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Abstract Proceedings
of the
Finance and Economics Conference 2010
Frankfurt am Main, Germany
August 17-18, 2010
Hosted by the Lupcon Center for Business Research
(www.lcbr-online.com)
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Session A
Revaluation Issues in the way of Financial Reporting of Securities - Fair Value Measurement
versus Historical Costs Approach
Jiri Strouhal (VSE, Czech Republic)
Measurement in financial reporting is one of factors which determines the quality and reliability of
presented information. There may be seen a conflict between the requirements for relevance and
timeliness of measurement on one side and the reliability and conclusive evidence on the other side.
The most important problem of measurement issues is the possibility of subjective manipulation with
values, which is possible when using certain measurement bases. Paper deals with the impact of
different approaches using for measurement of financial securities and their impact on key financial
indicators upon revaluation process.
Upon economic boom there can be seen higher optimism of investors which leads towards
requirement of measurement of all accounting items at fair value, which mainly represents current
market prices of assets. Using this concept means the turn from the prudence principle and
conservative historical costs concept in financial reporting. Moreover fair value concept leads to
higher tendency of revaluation assets or liabilities affecting profit or loss of the company.
Upon economic crisis conditions users revaluate their views on accounting methods, especially the
measurement bases. When we try to find out the reasons of economic crisis, we can hear opinions that
it was very optimistic information given by fair value accounting in the period of economic boom. But
history used to repeat: the greatest moment was Black Friday at New York Stock Exchange. The
reaction on the mentioned crisis was the evolution of US GAAP national standards which may be
allowed to face the problems like this.
The Effects of Global Financial Crisis on Turkish Foreign Trade
Rana Atabay Baytar (Istanbul Commerce University, Turkey)
Oksan Artar (Istanbul Commerce University, Turkey)
The financial crisis that began in the United States in the sub-prime mortgage market in 2007 and that
spread quickly to Europe has become a global crisis, affecting both financial systems across the globe
and economic activity in virtually all countries. Developing countries have been hit hard. Even those
countries that had strengthened their policies and built defenses to withstand a less benign global
environment than that which existed for much of the previous decade have not been spared.
Turkey, immediately after getting thrown/dragged into the largest crisis of its history has entered a
process of recovering and restructuring by giving its back to the winds of the political and economic
conjuncture in the world. It has managed to grow mainly in the financial sector due to the macro
reform movements it realized. Even though being a tangent to the crisis has often been prophesied by
the political decision makers, it is not possible for Turkey whose economy is greatly tied to external
dynamics to not be affected by this crisis. Hence, the global economic crisis has seriously affected
Turkish economy in 3 basic ways and it seems this effect on the economy will continue.
This study, basing itself on latest statistical data will show how Turkey has been affected by foreign
trade, credit and investment channels from financial crisis.
Individual Investors – Additional Purchases
Cristiana Cerqueira Leal (University of Minho, Portugal)
Manuel Roche Armada (University of Minho, Portugal)
Our study is based on a unique database of 6 177 individual investors accounts, with detailed data on
their registered trades. The data set under analysis goes from 1st August 2003 to 31st July 2007,
comprising about 1 million trades. Using the accounts movements, we compose the account position
of each investor, on each day of the sampling period. Our analysis focus the stock decision related to
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investor past prices. We find that (1) investors prefer repurchase stocks that are their past winners; (2)
investors prefer repurchase stocks that have decreased in price since sold; (3) the preference is
accentuated when simultaneously the stock is a past winner and has decreased in price since sold; and
(4) investors prefer to additionally purchase stocks currently owned when the price of the stock has
decreased in value. We also test these preferences related to investor activity. We find every of those
preferences for frequent and infrequent traders but statistically stronger for infrequent traders. These
patterns can be explained mainly by behavioral factors related to prospect theory, mental accounting
and counterfactuals. Generally, individual investors take decisions to emphasize the positive
experiences (gains), expected to be repeated, and to avoid the sources of regret associated with
negative experiences (losses realized). We also test these preferences related to investor activity. We
find every of those preferences for frequent and infrequent traders but statistically stronger for
infrequent traders.
