Jahangir Sultan

Time Varying Distributions and Dynamic Hedging with Foreign Currency Futures

Most research on hedging has disregarded both the long-run cointegrating relationship between financial assets and the dynamic nature of the distributions of the assets. This study argues that neglecting these affects the hedging performance of the existing models and proposes an alternative model that accounts for both of them. Using a bivariate error correction model with a GARCH error structure, the risk-minimizing futures hedge ratios for several currencies are estimated. Both within-sample comparisons and out-of-sample comparisons reveal that the proposed model provides greater risk reduction than the conventional models. Furthermore, a dynamic hedging strategy is proposed in which the potential risk reduction is more than enough to offset the transactions costs for most investors.

Ethical Reasoning and the Use of Insider Information in Stock Trading

The cognitive developmental theory of ethics suggests that there is a positive relationship between ethical reasoning and ethical behavior. In this study, we trained a sample of accounting and finance students in performing competitive stock trading in our state-of-the-art trading room. The subjects then performed trading of stocks under two experimental conditions: insider information, and no-insider information where significant performance-based financial awards were at stake. We also administered the Defining Issues Test (DIT). Ethical behavior, as the dependent variable was measured in a binary scale: whether the subjects used insider information for trading of stocks or not. Ethical reasoning as measured by the DIT P-score indicated statistically significant effect on ethical behavior. The results have important implications for recruitment and training of professionals engaged in the use of financial markets for securities trading.

The link between monetary policy and stock and bond markets: evidence from the federal funds futures contract

This study examines the simultaneous response of both stock and bond market returns to changes in the CBOT 30-day federal funds futures rate. It is found that changes in the federal funds futures rate are negatively related to both stock and bond returns. It is also found that positive and negative changes in the federal funds futures rate have symmetric effects on the bond market, but somewhat asymmetric effects on the stock market.

The impact of the listing of options in the foreign exchange market

Abstract This paper documents the impact of the introduction of foreign currency options and options on foreign currency futures on the underlying securities. We find that the volatility of exchange rates decreases following the listing of options for a majority of the currencies under consideration. In addition, we find that trading volume and open interest in currency futures increases after option introduction. This evidence is consistent with the notion that derivative securities are important innovations for stabilizing and increasing liquidity in the market for the underlying assets.

Risk Premium, Volatility, and Terrorism: New Evidence

Terrorism has important direct and indirect economic costs. Direct costs arise from loss of lives, destruction of property, search, and rescue effects, rebuilding of the infrastructure, restoring the quality of life through government assistance, and improved security systems to prevent terrorist attacks.1 According to the Organization for Economic Co-operation and Development (OE CD), the estimates of the direct costs associated with the 9/11 attack in the United States are as follows:

Consumer confidence announcements: do they matter?

14 billion (private sector),

The choice of an invoicing currency in international trade and the balance of trade impact of currency depreciation

1.5 billion (state and local government),

The effectiveness of dynamic hedging: evidence from selected European stock index futures

700 million (Federal government), and

Modeling Correlation Risk

11 billion (private and public sector costs for search and rescue operations).2 The indirect costs of terrorist attacks are more difficult to measure. According to the IMF, indirect costs of terrorism are psychological, resulting from pessimism among consumers and investors. This has the potential to depress asset prices and promote flight to quality.3

Economics, politics and the federal funds markets: does the Fed play politics?

This paper examines the response of financial markets to consumer confidence announcements during 1980-93. Several hypotheses are tested to examine the impact of consumer confidence announcements on the conditional mean and the conditional volatility of stock, bond and foreign exchange prices. Despite a plethora of causal empiricism in the popular press, consumer confidence appears to influence only the Dow Jones Industrial Average, and not bond or other stock indexes. However, changes in the consumer confidence index are found to have asymmetric effects on the dollar exchange rates of five major currencies. Finally, we find that the impact of the consumer confidence index on the conditional volatility is not uniform across five major currencies.