International Research Journal of Finance and Economics  Issue 106  February, 2013

 

Public Spending and Economic Growth in Lebanon	8-16
Ahmad Salloum and Jamal Hayek
Abstract: The objective of this paper is to examine the causal relationship between economic growth and public spending in Lebanon, over the period 1970-2010. The analysis is conducted using the causality tests developed by Toda and Yamamoto (1995), and using the cointegration methodology, which leads to vector error correction. The main results of the paper show that the direction of causality runs from government expenditure to economic growth. Additionally, the relationship between public spending and economic growth was found to be negative. Keywords: Government Expenditures, Economic Growth, Causality, Cointegration.
Does External Indebtness Enhance the Incidence of Poverty in Pakistan? An Empirical Evidence	17-23
Muhammad Ramzan Sheikh and Tanvir Alam
Abstract: Almost all the developing countries including Pakistan are relying on foreign recourses because these countries do not have so much domestic resources to fill their internal and external gaps. So, it is a vital question to explore that whether the dependence on foreign loans is adding poverty or not. The paper examines the impact of external debt on the incidence of poverty in Pakistan using OLS technique for the period 1985-2010. The study observes that external debt and external debt servicing enhance the poverty level in Pakistan. The effect of the volume of external debt and external debt servicing on poverty is found positive and statistically significant. The reason of this result may be that an increase in external debt and especially external debt servicing soaks up government revenues which lessen government’s capacity to spend more on development projects to reduce poverty. In the end, the study also offers some polices to trim down the dependence on external debt. Keywords: External debt, External debt servicing, Poverty, Per-capita real GDP JEL Classification: H63, I32
Transitional Dynamics of Oil Prices	24-30
Süleyman Hilmi Kal, Ferhat Arslaner and Nuran Arslaner
Abstract: There has been a well-known relationship between macro financial fundamentals and oil prices, yet there is also ample evidence that this relationship weakens during some periods. In this paper, we investigated whether the relationship between oil and macro financial fundamentals vary depending on gold price of oil. To achieve this, a Markov model is implemented to the monthly data for the period 1974 - 2010. In the Markov model utilized in this paper, transition probabilities are endogenous and governed by the volatilities of oil, gold, stock market and exchange rate. This allowed us to endogenously model the switching process. Our results provide evidence that the link between oil price and macro financial fundamentals disappears in the periods of inexpensive gold price of oil. Our findings also provide evidence that the volatilities of the variables matter only when gold price of oil is inexpensive. Keywords: Oil Price, Gold Oil Ratio, Exchange Rates, Interest Rates, Stock Market Yields, Time Series Analysis, Markov Switching Regimes JEL Classification: C22, E44, G12
Growth & Future Prospects of Currency Derivatives in India	31-43
Meena Bhatia
Abstract: Post 1970 period there was growing instability in financial markets & that’s when financial derivatives gained significance. The market for derivatives has grown in terms of turnover, complexity & variety of instruments available. The journey of these instruments started in India in year June 2000 with the launch of index futures, & subsequently index options were launched in year June 2001. Options & futures in stocks started in July 2001 & November 2001 respectively. Trading on Currency derivatives commenced on August 29, 2008 at NSE with future contracts on the USD-INR. In February 2010, trading in additional pairs such as the GBP-INR, the EUR-INR, and the JPY-INR was allowed, while USD-INR currency options were allowed for trading on October 29, 2010. The interest rate futures trade on the currency derivatives segment of the NSE, and they were allowed for trading on August 31, 2009. Since 2008, the currency futures market in India has experienced an unprecedented growth in terms of no of contracts traded, open interest, monthly turnover, value of futures trading in currency & the number of modern exchanges. At the time of introduction of currency futures in India, it was thought that the currency futures market in India would make a notable contribution towards improving the menu of options available for currency risk management. This paper seeks to present the rationale, growth & future prospects of currency derivative market in India. A brief discussion of the status of global currency derivatives market is also carried out. Other emerging economies may learn from India’s experience of currency derivatives. Keywords: Currency derivatives, financial markets, India JEL Classification Codes: G1, G2