The influence of the Crisis 2008 in the Greek Stock Exchange
Maria K. Markopoulou (University of Macedonia, Greece)
George C. Chatzinas (University of Macedonia, Greece)
The aim of this article is to investigate the way that the financial crisis of 2008 influenced both kinds
of risks, systematic and non-systematic, of the Greek Stock Exchange. Using the Single Index Model
Theory and a 3-year-database of the closing prices of every single index of the Athens Stock Exchange
and, we computed a number of tests for the beta coefficients, the total variances and the variances of
the residuals of the model. The results of our research are in accordance with previous research that
suggests a rise in systematic risk of the markets whenever a crisis occurs.
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Session B
The SR Approach: a new Estimation Method for Non-Linear and Non-Gaussian Dynamic Term
Structure Models
Martin Andreasen (Bank of England, United Kingdom)
This paper suggests a new and easy approach to estimate linear and non-linear dynamic term structure
models with latent factors. We impose no distributional assumptions on the factors and they may
therefore be non-Gaussian. The novelty of our approach is to use many observables (yields or bonds
prices) in the cross-section dimension. An important benefit of using many observables in each time
period is that the latent factors can be estimated quite accurately using standard regressions. That is, in
each period we set the latent factors to minimize the distance between the observed yields/bond prices
and the model implied yields/bond prices. We also show how output from this regression filter can be
used to get consistent and asymptotic normal estimates of parameters in dynamic term structure
models. These results hold for non-linear models with potentially non-Gaussian factor dynamics and
they do so with weaker restrictions than those needed for likelihood inference. Two potential
disadvantages of our approach are that we may need to rely on sequential identification of parameters
and that our approach is not fully efficient. However, simulation results show that the SR approach
based on 25 observables in each period and sequential identification is just as efficient as Maximum
Likelihood with about 5-10 observables in each period. Given these results, we argue that estimation
of dynamic term structure models could benefit from using many observables instead of focusing only
on how to do likelihood inference based on relatively few observables.
Growth Effects of Government Sector: A Panel Data Analysis for International Comparison
Ismail Seyrek (Hitit University, Turkey)
Mehmet Tuncer (Karadeniz Technical University, Turkey)
This paper deals with the relationship between government expenditures and economic growths in
general. Motivation behind the work is the recent crisis, which has been calling an active involvement
of governments into economies around the world. This paper utilized the panel estimation models in
order to analysis the relationships concerned. Although they are statistically weak the paper found two
main results. The first one is that while there is a positive relationship between the military
expenditure and the economic growth, there is a negative one between the expenditures on education
and economic growths. The second result is that panel estimations of the annual growth rates by the
government expenditures have given a positive sign though statistically weak.
How many insolvent debtors are we going to have tomorrow?
Alesia Khudnitskaya (TU Dortmund, Germany)
Improving the ways of monitoring and forecasting problematic debt at regional level is essential for
building health economic environment within a region. In this paper I introduce the model which can
be applied to forecasting the share of insolvent borrowers at the county or regional level. For this
purpose I use the multilevel simultaneous equation modeling. The first equation is the credit scoring
model which assesses the credit worthiness of a borrower. It predicts the probability that a borrower
will default on his credit obligations given the credit history on the past loans. I define the borrowers
as individual persons or families. The second equation is a panel-data Possion model for counts. It
estimates the share of the insolvent debtors within the region during the year. Equations are linked by
the random-effects which are specified at the second-level of the model hierarchy. Including correlated
random-effects allows bringing the information on credit scores in the regional model for counts. It
also incorporates region-specific effects in the joint model. I apply Bayesian Monte Carlo Markov
chain approach to fit the joint model.
