basket cases tax incentives and international joint venture participation by american multinational firms abstract this paper examines the impact of the u s tax reform act of 1986 tra on international joint ventures by american firms the tra mandates the use of separate baskets in calculating foreign tax credits on dividends received from each foreign corporation owned 50 or less by americans which greatly reduces the attractiveness of joint ventures especially those in low tax foreign countries since the effect of the tra on joint ventures varies with foreign tax rates the country level pattern of subsequent joint venture activity illustrates the sensitivity of organizational form to tax considerations the evidence indicates that american participation in international joint ventures fell sharply after 1986 particularly in low tax countries moreover joint ventures in low tax countries use more debt and pay greater royalties to their american parents after 1986 reflecting their incentives to economize on dividend payments

combined use of foreign debt and currency derivatives under the threat of currency crises the case of latin american firms abstract we investigate the determinants of firms use of foreign currency derivatives in emerging markets exposed to currency crises we develop a model where a firm with international orientation chooses its optimal foreign debt and hedging ratio in the context of highly volatile exchange rate periods in five latin american countries we calibrate the model on adrs we find theoretical and empirical evidence that country specific factors i e aggregate exposure of a country to a crisis explain significantly part of our firms foreign debt and hedging policy as opposed to literature on firms in developed markets we claim that derivative markets have been effective tools for firms in these countries at least in the post crisis era

the ex dividend day behavior of canadian stock prices tax changes and clientele effects with some simple assumptions the ex dividend day price drop and the associated dividend can be used to measure the market s marginal tax rate previous research has estimated the implied tax rate for the u s this paper extends the analysis to canada where the tax treatment of dividends and capital gains is completely different from that in the u s the paper also presents estimates from 1970 80 to include four distinct periods when the tax treatment was different hence we include an implied test of market efficiency as well as those for the relevance of taxes and the existence of tax based dividend clienteles

evidence on corporate hedging policy this paper provides empirical evidence on the determinants of corporate hedging decisions the paper examines the evidence in light of currently mandated financial reporting require ments and in particular the constraints placed on anticipatory hedging data on hedging are obtained from 1992 annual reports for a sample of 3 022 firms out of the 771 firms classified as hedgers 543 firms disclose information in their annual reports on their hedging activities the remaining 228 firms report use of derivatives but no information on hedging activities based on the evidence i draw the following conclusions with respect to the models of hedging evidence is inconsistent with financial distress cost models evidence is mixed with respect to contracting cost capital market imperfections and tax based models and evidence uniformly supports the hypothesis that hedging activities exhibit economies of scale

foreign currency denominated borrowing in the absence of operating incentives abstract it is well known that corporations issue foreign currency denominated debt to hedge foreign currency cash flows with offsetting interest payments we test an alternative opportunistic motive for foreign currency denominated borrowing we do so by constructing a comprehensive sample of foreign currency denominated bonds issued by sovereign government and agency issuers with no foreign currency cash flows or foreign operations we find strong and consistent evidence that the borrowers in our sample consider cross currency differences in covered and uncovered interest yields in choosing the currency in which to denominate their international debt we estimate the average gains to opportunistic covered yield borrowing to be 4 to 18 basis points interestingly we also find that the average bond offering in our sample precedes a large and beneficial depreciation of the issue currency over the course of the following year these results support what has been a frequent conjecture in the foreign debt market

the early exercise of options on treasury bond futures this paper presents a test of the theory of rational option exercise exercise data from the market for options on treasury bond futures are used to test the model of rational early exercise developed by barone adesi and whaley 1987 baw the results show that the baw model underestimates the futures price that will trigger exercise for calls and overestimates this price for puts the exercise bias is observed to change across option maturities and the direction of the bias is consistent with the direction of the model pricing bias observed by whaley 1986

firm valuation earnings expectations and the exchange rate exposure effect consistent with previous research we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar we investigate the possibility that this failure is due to mispricing lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms suggesting that mispricing does occur a simple trading strategy based upon these results generates significant abnormal returns corroborating evidence from returns around earnings announcements as well as errors in analysts forecasts of earnings is also provided it is a widely held view that exchange rate movement should affect the value of a firm standard economic analysis implies that the profitability and value of most u s firms with foreign sales or operations abroad should increase decrease with an unexpected depreciation appreciation of the dollar as expected foreign currency cash flows translate into larger smaller u s

the american put option valued analytically an analytic solution to the american put problem is derived herein the hedge ratio and other derivatives of the solution are presented the formula derived implies an exact duplicating portfolio for the american put consisting of discount bonds and stock sold short the formula is extended to consider put options on stocks paying cash dividends a polynomial expression is developed for evaluating these formulae values and hedge ratios for puts on both dividend and nondividend paying stocks are calculated tabulated and compared with values derived by numerical integration and binomial approximation as with european options evaluating an analytic formula is more efficient than approximating the stock price process or the partial differential equation by binomial or finite difference methods finally applications of this american put solution are discussed

