GLOBAL FINANCE JOURNAL
Volume 12, Number 2, 2001

CONTENTS

Overreaction and Under-reaction in the Foreign Exchange Market . . . . . . . . . . . . . . . . . . . . .

Stephen J. Larson and Jeff Madura

Research has documented overreaction and under-reaction for stocks and stock market indices, but it has not yet analyzed these phenomena with regard to currency exchange rates. This paper examines exchange rate changes following extreme one-day fluctuations for currencies in industrialized and emerging markets. In this study, the exchange rate is defined as the number of foreign currency units per U.S. dollar. An overreaction phenomenon for currencies in emerging markets and an under-reaction phenomenon for currencies in industrial markets is found.

A Test of the Stability of Exchange Rate Risk: Evidence from Australian Equities Market

Amalia Di Iorio and Robert Faff

This paper investigates the sensitivity of equity returns on Australian industry portfolios to an exchange rate factor for the period 1988 to 1998. Specifically, using daily data, we (i) analyse the exchange rate exposure of the Australian equities market by implementing a basic augmented market model using relevant bilateral exchange rates; (ii) investigate the intertemporal stability of the exchange rate exposure by using a dummy variable specification; and (iii) attempt to establish the determinants of the exchange rate exposure of Australian industries by undertaking a cross-sectional analysis. A further empirical issue addressed by our study is that of whether the sensitivity is contemporaneous or lagged. We find (a) some evidence of exchange rate exposure; (b) some evidence of intertemporal sensitivity; and (c) a greater sensitivity to movements in the Australian dollar/US dollar exchange rate factor than to movements in the Australian dollar/Japanese yen. Further, we observe a significant lagged effect when employing the basic augmented model. This difference in the response of the industry portfolio returns is not observed, however, in our intertemporal stability investigation. Finally, we do not find significant evidence in terms of the cross-sectional determinants of foreign exchange exposure.
e-Finance: Promises Kept, Promises Unfulfilled and Implications for Policy and Research. .
Anthony F. Herbst

Growth of electronic, Internet based commerce, or e-commerce, has been truly explosive. However, innovations and growth of e-finance have lagged those of e-commerce in general. E-cash has stumbled along but not lived up to its early promise or its current potential. This paper discusses the current status of e-finance, some of the problems that have stood in the way of its growth and development, and implications for government policy and research. Lengthy, detailed discussion of such ancillary issues as encryption technology, e-cash algorithms and other technical detail at the micro level of implementation is avoided.

Economic Exposure & Hysteresis: Evidence from German, Japanese & U.S. Stock Returns

Wayne Y. Lee and Michael E. Solt

Real exchange rate changes reflect terms of trade changes and macroeconomic shocks in productivity, aggregate demand, and interest rates. We show that German, Japanese, and U.S. excess stock returns vary directly with changes in the real terms of trade as well as with exchange rate changes induced by the macroeconomic factors. These results suggest that economic exposure is a global phenomenon. Although German, Japanese, and U.S. firms appear to adjust costs and productivity in response to economic exposure there are indications that firms in all three countries suffer from hysteresis, an effect persisting after the initial cause is removed.

Performance Persistence of International Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William Droms and David A. Walker

This study applies the “winner-winner, winner-loser” methodology developed by Goetzmann and Ibbotson, Brown and Goetzmann and Malkiel to test for short-term performance persistence in international equity mutual funds over the 20-year period from 1977 to 1996. Persistence tests are applied to a database consisting of all international equity funds in existence during this period, varying from a low of 11 (1977) to a high of 473 (1996) funds, reflecting the extremely rapid growth of this asset class over the last 20 years.

Parameter Shifts When Measuring Wealth Effects in Cross-Borders Mergers. . . . . . . .
Halil Kiymaz and Tarun K. Mukherjee

The most critical assumption in applying the market model in event studies is that estimated parameters are unaffected by the event. This assumption may not necessarily hold for mergers and acquisitions as they may alter the operating and/or financial risks, and therefore, the betas of acquiring firms. The potential for beta reduction may be even higher for a firm acquiring abroad since cross-border mergers provide additional risk reduction opportunities. Measuring wealth effects without considering potential changes in betas may result in biased interpretation of results. In this paper we examine if parameters change in response to U.S. firms’ announcements of cross-border acquisitions occurring during 1982-1991. The results indicate that U.S. bidders experience statistically significant beta reduction in the post-estimation period. Also, betas decline irrespective of the location of the target, although the degree of decline and its level of significance vary across countries. The abnormal returns based on pre-announcement and post-announcement parameters lead at times to different conclusions regarding wealth effects.