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From policy prospective the joint model can be applied to address different questions: inspect
relationship between credit scores and number of insolvent debtors in high and low income areas,
monitor changes in the share of problematic debtors for the different credit products and forecast the
next year's share of debtors given current year credit scores of applicants for a loan.
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Session C
The Information Content of Accruals and Cash Flows in an Emerging Capital Market During
Financial Crisis: The Case of Turkey
Burcu Adiloglu (Istanbul University, Turkey)
Bengu Vuran (Istanbul University, Turkey)
In the last two years, global economy has experienced severe bouts of financial instability that have
had devastating impacts on many countries. The last global financial crisis made Turkey to experience
a significant downturn in real economic activity especially in industrial sector. Contraction of the
economy, made security returns decline substantially because of the inadequate cash flow generation.
The current turmoil in the global finance market made it imperative to question once again the validity
and relevance of accounting information in stock returns. This paper investigates the relative and
incremental information content of earnings, components of cash flow statement and accruals in the
emerging capital market of Turkey. Regression analysis is conducted to examine the association in
financial crisis period based on a sample of 142 industrial firms listed in Istanbul Stock Exchange
(ISE) for the year of 2009. The results are expected to reveal strong relevance between accruals and
cash flow components on stock returns in Turkey as an emerging market.
Examining the Tourism Income in Turkey Using Liu and Ridge Estimators
Betül Kan (Anadolu University, Turkey)
The linear relationship among the independent variables, multicolinearity, causes coefficient estimates
with big variances in multiple linear regression models. Biased estimation methods are commonly
used in order to remove or reduce multicolinearity. In this study, the comparison of liu and ridge
estimators which are known as biased estimation methods is given. Firstly the two methods in question
are defined then the comparison is given for a data set about tourism income in Dollars in Turkey
between 1985 and 2006. The independent variables that are taken in the model are total bed amount,
the number of foreign tourists, the number of tourism agencies, the amount of foreign investment, the
exchange rate of Euro, and the exchange rate of US dollars. The two methods are compared with each
other in terms of their efficiency and their biasedness. Finally the results are interpreted.
Information Asymmetry and the Cost of Equity Capital
Peng He (University of Sydney, Australia)
This study empirically examines the investment value of security analyst recommendations on
constituent stocks of the S&P/ASX 50 index. We find that stocks with favourable (unfavourable)
recommendations on average outperformed (underperformed) the market index. An investment
strategy using the Black-Litterman asset allocation model that incorporates consensus analyst
recommendations, in conjunction with daily rebalancing, outperforms the market in terms of return
and risk adjusted performance measures. The investment strategy involves high levels of trading and
no significant abnormal returns are achieved after transaction costs. Less frequent rebalancing, under
most situations, causes a decrease in both performance and turnover. Filtering of dated
recommendations causes an increase in turnover, whilst having mixed effects on investment returns.
Insights from Knowledge Economy to Radical Innovation - Internet Banking Applications in the
European Union
Erhan Atay (Trakya University, Turkey)
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The introduction of new products is desirable whenever it results in better banking performance.
Increase in internet usage in the worldwide strengthening of communication structure led to expansion
of internet banking.
Internet banking is an alternative delivery channel developed by using internet to offer banking
services.
Various types of innovation have been differentiated in the banking sector. On the one hand ,
incremental innovations lead to reinforcing the position of the knowledge economy on its market
improving existing products. On the other hand, radical innovations may renew the of the banks.
Today, in knowledge age ,corporations recognize that to be successful, they need to understand
modern strategic management techniques.
In this regard, several research related to radical innovations have underlined that banking sector face
difficulties when trying to develop non-incremental innovation such as dominant logic of managers,
resources allocation processes , and the dominance of exploitation learning.
Internet banking attracts a special worldwide attention because of its benefits to both banks and
customers. Banking sector started to use the internet not only as an innovative payment method and to
increase customer convenience, but also as a way to reduce costs and enhance profits. General
economic features such as the level of investment banking in technology, ICT, ,internet access,, R&D
expenses, and skill of end-users with new technologies may influence the future of internet banking.
