Dynamic linkages among equity markets in the Middle East and North African countries

The relaxation of security laws and regulations in emerging markets in the Middle East and North Africa (MENA) provides abundant opportunities for foreign investors. These markets exhibit high-expected returns and substantial volatility. In this paper, we investigate the lead/lag relationship between the MENA countries and regions. We find no market causality or spillover from one country to another in the North Africa region. Our results for the Levant region reveal that there are linkages between stock markets in this region. The results for the Gulf Cooperation Council (GCC) region show that there is more interaction and linkage in the GCC region than in the North Africa and Levant regions. An unexpected result is that UAE's stock market leads all the markets in this region. Finally, we investigate linkages among the three regions. We find that GCC influences the other two regions.     

Trade, foreign firms and economic policy in Indonesian and Thai manufacturing

This paper first examines the rapid growth and changing composition of manufactured exports in Indonesia and Thailand, highlighting the rapid growth of office and computer machinery and electric machinery, somewhat slower growth of non-electric and transportation machinery, as well as the low growth of previously large exports of textiles apparel. Second, the important contributions of foreign multinational enterprises (MNEs) to export growth in the machinery industries, particularly in electric, office, and computing machinery, are documented. Third, the paper describes trade policies in all these industries in some detail, emphasizing how low protection was a key facilitator of rapid export growth in the MNEs that dominated the electric, office, and computing machinery industry, while high protection reduced incentives to export among MNEs in the transportation machinery industry.     

LIQUIDITY AND ASSET PRICING UNDER THE THREE‐MOMENT CAPM PARADIGM

We examine whether the use of the three‐moment capital asset pricing model can account for liquidity risk. We also make a comparative analysis of a four‐factor model based on Fama–French and Pástor–Stambaugh factors versus a model based solely on stock characteristics. Our findings suggest that neither of the models captures the liquidity premium nor do stock characteristics serve as proxies for liquidity. We also find that sensitivities of stock return to fluctuations in market liquidity do not subsume the effect of characteristic liquidity. Furthermore, our empirical findings are robust to differences in market microstructure or trading protocols between NYSE/AMEX and NASDAQ.     

Option-Implied Risk Aversion Estimates

Using a utility function to adjust the risk‐neutral PDF embedded in cross sections of options, we obtain measures of the risk aversion implied in option prices. Using FTSE 100 and S&P 500 options, and both power and exponential‐utility functions, we estimate the representative agent's relative risk aversion (RRA) at different horizons. The estimated coefficients of RRA are all reasonable. The RRA estimates are remarkably consistent across utility functions and across markets for given horizons. The degree of RRA declines broadly with the forecast horizon and is lower during periods of high market volatility.     

Overcompensation as a Partial Solution to Commitment and Renegotiation Problems: The Case of Ex Post Moral Hazard

In a Costly State Verification world, an agent who has private information regarding the state of the world must report what state occurred to a principal, who can verify the state at a cost. An agent then has what is called ex post moral hazard: he has an incentive to misreport the true state to extract rents from the principal. Assuming the principal cannot commit to an auditing strategy, the optimal contract is such that: (1) the agent's expected marginal utility when there is an accident (high‐ and low‐loss states) is equal to his marginal utility when there is no accident; (2) the lower loss is undercompensated, while the higher loss is overcompensated; and (3) the welfare of the agent is greater under commitment than under no‐commitment. Result 2 is contrary to the results obtained if the principal can commit to an auditing strategy (higher losses underpaid and lower losses overpaid). The reason is that by increasing the difference between the high and the low indemnity payments, the probability of fraud is reduced.