Tobin’s Q, Agency Conflicts & Differential Wealth Effects of International l Joint Ventures

Jae Hoon Min and Larry J. Prather

This article examines announcement effects of 240 International Joint Ventures (IJVs) undertaken by U.S. firms to ascertain their impact on shareholders' wealth. The objective is to ascertain whether the mixed results of announcement effects reported in the literature can be explained. Theory suggests that IJVs would result in differential stock price reactions due to firm-specific characteristics. Therefore, it is hypothesized that IJVs would elicit a positive stock price reaction, on average. Also, it is hypothesized that this reaction should be greater for high Tobin’s q firms and for low free cash flow firms. Empirical analysis reveals that firm specific characteristics do influence announcement effects and suggests that these factors may explain the mixed announcement effects documented in the literature.

Industrial Structure on the Exchange-rate Exposure of Industry Portfolio Returns………..

Anand Krishnamoorthy

The purpose of this paper is to demonstrate that industrial structure is an important determinant of the exchange-rate exposure of industry portfolio returns. A time series regression is conducted on the sample of industries by regressing the rate of change of a trade-weighted U.S. dollar index on the industry portfolio return while controlling for the U.S. market. The regression was conducted using monthly data over a three year period (1995-1997). The results indicate that industries that are classified as being globally competitive and those that primarily serve the consumer sector of the economy have significant levels of exposure. The paper also provides some evidence on market efficiency as it pertains to changes in the value of the dollar.

On the Long Run Relationship between Gold and Silver Prices: A Note . . . . . . . . . . . . .

Cetin Ciner

This study examines the long run trend between the prices of gold and silver futures contracts traded on the Tokyo Commodity Exchange and concludes that the stable relationship between gold and silver prices has disappeared in the 1990’s. The underlying causes and implications of this finding are discussed.

GLOBAL FINANCE JOURNAL
Volume 12, Number 1, 2001

CONTENTS

Equity Market Linkages in the Asia Pacific Region: A Comparison of the Orthogonalized and Generalized VAR Approaches…… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

Arie Dekker, Kunal Sen and Martin Young

This study provides an empirical analysis of the linkages between markets, and the efficiency with which innovations between markets are transmitted in the Asia Pacific region, using two competing methodologies. Specifically, this study compares the generalized approach to forecast error variance decomposition and impulse response analysis to the more traditional orthogonalized approach. The findings of this study confirm earlier studies that show the Asia Pacific region to be characterized by informationally efficient equity markets, with a number of these markets showing strong linkages. More significantly, the generalized VAR approach is shown to give more realistic results, particularly for those markets with the closest geographical and economic links.

Chaotic Behavior in National Stock Market Indices: New Evidence Form The Close Returns Test ……………………………………………... .

Michael D. McKenzie

Attempts have been made to detect chaotic behavior in financial markets data using techniques which require large, clean data sets. Although such data is common in the physical sciences where these tests were developed, financial returns data typically do not conform. The close returns test is a recent innovation in the literature and is better suited to testing for chaos in financial markets. This paper tests for the presence of chaos in a wide range of major national stock market indices using the close returns test. The results indicate that the data are not chaotic, although considerable non-linearities are present. The commonly used BDS test is also applied to the data and in comparison, the close returns test provides substantially more evidence of non-linearity compared to the BDS test.

An Empirical Investigation of Trading Volume and Return Volatility of the Taiwan Stock Market ………………..…………………………… . . . . . . . . . . . . . . . . . . . . . . . .

Bwo-Nung Huang and Chin-Wei Yang

This study examines the Mixed Distribution Hypothesis (MDH) using five-minute interval stock returns of the Taiwan Stock Index(TSI). Startlingly enough, the persistence of stock volatility remains dominant after the stochastic mixing variable is include in the variance equation. It implies that the MDH cannot explain away the ARCH phenomenon. We have found that the composition of participants (approximately 92% of participants are individual investors) in TSI is a major contributing factor to the persistent volatility. In addition, the existence of limits on price changes, to some extent, accounts for the persistence phenomenon. Similar results are also found for individual stocks in the sample. Interestingly enough, the explanatory power of trading volume exhibits a U-shaped pattern in explaining return volatility in Taiwan Stock Market.