Since innovative activity is capital intensive and tends to require outside financing, we expect radical
innovation to be more prevalent in the countries with a relatively more developed financial sector.
Radical innovation has a higher effect on productivity in financially developed countries such as the
EU.
We believe that radical innovations will be better able to provide a more sustainable competitive
advantage than incremental ones. Radical innovations involve new, superior solutions to customer
needs and may help to redefine competitive rules, which in turn improve the competitive position of
the banking sector. This paper attempts to explain the roles of knowledge economy in radical
innovations, especially as applied to the are of internet banking in the EU.
National Accounting Culture and the Recognition of Provisions: The Application of the
Prudence Principle
Voicu Dragomir (Bucharest Academy of Economic Studies, Romania)
Prudence in accounting is a corner-stone concept which has shaped accounting theory, as well as
ordinary financial reporting, sometimes in obscure and perverse ways. Thus, on the quantitative side
of the study, we developed a proxy for accounting conservatism, namely the degree of uncertainty
associated with the settling of a company’s obligations. To this purpose, we hand-collected accounting
data for 388 business groups from 17 European countries. The companies are representative for the
main industrial and consumer sectors, excluding financial institutions. For these companies we
computed the provisions-to-liabilities ratio (PLR) and performed several group tests, according to the
following original classification of national accounting cultures.
The qualitative nature of our contribution is apparent in the critical analysis of the degree of
conservatism as a fundamental attribute of any national accounting culture. We classified the 17
European countries in our sample in three groups according to how domestic standards recognize and
measure provisions for risks and charges, in comparison with IFRS. Thus, the companies in our
sample belong to the following accounting environments: IFRS-compliant (147 firms), conservative
(179) and liberal (62).
The results indicate that companies incorporated in countries that are classified as conservative do
assign a significantly higher degree of uncertainty to their total amount of liabilities. If we take into
account that all the companies in our sample prepare their annual accounts in compliance with IFRS,
we can conclude that national accounting culture when classified as prudent exhibits a significant
influence on the IFRS policies that companies apply with regard to the recognition and measurement
of provisions.
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Session D
Mergers and Acquisitions in UK: A Critical Review of the Theoretical and Empirical
Literature’s Contributions
Talie Kassamany (Notre Dame University, Lebanon)
Mergers and Acquisitions is one of the most researchable topics in corporate finance. Researchers are
interested in whether takeover activities create or destroy value to the shareholders of the target and
acquirer firms. The purpose of this study is to present a critical literature review of the relevant
theoretical and empirical literature that investigate the impact of mergers and acquisitions on firm
performance in order to identify gaps or inconsistencies and propose potential topics for future
empirical investigation. The study contributes to the vast academic literature on mergers and
acquisitions by providing a synthesis to the extant literature through reviewing the theoretical basis for
investigating the impact of acquisitions on shareholders performance of acquirer and target companies
after controlling for various bid and market characteristics. A systematic survey of the literature is
adopted to earn comprehensive theoretical and empirical understanding about the effect of takeovers
on firm performance. This process assists in identifying major contributions from influential and
recent studies and finding out gaps and inconsistencies in the literature.
Several UK and US studies unanimously conclude that target shareholders gain while the size and
magnitude of acquirers’ return depends on the takeover’s management motivations, firm’s factors, and
bid characteristics. The relatively inconclusive findings about acquirers’ returns have encouraged
researchers to investigate whether announcement returns are sensitive to various bid characteristics.
Researchers focus their analysis on various bid characteristics such as target attitude, the method of
payment by the acquirer, the relative size of acquirer and target, the industrial relatedness of the two
firms, and target type and location. Recently, the focus by researchers is on target type and location
(Conn et al 2005, Draper , Paudyal 2006, and Antoniou et al. 2007) and on the effect of stock market
misevaluation on US takeover activities (Rhodes-Kropf, Robinson & Viswanathan 2005, Dong et al.
