Studies in Economics and Finance

Determinants of credit spread changes for the financial sector : Table of Contents

Wassim Dbouk, Lawrence Kryzanowski — Mon Mar 01 02:05:39 GMT 2010

Abstract:
Purpose – Most of the credit spread literature deals with the determinants of credit spread changes for individual bonds. The purpose of this paper is to investigate the explanatory power of credit spread changes and their determinants for portfolios. Design/methodology/approach – Using ordinary least squares (OLS) regressions and monthly data from 1990 to 1997, this paper tests several new potential determinants (e.g. portfolio diversification) and expectations (and realizations) for some previously identified determinants (e.g. gross domestic product (GDP)) of credit spread changes for portfolios of financials as derived from spot curves. Findings – Strong empirical support is reported that default risk and undiversified risk are priced in credit spreads. The paper finds that forecasts for GDP and inflation are better determinants of credit spread changes than the realized values previously used in the literature, which is consistent with the notion that term structures convey expectations about future interest rates. Research limitations/implications – Interesting issues for future research include the sensitivity of the results to the use of other procedures for deriving zero-coupon spot rates, and whether forecasts of macrovariables (such as GDP) are better determinants of credit spreads for other industrial categories, such as utilities and industrials. Practical implications – The findings provide guidance for the management of risk for fixed income portfolios, for the pricing of fixed income securities differentiated by the difficulties encountered in achieving well-diversified portfolios, and for assessing the performance of credit spread portfolios managed by financial institutions. Originality/value – The empirical model, which achieves substantial explanatory power while being parsimonious, is the first to support the usage of forecasts instead of realized values in determining credit spreads, and to show that undiversifiable risk is an important component of the credit spreads of portfolios.

Stock market and aggregate consumption asymmetry: evidence from Malaysia : Table of Contents

Mansor H. Ibrahim, Muzafar Shah Habibullah — Mon Mar 01 02:05:39 GMT 2010

Abstract:
Purpose – The purpose of this paper is to analyze the influences of real share prices on aggregate consumption for Malaysia with the focus on whether there is asymmetry in the long-run relation of the two variables. Design/methodology/approach – The paper specifies aggregate consumption to depend on real income and real share prices. Alternatively, imposing long-run budget constraint, the paper specifies the relation between aggregate consumption and real share prices as ratio to real income. Then, it applies an asymmetric cointegration and error correction modeling. Findings – The cointegration tests indicate the presence of a long-run relation between consumption-income ratio and share price-income ratio. More interestingly, while changes in share prices exert short-run causal influences on Malaysia's private consumption, evidence is found for the adjustments of consumption – income ratio to the long-run equilibrium path only when it is above its long-run value. The paper interprets the finding as suggesting downward revisions in the consumption patterns when there are adverse shocks in share prices and, accordingly, supports the existence of especially negative wealth effect for Malaysia. Research limitations/implications – Owing to data limitations, the paper relies on aggregate consumption and aggregate income data. It acknowledges that the sum of non-durable consumption and flow-of-services from durable purchases and labor income are more appropriate measures of, respectively, consumption and real income. Originality/value – The findings have important implications for understanding consumption behavior in a developing country and can provide insight on the effectiveness of monetary policy.

The impact of cross-listings on the UK and the German stock markets : Table of Contents

Mon Mar 01 02:05:39 GMT 2010

Abstract:
Purpose – The purpose of this paper is to examine volatility transmissions between portfolios of cross-listed equities and exchange rate differences and also the volatility persistence for home, foreign equities, and exchange rate differences in the UK and German markets. Design/methodology/approach – A primary focus of this paper is to see if there is an impact first on the volatility persistence for foreign equities that are listed in the UK and German markets, second on the respective home portfolios of cross-listed equities, and third on the exchange rate differences. In addition, whether there are any bilateral spillovers between the following equity portfolios: foreign cross-listed equities, home cross-listed equities, and also local or global exchange rate differences are investigated. Findings – The paper finds that the volatility persistence is more prominent than error persistence from cross-listed equities, foreign or home, and the exchange rate differences. Furthermore, the transmission mechanism indicates a bilateral integration process in some of the cases that were examined. Based on these results, it is concluded that in the UK market the foreign cross-listings affect less the domestic equities compared to the German market. Originality/value – This paper examines the interdependence of portfolios of home and foreign equities for cross-listings that belong to the same stock exchange with two exchange rates, a local and a global one in order to provide more evidence in this area of literature.

Stackelberg real-leader in an insider trading model : Table of Contents

Leonard F.S. Wang, Ya-Chin Wang — Mon Mar 01 02:05:39 GMT 2010

Abstract:
Purpose – The purpose of this paper is to extend the work of earlier researches relating to insider trading issues in the stock market under a Cournot-Stackelberg duopoly. Design/methodology/approach – This paper models that the competition among the insiders in the real market be Stackelberg, which reflects that for all outside and inside reasons, the position and influence of a firm may become the leader or the follower as time goes by. Findings – The paper demonstrates that when the listed company with insiders becomes the leader in the industry, the reaction functions of insiders will change as well as the parameters of the market, to signal from real and financial sides, but the amount traded by insiders remains the same; so does the degree of information revelation. In addition, for the information revealed to the public, the stock price reveals more information with Stackelberg real-leader model than that of the Stackelberg financial-leader model. Originality/value – The main contribution of this paper is that market makers can very well observe signals from the real side, and bringing a signal from the real side can help the stock market reveal more information, but once the signal is introduced, it may not further enhance market efficiency.

Does trade matter for stock market integration? : Table of Contents

Bakri Abdul Karim, M. Shabri Abd. Majid — Mon Mar 01 02:05:39 GMT 2010

Abstract:
Purpose – The purpose of this paper is to re-examine the stock market integration and short-run dynamic interactions between the Malaysian stock market and the stock markets of its major trading partners (the USA, Japan, Singapore, China and Thailand). Design/methodology/approach – Weekly stock indices spanning from January 1992 to May 2008 is analysed using autoregressive distributed lag (ARDL) bound testing approach and vector autoregression (VAR) framework. Findings – Stock markets of Malaysia and its major trading partners are found to be integrated. To some extent, it is found that trade does matter for stock market integration. Additional, geographical proximity and close relationship between the countries further contributes towards a greater integration between them. To move forward to a greater financial integration among these countries, trade liberalisation, including reduction or removal of trade and investment barriers would be necessary. Originality/value – This paper is among the first attempts to use ARDL and VAR frameworks to examine integration among the stock markets of Malaysia and its major trading partners. The findings of the study would shed some empirical lights for the purpose of policy making.