Quality Service and Customer Satisfaction in Micro-Finance Institutions in Ethiopia	44-71
Bekuretsion Assassahegn Fetene and Eno L. Inanga
Abstract: The objective of this study is to identify the challenges faced by OMO Micro Finance Institution in satisfying customers by delivering quality service. The research uses SERVQUAL model to diagnose such challenges and provides relevant recommendations. Besides, this study helps to minimize the literature gap observed in the microfinance industry in Ethiopia. To identify the challenges, SERVQUAL employs five service quality dimensions, namely, tangibility, reliability, responsiveness, assurance and empathy having 22 attributes in total. The intensive analysis of 22 attributes has led to the identification of problems faced by the Omo Microfinance Institution. If the gap score for that attribute is positive or zero, then customers are satisfied: if the gap is negative, then customers are dissatisfied. Weighted, UN-weighted gap score analysis and important weight allocation for each service quality dimensions are also analyzed. The result revealed that in the five service quality dimensions OMO failed to deliver the expected service to its customers. It has scored over negative five for each dimension. The overall average gap score is found to be -5.57. Moreover as per the finding of the study the customers place five dimensions, on the basis of their priorities, as reliability being on top followed by responsiveness, assurance, tangibility and empathy respectively. The overall weighted gap score found to be -1.17 which is very high indicating OMO failure to match the expectations of customers. Thus, based on the findings the research has developed specific and general recommendations for OMO Micro Finance Institution management and key partners to overcome the challenges. Keywords: SERVQUAL, OMO Micro-Finance Institution, Gap analysis, Service quality, Customer Satisfaction
The Effect of Judicial Independence to FDI into Eastern Europe and South Asia	72-77
Bülent Dogru
Abstract: In this paper, we investigate the impact of judicial independence on foreign direct investment (FDI) into Southern Europe and South Asia. The panel least square method is employed to estimate the relationship between FDI and its potential macroeconomic and institutional determinants using a sample of 28 developing countries for the period of 1990-2010. The findings show that a 10% percentage increase in judicial independence of the host country in the previous one year increases the FDI inflows to Eastern Europe and South Asia about 2, 7% and 1, 3% respectively. The findings also show that the size of economic activity (GDP and GDP per capita), deposit interest rate, trade openness, and lagged FDI are main determinants of FDI inflows to host country. Keywords: Judicial Independence, Foreign Direct Investment, Panel Least Square, Eastern Europe, South Asia, JEL Classification Codes: F21, C23, F55
Testing for Contagion, Volatility Spillover and Regime Shift Among Three Strong, Quasi Strong and Semi Strong South-Asian Economies in Presence and Absence of U.S. Accession: A VECH (1, 1) Approach	78-92
Raisul Islam, M. Talhatul Islam and Sonia Sharmin
Abstract: This study bears significant importance for examining a class of dynamic phenomenon. This paper attempts to mark the contagion effect leading to the volatility spillover and specifically defining the structural break among the three important peripheral economies in the Southeast Asian region Japan (Strong), Singapore (Quasi-strong), India (Semi-Strong) with U.S. (Developed) accession and without U.S. accession, applying short term dynamic linkage methods during both pre and post global financial crisis of 2007. This study applied VECH framework to trace indication of contagion, simultaneous GARCH (1,1) for spillover effect and Regime shift is examined with EGARCH(1,1). The results should indicate if due to real linkage US market shock of 2007 propagates into Asian markets of different peripherals, or important Asian markets through contagion and reverse contagion, reacts to market anomalies by successfully diminishing persistant idiosynchratic and non-idiosynchratic shocks. Keywords: Volatility Spillover, Contagion, Real linkage, Financial Linkage, Idiosyncratic Shock, Structural Break, VECH, GARCH, EGARCH
Fiscal Policy Sustainability: A Survey and New Tests for the US	93-115
Samih Antoine Azar and Fadi Asrawi
