An alternative measure of the “world market portfolio”: Determinants, efficiency, and information content

The world market portfolio plays an important role in international asset pricing, but is unobservable in practice. We first propose a framework for constructing a market proxy that corresponds to the “market portfolio” of financial theory. We then construct this proxy, analyze its determinants and test its efficiency and explanatory power over the period 1975-2007 with respect to the return generating processes of a broad asset universe. We show that its major determinants are traded assets and that it is not efficient. However, it is significant for explaining individual asset returns over an asset universe that includes stocks, bonds, money markets and commodities. The explanatory information is incremental to what is available in traded asset prices and the significance of this information is robust with respect to diversified portfolios generated by factor analysis and to characteristic-sorted portfolios as well as to various model specifications, including the single-index model, the Fama-French (1992) three factor model for stocks, and various specifications of multi-index models hedged and unhedged for foreign currency risk.     

Foreign Currency Derivatives versus Foreign Currency Debt and the Hedging Premium

This paper compares the effect on firm value of different foreign currency (FC) financial hedging strategies identified by type of exposure (short‐ or long‐term) and type of instrument (forwards, options, swaps and foreign currency debt). We find that hedging instruments depend on the type of exposure. Short‐term instruments such as FC forwards and/or options are used to hedge short‐term exposure generated from export activity while FC debt and FC swaps into foreign currency (but not into domestic currency) are used to hedge long‐term exposure arising from assets located in foreign locations. Our results relating to the value effects of foreign currency hedging indicate that foreign currency derivatives use increases firm value but there is no hedging premium associated with foreign currency debt hedging, except when combined with foreign currency derivatives. Taken individually, FC swaps generate more value than short‐term derivatives.     

Asymmetric Foreign Currency Exposures and Derivatives Use: Evidence from France

This paper provides evidence on the asymmetric sensitivity of stock returns of French firms to exchange rate risk and the effect of foreign currency (FC) derivative use in alleviating this risk. The results show that FC exposure is frequently asymmetric and differs with respect to the US dollar (USD) and non‐USD currencies. Cross sectional analysis provides evidence that FC derivatives use has a significant effect on reducing FC exposure to appreciations and depreciations of non‐USD currencies and depreciations of the USD, but not to appreciations of the USD.     

Quantification of political risk with multiple dependent sources

In this paper, we develop a model using a conditional Poisson process for measuring the effect of a countable number of mutually dependant political risks on the outcome of foreign direct investment. We also apply a Bayesian updating process that makes it possible to re-estimate the model's parameters as new information becomes available. We then show how the model can be operationalized and provide a comparative example related to foreign direct investment. (JEL G31, D81, F21).     

The Determinants of Foreign Currency Hedging: Does Foreign Currency Debt Induce a Bias?

In this paper we use UK data to present strong empirical evidence that explains the mixed results in previous studies with respect to the effect of financial distress on the demand for corporate hedging. We build on recent studies that have identified a strong link between foreign currency (FC) debt use and leverage. Given this relationship, we show that using leverage variables as proxies for financial distress and the failure to distinguish between FC debt users and non‐users causes misleading inference. More specifically, when we partition our sample of FC hedgers into firms that use and do not use foreign debt, we show that leverage variables are significantly related to the FC hedging decision for firms that use FC debt either in isolation or in combination with FC derivatives but not for firms that only use FC derivatives. This suggests that FC debt users are influencing these results. However, we also find that other financial distress cost proxies with no obvious link to FC debt use are significant determinants in the corporate demand for FC hedging, including derivatives use.     

Efficiency measures in retentive and expansive marketing of financial services

The importance of the allocative decisions between expansive and retentive marketing efforts is reviewed. Practical cost-benefit methods with minimum data requirements are designed to measure the relative economic efficiencies of retentive and expansive marketing. Econometric models are specified for cases where either extensive historical data are available or their collection is economically justified. An application to the marketing of services by a commercial bank is presented and discussed. Although the emphasis of the paper is on the organizational marketing of financial services, the methodology is applicable to a wide variety of products and services.     

Connectedness Capitalism

As an approach to attenuating economic crises and enhancing sustainability in capitalism, the authors in this GDN 2009 keynote commentary present connectedness capitalism. In doing so, they consider social connectedness, purpose connectedness, common ground, right action and other key ideas of connectedness problem solving and negotiation, and apply these to problems in current capitalism.