School Of Business Administration: Financial Review

Initial margin requirements represent: (1) a cost impediment to the wealth constrained investor and (2) a potential way of mitigating excessive volatility. However, prior empirical research finds that margins are not an effective tool in reducing volatility. We consider the possibility that margins primarily affect certain stocks and investors. Specifically, we test whether margins affect individuals who, as a group, we believe to be the investors most affected when margin requirements change. Our initial empirical tests, however, do not support this contention.

Keywords: margin requirements; volatility; individual investor; Japan

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Contagion Effects from the 1994 Mexican Peso Crisis: Evidence from Chilean Stocks

Ike Mathur, Kimberly C. Gleason, Selahattin Dibooglu, Manohar Singh

Volume 37, No. 1, February 2002, pp. 17-33

The contagion, or informational spillover, effects of the 1994 peso crisis from the Mexican market to the Chilean market, and to the Chilean American Depository Receipts (ADRs) trading in the U.S., are examined. Significant excess returns are observed for Chilean stocks for the event dates of the Mexican Peso crisis, providing evidence of contagion effects. Significant excess returns on the Chilean ADRs are also observed for each of the five event dates associated with the Peso crisis, suggesting that the contagion effects spilled over to the ADRs. A multiple regression model shows that the spillover contagion effects were very efficiently transmitted from the Mexican market to the Chilean market to the Chilean ADRs. Multifactor regressions show that the most significant influence on the pricing of Chilean ADRs is the raw Chilean Index, rather than the Chilean Index expressed in U.S. dollars.

Keywords: contagion; Mexican Peso crisis; transmission of volatility

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Permanent and Transitory Driving Forces in the Asian-Pacific Stock Markets

Ali F. Darrat, Maosen Zhong

Volume 37, No. 1, February 2002, pp. 35-51

This paper uses weekly data from November 1987 through May 1999 to examine whether U.S. or the Japan stock market (or both) is the main driving force behind major movements in eleven emerging Asian-Pacific stock markets. We find a robust cointegrating relation linking each of the emerging market with the two matured markets of the U.S. and Japan. The results also show that the U.S., rather than Japan, is the main permanent force driving the equilibrium relations across all Asian-Pacific markets. In contrast, the effect of the Japanese market on the Asian-Pacific region is only transitory. Therefore, strategic asset portfolios in the Asian-Pacific region should include Japanese stocks to diversify any country specific risks. As to U.S. investors, the persistent influence of the U.S. market may limit long-run diversification gains from Asian-Pacific stocks.

Keywords: Asian-Pacific stock markets; the U.S. and Japan; cointegration; driving forces; international asset diversification

Winners and Losers as Financial Service Providers Converge: Evidence from the Financial Modernization Act of 1999

Robert J. Hendershott, Darrell E. Lee, James G. Tompkins

Volume 37, No. 1, February 2002, pp. 53-72

The Financial Modernization Act of 1999 dramatically increased insurers’ and investment banks’ authority to provide an array of financial services and allowed commercial banks to offer investment banking and insurance services. In this paper we examine the market response to this legislation. We find a strong positive response among insurance companies and investment banks, and no significant response among commercial banks. Larger institutions in all three financial sectors earn higher abnormal returns. Additionally, better performing banks earn higher abnormal returns. Our results suggest that allowing financial convergence can add value through synergies and that large players are needed to exploit the scope economies.

Keywords: financial services; Glass-Steagall; Gramm-Leach-Bliley, deregulation

Interest Rate Surprises and Stock Prices

Bento J. Lobo

Volume 37, No. 1, February 2002, pp. 73-91

This paper examines the impact of unexpected changes in the federal funds target on stock prices from 1988 to 2001. Measures of interest rate surprises are constructed from survey data and changes in the 3-month T-bill yield. I find that surprises associated with decreases in the target cause stock prices to rise significantly. Surprises associated with increases in the target increase stock market volatility on the announcement day, with volatility reverting to pre-surprise levels on the day after the announcement. This volatility pattern is only evident since 1994. An implication is that concerns about immediate disclosure causing persistent and heightened stock market volatility might be misplaced.

Keywords: Monetary policy, Fed funds rate target, interest rate surprises, survey data, stock market volatility, asymmetric reactions, EGARCH model

Forecasting Stock Index Futures Price Volatility: Linear vs. Nonlinear Models

Mohammad Najand

Volume 37, No. 1, February 2002, pp. 93-104

The study examines the relative ability of various models to forecast daily stock index futures volatility. The forecasting models that are employed range from naïve models to the relatively complex ARCH-class models. It is found that among linear models of stock index futures volatility, the autoregressive model ranks first using the RMSE and MAPE criteria. We also examine three nonlinear models. These models are GARCH-M, EGARCH, and ESTAR. We find that nonlinear GARCH models dominate linear models utilizing the RMSE and the MAPE error statistics and EGARCH appears to be the best model for forecasting stock index futures price volatility.

Keywords: stock index futures volatility; autoregressive; EGARCH; ESTAR

Price Limits and Margin Requirements in Futures Markets

Haiwei Chen

Volume 37, No. 1, February 2002, pp. 105-121

This paper investigates the hypothesis that futures exchanges could use daily price limits as a substitute for higher margin requirements. The empirical results show that the size of margin is negatively correlated with the presence of price limits. Evidence points to the portfolio adjustment costs theory as an explanation of the benefits from price limits. The empirical results cast doubt on the notion that price limits should be abolished. The results also confirm that exchanges have set margin requirements according to economic theories.

Keywords: margin; price limits; futures markets

The University of Mississippi: School of Business Administration