Time Variation Paths of International Transmission of Stock Volatility – U.S. vs. Hong Kong and S. Korea. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ling T. He

This study examines continuous time variation paths of sensitivities of the Hong Kong and South Korea stock markets to the U.S. stock market and bond market (proxied by long-term interest rates) by using the Flexible Least Squares (FLS) estimation technique. The FLS findings suggest that changes in both the U.S. stock market and U.S. long-term interest rates may simultaneously have significant effects on the Hong Kong stock market in some time periods. In other periods, neither may have significant effects on the Hong Kong stock market. The results also indicate that the South Korea stock market are overall insensitive to changes in the U.S. capital markets. However, it becomes more sensitive in the 1990s. Some macroeconomic variables may explain changes in the sensitivities of the Hong Kong and South Korea stock markets to changes in the U.S. capital markets.

Price and Volatility Spillovers Between Interest Rate and Exchange Value of the US Dollar.
Raymond W. So

In this paper, the dynamic relationships between interest rate and exchange value of the U.S. dollar are studied via a multivariate Exponential Generalised Autoregressive Conditional Heteroskedascity (EGARCH) model. In terms of price changes, movements of interest rates have positive effects on movements of exchange rates. However, changes in exchange rates do not explain changes in interest rates. Nevertheless, there exists volatility spillovers between the two markets, indicating that their second moments are related. Overall evidence suggests that these two markets have short-term dynamic interactions. The existence of volatility spillovers also suggests that the relationships between these two economic variables are not necessarily linear.

US Exports and Time Varying Volatility of Real Exchange Rate. . . …….. . . . . . . . . . . . . . . .
Abdul-Hamid Sukar and Seid Hassan

The effect of exchange rate volatility on trade is a controversial issue in international economics. Despite a widespread view that an increase in exchange rates volatility reduces trade, there is no real consensus on the direction or the size of the exchange rate volatility-trade level linkages. This paper investigates the relationship between U.S. trade volume and exchange rate volatility using cointegration and error correction models. We use conditional variances of the real effective exchange rate series modeled as a generalized autoregressive conditional heteroskedastic (GARCH) process to measure the exchange rate volatility. The Cointegration results indicate a significant negative relationship between U.S. export volume and exchange rate volatility. The short run dynamics of the relationship, however, show that the effects of both real exchange rates and exchange rate volatility are insignificant.

International Transmission of Inflation Under Alternative Exchange Rate Regimes: Empirical Evidence and Its Implications ………………………………
Jin-Gil Jeong and Youngho Lee

This is a study of the transmission pattern of inflation under alternative exchange rate regimes, fixed and flexible, among G-7 countries and their subsets, including four members of the European Union and two countries from North America. Our key empirical findings are as follows. The price levels of several countries, we found, move together as a co-integrated system, forming an equilibrium relationship under both fixed and flexible exchange regimes. Second, the speed of adjustment estimates shows that transmission of inflationary disturbances across countries is less pronounced under the flexible exchange rate regime than under the fixed exchange rate regime. Third, the U.S. was found to be a main producer of inflationary innovations among G-7 countries whereas the U.K. was found to be a main producer of inflationary innovations among the European Union countries, regardless of exchange rate regime.

An Examination of Nonlinear Dependence in Exchange Rates, Using Recent Methods From Chaos Theory. . . . . . . ………….. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Clair G. Gilmore

Interest in the relevance of nonlinear dynamics to finance and economics has spurred the evolution of new ways to analyze time series data. Tests for chaos, based on a metric approach which measures spatial correlations, led to the development of the correlation dimension test for chaos and the BDS test for non-linearity. More recently, a topological method has been introduced into the scientific literature which employs a simple qualitative test for chaos that is adaptable to the characteristics of financial data. A quantitative version is also presented here. Conflicting evidence exists about the presence of chaotic behavior in exchange-rate data. The qualitative topological test does not support evidence of a chaotic generating mechanism in these series. The quantitative form finds nonlinear dependence and is a useful diagnostic to determine the adequacy of ARCH-type models for this nonlinear structure.