2006, and Savor , Lu 2009).
Based on the findings and contributions of recent and influential studies, two potential researchable
topics for future research could be proposed and discussed. The first one deals with the unprecedented
occurrence of hostile takeovers in Europe, Japan, and China in the 1990s and early 2000s in which this
topic is ignored by many researchers. The second topic deals with the effect of misvaluation of the
market on takeovers activities in UK.
Credit Ratings during Credit Crunch: Implications for Investors and Regulators
Ali Ebrahimnejad (Queen’s University, Canada)
This paper studies the behavior of Credit Rating Agencies both in times of credit crunch and calm.
In particular, I examine whether or not the rating agencies differ in their propensity to downgrade
firms during times of financial crisis, and especially, times of credit crunch. Having established
that, I study the stock market reaction to rating changes with a focus on downgrades so see whether
or not investors are able to distinguish between firms downgraded primarily due to firm-specific
factors and those downgraded due to adverse developments, both at the firm and market level. I
compare this reaction both during times of credit crunch and calm to identify any changes in
investors behavior. According to the findings, recommendations are made to both investors and
regulators; for investors, it may necessitate further investigation of the creditworthiness of the
downgraded firms, and for regulators, cautious approach might be needed in incorporating the
credit ratings in the regulatory frameworks to avoid the creation of a vicious circle of bankruptcy
and credit crunch in the markets in the times of financial crisis.
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Modeling the relationship between cross-cultural leadership styles and cross-border acquisition
financial performance
Tarek Kandil (Plymouth University, United Kingdom)
Researchers and practitioners in banking industry admit that culture plays a crucial role in determining
the long-term successful performance of the cross-border mergers and acquisitions deals, especially in
the last wave the banking cross-border mergers and acquisitions face. Although theorists and
practitioners recognize that acquisitions frequently fail to live up to their potential, they have not been
well articulated or studied the role of leadership , Shared Understanding values and customer
perceived and its effect on banking industry M&A performance.
The study is an in-depth research of the effects of culture on cross-border banks mergers and
acquisitions long-term performance in both the British and Egyptian banks. The data collection
process was carried out between January 2007 and January 2009.
Structural Equation l models have been used to analysis the data and to test the hypotheses .This
statistical technique will help the researcher assess direct, indirect and total effects of culture on
mergers performance by using multi group models.
The Research hypotheses and models were developed from theoretical insights and extant empirical
research findings. Data were collected using questionnaire survey from medium to large companies
based in the UK, and subsequently analyzed using (SPSS 17 and AMOS 18). The main findings of this
research supported the theoretical proposition that there are direct and indirect effects between culture
and leadership; and post financial performance.
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Session E
Empirical Study of Relationship between R&D and Economic Growth in India
Sanjay Tupe (Indian Institute of Technology, India)
This paper investigates casual relationship between R & D and economic growth in India for the
period 1981-2008. The results of Granger causality reveal that there is bidirectional causality between
domestic capital formation process and research & development. Further, causality test shows that
investment made in research & development promotes openness process of the economy in Indian
case. The findings appeared from the Dynamic error correction model shows that model will not reach
in equilibrium during the short run period. Hence causality relationship does not exit between GDP
and R & D. However, the negative sign of vector of Error term (ECT) reveals possibility of
equilibrium in the long run period.
Can a CCAPM with habit generate realistic conditional volatility in exchange rate returns
Jingyi Liu (Nottingham University, China)
In this paper we attempt to give a theoretical underpinning to the well established empirical stylized
fact that asset returns in general and the spot FOREX returns in particular display predictable volatility
characteristics. Adopting Moore and Roche's habit persistence version of Lucas model we find that
both the innovation in the spot FOREX return and the FOREX return itself follow "ARCH" style
processes. Using the impulse response functions (IRFs) we show that the baseline simulated FOREX
series has "ARCH" properties in the quarterly frequency that match well the "ARCH" properties of the
empirical monthly estimations in that when we scale the x-axis to synchronize the monthly and
quarterly responses we find similar impulse responses to one std. dev. shocks in conditional variance.