the impact of taxation on the currency of denomination decision for long term foreign borrowing and lending this paper shows the distorting effects of different tax regulations on the effective absolute and relative costs of long term borrowing in different currencies in particular if expected borrowing costs are equal before tax then the process of minimizing expected after tax borrowing costs generally involves borrowing the weakest currency

the value of shorting abstract this paper assesses the effects of short sale constraints on asset prices the analysis focuses on a particular period in sweden during which shorting stocks was impossible but stock options were traded firstly the effect on both stock options and the underlying stock was investigated jointly by considering deviations from put call parity secondly the effects on only the derivatives were investigated by considering their implied volatilites the main findings are i the impact on pricing are consistent with a short sale constraint ii these effects are much more pronounced when shorting is not possible iii these effects are not solely attributable to the mispricing of the stock as previous research indicates and iv access to international shorting markets can alleviate local short sale constraints

the use of the control variate technique in option pricing this paper presents a generalized version of the lattice approach to pricing options it shows how the control variate technique can produce significant improvements in the effi ciency ofthe approach the control variate technique is illustrated using american puts on dividend and nondividend paying stocks

on the determinants of corporate hedging finance theory indicates that hedging increases firm value by reducing expected taxes expected costs of financial distress or other agency costs this paper provides evidence on these hypotheses using survey data on firm s use of forwards futures swaps and options combined with computstat data on firm characteristics of 169 firms in the sample 104 firms use hedging instruments in 1986 the data suggest that firms which hedge face more convex tax functions have less coverage of fixed claims are larger have more growth options in their investment opportunity set and employ fewer hedging substitutes

exchange rate exposure and industry characteristics evidence from canada japan and the usa abstract this paper examines industry level exchange rate exposures for canada japan and the usa measuring exposure by adding the change in the exchange rate to the domestic market model of industry portfolio returns some industries in all three countries display significant exposures moreover for each country the exchange rate is important for explaining industry returns at the economy wide level to explore whether exchange rate exposures are systematically linked to the activities of the industries we model exposure as a function of industry characteristics for all three countries the relation between exposure and industry characteristics is broadly consistent with economic theory jel f3

when did the dollar overtake sterling as the leading international currency evidence from the bond markets abstract we offer new evidence on the emergence of the dollar as the leading international currency focusing on its role as currency of denomination in global bond markets we show that the dollar overtook sterling much earlier than commonly supposed as early as in 1929 financial development appears to have been the main factor helping the dollar to overcome sterling s head start the finding that a shift from a unipolar to a multipolar international monetary and financial system has happened before suggests that it can happen again that the shift occurred earlier than commonly believed suggests that the advantages of incumbency are not insurmountable and that financial deepening was a key determinant of the dollar s emergence points to the challenges facing currencies aspiring to international status

implied interest rates one of the most important assumptions in financial economics models is the existence of a risk free rate available for borrowing and lending in any economy however the borrowing rate does not coincide with the lending rate even for the short run the difference between the rates is considered a compensation for intermediation that is necessary in the imperfect real world in a well functioning financial market this difference would be small and the smaller it is the better off is the economy the two short term rates that best approximate riskless lending and borrowing rates are the treasury bill rate and the brokers loan call rate respectively with the introduction of put and call options a new risk free instrument has been created using options alone or options combined with the underlying asset one could turn to these markets for his borrowing or lending needs thereby with the introduction of put and call options a new risk free asset has been created the objective of this study is to estimate the rate implied in option prices and compare it to other riskless instruments we have used transactions data on chicago board options exchange options taking into account the american feature of these options we find that options markets provide rates that are competitive with other short term rates these rates are closer to the borrowing rate than to the lending rate

resolving the exposure puzzle the many facets of exchange rate exposure theory predicts sizeable exchange rate fx exposure for many firms however empirical research has not documented such exposures to examine this discrepancy we extend prior theoretical results to model a global firm s fx exposure and show empirically that firms pass through part of currency changes to customers and utilize both operational and financial hedges for a typical sample firm pass through and operational hedging each reduce exposure by 10 15 financial hedging with foreign debt and to a lesser extent fx derivatives decreases exposure by about 40 the combination of these factors reduces fx exposures to observed levels

on the effects of barriers to international investment a simple model is presented in which it is costly for domestic investors to hold foreign assets the implications of the model for the composition of optimal portfolios at home and abroad are derived it is shown that all foreign assets with a beta larger than some beta plot on either one of two security market lines some foreign assets with a beta smaller than are not held by domestic investors even if their expected return is increased slightly while it is obviously not true that asset markets are completely segmented between countries there is evidence of barriers to international investment although reality seems to lie in that grey area between complete segmentation and no segmentation at all most international asset pricing models are concerned with the extreme case of no barriers to international investment no effort seems to have been made to study the effect on portfolio choice of such barriers which make it costly to hold foreign securities as opposed to domestic securities but which do not in general render international diversification so onerous that investors avoid foreign securities completely casual empiricism suggests that models without barriers to international investment should be suspect those models cannot explain why it appears that in every country investors on average hold more domestic securities than would be required if they held the world market portfolio 2 this paper constructs a model of international asset pricing in which there is a cost associated with holding either long or short risky foreign securities for the sake of simplicity in most of the paper we assume that while domestic investors face barriers to international investment foreign investors face no such barriers it turns out that nothing significant is lost with such an assumption the main conclusions of this paper for the case in which foreign investors face no barriers to international investment are 1 in the presence of barriers to international investment some risky foreign

