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Non-linearity
in Financial Markets: Evidence From ASEAN-5 Exchange Rates
and Stocks Markets
-- Kian-Ping Lim and Venus Khim-Sen Liew
This study found strong evidence for the presence of non-linearity in all the ASEAN-5 exchange rates and stock returns series based on the Hinich bispectrum test (Hinich, 1982) and Lukkonen-Saikkonen-Teräsvirta linearity test (Luukkonen et al., 1988). As such, it is argued that before any further empirical analysis, preliminary tests should be conducted to examine the linearity nature of the time series of ASEAN-5 financial markets variables, as it is no more appropriate to take linear assumption for granted.
© 2004, The IUP Journal of
APPLIED FINANCE.
Optimizing a Portfolio of Equities, Equity Futures and Equity European Options by Minimizing Value-at-risk - A Simulated Annealing Framework
-- Ajay Raina and C Mukhopadhyay
Value-at-Risk (VaR), henceforth referred to as VaR, is increasingly gaining acceptance as a popular measure of risk. The recent Basel-II consultative document and its emphasis on VaR-based models is an important case in point. VaR is an attempt to provide a single number summarizing the total risk in a portfolio of financial assets. VaR aims to make a statement of the following form: "We are X% certain we will not lose more than V dollars in the next N days." It can be more formally defined as a particular quantile of a portfolio loss distribution for a given time period. In this paper we consider a portfolio of equities, equity futures and equity European options. The model comes out with optimal allocation of a unit capital between the portfolio elements. The objective is to minimize VaR of the portfolio. The problem can be considered as a general case of hedge ratio calculation, in which case we will have only a two-element portfolio containing equity and the equity future or equity and the equity option.
© 2004, The IUP Journal of APPLIED FINANCE.
The Impact of Indian Overseas Listings on the Returns of the Underlying Shares
-- Manoj Kumar
Between May 1992 and June 2001, 72 Indian companies tapped the international capital markets with their equity offerings in the form of Depositary Receipt (DR) programs. Initially, most of these programs were in the form of Global Depositary Receipts (GDRs) and were traded on London and Luxembourg stock exchanges. Since 1999, many Indian companies have been listing their American Depositary Receipts (ADRs) on the US stock exchanges. Home market responses to issuance of DRs are of interest to the policy makers, investors, market intermediaries, CFOs, and finance scholars. Policy makers in emerging markets are increasingly concerned about the consequences for the domestic equity market when companies list stocks abroad. The present paper assesses the impact of listing of ADRs/GDRs on the returns of the firm's underlying domestic shares by using a sample of 68 Indian DR programs that listed on the foreign markets between January 1, 1996 and June 30, 2001. We recorded that the impact on the returns available from the underlying domestic shares depends on the listing venue of the DR programswhile the GDR listings adversely affect the returns, ADR listings do not seem to have any significant impact on the returns available from the underlying domestic shares. Our results are similar to the results recorded in the similar studies conducted with foreign listings from the other emerging economies.
© 2004, The IUP Journal of APPLIED FINANCE.
How to Value a Seasonal Company by Discounted Cash Flows
-- Pablo Fernández
The correct way to value seasonal companies by discounted cash flows is to use monthly data. It is possible to use annual data, but some adjustments are required. When using annual data in the context of the adjusted present value, the calculations of the value of the unlevered equity and the value of the tax shields must be adjusted. We derive the adjustments to be made. Errors due to using annual data without making the necessary adjustments are big. Adjusting merely by using average debt and average working capital requirements does not provide a good approximation. When inventories are a liquid commodity such as grain or seeds, it is not correct to consider all of them as working capital requirements. Excess inventories financed with debt are equivalent to a set of futures contracts. We show that not considering them as such leads us to undervalue the company. This paper includes a valuation of a company in which the seasonality is due to purchases of raw materials: The company buys and pays for all raw materials in December. We show that the equity value calculated using annual data without making the necessary adjustments understates the true value by 45% if the valuation is done in December, and overstates the true value by 38% if the valuation is done in November. The error due to adjusting only by using average debt and average working capital requirements ranges from _17.9% to 8.5%.
© 2003, IESE Business School (http://www.iese.edu). Reprinted with persmission. |
