DURATION,IMMUNIZATION, AND HEDGING WITH INTEREST RATE FUTURES

The recent advent of the interest rate futures markets has greatly enriched the hedging opportunities of market participants faced with undesired interest rate risk. The variety of futures contracts presently spans a number of instruments with different risk, maturity, and coupon characteristics. This paper modifies the concept of duration and extends the duration hedging approach to cases where futures contracts are used as the hedging instrument. The derived hedge ratios take into account differences in coupon, maturity, and risk for three different regimes. Usage of these hedge ratios should lead to more efficient hedging of interest rate risk.     

EMPIRICAL ANALYSIS ON THE PREDICTORS OF FUTURE SPOT RATES

This paper examines the issue of the prediction of future spot rates by applying the seemingly unrelated regression technique to four major currencies using data from January 1974 to September 1982. The empirical evidence indicates that current spot rates provide a better prediction of future spot rates than do current forward rates. In further rolling subsample studies, the estimated coefficients for current forward rates (or spot rates) are found to be sensitive to the new information. An important implication of this paper is that since the estimated coefficients vary over time, the underlying pattern of the generated coefficients should be extrapolated and incorporated into the exchange rate predictions.     

INTEREST RATE RISK HEDGING FOR DUE-ON-SALE MORTGAGES WITH EARLY TERMINATION

The impact of random early termination on the interest rate elasticity and the related implications of hedging a mortgage security are examined. The common approach to computing duration using average mortgage life is shown to be biased and insufficient. Because the prepayment distributions of mortgages tend to have wide dispersions, substantial errors result from using average mortgage life. These results are also applicable to other financial obligations subject to prepayment.     

Adverse selection as an explanation of credit rationing and different lender types

An adverse selection model is utilized to demonstrate that informational asymmetry may make it wealth optimal for the financial intermediary (FI) to credit ration and to rationalize the existence of different lenders in the credit market. The crucial assumption is that borrowers differ in their tolerance for a lender-imposed default penalty, the severity of which also varies with the lender. The credit rationing portion proves that the FI will: 1) be forced by a binding regulatory constraint to overinvest in capital; 2) ration its worst risk class borrowers; 3) establish its optimal loan interest rate on the basis of the average quality of its loans and the interest rate elasticity of the borrower demand in its best risk category; and 4) decrease the total loan volume and increase the loan interest rate due to an increase in the capital requirement, but the effect on the default risk quality of its loan portfolio is ambiguous. The existence result is that if a lender has a high default penalty, he can charge a lower rate and attract only “good” borrowers, i.e., heterogeneous lender types encourage the screening of borrowers and vice versa.     

Dynamic analysis of stock return volatility in an integrated international capital market

This paper examines the dynamic behavior of the stock return volatility for Canada, Japan, Germany, and the United Kingdom. The evidence indicates that international stock return volatility is mainly influenced by the U.S. stock return volatility and the exchange rate volatility, supporting the international capital market integration hypothesis. There seems to be some correlation between stock return volatility and macroeconomic volatility, but the effect is relatively weaker. In addition to the economic fundamentals, the noise component is found to be time varying, confirming the AR(MA)CH specifications in the stock return models.     

Applying a New Model of Customer Value on International Air Passengers' Market in Taiwan

This paper proposes a new model to discover customer value of air passengers by using data mining technologies. The results of this research can be applied in database marketing systems. The procedure applies See5/C5.0 (RuleQuest Research Pty Ltd, St Ives, New South Wales, Australia) decision tree; transaction records; Frequency, Price Discount, Destination and No‐Show (FPDN model; Recency, Frequency and Monetary model based) model variables; and socio‐economic variables to create decision rules for airline business. An empirical case of air passengers' market in Taiwan is implemented for the identification of this procedure and the Frequency, Price Discount, Destination and No‐Show model. Copyright © 2011 John Wiley & Sons, Ltd.     

A comparative analysis of perception of dividends by financial managers

This paper is a report about the perception of dividends by Chief financial officers (CFOs). The research encompasses five countries, on three continents, and covers three types of economies. Our cross-sectional study is concerned with both inter- and intra-societal differences that may or may not exist regarding the perception of dividends by those who are in charge of making such decisions in the firm. Using a survey instrument, we find that both similarities and dissimilarities exist inter- and intra-culturally. Perhaps the most important conclusion we reach is that dividend research must take a different track than it has been following so far.     

Empirical analysis of real and financial volatilities on stock excess returns: evidence from Taiwan industrial data

This paper tests the relation between stock excess returns and risk factors measured by volatility. The sources of the volatility are based on the volatility of macroeconomic factors and time-series volatility. To model the macroeconomic fundamentals, we divide the risk into real and financial volatilities pertinent to Taiwan's economic environment. By examining the data of indusry excess returns and market excess returns, we find evidence to reject the hypothesis that the stock excess returns are independent of the real and financial volatilities.     

Premium setting and bank behavior in a voluntary deposit insurance scheme

This study analyzes the effect of premium rates on banks’ incentives to join a deposit insurance scheme and their incentives to invest in risky projects under a voluntary deposit insurance scheme. We find that in order to maximize social welfare, the insurance agency must either set the premium rate to be low so as to attract all banks to join the insurance scheme, or not to have the deposit insurance at all. However, the low premium rate in the voluntary scheme does not balance the budget of the deposit insurance. We also show that in the compulsory deposit insurance scheme, however, it is possible to impose an optimal premium rate that can balance the insurance agency’s budget and achieve the highest social welfare. The results also present the dominance of the compulsory scheme over the voluntary scheme in terms of maximizing social welfare and balancing the budget.