The effectiveness of interest-rate futures contracts for hedging Japanese bonds of different credit quality and duration

This study investigates the effectiveness of the Tokyo Stock Exchange (TSE)-traded Japanese 10-year JGB futures contract to hedge portfolios of Japanese bonds of differing maturity and credit quality. The bond portfolios examined are Government, AAA-, and AA-rated Eurobonds with maturities of 2, 3, 5, 7, 10, and 20 years. Consistent with the recent literature, the study employs univariate methods for calculating hedge ratios based on levels, first differences, and percentage change of each series. Out-of-sample forecasting is used to determine the effectiveness of the calculated hedge ratios for each of the bond portfolios and to determine which approach to calculating hedge ratios is the most effective. The results show that this particular futures contract does provide a good hedge, particularly for those bond terms closest to the 10-year term of the contract. There is some evidence, although not strong, that JGBs are better hedged than AAA and AA bonds. Investors should take some caution when using this futures contract to hedge bond portfolios of different maturities and credit ratings.     

Informed and uninformed trading on the Australian dollar

Using a high-frequency data set of the spot Australian/US dollar, this study examines the distribution of quotes, spreads, and returns across the trading day. By identifying the direction of trade and the subsequent quote returns from contributing banks, the segmented nature of the market into market-makers and informed and uninformed traders is investigated. The results suggest that the economic gain possible from private information is maximised over 2 to 5 quotes and is rapidly eroded by 20 quotes (about 2 min later during busy trading times) as other new information enters the market. Also, the analysis is revealing of discontinuities in trading and the volatility of pricing across the trading day.     

CONVERTIBLE BOND PRICING MODELS

Convertible bonds are an important segment of the corporate bond market, with worldwide outstandings approaching US$235 billion. Simple pricing models value a convertible bond as being equivalent to a straight bond with an embedded option that enables the bond holder to convert to a specific amount of common stock. The straight bond is subject to both interest rate and credit risk, whereas the option to convert is dependent on the underlying stock price, which exposes the convertible bond holder to equity risk. The complexity of these features means that convertible bonds tend to be treated casually in major derivatives and corporate finance textbooks. This paper presents a survey of the theoretical and empirical aspects of convertible bond pricing. The limitations of these studies are highlighted to identify those areas of research that may improve the valuation process and facilitate the application of these securities for corporate financing.     

Discount rate changes and the foreign exchange market

Changes in the discount rate can have associated announcement effects on the foreign exchange value of the dollar only if these changes are not anticipated by the market. This paper provides evidence to support this contention. Specifically, discount rate changes made for reasons other than technical adjustments have not been anticipated fully and, consequently, their announcements have had a significant impact on the dollar's exchange rate. Furthermore, results are obtained that support the hypothesis that unanticipated discount rate changes alter inflationary expectations.     

Defining Corporate Citizenship: Evidence from Australia

This study reports the results of a survey of the attitudes to corporate citizenship and practices of corporate citizenship of 93 of the largest private and publicly listed corporations in Australia. The results suggest there was considerable hesitation in positioning corporate citizenship as a proactive, long term, internal culture process. Instead, corporate emphasis was generally on short-term community activities. Also, there was little variation in these results when respondents were classified by industry, international involvement and legal structure. Clearly, significant links have yet to be made by corporate Australia to connect the financial, social and environmental bottom lines.     

Responsibility Cost Control System in China: The Han Dan Experience

This study undertakes a longitudinal analysis of the ethical management practices of Sri Lankan companies by comparing the results from a survey conducted in 2003. During this period regulatory developments have taken place within Sri Lanka and internationally aimed at improving the level of corporate governance. Based upon this survey data we conclude that progress has been made in ensuring that ethical management practices are more homogenous and standard practice across companies. Internationalized companies remain the ones that are more aware of the environmental consequences of their actions, although few companies, unfortunately, recognize this as an issue of concern.     

Small Firm Behaviour in Sri Lanka

This paper investigates the behaviour of small firms in Sri Lanka using a countrywide cross-sectional survey. The 73 responding firms provide information on whether certain variables: the firm's utilisation of assets; labour; technology; family savings; and access to bank financing, vary with four firm-specific factors: industry; family ownership; size; and whether the firm's manager was also an owner of the firm. Sampled small firms are mostly family owned and owner managed although a significant number of family owned firms are managed by non-family managers. Most firm's under-utilise assets, use existing rather than the latest technology, and are reliant upon family savings. Statistical analysis provides evidence of significant cross-sectional variation in small firm practice. The results are explained in terms of the cost of acquiring new technology, asymmetries and opacity in financial information, and the non-value maximising behaviour of firm owners who are also firm managers.     

The Andersen-Jordan equation revisited

This paper deals with two common econometric criticisms of the Andersen and Jordan (1968)equation—the endogeneity of the right-hand-side variables and the ad hoc implementation of Almon's polynomial distributed lag estimation technique. Using the original Andersen-Jordan data, we found no support for either criticism. While we note that the PDL specification of their equation is highly unusual, we found that their policy conclusions do not depend their particular choice of lag length or polynomial degree or their imposition of the endpoint constraints. Furthermore, the right-hand-side variables were found to satisfy necessary conditions for statistical exogeneity.     

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