Review of Pacific Basin Financial Markets and Policies

This paper proposes an integrated process to recover the moments of the risk-neutral distribution using a Gram-Charlier expansion series and Rubinstein's implied binomial tree approach. The advantage of using the implied tree approach is that it accounts for the possibility of early exercise of American options. We apply the method to American-style options on Nikkei 225 futures. We then demonstrate how to use the implied moments for trading options.

The increased flows of securities investment have shifted from developed countries to emerging ones over the last decade. Capital flows to developing countries have important benefits. However, large surges in short-term and potentially reversible capital flows can have very negative effects. The idea of this study is to assess the empirical evidence in Asia-Pacific developed and emerging markets for whether the "return-chasing" hypothesis is true? The conditional variance in the model is assumed to follow a generalized ARCH-M model, including country credit ratings as explanatory risk variables in the mean and variance equations. The results suggest that the relationship between country index returns and return variance are weak for both developed and emerging markets. The changes of country credit ratings have positive impacts on country index returns in some Asian emerging markets, but not in developed markets. We also found that the changes of country credit ratings have significant influence, but with mixed sign, on country index return volatility for some Asian emerging markets, but not for developed markets. The findings support the "return-chasing" hypothesis, in which the flow securities investment tends to move into the markets whose returns are expected to be high and retreat from markets whose returns are predicted to be low. The result suggests that the world community and national authorities have to manage these flows more effectively. There exists a serious risk that such volatile flows could undermine the benefits that globalization and free markets can otherwise bring.

This study examines the patterns of four discretionary financial variables surrounding president turnovers in Japanese firms. A new theory for earnings management, the coaching hypothesis, and three previously tested theories, the horizon, cover-up, and big bath hypotheses, are investigated. Our empirical results reinforce the importance of controlling for firm performance when testing earnings management. For routine turnovers, the evidence is consistent with the coaching hypothesis, which predicts mutual interests between incoming and outgoing presidents to portray a triumphant transition. We also find evidence for the horizon hypothesis, in that outgoing presidents in routine turnovers attempt to increase earnings during their last years, but the extent of the horizon problem may be curtailed by incentives to preserve a successful transition, the coaching hypothesis. For non-routine turnovers, we find little evidence of outgoing presidents attempting to cover up poor performance by employing income-increasing strategies. We also find weak support for the big bath hypothesis, which predicts incoming presidents of non-routine turnovers to decrease earnings in the transition year in order to report improved earnings in the following year.

This paper examines mispricing, volatility and parity on the Hang Seng Index (HSI) options and futures market. Most of the previous research has focused on futures contracts; we update this research and extend it by considering also option contracts. It is also important to examine these issues post 1997 Asian crisis. We find mispricing of HSI futures and option contracts if no transaction costs were considered. However, by incorporating transaction costs, the HSI futures are bounded within the arbitrage free region and most of the mispricing of the HSI options disappears. Additional tests on the mispricing series reveals that most of the derivative HSI contracts are positively autocorrelated and that the mispricing series for both derivative contracts are not identical among the different contract months. From our results we cannot conclude that there is causal relationship between the mispricing and the spot index volatility. Finally, our empirical results show that for HSI derivative contracts future and option parity holds, supporting our mispricing test that the HSI derivative market is efficient and has not been adversely affected by the Asian economic crisis.

The recent trends toward consolidation in financial markets, both global and national, and the difficult state of the Japanese financial industry suggest the importance of an examination of consolidation in the Japanese financial industry. Recent mega-mergers have produced enormous banks such as the Bank of Tokyo-Mitsubishi, but as usual in Japan the health of the financial industry depends substantially on small and medium-size institutions. There the recent trend toward merger extends back a few decades.

This study reports a further examination of performance of mergers among credit associations (CA) in Japan, using a sample of 25 pairs of merging and non-merging institutions. Each pair is chosen for comparability in terms of variates such as size and geography. Performance is measured by 19 financial ratios sampled during the period of 1983–1998. Considering pre-versus post-merger values of various ratios, mergers have significant positive effects on ratios such as non-personnel expenses ratio, income ratio after tax, loan-deposit ratio, deposit per office and deposit per association's member. But mergers have rather negative effects on net equity ratio and ratio of current expense to current income. On balance mergers are a positive factor in the CA industry. These results contradict the conclusions of earlier studies (Hoshino, 1988).

Among relative financial ratios (comparing merging and non-merging CA), the effect of merger on yield on interest received and non-personnel expenses ratio are shown to be positive in this sample, contradicting previous results. However, in general the financial characteristics of merging CA are rather inferior to those of non-merging CA.

We find that Singapore listed firms which have conducted private placements subsequently experience long-run stock underperformance. The long-run underperformance is more severe for small firms and firms with a higher book-to-market ratio. This suggests that small firms and firms with poorer growth prospects are more likely to time the issue when the stock is temporarily overvalued. Further more, we find a positive relation between the long-run stock performance and the change in ownership concentration of the issuing firms, which is consistent with the alignment-of-interests hypothesis. We do not find evidence supporting the earnings-management hypothesis.