Review of Pacific Basin Financial Markets and Policies

The study investigates the impact of structural breaks on the long memory of daily returns and variance of 11 sectors. Using multiple sequential structural breaks tests, we uncover numerous and roughly shared structural breaks. Results from two non-parametric, three semi-parametric, and three parametric fractional differencing models using break-adjusted and break-unadjusted returns reveal incidence of short memory and anti-persistence in sector returns. Regarding variance, we find that the removal of breaks from the sector series dampens the fractional differencing parameter estimates. Therefore, the observed long memory in variance may be attributable to the occurrence of structural breaks in the sector series.

This paper examines the export competitiveness of the manufacturing sector in Singapore. More specifically, we examine how the existence of import content of exports, productivity gains, and profit margins affect the competitiveness of Singapore’s manufacturing exports. Using proxies such as price of exports, price of imports, unit business costs, and net operating surplus over manufacturing output, we analyze our results empirically and seek to show the significance of these variables in affecting the export competitiveness in the unique case of Singapore. As price of exports and price of imports are both expressed in Singapore dollars (SGD) and this captures the exchange rate, we can assess the impact of a stronger SGD on the export competitiveness of Singapore’s manufacturing sector. Traditional economic notions according to Mundell–Fleming model have predominantly assumed that the appreciation of local currency would stimulate imports and harm exports, vice versa. However, in the case of Singapore where there is a high import content in exports, our paper reveals that exports are not adversely affected by an appreciation of SGD. This is attributed to the direct causal relationship between import prices and export prices that helps to minimize the effects of a higher cost of export production brought about by appreciation, with lower import costs. Furthermore, the impacts of productivity growth and profit margins on export competitiveness are very small, supporting the notion that Singapore exporters are price-takers.

This paper examines the predicting power of the volatility indexes of VIX and VHSI on the future volatilities (or called realized volatility, ${\sigma }_{30,r})$ of their respective underlying indexes of S&P500 Index, SPX and Hang Seng Index, HSI. It is found that volatilities indexes of VIX and VHSI, on average, are numerically greater than the realized volatilities of SPX and HSI, respectively. Further analysis indicates that realized volatility, if used for pricing options, would, on some occasions, result in greatest losses of 2.21% and 1.91% of the spot price of SPX and HSI, respectively while the greatest profits are 2.56% and 2.93% of the spot price of SPX and HSI, respectively, making it not an ideal benchmark for validating volatility forecasting techniques in relation to option pricing. Hence, a new benchmark (fair volatility, ${\sigma }_f)$ that considers the premium of option and the cost of dynamic hedging the position is proposed accordingly. It reveals that, on average, options priced by volatility indexes contain a risk premium demanded by the option sellers. However, the options could, on some occasions, result in greatest losses of 4.85% and 3.60% of the spot price of SPX and HSI, respectively while the greatest profits are 4.60% and 5.49% of the spot price of SPX and HSI, respectively. Nevertheless, it can still be a valuable tool for risk management. $z$-values of various significance levels for value-at-risk and conditional value-at-value have been statistically determined for US, Hong Kong, Australia, India, Japan and Korea markets.

This paper examines the relationship between liquidity and profitability of the non-financial firms listed in Dhaka Stock Exchange (DSE) for the period of 1998–2013. Pedroni and Johansen co-integration results show that liquidity, profitability, firm size and long-term debt (LTD) have significant co-integration relationship in the long run. The causality test results expose that a strong bidirectional casual relationship exist among the variables of liquidity and profitability, LTD and liquidity profitability and firm size in the short run. Also, there exists unidirectional causality among the variables of firm size and liquidity, profitability and LTD in the short run. Furthermore, Pooled Mean Group results show that profitability, firm size and LTD have long-run co-integration relationship with liquidity. However, in the short run, profitability and LTD significantly contribute to the liquidity and the error correction mechanism shows that speed of adjustment to equilibrium is significant within the year. Impulse response analysis indicates shocks in the firm size, LTD and profitability have positive and significant impact on liquidity.

We investigate how Korean officers manage revenue and earnings to achieve cognitive reference points (round up). In Korea, revenue has traditionally served as one of the key financial statement figures. Thus, we study revenue management around cognitive reference points both in isolation and to influence earnings around cognitive reference points through a chain effect. Our study compares the distributions of the second (from the left) and first digits in revenue and various proxies for earnings with their corresponding Benford distributions (Benford, 1938). Also, we perform a logistic regression analysis and compute probabilities based on this analysis. The results show that revenue observations have more first digit 1’s and second digit 0’s and fewer first and second digits 9’s than under a Benford distribution. Korean managers appear to round up revenues with high second digits to improve first digits. In addition, we document that revenue observations with second digits of 0 are associated with higher proportions of positive earnings (gross margin and earnings from operations) with second digits of 0. This suggests that Korean firms simultaneously convert the second digits of revenue and earnings to improve the first digits of those numbers. Results from additional tests convey more upward management of the second digit of revenue for firms that have characteristics that indicate higher ex ante benefits and stronger ex post effects from revenue management.

As stock-option holdings increase, managers alter their firms’ payout composition, choosing stock repurchases rather than dividends to return cash to shareholders. Prior research presents two competing explanations for this behavior: the flexibility hypothesis and the shareholder power hypothesis. In support of the flexibility hypothesis, I document that this executive stock-option incentive to repurchase stock as a substitute for dividends is stronger when firms have weak shareholder rights and when information asymmetry is severe. In addition, I find that option-induced repurchases are associated with lower shareholder wealth when shareholder rights are weak or when information asymmetry is high. These firms also perform worse in the following year but show higher total payouts to shareholders. Overall, this paper provides a comprehensive picture of managers’ option-driven repurchase behavior.