The IRFs for the ARCH processes we estimate "look the same" with an approximately monotonic
decreasing fashion. The Lucas two-country monetary model with habit can generate realistic
conditional volatility in spot FOREX return.
International Portfolio Diversification Benefits: Cross Country Evidence from Malaysian
Perspective
Surianor Kamaralzaman (Universiti Teknologi MARA, Malaysia)
A vast deal of research presenting evidence on the benefits of international diversification has been
published. The empirical studies came to rather diverse conclusions as the authors used different
sampling data, analyzed different countries within a different time period. The purpose of this paper is
to analyze the degree of financial integration and benefits of portfolio diversification between the
Malaysian equity market and developed equity markets from Malaysian perspective. In the analysis,
the developed equity returns are adjusted for exchange rate fluctuations using Ringgit Malaysia based
exchange rates. By employing time series analysis, the paper also seeks to investigate which market
actually leads the Malaysian stock market. The research is based on secondary data, existing theories
and earlier studies regarding international integration of stock market movements. The methodology
utilizes standard cointegration analysis and vector error correction model. We also rely on variance
decomposition and impulse response functions to gauge the strength of the interactions among the
variables. This study contains secondary data for the period of 1999 to 2008.The study comprises
monthly closing Morgan Stanley Composite Index (MSCI) indices of fifteen developed countries. The
findings from the analysis could be useful to fund managers in their essential decision for portfolio
management. The findings may also be of interest to policy makers interested in stock market
comovement, since internationalization of markets could represent significant capital inflow or
outflow and thus influence savings and consumption decisions.
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Modelling daily electricity prices at deregulated markets by applying linear and non-linear M-R
models
Miroslav Culik (VSB-Technical University, Ostrava, Czech Republic)
This paper is concentrating on the electricity market and electricity prices. Because of the features
occurring in the time series of electricity prices (i.e. high frequency, non-constant mean,
autocorrelation, non-normal distribution, heteroscedasticity, seasonality, etc.), it is necessary to
employ more sophisticated models for the purposes of their modelling. The goal of this paper is to
propose and compare linear and non-linear mean-reversion models for modelling daily electricity
prices in three selected regions (California, North Europe and Austria) including statistical
verification. The paper is organized as follows: first, general features of electricity prices and price
formation at electricity deregulated markets are described. Next, linear and non-linear mean-reversion
models are described; these models are applied on the data series of electricity prices at given markets.
In the end, statistical verification and result comparison is conducted.
Optimal Option Portfolio Strategies
Jose Faias (Universidade Nova de Lisboa, Portugal)
Options should play an important role in asset allocation. They allow for kernel spanning and provide
access to additional (priced) risk factors such as stochastic volatility and negative jumps. Traditional
methods of asset allocation (e.g. mean-variance allocation) are not adequate for options because the
distribution of returns is non-normal
and the short sample makes it difficult to estimate their distribution. We propose a method to optimize
option portfolios that solves these limitations. An out-of-sample exercise is performed and we show
that, even when transaction costs are incorporated, our portfolio strategy delivers an annualized Sharpe
ratio of 0.54 compared to 0.06 of S&P 500 index in the period between January 1996 and September
2008.
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Session F
Financial Crisis and the Adaptation of Governance Structures of Banks
Fung Lai Kin Sammy (Hong Kong University, China)
The 1997-98 Asia financial crisis provides a natural experiment to examine how firms adapt their
strategic choices to the changing business environment. In this study, I investigate the evolution of the
governance structure of the 83 surviving commercial banks in Hong Kong, Indonesia, Korea,
Malaysia, the Philippines, Singapore and Thailand around the financial crisis. The governance practice
of banks has been significantly improved after the crisis. These results suggest that the Asian banks
strived to adapt their governance structure to the dynamic regulatory and market environment in the
post-crisis period.