Abstract: This paper has a dual purpose. The first purpose is to provide for a survey of the literature on fiscal sustainability. This survey includes all the common specifications of the relations implied by the intertemporal government budget constraint, and the no-Ponzi boundary conditions. The second purpose is to test a model of fiscal sustainability that relies on stochastic interest rates. The model is very well-supported, which implies that the US fiscal policy was indeed sustainable during the period considered. From there it follows that if the US authorities stay with the same fiscal stance US fiscal sustainability is assured. Contrary to widespread beliefs the fiscal stance is not found to be significantly different after 2006, nor did it change during the Reagan US presidency, and nor was it different during the Clinton US presidency. It seems as if fiscal policy sustainability does not vary significantly with the political party in power. The only significant change or break in the series comes from the failure of US Treasury yields to reflect the increased US sovereign risk after 2006. Once an adjustment is made to these yields, the model is much better supported and the hypothesized measure of fiscal sustainability developed in this paper is re-affirmed. Keywords: Fiscal policy, sustainability, intertemporal government budget constraint, government receipts and spending, no-Ponzi scheme, stochastic interest rates, non-stationarity, cointegration, likelihood ratio tests. JEL Classification Codes: E62, E43, H62, H63, C22.
Analysis of the Interrelationship between the Economies of Laos, China and Thailand	116-127
Phoukeo Vongvichith
Abstract: Although Lao Peoples’ Democratic Republic has been one of the poorest Southeast Asian countries, in recent years, the economy of the Lao Peoples' Democratic Republic is rapidly growing, as the government began to decentralize control and encourage private enterprise in 1986. It opened a stock exchange in 2011, and has become a rising regional player by attracting foreign investments from its neighbors such as China, Thailand and Vietnam. Laos, as a landlocked country for decades, has inadequate infrastructure and a largely unskilled work force. Thus, Lao economy depends heavily on trade and investment with its neighbors, Thailand, Vietnam, especially in the north of Laos, China. China and Thailand are both geographically and economically very close to Laos. Thus, the economy of them will be presumed to directly affect how well Laos’ economy is doing. Thus, this research paper will investigate how the economy of China and Thailand affect Laos. Research results indicate that becoming a vital trade partner with Laos, China has been one of the most important investors since the economic reform of Laos in 1988. Laos has growing dependence on China economy. However, results show that Thailand does not have significant effect on Laos’ economy. Keywords: GDP FDI Capital Stock China Laos Thailand
Lead-lag Relationship between Option Returns and Spot Returns: A Study of the Indian Markets	128-132
Dipti Ranjan Mohanty and Susanta Kumar Mishra
Abstract: The advantages of introducing derivatives in capital markets include providing liquidity to the market, bringing in flexibility for the portfolio managers, traders and investors among others. As investors’ engagement in derivatives increases, the volume and penetration of derivatives also increase and they get more attention from informed investors. This might mean the derivatives could start leading the spot markets in reflecting information available in the market. This paper is an attempt to investigate if the option returns have information that can help predict the spot returns. In other words, it is an attempt to uncover if option returns granger cause spot returns in India. This causality analysis is done using NIFTY index and an option on it as the two time series under consideration. The investigation of data under consideration suggests two way causality; spot return granger causes option return and option return granger causes spot returns. Keywords: Granger causality test, causality option returns and spot returns
Sustaining the Strategic Options and Programmes for the Development of the Nicer Delta Communities	133-136
G.O. Demaki and P. Okumagba
Abstract: The massive exploitation of the Vast Resources of the Niger Delta without commensurate human, socio-economic and infrastructural development has led to the endless civil unrest in the region. A comprehensive strategic options and programmes for the development of the Niger Delta must be sustained to correct this injustice for a lasting peace, prosperity, abundant economic opportunity for the people of the region.
