International Research Journal of Finance and Economics
 Issue 162
 July, 2017
Causality Effect of Returns, Continuous Volatility and Jumps: Evidence from the U.S. and European Index Futures Markets
Szu-Lang Liao, Shih-Kuei Lin and Chih-Wei Liao

This study examines the intraday causality between returns, volatility and jumps in the U.S. and European index futures markets during the financial crisis from 2007 to 2009. We examine whether during the financial crisis, the S&P 500, Dow Jones, Nasdaq, FTSE, DAX and CAC index futures markets have a significant impact on the leverage and volatility feedback effects, as well as whether these interactions also occur between returns and jumps. The intraday behavior of 1-min, 5-min and 1-hour index futures returns, volatility and jumps is examined by employing data from the period between January 2003 and May 2014. Thus, the study covers the major upward and downward trends in the market. Our empirical data indicate the main leverage and volatility feedback effects caused by intraday volatility and jump clustering significantly increased after the financial crisis. The effects with different sampling frequencies before, during and after the financial crisis show that jumps have increased the volatility feedback effect, especially when in a 5-min and 60-min sampling frequency is used. These findings have important implications for both policymakers and investors.
Keywords: High-frequency Trading; Leverage Effect; Volatility Feedback Effect; Causality; Jumps.
JEL Classification: B26; C58; G15
Using Analytic Hierarchy Process (AHP) for Selecting the Appropriate Country for Economic Integration (Case of Iran’s Foreign Trade with OIC Countries)
A.R. Hadadian and Ali Rasoulian

This paper deals with application of Analytic Hierarchy Process (AHP) for selection of an appropriate country for economic integration with the case study of Iran’s foreign trade with Organization of Islamic Countries (OIC). The main sample of this study was chosen from experts who are frequently involved in trade especially with OIC countries. Appropriate country selection process includes the identification of relevant criterions which found necessary by traders such as; Legal factors, financial factors, transportation factors, political and cultural factors and origin and destination economy factors. The described process also includes the identification and evaluation of selected OIC countries such as; Saudi Arabia, Indonesia, Pakistan, Turkey, Malaysia and Egypt with the quest for consensus among multiple decision makers. The hierarchical model was designed in such a way and the experiences in implementing and using the model are discussed. The paper discovered that, choosing Malaysia as the appropriate country for economic integration with Iran is the best alternative.
Keywords: Multiple criteria decision making, Analytic hierarchy process, economic integration, OIC countries.
JEL Classification: F15, O24
Description of a Diffusion Price Model with Uniform Constant Jump Rate
Anwar Al-Shriaan

There is a considerable interest in stochastic analogs of classical difference and differential equations describing phenomena in theoretical models involving economic structure. In this paper a description of diffusion price model with Uniform constant jump process using a solution of stochastic differential equation is considered. The Moments of such price model is studied. More specifically, the mean and the variance as well as the sample path of such a process are determined.
Keywords: Stochastic differential equation, Diffusion price process, Uniform jump process.
JEL Classification: E31
Liquidity-Adjusted Value at Risk and Hellinger Distance Measure: Evidence from Taiwan Single Stock Futures
Chui Chun Tsai and Tsun Siou Lee

This paper empirically investigates the liquidity adjusted Value-at-Risk (LaVaR) of Single Stock Futures (SSFs) using the Hellinger distance measure by sensitizing endogenous liquidity risk with trade sizes at 1%, 5%, and 6%. We find that by incorporating exogenous and endogenous liquidity risk adjusted, LaVaR produces more accurate risk estimates. The practical failure rates of all SSFs are largely consistent with their theoretical failure rates. Despite the use of different empirical models, the highest and lowest LaVaR are CEF and CJF.
Keywords: LaVaR, Hellinger distance measure, Taiwan Single Stock Futuress.
JEL Classification: D46, D81, G32
Value-At-Risk Under Systematic Risks: A Simulation Approach
Arthur L. Dryver, Quan N. Tran and Vesarach Aumeboonsuke

Daily Value-at-Risk (VaR) is frequently reported by banks and financial institutions as a result of regulatory requirements, competitive pressures, and risk management standards. However, recent events of economic crises, such as the US subprime mortgage crisis, the European Debt Crisis, and the downfall of the China Stock Market, have provided strong evidence that bad days come in streaks and also that the reported daily VaR may be misleading in order to prevent losses. This paper compares VaR measures of an S&P 500 index portfolio under systematic risks to ones under normal market conditions using a historical simulation method. Analysis indicates that the reported VaR under normal conditions seriously masks and understates the true losses of the portfolio when systematic risks are present. For highly leveraged positions, this means only one VaR hit during a single day or a single week can wipe the firms out of business.
Keywords: Value-at-Risks, Simulation methods, Systematic Risks, Market Risks.
JEL Classification: D81, G32
A Non-Parametric Approach to Assessing Efficiency in Conventional and Participation (Islamic) banks of Turkey
Sani Abdul-Aziz

Over the past forty years, global Islamic banking has experienced phenomenal growth. Along with this growth is the associated the global Islamic banking and finance industry faces some challenges. The last decade has seen the evolution of special finance houses within Turkey into fully-fledged participation banks or Islamic Banks operating under the dictates of the Shari’a.
Based on these developments this study sought to assess the technical efficiency of these participation banks in comparison with their conventional counterparts using the non-parametric frontier: Data Envelopment Analysis (DEA). An input-oriented DEA based on the intermediary approach was adopted. The technical efficiencies were calculated under notions of both the variable returns to scale (VRS) and constant returns to scale (CRS).
Results indicated fairly high levels of efficiency attained by both Participation Banks and Conventional Banks with the latter generally on the higher side of the percentage technical efficiency.
Keywords: Data envelopment analysis, Islamic banking, performance, technical efficiency, scale efficiency, decision making unit, and Turkey.
JEL Classification: G21, C14
A Combined Assessment of Capital Structure Determinants in A Developing Economy
Oscar Briones and Melissa Chang

