Long-memory and heterogeneous components in high frequency Pacific-Basin exchange rate volatility

Recent research examining high-frequency financial data has suggested that volatility dynamics may be confounded by the existence of an intra-day periodic pattern and multiple sources of volatility. This paper examines whether these dynamics are present in the US Dollar exchange rates of five Pacific Basin economies. Using 30-min sampled returns, evidence of a ‘U’-shape intra-day pattern in volatility for regional markets is reported and controlled for using a Flexible Fourier transform. Supportive evidence for the existence of multiple volatility components is offered by semi-parametric fractional difference estimates of the long-memory properties of absolute exchange rate returns at various intra-day data sampling frequencies. Further parametric evidence of an explicit component structure in such high frequency exchange rate volatility is offered by the estimates of a component-GARCH model which comprises both a long-run volatility component exhibiting slow shock decay and a short-run volatility component exhibiting far more rapid decay, and provides a generally superior fit to the data. Further application of these C-GARCH models in the analysis of high frequency volatility spillovers between the currencies considered also reveals that such spillovers are predominantly transitory rather than highly persistent in nature, but that where volatility spillovers do impact on the long-run component of exchange rate volatility the Australian Dollar plays a pivotal role in the localised causality transmission mechanism.      

Estimating the Cost of Equity Capital for Property-Liability Insurers

This article presents new evidence on the cost of equity capital by line of insurance for the property‐liability insurance industry. To do so we obtain firm beta estimates and then use the full‐information industry beta (FIB) methodology to decompose the cost of capital by line. We obtain full‐information beta estimates using the standard one‐factor capital asset pricing model and extend the FIB methodology to incorporate the Fama–French three‐factor cost of capital model. The analysis suggests the cost of capital for insurers using the Fama–French model is significantly higher than the estimates based upon the CAPM. In addition, we find evidence of significant differences in the cost of equity capital across lines.     

Cournot Oligopoly Conditions under which Any Horizontal Merger Is Profitable

Findings in economic theory suggest that horizontalmergers involving firms with aggregate market shareless than 50% are unlikely to be motivated by theconsequent reduction in competitivity. The resultsarise because, absent cost efficiencies, quantity-settingfirms in small mergers are impoverished by the merger.We demonstrate that this conclusion is a consequence ofthe strong restrictions imposed on the demand function,and we identify a well-behaved demand function suchthat any set of merging firms benefits from the reductionin competition even when there are no cost efficiencies.     

Exporting and Productivity in the United Kingdom

This paper investigates various aspects of the links betweenexporting and productivity for a large sample of firms in theUnited Kingdom. We find evidence to support the propositionthat sunk costs are important. Self selection takes place, withlarger and more productive firms entering export markets, andfirms have to become more productive in order to enter. Industrycharacteristics also affect the likelihood of entry—bothindustrial and spatial agglomeration are important. When werely on an unmatched sample of firms we can find some evidenceof further productivity improvement after entry, but this disappearswhen we use a matched sample. Our results suggest that policyshould avoid simply subsidizing firms that may self select intoexport promotion policies and focus instead on reducing informationasymmetries and supporting development of clusters.     

Globalization and real wages in New Zealand 1873-1913

This paper reports annual real wage indexes for laborers and for workers more generally in New Zealand, adjusted for purchasing power parity, for the years 1873-1913. These data are used to include New Zealand in the debates surrounding international wage convergence. On the basis of time series tests we find evidence of an integrated trans-Tasman labor market. Productivity, the terms of trade, and swings in labor’s income share, rather than immigration, shaped New Zealand’s wage growth.     

Mutual fund portfolio trading and investor flow

I estimate the extent to which mutual fund portfolio trading of securities is triggered by investor flows into and out of the funds, and find that this liquidity-induced portfolio trading activity is smaller than previously estimated by Edelen (1999). I obtain estimates from a much larger and broader sample of funds than Edelen’s (1999) sample. Portfolio managers of international funds trade a smaller fraction of investor flow than do those of domestic funds. Index funds invest a larger fraction. A funds’ usage of futures contracts does not have a statistically significant effect on how it trades in response to investor flows, but the unpredictability of investor flow weakly affects the trading response to flow.     

The Stock Market Reaction to Investment Announcements: The Case of Individual Capital Expenditure Projects

In this paper we provide novel evidence about the market reaction to capital expenditure announcements in the UK using a sample of nearly 500 disclosures made between 1989 and 1991. First, we show that the market reaction to joint venture announcements is significantly positive, whilst similar announcements from individual companies do not elicit any response. Second, we find that the market reaction to single company investments is positively related to the size of the expenditure, but only for projects which immediately generate cash. Finally, we report that the variability in the market response to announcements which follow large cash inflows is significantly lower than the variability in investors' reactions to announcements which are not preceded by such inflows.     

High Leverage and Willingness to Pay: Evidence from the Residential Housing Market

I document a strong correlation between paying the full listing price on homes and borrowing 100% loan‐to‐value. Homebuyers who do both overpay by 2.8% to 3.9% ($4,800 to $6,700) and are 22.7% more likely to have their properties foreclosed within one year. The correlation is not mechanical: there is a discontinuity in the average leverage around the full listing price. The correlation is stronger in areas with a high fraction of financially constrained and unsophisticated residents, and in areas of high past price growth (potentially indicative of buyer optimism).     

Knowledge transfer costs and dependence as determinants of financial reporting

Abstract This paper examines the circumstances in which financial reporting exists. Jensen and Meckling (1995 ) observe that where there are high knowledge transfer costs, then decentralisation is necessary; and that where decentralisation occurs there is a control problem, which can be addressed by providing a control system. I predict that where there are high knowledge transfer costs there will be a control system; if the control system uses financial reports, these will occur for activities with high knowledge transfer costs. The ability to decentralise is reduced where dependence makes it potentially costly to allow a subordinate to make decisions about the activity. The paper predicts that high dependence will be negatively associated with the existence of financial reports. The results confirm the predictions that financial reports are positively associated with knowledge transfer costs and negatively associated with dependence.