School Of Business Administration: Financial Review

Fama and French's (1992) assertion that investors receive premium payments for risk associated with the book value to market price (BE/ME) and size and not for holding beta risk has sparked a lively debate concerning risk factors that are priced in the market. Howton and Peterson (HP, 1998) use a dual-beta model to test the Fama and French conclusions. They conclude that the significant relationship between beta and returns depends on the use of the dual-beta model. This work, however, ignores the results reported by Pettengill, Sundaram, and Mathur (PSM, 1995). PSM find a significant relation between a constant risk beta and returns when data are segmented between up and down markets but do not consider the impact of size and BE/ME. In this paper we show that the PSM (1995) market segmentation procedure alone provides a sufficient condition to identify a significant relation between beta and returns in the presence of size and BE/ME. Dual market betas may be relevant in explaining risk and return. However, the market segmentation procedure of PSM (1995) is the critical condition for finding a significant relationship between returns and betas.

Keywords: constant beta; risk and return; systematic risk

Mean and Variance Causality between the Official and Parallel Currency Markets: Evidence from Four Latin American Countries

Angelos Kanas, Georgios P. Kouretas

Volume 37, No. 2, May 2002, pp. 137-163

This paper examines the issue of mean and variance causality across four Latin American official and black markets for foreign currency using monthly data for the period 1976-1993. We apply a recent test developed by Cheung and Ng (1996) in order to test for mean and variance spillovers. The main findings are: (i) In contrast to the findings of previous studies, EGARCH-M processes characterize each bilateral exchange rate series in both markets; (ii) There is substantial evidence of causality in both mean and variance with the causality in mean largely being driven by the causality in variance; and (iii) The results indicate that the major exporter of causality is the Mexican black market with the black market of Argentina and the black and official markets of Brazil being the smallest contributors.

Keywords: Causality; cross-correlation function; EGARCH-M; black market; exchange rates; volatility spillovers

Wealth Effects of Private Equity Placements: Evidence from Singapore

Sheng-Syan Chen, Kim Wai Ho, Cheng-few Lee, Gillian H.H. Yeo

Volume 37, No. 2, May 2002, pp. 165-183

We examine institutional characteristics and the wealth effects of private equity placements in Singapore. Our findings show that private placements in Singapore generally result in a negative wealth effect and a reduction in ownership concentration. We find that at high levels of ownership concentration, the relation between abnormal returns and changes in ownership concentration is significantly negative. We also show that the market reacts less favorably to placements in which management ownership falls below 50%, but more favorably to issues to single investors. We do not find evidence suggesting that our results are due to an information effect.

Keywords: equity offerings; private placements; ownership structure

Conflict of Interest in Commercial Bank Equity Underwriting

Gregory M. Hebb

Volume 37, No. 2, May 2002, pp. 185-205

This paper examines the pricing characteristics of initial public offerings underwritten by commercial banks. Assuming IPO underpricing is directly related to ex ante uncertainty, if the market rationally perceives these commercial banks to have a conflict of interest, these securities should have more underpricing than non-commercial bank underwritten initial public offerings (all else equal). On the other hand, if the market believes that commercial bank involvement signals firm quality, less underpricing should be observed. This topic has recently gained in importance with the passage of the Financial Services Reform Act in November, 1999. We find that the underpricing of commercial bank underwritten initial public offerings in which the firm had a previous banking relationship with the underwriter is significantly less than those underwritten by investment banks.

Keywords: commercial banks; conflict of interest; initial public offerings; underwriters

A Simple Option-Pricing Formula

Robert Savickas

Volume 37, No. 2, May 2002, pp. 207-226

A simple option-pricing formula based on the Weibull distribution is introduced. The simplicity of the algebraic form and ease of implementation are comparable to those of Black-Scholes. Application to S&P500 options shows that the pricing biases present in the Black-Scholes model are eliminated. Prices produced by the presented model generally lie within or close to the bid-ask spread. For long term options (over one year), the Weibull formula exhibits significantly higher precision than the Black-Scholes formula does. While a rigorous comparison of all available models is necessary, the simplicity and precision of the proposed model are its main advantages over the existing models.

Keywords: option-pricing; S&P 500; Weibull distribution; Black-Scholes; skewness

Crises, Cronyism, and Credit

Michael S. Pagano

Volume 37, No. 2, May 2002, pp. 227-256

This paper examines the effects of several potential explanatory factors related to the 1997-1998 East Asian crisis. We find that a crisis can improve a poorly functioning credit system by making domestic lending rates more responsive to market-based returns. We report that the responsiveness of short-term lending rates is directly related to the level of transparency in the economy. Thus, countries with greater transparency (less corruption) are more likely to make credit decisions based on market-wide forces rather than succumb to the influence of special interest groups. Nations with greater transparency also experienced significantly shorter and less severe economic downturns.

Keywords: international finance; credit allocation; commercial banks; corruption; financial markets; empirical analysis

Cost and Profit Efficiency of the Turkish Banking Industry: An Empirical Investigation

Ihsan Isik, M. Kabir Hassan

Volume 37, No. 2, May 2002, pp. 257-279

By employing a stochastic frontier approach, we examine the effect of bank size, corporate control and governance as well as ownership on the cost (input) and alternative profit (input-output) efficiencies of Turkish banks. We found that the average profit efficiency is 84% for Turkish banks. The oligopolistic nature of the Turkish banking industry has contributed to less than optimal competition in the loan market and deposit markets. Our results indicate that the degree of linkage between cost and profit efficiency is significantly low. This suggests that high profit efficiency does not require greater cost efficiency in Turkey and cost inefficient banks can continue to survive in this imperfect market where profit opportunities are abundant for all types and sizes of banks. Accordingly, our results indicate that the different sizes of banks have capitalized these opportunities equivalently.

Keywords: efficiency; Turkish banks; governance and control; stochastic frontier approach

Does Price Discreteness Affect the Increase in Return Volatility Following Stock Splits?

Dan W. French, Taylor W. Foster, III

Volume 37, No. 2, May 2002, pp. 281-293

Stock return volatility tends to increase significantly following stock splits. One potential cause of this is the trading of stocks in discrete price intervals called ticks. This study provides a direct test of price discreteness as a determinant of this phenomenon by examining variance increases before and after the 1997 date when the exchanges reduced the tick size from 1/8 to 1/16. Results generally show that the post-split variance increase was unaffected by the reduction in tick size even after controlling for other factors. AMEX stocks provided the exception with slightly lower variance increases following the tick size reduction.

Keywords: stock splits; price discreteness; tick size; return variance; price clustering

Information, Trading Demand, and Futures Price Volatility

Changyun Wang

Volume 37, No. 2, May 2002, pp. 295-315

We examined the relation between futures price volatility and trading demand by type of trader in the Standard & Poor’s (S&P) 500-stock index futures market. We found that volatility covaries negatively with signed speculative demand shocks but is positively related to signed hedging demand shocks. No significant relation between volatility and demand shocks for small traders was found. Our results suggest that changes in positions of large hedgers destabilize the market, whereas changes in positions of large speculators stabilize volatility. Consistent with models with asymmetrically informed traders, we found that large speculators are likely to possess superior forecasting ability, large hedgers behave like positive feedback traders, and small traders are liquidity traders.

Keywords: index futures; trading demand; information; volatility

The University of Mississippi: School of Business Administration