George Emir Morgan

The monitoring rationale for dividends and the interaction of capital structure and dividend decisions

Abstract This paper develops an agency-cost framework for the simultaneous determination of a firms capital structure and dividend decisions. In the model, simultaneity is contingent on the applicability of Easterbrooks (1984) monitoring rationale for paying dividends, which, in turn, is hypothesized to depend on the existence of alternative sources of monitoring. Estimations of the Rozeff (1982) specification for dividend payout for subsamples stratified according to the prevalence of non-dividend monitoring mechanisms and growth-induced capital market monitoring, confirm the sample-specific validity of the monitoring rationale. A simultaneous system of equations is then estimated and, consistent with our hypothesis, simultaneity between capital structure and dividend decisions is observed only for the subsample in which the monitoring rationale for dividends is found applicable.

Bank foreign exchange and interest rate risk management: simultaneous versus separate hedging strategies

Abstract This paper investigates the hedge ratio dynamics for large US banks with exposure to both interest rate and foreign exchange risks. Using a mean–variance framework, the paper evaluates hedging performance when interest rate and foreign exchange risks are hedged separately versus simultaneously. Optimal hedge ratios for separate and simultaneous hedging strategies are estimated using the multivariate GARCH model. The magnitude of separate hedge ratios is found to consistently overstate that of simultaneous hedge ratios for banks that engage in both domestic loan extensions and foreign exchange operations. Both in-sample and out-of-sample results indicate that a simultaneous hedging strategy outperforms a separate hedging strategy. The mean–variance efficiency test results strongly support statistical significance to this finding.

Cross-hedging foreign exchange rate risks: The case of deposit money banks in emerging Asian countries

Abstract This paper investigates the performance of five major currency futures for cross-hedging local currency/US dollar exchange rate risks faced by depository financial institutions in a selected group of emerging Asian countries. In particular, we present performance rankings by composition method of currency futures and suggest an approach that can help bank managers compare cross-hedging performance of major currency futures and identify the optimal cross-hedging strategy. Empirical findings suggest that a minimum variance cross-hedge with a futures portfolio performs better than a minimum variance cross-hedge with one currency futures for Indonesia, Singapore, and Thailand, whereas for Korea and Malaysia the minimum variance cross-hedge with one currency futures outperforms. The best performance for one currency futures is found to be made with the German mark futures for Korea and the Canadian dollar futures for Malaysia. A joint naive cross-hedge performs the worst among all the composition methods we examined.

Basis risk, partial takedown and hedging by financial intermediaries

In this paper we provide a model of futures market equilibrium in which both financial intermediaries and their customers are able to hedge both quantity and price risk. The interplay between alternative loan commitment arrangements and hedging decisions is examined in some detail. As an example we show conditions under which futures contracts can be used, in conjunction with a particular loan pricing scheme, to replicate another pricing mechanism. By considering both input and output price uncertainty we argue that, due to the ‘built-in’ hedge on their balance sheets, the equilibrium hedge ratios for both firms and intermediaries is less than one (that is, a partial hedge). This generalization also allows us to provide counterexamples to some commonly held beliefs concerning futures trading (for example, that hedgers would always want to avoid basis risk).

A Business Model Framework for Dynamic Spectrum Access in Cognitive Networks

We have outlined a comprehensive business framework to evaluate the business impact of dynamic spectrum access technology in cognitive networks. Our model seeks to address the technical feasibility and practicality of this new technology. We attempt to obtain upper bounds on the allowable capital expenditure below which the technology might be worth pursuing for the primary providers. Cognitive radios & networks are bound to open new frontiers in the field of wireless networks and spectrum management and have the potential of becoming success stories in the near future.

Risk premia on foreign exchange: a direct approach

Abstract This paper derives an explicit, direct model of the foreign exchange risk premium as an observable variable and uses it to test the time-variation and stationarity of foreign exchange risk premiums. It also examines the significance and accuracy of the forward market forecast error in predicting the risk premium. Assuming that returns in the foreign exchange market can be described by a diffusion-type stochastic process, it shows that the risk premium on foreign exchange is a weighted average (weighted by a finite time interval) of the forward premium and the exchange rate risk-adjusted excess return to holding foreign exchange. We find that there exists a long-run equilibrium relationship between the forward premium and the risk-adjusted excess return in a cointegrated system. The Johansen (Econometrica 59 (1991) 1551) procedure for cointegration tests confirms that risk premiums are stationary and time-varying. The forward market forecast error appears to be a poor predictor for the risk premium on foreign exchange.

Determinants of Transnational Regulatory Regimes

A conceptual framework for cross-country regulatory regimes is modeled through the interplay between the private sector, government, and society. Our goal is to provide a baseline economic foundation for discussions of transnational regulation. A cross-country or transnational regulatory apparatus is demanded by some parties based on cost and benefits while other parties may meet the demand by supplying regulation based on cost and benefits. One of the contributions of the paper is an economic classification of the drivers that assists in identifying sources of conflicts between the different parties, the factors causing divergence between public and private optimum levels of regulation, and why some efforts at transnational regulatory regimes fail while others succeed. A graphical model shows how the interaction between demand and supply as seen from the perspective of private financial firms, government (and the public from which their power is derived), and society establishes the optimal level of transnational regulation. We analyze the emergence of various regulatory structures as a result of the interaction of supply and demand for regulation. We further assess the effects of changes in the drivers that cause shifts in the demand and supply curves for regulation that make the creation of transnational regulation more or less likely. Those include the evolution of a common currency and globalization of trade that changes the level of economic integration over time. The results of the model are applied to and used to discuss the evolution of regulatory processes related to MIFID as a process of shifting demand and supply curves that moved the “optimal” solution. We address how the shifting characteristics of the political and macro-economic environments as well as legacy national cultures and attitudes toward the regulation of financial services and markets affected the path of MIFID.

Risk Aversion in the Approximate and the Exact Forms

A rigorous but intuitive framework is used to construct the Pratt-Arrow measures of absolute and relative risk aversion as exact measures of aversion to a general form of mean preserving spreads for any twice differentiable utility function. The derivation applies even to distributions that have undefined second or higher moments.