The study investigate the determinants of capital structure in a developing economy considering the Pecking Order and the Trade-Off Theory. It uses data from two hundred and ten Ecuadorian firms from the top thousand companies of 2013 which considers myriad of industries. The independent variables chosen, according to data availability and literature review, are Tangibility measured by fixed assets over total assets; Profitability measured by return on assets (ROA) and Firm Size measured by the natural logarithm of sales. However, some of these regressors were dichotomycally divided to select the best ratio combination and obtain a more robust model. The dependent variable, leverage, is measured by total debt ratio. The research used cross-sectional methodology using Ordinary Least Square (OLS). The Multivariate regression analysis concludes that there is a statistically positive relationship between firm size and leverage as stated by both theories. However, tangibility and profitability are statistically negative related with debt level. Profitability behaves under the Pecking Order theory, while tangibility does not follow neither of the theories. These findings are compare and contrast against other authors researches following the same trend. We theorize that Ecuadorian firms combine both theories when deciding their capital structure. Moreover, the variable growth is found to be not statistically significant in this market. However, the variable Non-Debt Tax Shield was omitted from the model due to the lack of information.
Keywords: Capital Structure, Pecking Order Theory, Trade-Off Theory, leverage, firm size, profitability, tangibility.
JEL Classification: G32
The Effect of Corporate Governance on Financial Performance of Listed Companies in Palestine Exchange(PEX)
Wasim M.Y.Falah

This study examines the relationship between the Corporate Governance and firms’ performance of 32 firms listed on the Palestine Stock Exchange (PEX) during the period of 2008-2016. The results revealed that a negative and significant impact of board size and CEO duality on firm performance in ROA, ROE, and TobinQ, while the independent directors found to have significant positive relation with firms’ performance (Tobin's Q, ROE and ROA).
Keywords: Corporate governance, Palestine, board size, CEO duality, firm performance.
JEL Classification: G34, L25
A Comparison using PLS-MGA between PIGS and V4 Countries’ Financial Systems
Juan José García-Machado and Agnieszka Jachowicz

The aim of this study is to investigate the financial system of the countries that are in the tail of the Eurozone (contemptuously named PIGS). They form part of the ESCB, are subject to the discipline of the ECB and the troika, and are more efficient than the systems of the countries which are at the top of the New Member States (NMS) and do not have the Euro currency. PIGS countries have financial markets and financial institutions which are more developed than NMS, including V4 countries, but the crisis mainly began there. The role of insurance companies, investment funds, and pension funds seemed to be well established and its involvement played an essential role in PIGS developed financial systems more than in V4. The reason why PIGS gained popularity is a serious concern within the EU, with regard to their national debts, especially in Greece. In the year 2010, it was clear that these countries were in need of corrective action in order to regain their former financial stability. In this paper we apply a PLS-SEM Multigroup Analysis to study if making a partition of data into separate groups for PIGS and V4 countries, we can gain knowledge about the differences in their financial systems, identifying observed heterogeneity, and checking if they are statistically significant. Eventually, we try to find out where the problem is. In our opinion, this study provides important and reliable information to the ECB, PIGS and V4 countries’ policy makers.
Keywords: Banking System Quality, Financial System Efficiency, European Financial Integration, PLS-SEM Multigroup Analysis, PIGS, V4 countries.
JEL Classification: E42, F36, G14
“Bad Bank” Strategy in Greek Banking Sector and Receivables from Banks Under Liquidation
Spyridon Repousis

Purpose - The purpose of this paper is to present the “bad bank” strategy followed in Greek banking system to safeguard the stability during the current financial crisis.
Design/methodology/approach - Swedish model designed in a more stable macroeconomic and financial global setting than today. Swedish crisis of the early 1900s was a local problem to a small open economy with a pegged exchange rate. Establishing a “bad bank” was the solution of choice for Ireland and Spain in the aftermath of the recent global financial crisis. Bad bank solution in Greece is most of all a funding problem. The Hellenic or Greek Financial Stability Fund was founded in Greece, in July 2010 (under Law 3864/2010) as a private legal entity and does not belong to the public sector, became liable to pay until 31/12/2014 the amount that the Hellenic Deposits and Investments Guarantee Fund would have covered, in the context of the resolution of the financial institutions.
Findings - In Greece from October 2011 to March 2014, twelve banks resolved through the legal and regulatory framework under either a transfer order (order to transfer assets and liabilities to a transferee credit institution) or establishment of a bridge bank. The solvent or “good assets” of these failed banks were transferred either to another bank (in the case of purchase and assumption) or to a bridge bank, leaving the remaining assets (“bad assets”) and liabilities in entities under liquidation, under the responsibility of liquidator. Also, Bank of Greece appointed “PQH Single Special Liquidation S.A.” as Special Liquidator for all the banks under liquidation, to manage total assets under special liquidation, amounting to about €9 billion, consisting almost in their entirety in non-performing loans. Up to 30/09/2016 the total amount provided by the HFSF to cover funding gap reached the amount of € 13,489m, out of which € 516m were recovered and €11,036m were assessed as non-recoverable.
Originality/value – This is the first paper to present the “bad bank” strategy followed in Greece and receivables from banks under Liquidation.
Keywords: Bad banks, Greek banks, banking crisis
JEL Classification: G01, G10, G21