A diagnostic m-test for distributional specification of parametric conditional heteroscedasticity models for financial data

This paper proposes a convenient and generally applicable diagnostic m-test for checking the distributional specification of parametric conditional heteroscedasticity models for financial data such as the customary Student t GARCH model. The proposed test is based on the moments of the probability integral transform of the innovations of the assumed model. Monte-Carlo evidence indicates that our test performs well both in terms of size and power. An empirical example illustrates the practical usefulness of the test and some of its possible extensions are outlined.     

Improving Portfolio Performance with Option Strategies: Evidence from Switzerland

This paper investigates the performance of a global investment strategy that combines diversification and option strategies, in particular the covered call strategy, on the Swiss Exchange over the period 1989–96. As the return distributions of portfolios including options are possibly non-normal, the mean-variance framework may not be appropriate to assess the relative performance of such portfolios. Stochastic dominance and modified betas are the alternative approaches, robust to departure from normality, used in this paper to compare the performance of portfolios. The results show that the use of option strategies consistently improves the performance of stock portfolios, even in the presence of transaction costs.     

Foreign Investment and Productivity Growth in Czech Enterprises

This article uses firm-level data for the Czech Republic toshow that during 1992–96 foreign investment had the predictedpositive impact on total factor productivity growth of recipientfirms. This result is robust to corrections for the sample biasthat arises because foreign companies tend to invest in firmswhose initial productivity is above average. Together, jointventures and foreign direct investment appear to have a negativespillover effect on firms that do not have foreign partnerships.However, with foreign direct investment alone, the magnitudeof the spillover becomes much smaller and loses significance.This result, in conjunction with the fact that joint venturesand foreign direct investment account for a significant shareof total output in many industries, suggests that further researchis required to determine the extent of knowledge diffusion fromfirms that have foreign links to those that do not.     

Pass-through and Exposure

Firms differ in the extent to which they "pass through" changes in exchange rates into foreign currency prices and in their "exposure" to exchange rates—the responsiveness of their profits to changes in exchange rates. Because pricing affects profitability, a firm's pass-through and exposure should be related. This paper develops models of exporting firms under imperfect competition to study these related phenomena. From these models we derive the optimal pass-through decisions and the resulting exchange rate exposure. The models are estimated on eight Japanese export industries using both the price data pass-through and financial data for exposure.     

Model free regression

Model free estimation of variance is discussed and compared to OLS estimates.     

The economics of discrimination in the granting of credit

Conclusion As a result of credit supply imperfections and inelastic demand, creditworthy consumers may not fully benefit from accurate credit assessments as is implied by the concept of qualified demand. Yet, despite the existence of house rates and prepackaged credit offers, consumers are still able to shop around for the best terms from creditors who are all competing to make profitable credit extensions. If creditors become less accurate in their credit risk assessment due to ECOL, as the cited empirical studies predict, their opportunity to make profitable credit extensions has diminished. In a competitive credit market, credit availability would decline as creditors would be compelled either to raise rates to compensate for greater default losses and other costs associated with less accurate credit evaluation or to cut those costs by applying more stringent credit standards. Otherwise, credit institutions would be unable to earn a return on invested capital sufficient for the risk involved and the supply of consumer credit funds would diminish. With the existing credit market, creditors may not be as compelled by competition to raise house rates (or able, if such rates are at ceiling levels) or raise credit standards, as is implied by a highly competitive market. However, creditors would still have the same economic incentive to repond to increased costs of doing business in ways which would reduce credit availability to qualified demanders. Furthermore, as credit extensions become less profitable, the economic penalty accorded invidious discrimination is diminished and credit grantors, who are so inclined, are more likely to engage in such practices. Alternatively, if legislators focused upon increasing competition in the consumer credit market, increased credit availability would result. And as this would increase the economic penalty for invidious discrimination, such practices would decline.