Dynamic hedging with futures: A copula‐based GARCH model

In a number of earlier studies it has been demonstrated that the traditional regression‐based static approach is inappropriate for hedging with futures, with the result that a variety of alternative dynamic hedging strategies have emerged. In this study the authors propose a class of new copula‐based GARCH models for the estimation of the optimal hedge ratio and compare their effectiveness with that of other hedging models, including the conventional static, the constant conditional correlation (CCC) GARCH, and the dynamic conditional correlation (DCC) GARCH models. With regard to the reduction of variance in the returns of hedged portfolios, the empirical results show that in both the in‐sample and out‐of‐sample tests, with full flexibility in the distribution specifications, the copula‐based GARCH models perform more effectively than other dynamic hedging models. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1095–1116, 2008     

The Determinants of Investor Valuation of R&D Expenditure in the Software Industry

This paper examines the cross-sectional variability in the market valuation of R&D expenditures in the pre-packaged computer software industry. Consistent with some prior research, this paper argues that R&D spending is valued heterogeneously by the stock market, and derives hypotheses regarding the determinants of the cross-sectional heterogeneity in the market valuation of R&D. The empirical tests use an extensive database containing product level information of software firms between 1994 and 1998, along with accounting and stock price data of the same period. The test results, consistent with our hypotheses, show that R&D spending is more valuable for firms with larger market shares, higher percentage of technical employees, and those that have diversified into different product categories. The results also indicate that market valuation of R&D spending is a function of product life cycle.     

Empirical Analysis of Stock Returns and Volatility: Evidence from Seven Asian Stock Markets Based on TAR-GARCH Model

This paper investigates the time-series behavior of stock returns for seven Asian stock markets. In most cases, higher average returns appear to be associated with a higher level of volatility. Testing the relationship between stock returns and unexpected volatility, the evidence shows that four out of seven Asian stock markets have significant results. Further analyzing the relationship between stock returns and time-varying volatility by using Threshold Autoregressive GARCH(1,1)-in-mean specification indicates that the null hypothesis of no asymmetric effect on the conditional volatility is rejected for the daily data. However, the null cannot be rejected for the monthly data.     

Why do Japanese giant trading companies prefer foreign currency to Japanese yen?

This article examines invoicing strategies in the presence of forward exchange markets. The choice of invoice currency is shown to depend upon the monopoly power traders possess. If the exporter has greater market power to determine the use of invoice currency, invoicing in the currency of the importing country will be preferred. But if the importer has power to determine what currency to use, the converse is true. Moreover, the levels of trade and employment are proven to be invariant to invoicing strategies chosen.     

Exploring the transitional behavior among value and growth stocks

Unlike the corporate funds in the US, mutual funds in many countries such as China and Germany operate under a different governance arrangement and are thus called “contractual funds.” The governance structure of contractual funds allows shareholders of fund management companies, rather than the fund investors, to be responsible for asset management decisions. Therefore, a fund’s governance attributes may be especially important in driving its performance. Using a comprehensive governance data covering Chinese mutual funds, this paper finds that the governance and organizational structures of Chinese fund management companies significantly influence the performance of their affiliated funds. In particular, while a larger stake from the top1 shareholder significantly improves the performance of affiliated funds, the presence of multiple largest shareholders reduces their performance. Moreover, fund management companies that offer fewer fund products and charge higher management fees tend to perform better. Finally, more institutional holding in a fund appears to function as an external supervisory surrogate for internal board governance to help improve fund performance.     

Government funding strategy in technology programs

Industrial R&D in a market economy is mainly implemented in the private sector, therefore public funding is a very important tool of government to guide private R&D activities. This paper investigates the experience of funding national programs in a number of industrialized countries, and reaches some preliminary conclusions: (a) To reduce opportunistic behavior and ingrain intrinsic incentive in firms, both competition and cost-sharing principles should be used concurrently in underwriting firms' R&D projects. (b) Competition principles can be applied across many candidate projects around the same time or a series of one-of-a-kind projects over a longer time horizon. (c) The major threat to application of competition principles is that there is no “real competition” due to few qualified candidates in specific technological fields or in some, especially small, countries. (d) In practice, the appropriate cost-sharing level is difficult to determine. Fifty-fifty is used as a rule of thumb in many countries to simplify the decision making and circumvent “bounded rationality.” (e) Full cost endorsement may be another “quantum” alternative for projects urged by government but not felt to be very relevant by firms.