Diversification benefits in the smaller European stock markets

This paper examines the diversification benefits available to U.S. and Japanese investors over the period 1974-94 in seven of the smaller European stock markets (SESMs): Austria, Belgium, Greece, Holland, Ireland, Italy, and Spain. With reference to a simplified International CAPM that accommodates both contemporaneous and delayed information flows, we employ correlation, principal components, and cointegration analysis in studying monthly observations from national basket indices. The empirical evidence is conclusive in showing that the SESMs have behaved differently, at least since the October 1987 crash, with stronger contemporaneous interdependencies and integration between them and with the U.S. market. Cointegration analysis found no significant common trend shared between the SESMs and the U.S. and Japanese markets. We conclude that despite the increasing international integration there still exist opportunities for diversification investment in the smaller and less studied European stock markets.The present study is an extensively revised version of a paper presented at the 42nd Atlantic Economic Society Conference in Washington, DC, October 1996. We are indebted to the attendants and discussants of our session, especially Nicholas Apergis, Erotokritos Varelas, and George Zestos for their constructive comments and arguments. We also thank Terence Mills and two anonymous referees for their comments on this paper. Finally, we wish to thank Jay Smith, Leading Market Technologies, Cambridge, MA for providing us theEXPO/NeuralNet andEXPO/Econometrics software used in this study. For any remaining errors, the authors are fully responsible. Raphael Markellos is grateful for financial support received from the Department of Economics and the School of Humanities and Social Sciences, Loughborough University, United Kingdom.     

Macroeconomic,institutional, and sectoral determinants of outward foreign direct investment: Evidence from Japan

This paper empirically explores the determinants of outward foreign direct investment (FDI) in the Japanese manufacturing sector. We estimate a gravity model of FDI for 30 host countries covering the period 2005–2017, using Poisson pseudo maximum likelihood to tackle the issue of zero-value observations. The results indicate that Japanese overseas investments are not only driven by traditional factors, such as market size, the yen real exchange rate, trade openness, differences in perception of corruption, and financial instability, but also by industry characteristics. In particular, we find that low technological industries characterized by growing labour costs are more likely to be relocated abroad. Furthermore, we demonstrate nonlinearities in the determinants of Japanese overseas investments depending on the host country's development, the host country's region, and the category of FDI implemented (vertical vs horizontal).     

A jump diffusion model for VIX volatility options and futures

Volatility indices are becoming increasingly popular as a measure of market uncertainty and as a new asset class for developing derivative instruments. Although jumps are widely considered as a salient feature of volatility, their implications for pricing volatility options and futures are not yet fully understood. This paper provides evidence indicating that the time series behaviour of the VIX index is well approximated by a mean reverting logarithmic diffusion with jumps. This process is capable of capturing stylized facts of VIX dynamics such as fast mean-reversion at higher levels, level effects of volatility and large upward movements during times of market stress. Based on the empirical results, we provide closed-form valuation models for European options written on the spot and forward VIX, respectively.     

Accumulation and the transfer of technology: Issues of conflict and mechanisms for the exercise of control

The transfer of technology from developed to underdeveloped economies is almost always associated with a conflict of interests between the supplier and the recipient of technology. Where this conflict arises control is exerted by the more powerful party to ensure that the conflict is settled in its favour. It is argued in this paper that control is allied to the power to determine the rate and type of accumulation of capital. A number of potential areas of conflict are discussed, and this is followed by a discussion of the mechanisms which the various parties can use to settle conflict in their favour.     

OPTIMAL PRICE SETTING IN FIXED‐ODDS BETTING MARKETS UNDER INFORMATION UNCERTAINTY

This paper develops a model of optimal pricing under information uncertainty for fixed‐odds betting markets. The model suggests that bookmakers require a premium for quoting the odds several days before an event. This premium reflects the uncertainty of public information that can be exploited by expert bettors. The model predicts that when bookmakers set optimal prices, expected returns to bettors increase as a monotonic function of winning probabilities. In this manner, an information‐based explanation is given for the celebrated favourite‐longshot bias in fixed‐odds. Using an extensive data‐set of football odds from two major European bookmakers, we estimate the probability of informed betting.     

Do E‐verify mandates improve labor market outcomes of low‐skilled native and legal immigrant workers?

We examine the impact of the 2007 Legal Arizona Workers Act (LAWA) on employment outcomes of low‐skilled legal workers. We use the synthetic control method to select a group of states against which the labor market trends of Arizona can be compared. Our results suggest that contrary to its intent, LAWA does not appear to have improved labor market outcomes of legal low‐skilled workers who compete with unauthorized immigrants, the target of the legislation. In fact, we find some evidence of diminished employment and increased unemployment among legal low‐skilled workers in Arizona. These findings are concentrated on the largest demographic group of workers—non‐Hispanic white men. While they are less likely to find employment, those who do have on average higher earnings as a result of LAWA. The pattern of results points to both labor supply and labor demand contractions due to LAWA, with labor supply dominating in terms of magnitude.     

Have the Doors Opened Wider? Trends in Homeownership Rates by Race and Income

Homeownership among U.S. families increased notably in recent years, from 63 percent in 1989 to 66.2 percent in 1998. This article examines this trend and the factors contributing to it. We find that (1) homeownership rose for all racial, ethnic, and income groups; (2) the differences in homeownership between minority and nonminority families and between middle-income and lower-income families declined significantly; and (3) changes in family-related characteristics explain homeownership trends among only the top two income quintiles. Among the lower two income quintiles, family-related characteristics explain almost none of the increase in homeownership. This pattern suggests that the favorable economic climate of the last decade, changes in mortgage and housing markets, and changes in the regulations governing those markets account for the increase in homeownership among lower-income families.     

On measuring nonlinear risk with scarce observations

We propose a methodology for estimating the risk of portfolios that exhibit nonlinear dependence on the risk driving factors and have scarce observations, which is typical for portfolios of investments in hedge funds. The methodology consists of two steps: first, regressing the portfolio return on nonlinear functions of each single risk driving factor and second, merging together the obtained estimates taking into account the dependence between different factors. Performing the second step leads us to a certain probabilistic problem, for which we propose an analytic and computationally feasible solution for the case where the joint law of the factors is a Gaussian copula. A typical practical application can be to estimate the risk of a hedge fund or a portfolio of hedge funds. As a theoretical consequence of our results, we propose a new definition of the factor risk, i.e., the risk of a portfolio brought by a given factor.