is very important for policy makers and for corporate and investment managers, it remains a theoretical and empirical puzzle. In theory the forward rate should be an unbiased forecast of the future spot rate, but this hypothesis has little empirical support. For the currencies of the nine major industrialized countries, this paper documents that in spite of the very high trading volumes in currency markets, consistent with evidence for other asset markets, revisions in the forward rate forecasts of the future spot exchange rate reflect systematic pessimism and under-reaction to new information (JEL: F31, G14, F47, G15).

Keywords: exchange rates, forward bias, market rationality, under-reaction

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The Microstructure of the Irish Stock Market
(Multinational Finance Journal, 2008, vol. 12, no. 3/4, pp. 279–311)

Patricia Chelley-Steeley
University of Aston, U.K.
Brian Lucey
Trinity College Dublin, Ireland

This is the first paper to examine the microstructure of the Irish Stock Market empirically and is motivated by the adoption, on June 7th of Xetra the modern pan European auction trading system. Prior to this the exchange utilized an antiquated floor based system. This change was an important event for the market as a rich literature exists to suggest that the trading system exerts a strong influence over the behavior of security returns. We apply the ICSS algorithm of Inclan and Tiao (1994) to discover whether the change to the trading system caused a shift in unconditional volatility at the time Xetra was introduced. Because the trading mechanism can influence volatility in a number of ways we also estimate the partial adjustment coefficients of the Amihud and Mendelson (1987) model prior and subsequent to the introduction of Xetra. Although we find no evidence of volatility changes associated with the introduction of Xetra we do find evidence of an increased in the speed of adjustment (JEL: G15).

Keywords: trading systems, adjustment speed, cross listing, microstructure.

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