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The IUP Journal of Financial Economics

In this issue, we have three interesting papers broadly pertaining to asset pricing, while the last one focuses on the settlement failures in the bond market. Literature on asset pricing has come a long way from the simple Sharpe-Lintner model to the Fama-French multifactor models. The first paper, “Unexpected Correlations in Fama-MacBeth Methodology Outcomes”, by Laurent Cavenaile, David Dubois and Jaroslav Hlávka, applies the two-stage Fama-MacBeth procedure to the three-factor model of Fama and French. Instead of a market model, the first stage time series regression uses a three-factor model. In the second stage, a cross-sectional regression is estimated using the partial slopes of the earlier regression. The results are further corroborated using the procedure described by Cochrane (2001). The analysis is based on 55 portfolios consisting of 25 two-way sorted portfolios and 30 industry portfolios. The results highlight the pitfalls in using the Fama-MacBeth procedure due to the presence of unexpected quasi-perfect correlations in the second stage cross-sectional regression.

The second paper, “Capital Asset Pricing Model: Evidence from the Stock Exchange of Mauritius”, by Subadar Agathee Ushad, examines the validity of the standard and higher moments-based extensions of Capital Asset Pricing Model (CAPM). Specifically, this paper evaluates the significance of co-skewness and co-kurtosis factors in explaining security returns. Past theoretical and empirical results suggest that a part of cross-sectional variation in returns due to size and value effects is accounted for by co-skewness. Further, it has been proved that skewness can partially explain the momentum anomaly documented by Jegadeesh and Titaman vis-à-vis Fama-French three-factor model. Results in this paper indicate weak support for the three-moment CAPM while rejecting the co-kurtosis term. The result adds to the body of literature motivating the inclusion of skewness as an important variable in valuation.

The third paper, “Illiquidity Premium and Stylized Equity Returns”, by Arshad Hassan and Muhammad Tariq Javed, focuses on the relevance of the (il)liquidity premium. There is a growing literature support for the inclusion of the liquidity-based factor in the asset pricing equation. The last decade has witnessed a large number of papers supporting the extension of Fama and French model to incorporate the fourth factor of liquidity. The findings of the paper add further support to the liquidity-based factor in the Pakistani context. The results are consistent and robust with regard to various characteristics-based sorting, such as size, book-to-market ratio, price-earnings ratio, and momentum.

The fourth paper, “Trade Settlement Failures in US Bond Markets”, by Susanne Trimbath, provides a nice primer on the trade settlement operations for the bond market and provides estimates and impact of settlement failures. A very high level of heterogeneity is documented in the trade settlement failures for the US bond market. Based on a conservative estimate, the author arrives at $271 mn as annual revenue loss to the states in the form of taxes and $7.3 bn per year as loss of use of funds to investors. Given the huge economic significance, the author explores various reasons for the continuing settlement failures. Evidences presented suggest moral hazard behavior of broker-dealers as the key problem. Besides providing some policy implications, the paper also highlights the scope for further research in this area.

-- Vishwanathan Iyer
Consulting Editor

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Automated Teller Machines (ATMs): The Changing Face of Banking in India

Bank Management
Information and communication technology has changed the way in which banks provide services to its customers. These days the customers are able to perform their routine banking transactions without even entering the bank premises. ATM is one such development in recent years, which provides remote banking services all over the world, including India. This paper analyzes the development of this self-service banking in India based on the secondary data.

The Information and Communication Technology (ICT) is playing a very important role in the progress and advancement in almost all walks of life. The deregulated environment has provided an opportunity to restructure the means and methods of delivery of services in many areas, including the banking sector. The ICT has been a focused issue in the past two decades in Indian banking. In fact, ICTs are enabling the banks to change the way in which they are functioning. Improved customer service has become very important for the very survival and growth of banking sector in the reforms era. The technological advancements, deregulations, and intense competition due to the entry of private sector and foreign banks have altered the face of banking from one of mere intermediation to one of provider of quick, efficient and customer-friendly services. With the introduction and adoption of ICT in the banking sector, the customers are fast moving away from the traditional branch banking system to the convenient and comfort of virtual banking. The most important virtual banking services are phone banking, mobile banking, Internet banking and ATM banking. These electronic channels have enhanced the delivery of banking services accurately and efficiently to the customers. The ATMs are an important part of a bank’s alternative channel to reach the customers, to showcase products and services and to create brand awareness. This is reflected in the increase in the number of ATMs all over the world. ATM is one of the most widely used remote banking services all over the world, including India. This paper analyzes the growth of ATMs of different bank groups in India.
International Scenario

If ATMs are largely available over geographically dispersed areas, the benefit from using an ATM will increase as customers will be able to access their bank accounts from any geographic location. This would imply that the value of an ATM network increases with the number of available ATM locations, and the value of a bank network to a customer will be determined in part by the final network size of the banking system. The statistical information on the growth of branches and ATM network in select countries.

Indian Scenario

The financial services industry in India has witnessed a phenomenal growth, diversification and specialization since the initiation of financial sector reforms in 1991. Greater customer orientation is the only way to retain customer loyalty and withstand competition in the liberalized world. In a market-driven strategy of development, customer preference is of paramount importance in any economy. Gone are the days when customers used to come to the doorsteps of banks. Now the banks are required to chase the customers; only those banks which are customercentric and extremely focused on the needs of their clients can succeed in their business today.


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Financial Economics