Donald Lien

The Impact of Corruption on Investment: Predictability Matters

Abstract This paper argues that it is not only level of corruption that affects investment but also the nature of corruption. Corruption regimes that are more predictable—in the sense that those seeking favors from government do obtain those favors—have less negative impact on investment than those that are less predictable. Using the data collected by World Bank in preparing the World Development Report of 1997, we provide empirical support for the conjecture.

Some Recent Developments in Futures Hedging

The use of futures contracts as a hedging instrument has been the focus of much research. At the theoretical level, an optimal hedge strategy is traditionally based on the expected-utility maximization paradigm. A simplification of this paradigm leads to the minimum-variance criterion. Although this paradigm is quite well accepted, alternative approaches have been sought. At the empirical level, research on futures hedging has benefited from the recent developments in the econometrics literature. Much research has been done on improving the estimation of the optimal hedge ratio. As more is known about the statistical properties of financial time series, more sophisticated estimation methods are proposed. In this survey we review some recent developments in futures hedging. We delineate the theoretical underpinning of various methods and discuss the econometric implementation of the methods. Copyright 2002 by Blackwell Publishers Ltd

Evaluating the hedging performance of the constant-correlation GARCH model

This paper compares the performances of the hedge ratios estimated from the OLS (ordinary least squares) method and the constant-correlation VGARCH (vector generalized autoregressive conditional heteroscedasticity) model. These methods are evaluated based on the out-of-sample optimal hedge ratio forecasts. A systematic comparison is provided by examining ten spot and futures markets covering currency futures, commodity futures and stock index futures. Using a recently proposed test (Tse, 2000) for the constant-correlation assumption, it is found that the assumption cannot be rejected for eight of the ten series. To gain the maximum benefit of a time-varying hedging strategy the estimation data is kept up-to-date for the re-estimation of the hedge ratios. Both the constant hedge ratio (using OLS) and the timevarying hedge ratio (using constant-correlation VGARCH) are re-estimated on a day-by-day rollover, and the post-sample variances of the hedged portfolios are examined. It is found that the OLS hedge ratio performs better than the VGARCH hedge ratio. This result may be another indication that the forecasts generated by the VGARCH models are too variable.

Hedging downside risk with futures contracts

This paper considers a futures hedge strategy that minimizes the lower partial moments; such a strategy minimizes the downside risk and is consistent with the expected utility hypothesis. Two statistical methods are adopted to estimate the optimal hedge ratios: the empirical distribution function method and the kernel density estimation method. Both methods are applied to the Nikkei Stock Average (NSA) spot and futures markets. It is found that, for a hedger who is willing to absorb small losses but otherwise extremely cautious about large losses, the optimal hedge strategy that minimizes the lower partial moments may be sharply different from the minimum variance hedge strategy. If a hedger cares for downside-only risk, then the conventional minimum variance hedge strategy is inappropriate. The methods presented in this paper will be useful in these scenarios.

Fractional cointegration and futures hedging

This article examines the performance of various hedge ratios estimated from different econometric models: The FIEC model is introduced as a new model for estimating the hedge ratio. Utilized in this study are NSA futures data, along with the ARFIMA‐GARCH approach, the EC model, and the VAR model. Our analysis identifies the prevalence of a fractional cointegration relationship. The effects of incorporating such a relationship into futures hedging are investigated, as is the relative performance of various models with respect to different hedge horizons. Findings include: (i) Incorporation of conditional heteroskedasticity improves hedging performance; (ii) the hedge ratio of the EC model is consistently larger than that of the FIEC model, with the EC providing better post‐sample hedging performance in the return–risk context; (iii) the EC hedging strategy (for longer hedge horizons of ten days or more) incorporating conditional heteroskedasticty is the dominant strategy; (iv) incorporating the fractional cointegration relationship does not improve the hedging performance over the EC model; (v) the conventional regression method provides the worst hedging outcomes for hedge horizons of five days or more. Whether these results (based on the NSA index) can be generalized to other cases is proposed as a topic for further research.

