Knowledge that Transforms

In order to assess the effect of EMU on market conditions for banks based in countries which adopt the Single Currency, we use the H indicator suggested by Panzar and Rosse (Panzar, J.C., Rosse, J.N., 1987. Journal of Industrial Economics 35, 443–456). Our contribution is to assess results separately for large and small banks, and for interest income and total income as a dependent variable. From a panel of banks over the period 1992–1996, we provide evidence that the behavior of large banks was not fully competitive as compared to the US. Regarding small banks, the level of competition appears to be even lower, especially in France and Germany.

Operating leases are estimated in the current paper to be approximately thirteen times larger than finance leases, on average. In recognition of this, the paper investigates the degree of substitutability between leasing and non-lease debt using a comprehensive measure of leasing, improving on the partial measures used in prior research. Operating lease liabilities are estimated using the ‘constructive capitalisation’ approach suggested by Imhoff, Lipe and Wright (1991, Accounting Horizons 5, pp. 51–63), modified to incorporate company-specific and UK-relevant assumptions. The results imply that leasing and debt are partial substitutes, with £1 of leasing displacing approximately £0.23 of non-lease debt, on average, consistent with the argument that lessors bear some risks which are not inherent in debt contracts. These findings suggest that substitution effects are not uniform across lease types.

The paper analyses the determinants of cross-sectional stock returns at the London Stock Exchange in the last 26 years. It finds that portfolio strategies based on low values of earning per share (EPS), market to book value (MTBV), market value (MV) and return on equity (ROE) significantly outperform the index. Do size and value (S&V) strategy premia disappear when risk-adjusted or do they reveal gains from trading against noise, near rational, liquidity or “weak-hearted” traders? We find that the significance of cross-sectional determinants of these strategies is not absorbed by ex post betas. They are not riskier in terms of monthly return standard deviations, covariation with GDP growth and their premia do not disappear when survivorship bias is taken into account. Portfolio mean monthly returns (MMRs), regressed on several risk factors in 3-CAPM models, confirm that S&V strategy premia persist when risk adjusted. Empirical results also mark the difference between ROE and MTBV portfolios, on the one side, and MV and EPS portfolios, on the other. Descriptive statistics on preformation and postformation returns, average balance sheet values and preformation standard deviations clearly show that ROE and MTBV portfolios have a common financial distress factor and are then more exposed to systematic risk.

This paper provides a new indicator for central bank independence (CBI) based on the turnover rate of central bank governors for 82 developing countries over the period 1980–1989. Using this new indicator it is concluded that this proxy for CBI is related to inflation, only if the high inflation countries are included in the sample. The view that both CBI and inflation are caused by effective opposition towards inflation is not supported. Using both the extreme bound analysis and Sala-i-Martin's method we do not find evidence that CBI is robustly related to economic growth.

One of Hungary's policies during the transition from a centrally planned to a market economy was the issue of compensation vouchers – a unique security designed both as a privatization mechanism and as a form of restitution for Hungarian citizens who suffered property losses in post-war nationalizations. The coupons were actively traded on the Budapest Stock Exchange (BSE). This paper examines the intertemporal behavior of the Hungarian voucher and equity markets in an effort to assess the efficiency of these markets and to gauge the degree of interaction between the two different assets. Evidence from variance ratio tests indicates that stock and voucher trading are each individually weakly efficient. Furthermore, vector autoregressions and cointegration methods show that there is little detectable intermarket interaction: a result which is consistent with joint efficiency. Thus, although the Hungarian equity market is small, it appears to function remarkably well.

The French derivatives market, the Marché à Terme International de France (MATIF) or the French International Futures and Options Exchange is one of the major derivatives markets in the world. The efficiency of four financial contracts traded on the MATIF-CAC40 Index Futures, ECU Bond Futures, National Bond Futures, and PIBOR 3-Month Futures are examined in this paper. Test results from serial correlations, unit root tests, and variance ratio tests provide overwhelming evidence that the random walk hypothesis cannot be rejected for these contracts.

China has an A-share market that is open only to local investors and a B-share market that is open only to foreign investors. Contrary to what has been observed in other markets with a similar segmented structure, the China B shares trade at a discount relative to the A shares. We show that the phenomenon can still be explained by basic economic principles. Specifically, the existence of the H-share and the “red-chip” markets in Hong Kong provide good substitutes for the B-share market. We find that when more H shares and red chips are listed in Hong Kong, the B-share discount becomes larger. This is consistent with the model of differential demand elasticity proposed by Stulz and Wasserfallen (Stulz, R., Wasserfallen, W., 1995. Review of Financial Studies 8, 1019–1057).

This paper’s estimates and tests of Fed intervention profits are the first that explicitly adjust for foreign-exchange risk premia; failure to adjust may grossly affect estimated profits. Profits appear economically and statistically significant, whether risk premia are modeled as time-constant or as appreciation’s market beta depending on Fed intervention. The estimates are sensitive to the method of risk adjustment and to the periods used. Because a key variable, cumulative intervention, is I(1), test statistics may have non-standard distributions, a problem affecting past tests; this paper’s tests account for non-standard distributions. Possible explanations of these profits have mixed empirical support in the literature.

This comment discusses the review by Franklin Allen and Anthony Santomero of the theory of financial intermediation in the 20th anniversary special issue of the Journal of Banking and Finance. We do not fully agree with their view that risk management is only of recent importance to the financial industry and with putting central the concept of participation costs. We suggest how the theory of financial intermediation might be developed further in order to understand present-day phenomena in the financial services sector.

The paper analyses the risk reduction effect of limits which are imposed on stock exchange price movements. As a result of the maximisation of traders’ utility functions subject to expected price constraints, a model similar to the capital asset pricing model (CAPM) is developed, where the observed returns are corrected for the appearance of constraints. An analysis of returns from six securities traded on the Warsaw Stock Exchange has been carried out. The models have been estimated by the two-limit Tobit model and compared with the results for the corrected returns. The results show that the trade barriers increase the portfolio risk.