How Good are Equity Valuation Models in Predicting Stock Prices?	137-151
Christoph Hukelmann, Cesario Mateus and Irina Mateus
Abstract: This paper aims to test the accuracy of three well-known equity valuation models for the period 1990 to 2006. This was done to a sample of German listed firms which diverge from the US market in accounting standards, market maturity and corporate governance culture (bank-based in contrast to the market-based US regime) as well as different market movements and trends which influence main input factors and estimations (e.g. market risk premium, inflation rate and GDP growth rate). To the best of our knowledge this is the first paper to address this issue for a sample of listed firms from the largest bank-based European economy. Using different accuracy measures such as absolute prediction error (average, median and central tendency) as well as multiple regression analysis the results show that dividend discount and abnormal earnings models tend to provide better accuracy than the free cash flow approach. Additionally, we find evidence of the importance in German accounting standards in the less accurate performance of the abnormal earnings model compared to previous studies due to the conservative accounting and the influence of hidden reserves. Finally, we did not find any significant valuation differences regarding the alternative values used for growth and discount rates. Keywords: Accounting standards, Equity Valuation models, prediction error, Value of Firm JEL Classification Codes: G3, G32
Analysis of Sector Indexes: The Case of Logistics	152-160
Hakan Altin
Abstract: International trade and increasing cooperation in international trade raised the importance of logistics activities of companies. This importance is not only company-based, rather it is at the level that can affect all sectors mutually. In this study, functional relation between logistics and other sectors is analyzed. The results obtained are compatible with the general expectations. Keywords: Logistics, Stress Test, Impulse Response, Variance Decompositions, ISE JEL Classification codes: G10, G11
The Dichotomy between Industrial and Financial Activities and Instability of Capitalism in Veblen's Analysis1	161-176
Gulenay Bas Dinar
Abstract: Veblen examined the features of modern capitalism in his works “The Theory of Business Enterprise” in 1904 and “The Absentee Ownership” in 1923. In this context, the most distinctive characteristic of the 19th century capitalism is that production became a financial fact and thus businessmen directed their activities into financial activities rather than industrial ones. Veblen asserts that fluctuations in economy do not stem from industrial sector, but from activities that business enterprises follow for more benefit. Veblen defines fluctuations emerging at the level of economic activity not as industrial fluctuations but as business cycles. In this sense, Veblen indicates crisis and financial fluctuations in modern economy not as a result of industrial economy but as a result of money economy.The aim of this study is to examine Veblen’s explanations about fluctuations in economy under modern capitalism conditions taking as the basis of the conflict he had defined between industrial and business (financial) activities. For this purpose, the study comprises three parts. Firstly, Veblen’s opinions about modern capitalism will be analyzed, and the elements of modern capitalism will be explained from Veblen’s point of view; in the second part, Veblen's opinions about economic instabilities will be addressed based on these characteristics defining the modern capitalism and the study will be concluded with the discussion how Veblen’s opinions about instabilities in economy may be utilized to understand current financial crisis. Keywords: Economic instabilities, Veblen, business enterprise, industrial activity JEL Classification: B15
Economic Activity of Oil Price Volatility and Stock Market Behaviour: An Empirical Analysis from Saudi Arabia	177-185
Saad A. Alshahrani and Ikhlaas Gurrib
Abstract: Using an auto-regressive distributed lag (ARDL) model approach, this paper empirically attempts to shed light on the dynamic relationship between oil prices and the total real stock prices in Saudi Arabia, one of the fastest growing economies in the Middle East and North Africa and the largest oil producing country in the world, with a large current account surplus. The seemingly unrelated regression estimation (SURE) model is used to study the economic activity of oil price fluctuations on each sector of the stock market sectors. Then, we test the hypothesis of whether the current market value of total stock in Saudi Arabia significantly depends upon the lagged market value of stock and real oil prices, and which sectors of the Stock Market are not significantly influenced by changes in oil prices. Findings suggest that oil price movements affect the macro-economy and oil price movements affect economic activity. Further, this study suggests oil prices can play a big role in explaining stock price movements. Keywords: Oil Prices, Stock Market, Economic Growth, Cointegration, Unit Root, Vector-Error-Correction Model, Saudi Arabia