To examine whether governance structure are related to bank performance, I find that bank
profitability and interest spreads are positively related to the board size, independence and nonpolitical connection of board. The evidence suggests that the adaptability of the Asian bank to
dynamic business environment is critical to the banks survival. My research results also indicates the
new corporate governance of Asian banks shows convergence towards the Anglo-American model and
the adoption of Western governance practices can help improving bank performance. These findings
can provide some insights for the Asian regulators in the policy formulations in the future.
Investigating the Relationship between Earning Quality and Annual Adjustments in Tehran
Stock Exchange (TSE)
Farzaneh Heidarpoor (Islamic Azad University – Central Tehran Branch, Iran)
Rezvan Hejazi (Alzahra University, Iran)
Saeed Baghshahi (Islamic Azad University – Central Tehran Branch, Iran)
The main objective of this study is surveying the correlation between earning quality and annual
adjustments in Tehran Stock Exchange (TSE) corporations. In this research Richardson model has
been used to determine earning quality which is measured by accruals items. Change in method and
procedures, ignoring the facts in preparing the financial statements and correction of errors, have been
considered as the main elements of annual adjustments, and hypothesizes of the research have been
formed according to them. For this purpose, the data of 184 firms during 1384 to 1386 have been
collected from financial statements and notes to them. For investigating the hypotheses of this study,
regression analysis and multiple regression analysis have been done by using the data in the forms of
the cross-section and accumulation. The results of accumulative data analysis show that there is
meaningful relation between correction of errors and earning quality. Moreover the results of
examining the effects of independent variables altogether on earning quality verify that there is
meaningful correlation between annual adjustments and earning quality.
Linkage of Stock Prices in the Major Global Stock Markets and the Global Financial Crisis
Yan Zhang (Fukuoka Women’s University, Japan)
The global financial crisis had various influences not only on the American economy but also
worldwide. In this paper, I will examine the linkage of stock prices in major global stock markets such
as USA, UK, Germany, France, Australia, Japan, Singapore, China, and Hong Kong from 1991 to
2009. In addition, the influence of the global financial crisis on the linkage of stock prices in these
markets will also be analyzed by contrasting different periods.
In the paper, a brief literature review is provided first. Then, the vector autoregression (VAR) model is
introduced. Next, the data are presented, a time series transition and the summary statistics are
examined, and the results of the unit root tests are reported. Further, the linkage of stock prices in the
major global stock markets is analyzed by cointegration test, correlation analysis, impulse response,
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and forecast error variance decomposition. Finally, based on the results of the analysis, suggestions for
the future of global stock markets and desirable international economic relationships are considered.
The analysis demonstrated that the effects of the US and the UK markets on others, except China,
were great. In addition, the linkage of stock prices in the European markets was high, and so was the
linkage of stock prices in the Asian markets, except China. On the whole, it has been revealed that the
linkage of stock prices in the major global markets has increased after the global financial crisis.
Exchange Rate Expectations and Foreign Direct Investment (FDI): EVIDENCE FROM
JAPANESE INVESTMENT IN ASIA, 1987-2008
Zongying Shi (Osaka University, Japan)
The paper provides new evidence on the impact of exchange rate expectations on foreign direct
investment (FDI) flows from a developed to emerging market economies. By using the panel data of
Japanese FDI flows to nine Asian economies during 1987-2008, the paper finds that an expected
future appreciation of host economy currencies significantly increased FDI inflows from Japan. This
result is robust, with other control variables such as the level of exchange rates, host country openness,
market size, and relative labor costs having statistically significant coefficients with expected signs.