E-commerce and consumer's purchasing behaviour

After its first exposure to the public in 1993, there has been a rapid increase in the use of the Internet for different purposes, particularly for electronic trade. In such a new trade area, there are a lot of issues to be addressed with regard to the consumers purchasing behaviour. This study analyses the roles of sexual preference, primary place of online access, and online experience as well as demographic and economic factors on the consumers purchasing decision. Moreover, this study investigates the impact of the potential and/or prevalent critical issues facing the Internet (e.g. taxation of services, privacy, censorship, etc.) on online orders. Surprisingly, sexual preferences have a large significant effect on online purchases. Gay and bisexual people are more likely to shop from the Internet than the other ones. The results, also, suggest that people with more online experiences in a more private and secure environment like home are disposed to order more from the Internet. In addition to that, only the issues of taxation of services and privacy have some statistically significant effects on online purchasing decisions. The former and latter have positive and negative impacts on online orders respectively.

Competition and production efficiency telecommunications in OECD countries

Abstract This paper applies nonparametric methods to examine the production efficiency of telecommunications in 24 OECD countries. Three alternative DEA (data Envelopment Analysis) measures are adopted. Using the country data from 1980 to 1995, we found that, although the list of countries allowing for telecommunications competition varies over time, on average these countries are always more efficient by any of the three measures. Similar conclusions were derived from the company data during the 1992–1995 period. We concluded that competition in telecommunications tends to be associated with enhanced production efficiency.

A Survey of Emerging Derivatives Markets

This paper summarizes theoretical and empirical research on the roles and functions of emerging derivatives markets and the resulting implications on policy and regulations. Previous studies revealed that commodity derivatives markets offered an effective and welfare-improving method to deal with price volatility. Financial derivatives markets have helped to support capital inflows into emerging market economies. On the other hand, the use of financial derivatives has led to exacerbated volatility and accelerated capital outflow. There is a consensus that derivatives are seldom the cause of a financial crisis but they could amplify the negative effects of the crisis and accelerate contagion. Previous studies of derivatives markets have supported the hedging role of emerging derivatives markets. Empirical results from a few emerging countries suggest a price discovery function of emerging futures markets. The findings on the price stabilization function of emerging derivatives markets are mixed. Finally, recent research has documented that constructive development of derivatives markets in emerging market economies needs to be supported by sound macroeconomic fundamentals as well as updated financial policies and regulations.

Hedging downside risk: futures vs. options

Abstract In this paper, we compare the hedging effectiveness of currency futures vs. currency options on the basis of the lower partial moments (LPMs). The LPM measures an individual hedgers downside risk, as opposed to the two-sided risk measure. Two estimation methods are applied to estimate the optimal hedge ratio: the empirical distribution function method and the kernel density estimation method. We consider both methods for three currencies: the British pound, the Deutsche mark, and the Japanese yen. Currency futures are found to be a better hedging instrument than currency option.

Same-sex sexual behaviour: US frequency estimates from survey data with simultaneous misreporting and non-response

Survey-based research concerning sexual behaviour almost inevitably confronts the simultaneous problems of misreporting and non-response. These problems lead to disparities among estimates of the number and characteristics of those who engage in same-sex sexual behaviour. This paper proposes a statistical model to consistently estimate the frequency of same-sex sexual behaviour in the presence of non-ignorable misreporting and non-response. The model is fitted using 1991–2000 General Social Survey data. Frequency estimates corrected for simultaneous misreporting and non-response are reported. According to the model, 7.1% of US males and 4.1% of females – 15.8 million individuals – are not exclusively heterosexual. Allowing for misreporting and non-response increases the estimated same-sex frequency by more than four million. The model reveals new patterns between misreporting and non-response probabilities and standard demographic variables such as age and income.