Co-Movement Between Malaysian Stock Index and Bond Index: Empirical Evidence from Rank Tests for Cointegration

-- Shiok Ye Lim, Sheue Li Ong and Chong Mun Ho

This study aims at examining the long-run cointegration relationship for Malaysian stock and bond market indices in the period surrounding the Asian financial crisis based on the Breitung (2001) rank test procedures. The paper argues that the standard cointegration tests do not allow for breaks and lead to the finding of no cointegration. Breitung (2001) rank test was applied which can tackle the problem of breaks and can detect both linear and nonlinear cointegration relationships. For the full period (1994:1 to 2009:9) and sub-period (2000:1 to 2009:9), findings on the co-movement of stock index and bond indices suggest a long-run equilibrium relationship between these indices.

© 2011 IUP. All Rights Reserved.

Banking Sector Reform and Insolvency Risk of Commercial Banks in India

-- Khanindra Ch. Das

The paper analyzes the insolvency risk of commercial banks in India for the period 1998-2007. This has primarily been motivated by the changes in the structure and conduct consequent upon the banking sector reforms which have gradually brought the much-desired dynamic and competitive forces into the system that enabled banks to perform better by way of flexibility in their operations and diversification into organic and inorganic lines of business, notwithstanding the market-induced vulnerabilities. Though reforms have facilitated reduction in cost of deposits and cost of funds across all bank groups and improvement in the return on assets, facilitated by higher spread and lower burden, nonetheless, there is persistence of significant disparity among banks in their conduct, performance, cost minimization and on the risk management front. Using ‘Z-score’ measure of insolvency risk and panel data econometrics, it is found that the Indian private banks are most risky, whereas the foreign banks are found to be least risky for their fat capital cushion. The Public Sector Banks (PSBs) are in the intermediate category in terms of their risk levels. Further, higher competition tends to induce risk unless there are efficiency improvements across the banks. Diversification is also found to have a risk-mitigating effect; however, diversification per se is not sufficient condition for lowering the risk; rather, selective diversification coupled with buffer capital could yield the sufficient condition for banks’ safety. While the banks have adapted themselves to the changing environment, the fast evolving financial landscape continues to pose several challenges. Therefore, banking regulation assumes increasing significance in these changing environments for adequate assessment of risk and to discourage risky behavior.

© 2011 IUP. All Rights Reserved.

The Impact of the Developed World on the Indian Industrial Portfolios’ Return: Empirical Evidence

--Ashish Garg and Ajay Chauhan

The paper examines the impact of the developed world market on the Indian industrial portfolios’ return by taking returns of Dow Jones Index and Morgan Stanley Composite Index (MSCI) as representatives of the developed world markets’ returns, and returns of various sectoral indices, constructed by Bombay Stock Exchange (BSE), as representatives of the Indian industrial portfolios’ return. For the purpose, a set of parametrical and econometric tests are employed on daily data, from January 2000 to December 2009. The findings show that auto, metal, banking, healthcare, technology and real estate are the most affected sectors by the US market and developed world markets. The study also reveals that the Indian markets also influence the developed world markets.

© 2011 IUP. All Rights Reserved.

Return Percentile: A Momentum-Contrarian Approach to Technical Analysis

-- Vipul

We combine the momentum and contrarian approaches, using relative strength of individual stocks in the market, to develop a robust indicator called return percentile. It picks up those stocks which have been performing well over an intermediate-term window, but have underperformed in a short-term window. Using nine-year Indian stocks data, we find that our momentum-contrarian approach provides high returns irrespective of the holding period horizon (monthly, quarterly or annual). The results suggest that the contrarian approach can provide high returns, even in relatively short-term horizon, if applied with robust indicators like return percentile.

© 2011 IUP. All Rights Reserved.

Pricing and Hedging Copper Futures on the London Metal Exchange

-- Souha Boutouria and Fathi Abid

The purpose of this paper is to examine the behavior of copper spot prices in London Metal Exchange. Besides, we examine the relation between hedging effectiveness and the maturity of the contract. This research provides an empirical comparison of different econometric techniques in the context of hedging the market risk of copper traded on the London Metal Exchange. It is found that the VAR-MGARCH model estimates of time-varying hedge ratio provide highest variance reduction.

© 2011 IUP. All Rights Reserved.