Emerald | Studies in Economics and Finance

Consumption Hedging and Home-Country Bias in a Model of International Capital Market Equilibrium

Jacques A. Schnabel — 2012-03-02 00:00:00.0

Abstract

Purpose - A model of international capital market equilibrium is developed where investors exhibit home-country bias due to their desire to hedge real consumption.Design/methodology/approach - This paper posits a two-stage process of portfolio choice for the representative investor of a country. In the first step, the investor’s benchmark portfolio is determined, whereas in the second step, his optimal portfolio is chosen. The latter portfolio maximizes the expected portfolio rate of return minus the risk tolerance weighted variance of tracking error. The market equilibrium implications of the portfolio optimality conditions are determine via aggregation across all investors and countries.Findings - A revised security market line is derived that differs from the traditional security market line in terms of vertical intercept, slope, and beta coefficient. It is demonstrated that the derived model may be interpreted as a multi-country generalization of the Chen-Boness extension of the capital asset pricing model under uncertain inflation.Originality/value - This paper presents an innovative application of Roll’s tracking portfolio paradigm. Another novel feature is the derivation of the international capital market equilibrium implications of such portfolio choice behavior.

Bank concentration and financial constraints on firm investment in UK

Abubakr Saeed, Franco Esposito — 2012-03-02 00:00:00.0

Abstract

Purpose - This paper investigates the impact of bank concentration on firm financial constraints to perform investment across two types of financial constraints firms.Design/methodology/approach - We analyse this relationship by estimating the investment-cash flow sensitivity across groups of firms classified according to debt maturity structure model. We classified firms as short-term and long-term debt dependent firms. Empirically we analyze our sample that consists of most recent dataset over 2001-2009 of UK firms that engage in FDI by using fixed-effects and GMM-IV estimation techniques. Findings - Our analysis indicates that bank concentration relaxes financial constraints on firm level investment. Results indicates that higher level financial constraints are associated with short-term debt dependent firms that exhibit high level of investment- cash flow sensitivity. Further we find that bank concentration is associated with reduction in financial constraints on firm investment and this effect is stronger for short-term debt dependent firms. Originality/value - Unlike to previous studies, we investigate the bank concentration effects on UK foreign direct investing firms that are uniquely classified; base on distinctive dimension of financial frictions in capital market. Estimated results ascertain that information-based hypothesis is pertinent is UK capital market.

On the Cross-Methodological Validation of Bank Efficiency Assessments: Evidence from a Panel of Indian Banks

Shrimal Perera, Michael Skully — 2012-03-02 00:00:00.0

Abstract

Purpose - Since there is no agreement on the consistency of their estimates, this paper investigates whether parametric stochastic frontier analysis (SFA) and nonparametric data envelopment analysis (DEA) generate consistent bank efficiency assessments. Design/methodology/approach - We utilize four alternative efficiency computation models: two DEA technical efficiency models based on constant and variable returns to scale, and two SFA cost efficiency models employing Translog and Fourier functional specifications. An unbalanced panel of 59 Indian banks over 1990-2007 is employed as a model developing country banking market.Findings - The Translog and Fourier specifications in SFA and the constant and variable returns to scale assumptions in DEA rank and identify "best-practice" and "worst-practice" approximately in the same order. The association between DEA efficiency estimates and non-frontier standard performance measures, however, is mixed and inconclusive. Unlike DEA scores, SFA efficiency assessments were found to be consistent with cost and profit ratios and hence are ‘believable’.Practical implications - For regulators and bankers alike, our findings highlight the importance of investigating the consistency of efficiency scores across various research methods. They should ensure that frontier based efficiency assessments are not simply "artificial constructs" of models’ assumptions/specifications. Originality/value - This paper extends the existing literature by checking jointly the statistical consistency of both DEA technical efficiency scores and SFA cost efficiency scores. The prior studies focus either on technical efficiency or cost efficiency, but not both. Moreover, as far as we are aware, this is the first cross-methodological validation study to focus on bank efficiency in the context of a developing country banking market.

PROSPECT THEORY AND DISPOSITION PATTERNS: EVIDENCE FROM TAIWAN INVESTORS

Min-Hua Kuo, Shaw K Chen — 2012-03-02 00:00:00.0

Abstract

Purpose - The purpose of this paper is to demonstrate that various disposition patterns in terms of the price changes are plausible under the Prospect Theory (PT), which argues that investors have a greater tendency to sell assets that have risen in value since the purchase than those that have fallen. Numerous empirical evidences have shown that investors demonstrate the disposition effect (DE). This study highlights that, when the disposition measure is defined by the stock price changes, the PT predicts the DE indeed. It also indicates other seemingly contradicting disposition patterns: the reversed disposition effect and the pattern of the symmetry over gains and losses. Design/methodology/approach - To show that the disposition effect is only one of the disposition patterns under the preference of PT, as part of this study we apply the mental account theory and propose two decision criteria for the gain and loss accounts respectively (i.e. maximum loss tolerated and minimum gain required). We performed an empirical analysis from a large scale market survey in Taiwan to examine individual investors’ disposition patterns. Findings - The findings show that more than 50% of individual investors demonstrate their disposition patterns other than the disposition effect. Many investors show the reversed disposition effect or the pattern of symmetry (holding about the same magnitude of gains or losses before realization). Originality/value - This study answers the questions which, to our knowledge, have not been incorporated in the studies of the PT or the DE: First, when do investors sell losers which they are inclined to hold on? Second, for how long do they hold winners which they are eager to sell? Our arguments allow various disposition patterns to exist simultaneously, without changing the value function in the PT of convexity over losses and concavity over gains and without requiring strict assumptions on the expected stock returns.

AN ANALYSIS OF FIJI'S MONETARY POLICY TRANSMISSION

Paresh Kumar Narayan, Seema Narayan, Sagarika Mishra, Russell Smyth — 2012-03-02 00:00:00.0

Abstract

Purpose - In this paper we examine the monetary policy transmission mechanism for the Fiji Islands using a structural vector autoregressive (SVAR) model for the period 1975 to 2005. Design/methodology/approach - The SVAR model investigates how a monetary policy shock – defined as a temporary and exogenous rise in the short-term interest rate – affects real and nominal macro variables; namely real output, prices, exchange rates, and money supply.Findings - The results suggest that a monetary policy shock statistically significantly reduces output initially, but then output is able to recover to its pre-shock level. We discover that a monetary policy shock generates inflationary pressure, leads to an appreciation of the Fijian currency and reduces the demand for money. We also analysed the impact of a nominal effective exchange rate (NEER) shock (an appreciation) on real output and found that it leads to a statistically significant negative effect on real output.Practical implications - The findings of this study should be of direct relevance to the research and policy work undertaken at the Reserve Bank of Fiji.Originality/value - For a small economy, such as Fiji, where monetary policy is key to sustainable macroeconomic management, our paper is the first that undertakes a dynamic analysis of monetary policy transmission. The paper uses time series data over three decades and builds a structural VAR model, rooted in theory. This paper will be of direct relevance to the Reserve Bank of Fiji. The approach and model proposed will also be useful for applied monetary policy researchers in other developing countries where inflation rate targeting is a key element of the monetary policy setting.