They confirm the importance of exchange rate expectations in FDI decisions: source country investors
care about the future stream of revenues and returns denominated in their own currency.
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Session G
Real Options under Ambiguity: the case for Choquet-Brownian motions
David Roubaud (GREQAM, France)
A new class of real options models has recently emerged characterized by the presence of ambiguity
(or Knightian uncertainty) as opposed to risk only. Based on the standard recursive multiple-priors,
such models apply a maxim expected utility criterion, thereby reducing agent preferences to extreme
pessimism. By contrast, we rely on dynamically consistent Choquet-Brownian motions to represent
uncertainty. This allows a broader spectrum of attitudes toward perceived ambiguity to be considered,
through a newly defined index (psy-ignorance). Risk and ambiguity appear intricately related,
impacting irreversible investment valuations and timing of exercise. Overall, we show that ambiguity
aversion (loving) leads to earlier (delayed) option exercise.
Our conclusions generalize some previous results from multiple-priors models, established in the case
of extreme aversion to ambiguity only. We concur that risk and ambiguity may have different effects
on real option valuations. But we also show that i) decision makers revealing different attitudes
towards ambiguity will not value their projects identically and consequently will not exercise their
options at the same time (if ever they should). Furthermore, we show that ii) introducing perceived
ambiguity suffices to modify the impact of a change in risk level itself on project valuation in the
stopping region.
Decision makers preferences towards perceived ambiguity matter and should be taken into
consideration when assessing decisions ex-post. This may help understand why in practice real options
may be exercised later (or sooner) than predicted in the expected utility framework.
Microfinance 2.0 - Group Formation and Repayment Performance in Online Lending Platforms
During the U.S. Credit Crunch
Thilo Klein (University of Cambridge, United Kingdom)
This paper builds upon my Diploma thesis at the Max-Planck-Institute of Economics that won me an
international Best Thesis Award from the UMM Project last year. I examine the role of reputation
based intermediaries on the world's largest peer-to-peer online lending platform. This marketplace as
well as other recently opened lending websites allow people to auction micro-credit over the internet
and are in line with the disintermediation in financial transactions through the power of enabling
technologies.
To mitigate severe information asymmetries in anonymous online transactions, the platform allows
lenders to delegate the screening of potential borrowers and the monitoring of loan repayment to
designated group leaders. I find that, despite superior private information, these financial
intermediaries perform worse than the average lender with respect to borrower selection. I attribute
this to deliberately sending wrong signals. Bivariate probit estimates of the effect of group
membership on loan default indicate that borrowers with worse observed and unobserved
characteristics select into this contract form. I provide evidence that this is due to a misleading group
reputation system that is driven by a short term incentive design. I further find that, after controlling
for this group growth driven selection effect, group affiliation per se significantly reduces the
probability of loan default.
In summary, the paper provides a first study into the mechanisms of online credit information
networks and critically assesses their potential to ease access to finance for the credit constrained
during the U.S. credit crunch.
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The Effect of Basic Volume on Stock Price Event from TSE
Rezvan Hejazi (Alzahra University, Iran)
Farzaneh Heidarpoor (Islamic Azad University – Central Tehran Branch, Iran)
Hadi Khanmohammadi (Islamic Azad University – Central Tehran Branch, Iran)
In semi-strong EMH form, stock prices reflect all information that is published and is at hand for all
people. In such markets, a stock price’s response to new information and its changes will be according
to received information. In some markets some legislated methods are used by stock exchange
authorities to control stock price changes, which are called auto stopple. This type of control causes
the stock price to not reflect published information and markets become non-efficient markets. One
way is basic volume method. This paper investigates the effect of basic volume method on stock price
and delay of real price of stock in Tehran Stock Exchange (TSE).
Collected Information was examined by Wilcoxon test about the stock fluctuation 10 days before and
after an event day. Results of this research showed that basic volume causes acceleration in
fluctuation. It also indicates that basic volume causes delay in reaching to actual price.
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