Is the Gulf Cooperation Council an Optimum Currency Area?

This article applies the theory of Generalized Purchasing Power Parity (G‐PPP) to assess the potential for an optimum currency area (OCA) for the Gulf Cooperation Council (GCC) countries over the period 1973–2009. Utilizing a multivariate cointegration procedure that allows for up to two predetermined structural breaks, the results suggest that the GCC countries could form an OCA since macroeconomic conditions are in favor of forming an OCA, i.e., real exchange rates share common trends and the parameter stability test indicates that the G‐PPP relationship has been stable for the period analyzed. Moreover, the results suggest that the withdrawal of Oman and/or United Arab Emirates (UAE) from the union has no impact on forming the union. However, based on other OCA criteria, the results suggest that the OCA may be challenged.     

On the strong uniform consistency of the mode estimator for censored time series

Let (T _n ) _n≥1 be a sequence random variables (rv) of interest distributed as T. In censorship models the rv T is subject to random censoring by another rv C. Let θ be the mode of T. In this paper we define a new smooth kernel estimator [^(q)]_n{\hat{\theta}_n} of θ and establish its almost sure convergence under an α-mixing condition.     

Islamic takaful: Business models,Shariah concerns,and proposed solutions

Islamic insurance (takaful) is nearly as old as the Islamic banking system and dates back to 1979, when the concept was launched in Sudan and later in Saudi Arabia. Yet, unlike its banking counterpart, takaful has been covered less in the literature on Islamic finance, and its workings are not fully understood. Shariah scholars have raised a num‐ber of concerns about the Shariah permissibility of the business models employed in the industry. This article examines the basic principles of takaful and then analyzes the mechanics of the two models most commonly used in the industry— namely, the mudarabah system that was developed by the Malaysians and the wakala (agency) system that is now being used by most takaful operators and has achieved tremendous popularity and acceptance in recent years even in countries where the mudarabah model was earlier implemented. Shariah scholars have, however, expressed some misgivings about both approaches, but because of its wider acceptability among Shariah scholars in the case of the wakala approach, this is more urgent. With regards to the mudarabah model for risk management, there are major discrepancies that have been highlighted by Shariah scholars effec‐tively rendering it inappropriate to apply this for insurance contracts. For this reason, the article outlines a third model, a wakala with waqf fund, that seeks to remain within the wakala framework while incorpo‐rating modifications that may render it more acceptable from a Shariah perspective. © 2007 Wiley Periodicals, Inc.     

Testing for the Fisher hypothesis under regime shifts: an application to Asian countries

This article aims to provide new insights into trade effects of the Greater Arab Free Trade Area (GAFTA), using an imperfect competition framework. The model combines the new gravity model approach with supply-demand export equations in imperfect competition. In this regard, the role of scale economies, product varieties and expectations is explored. Facing the lack of international data on scale economies, we also develop a translog production system which makes it possible to obtain reliable estimates of this factor. For a more rigorous treatment of the endogeneity problem in the model, we make use of an instrumental GMM panel estimator. Results show limited effects of GAFTA on regional trade in imperfect competition, due to market segmentation and the predominance of inter-industry trade. In addition, the fitted intra-GAFTA trade values are far beyond the actual ones. This suggests that GAFTA countries could benefit from deeper regional trade integration. In this regard, the Arab Spring creates new opportunities to reinforce trade integration as a means of grasping additional trade gains in this area.     

Testing for PPP in developing countries using confirmatory analysis and different base countries: an application to Asian countries

Previous studies on PPP have tested either the null hypothesis of non-stationary or the null of a stationary real exchange rate and used the US as the base country and focused on industrialized countries. It has been argued that testing either null is insufficient to confirm the presence of PPP. It has also been noticed that the results are sensitive to the choices of the base country; for instance, the US versus Germany. In contrast to previous studies, this paper uses different unit root tests, confirmatory analysis, and different base countries to test PPP for a sample of developing countries in Asia during the current float. Overall, the results do not seem to be sensitive to the choice of the base country, and joint rejections are not present but joint non-rejections are far more common. Using Perron's test, which allows for a one-time break in the series, the results indicate evidence of stationarity for Indonesia, Korea, Malaysia and Thailand when the US is the base country. When Japan is the base country, evidence of stationarity is detected only for Indonesia.     

Exploring SME cybersecurity practices in developing countries

The continued use of information technology systems by small and medium enterprises (SMEs) in developing countries has the potential to bring significant benefits but, at the same time, expose them to online cybersecurity threats. Addressing these threats is, therefore, of paramount importance for developing countries, not only because SMEs are seen as the vehicle for employment and job creation, but because research on SMEs and cybersecurity in this context is limited. This study is a contribution toward addressing this gap.

The purpose of this study is, therefore, to explore SME cybersecurity practices and the challenges they face in developing countries. The goal is to sensitize practitioners and government institutions about the challenges and practices faced by SMEs, so that the various parties can work collaboratively in providing context-specific solutions to address these challenges and improve current cybersecurity practices. The study follows a qualitative enquiry approach to solicit information from three South African SMEs that had implemented cybersecurity practices. The findings show that an SME’s perception of cybersecurity is constrained by internal factors of budget, management support, and attitudes. Further findings show that SMEs’ cybersecurity practices are affected by the landscape of cybersecurity, as well as institutional pressures.     

The Minimal Entropy Martingale Measure (MEMM) for a Markov-Modulated Exponential Lévy Model

This paper deals with the characterization problem of the minimal entropy martingale measure (MEMM) for a Markov-modulated exponential Lévy model. This model is characterized by the presence of a background process modulating the risky asset price movements between different regimes or market environments. This allows to stress the strong dependence of financial assets price with structural changes in the market conditions. Our main results are obtained from the key idea of working conditionally on the modulator-factor process. This reduces the problem to studying the simpler case of processes with independent increments. Our work generalizes some previous works in the literature dealing with either the exponential Lévy case or the exponential-additive case.     

Is economic policy uncertainty important to forecast the realized volatility of crude oil futures?

In this research, we first investigate whether economic policy uncertainty (EPU) index can increase the HAR-RV-type models’ forecast accuracy. In addition, we explore how EPU index can be effectively used to gain larger economic values in the oil futures market. To this end, this research provides a new perspective on setting thresholds for EPU and examines whether these thresholds can help improve both the forecast accuracy and economic values. Empirical results suggest that the HAR-RV-type models including EPU can generate more accurate forecasts and economic values. The HAR-RV-type models including above-threshold EPU can further improve the forecast accuracy and yield higher economic values by setting specific thresholds for a range of horizons. The findings highlight the importance of EPU and effective way of using EPU in risk management and portfolio strategies that is crucial for investors and policymakers.     

Stock returns and expected inflation: evidence from an asymmetric test specification

Previous studies that examined the relationship between stock returns and inflation have used a symmetric test specification, and have reported evidence of an inverse relation. We use an asymmetric model to re-examine this fundamental relationship between stock returns and inflation. We partition the study period into sub-samples of high and low inflation regimes. An inverse relation between stock returns and inflation forecasts is found during only low inflation periods, while a positive relation is detected through high inflation periods. In combination, results from both high and low inflation regimes suggest that stocks have delivered favorable inflation protection.