STRATEGIC RULES ON SPECULATION IN THE FOREIGN EXCHANGE MARKET

In this article we specify the conditions for profitable speculaion in the foreign exchange market with spot and forward contracts. We derive the unique strategic rules from the initial two‐choice situations in a given environment. Finally, in a more complex structure involving covered arbitrage, speculative profits are computed with iterative plays. JEL classification: F310     

HEDGING WITH INTERNATIONAL STOCK INDEX FUTURES: AN INTERTEMPORAL ERROR CORRECTION MODEL

In this paper we extend the traditional price change hedge ratio estimation method by applying the theory of cointegration to hedging with stock index futures contracts for France (CAC 40), the United Kingdom (FTSE 100), Germany (DAX), and Japan (NIKKEI). Previous studies ignore the last period's equilibrium error and short-run deviations. The findings of this study indicate that the hedge ratios obtained from the error correction method are superior to those obtained from the traditional method as evidenced by the likelihood ratio test and out-of-sample forecasts. Using the procedures developed in this paper, hedgers can control the risk of their portfolios more effectively at a lower cost.     

The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach

According to the consumption-smoothing view, a high degree ofcapital mobility implies that agents are able to fully smooththeir consumption in the face of shocks. This article developsa framework to test whether, indeed, the current account indeveloping countries acts as a buffer to smooth consumptionin the face of shocks to national cash flow, which is definedas output less investment less government expenditure. Usingvector autoregression analysis, we estimate the optimal consumption-smoothingcurrent account with data from a sample of forty-five developingcountries. We find that for a majority of the countries, thehypothesis of full consumption smoothing cannot be rejected,suggesting that capital mobility may after all be quite highin this group of countries.     

The Hedging Effectiveness of ECU Futures Contracts: Forecasting Evidence from an Error Correction Model

In this paper, the traditional price change hedge ratio estimation method is extended by applying the theory of cointegration in case of hedging with European Currency Unit (ECU) futures contracts. Previous studies ignore the last period's equilibrium error and short-run deviations. The findings of this study indicate that the hedge ratio estimated by the error correction method is superior to the one obtained from the traditional method, as evidenced by the likelihood ratio test and out-of-sample forecasts. Hedgers can control the risk of their portfolios more effectively at a lower cost.     

A Test of the Signaling Value of IPO Underpricing with REIT IPO-SEO Pairs

The asymmetric information hypothesis states that IPO underpricing signals superior firm value. During the post-IPO period, the market learns the firms true worth such that good quality firms issue seasoned equity at favorable prices and recoup the loss sustained at IPO. Since REITs have no special incentive to issue debt because of their tax-exempt status, and since they must pay out 95 percent of net income as dividends, REIT managers are hard pressed to raise capital through seasoned equity. Consequently, the signaling link between IPOs and SEOs is critical for REITs. Consistent with the signaling model, we find strong evidence that (1) REITs that underprice IPOs more are likely to sell seasoned equity sooner, (2) higher IPO underpricing results in larger joint amount of capital raised through an IPO-SEO pair, and (3) firms that underprice IPOs underprice SEOs as well. IPO underpricing does not mitigate the valuation loss associated with seasoned offerings, however.     

Debt, Growth and Budgetary Regimes

Within the Barro (1990) model of productive public services, but with the inclusion of public debt, we derive and characterize on the balanced growth path, a set of welfare‐maximizing fiscal rules under two budgetary regimes – one with only the standard dynamic government budget constraint, and the other involving the golden rule of public finance. We demonstrate analytically that the optimal fiscal policy differs in the two budgetary regimes considered. We also analyse two cases within the second regime: one, where the ratio of current spending to tax revenues is parametrically given, and another, where this ratio is optimally chosen by the government.     

A macroeconomic model for Nigeria, 1958–1974

The Nigerian economy has been modelled with special emphasis on the aggregate demand side. The set of “administered” interest rates have been accommodated in the usual IS/LM analysis, with the extra assumptions that the equilibrium income is attained when the disequilibrating forces in the product and the money markets are equal in magnitude but opposite in signs. The model has been tested with the available data, found to be stable, and indicate, among other things, that an increase in the crude petroleum price would improve the balance of trade barely up to three years and after that, would become adverse.     

Microfinance and competition for external funding

In this paper we examine a one-period model in which poverty minimizing microfinance lenders must raise external funding from a profit maximizing investor. Assuming that the lenders vary in their operating costs, we find that competition between lenders for external funds can lead to higher aggregate poverty reduction.