some evidence on the effect of the separation of spending and taxing decisions it is often argued that separation of public spending and taxing decisions engenders in the voter overoptimistic hopes that someone else will bear the cost of public services thereby inducing an increase in the size of government but are perceived tax prices systematically and persistently reduced by separation although in stock markets all agents expectations may be unbiased they may or may not be unbiased in political markets this paper analyzes the separation created in federal states when the central government finances local expenditures evidence from a dynamic decisive voter model is presented that indicates that the separation introduced by federal grants to canadian provinces did in fact reduce the perceived tax price of provincial public services and raise provincial expenditures the results suggest also that the effect of separation diminished over time

foreign banks and foreign currency lending in emerging europe based on survey data from 193 banks in 20 countries we provide the first bank level analysis of the relationship between bank ownership bank funding and foreign currency fx lending across emerging europe our results contradict the widespread view that foreign banks have been driving fx lending to retail clients as a result of easier access to foreign wholesale funding our cross sectional analysis shows that foreign banks do lend more in fx to corporate clients but not to households moreover we find no evidence that wholesale funding had a strong causal effect on fx lending for either foreign or domestic banks panel estimations show that the foreign acquisition of a domestic bank does lead to faster growth in fx lending to households however this is driven by faster growth in household lending in general not by a shift towards fx lending

nonparametric estimation of american options exercise boundaries and call prices abstract unlike european type derivative securities there are no simple analytic valuation formulas for finite lived american options even when the underlying asset price has constant volatility the early exercise feature considerably complicates the valuation of american contracts the strategy taken in this paper is to rely on nonparametric statistical methods using market data to estimate the call prices and the exercise boundaries a comparison is made with parametric constant volatility model based prices and exercise boundaries the paper focuses on assessing the adequacy of conventional formulas by comparing them to nonparametric estimates we use daily market option prices and exercise data on the s p100 contract the most actively traded american option contract we find large discrepancies between the parametric and nonparametric call prices and exercise boundaries we also find remarkable similarities of the nonparametric estimates before and after the crash of october 1987

comparative performance of the black scholes and roll geske whaley option pricing models the original black scholes bs 2 european call option pricing model does not take account of divided payments on the underlying stock and does not allow for the possibility of early exercise that may be optimal when the stock pays dividends black 1 has suggested that the original bs model can be modified to take account of dividends and sharpe 14 predicts that this modified or pseudo american bs approach while not exact is probably sufficient for many listed options

international capital structure equilibrium this paper develops a theory of capital structure in an international setting with corporate and personal taxes we generalize the miller analysis to an international equilibrium characterized by differential international taxation and inflation in otherwise perfect international capital markets our analysis highlights the key role that corporate tax arbitrage plays in generating an international capital structure equilibrium and we set forth a number of mechanisms for tax arbitrage transactions we close the paper by outlining some implications of our analysis for national differences in capital structure the international fisher effect and international tax effects on yield differentials among major questions regarding corporate capital structure which arise in an international setting are how or whether multiple tax jurisdictions and multiple currencies affect firm financing decisions and the international bond market equilibrium we examine some of these questions by way of generalizing miller s 1977 debt and taxes model into an international setting this setting allows for different tax regimes across countries as well as the possibility of differential inflation across currencies with consequent exchange rate movements in the first part of this paper we find that an international miller type equilibrium obtains under differential international taxation with capital market conditions which are otherwise analogous to those required for a domestic miller equilibrium our analysis particularly highlights the role that corporations play in miller s analysis as vehicles for tax arbitrage we show that if corporations engage in international tax arbitrage transactions on an equal footing no optimal capital structure exists for individual firms consequently without further restrictions differences in international tax rates alone are incapable of dictating a particular capital structure for an individual firm in the second part of the paper we extend the analysis to consider differential inflation rates with a consequent exchange rate movement and draw additional implications for the international analog of the miller equilibrium with differential inflation and taxation we begin by showing the existence of the international fisher effect for both equity and bonds although inflation and or exchange rate movements may affect real corporate tax subsidy rates and real

bank funding securitization and loan terms evidence from foreign currency lending we examine how bank funding structure and securitization activities affect the currency denomination of business loans we analyze a unique data set that includes information on the requested and granted loan currency for 99 490 loans granted to 57 464 firms by a bulgarian bank our findings document that foreign currency lending is at least partially driven by bank eagerness to match the currency structure of assets with that of liabilities our results also show that loan currency as well as loan amount and maturity are adjusted to make loans eligible for securitization

an analytic approximation for the american put price black and scholes 1 derived the pricing equation for a european put when the stock price follows geometric brownian motion for this same case merton 5 derived the pricing equation for an american put with infinite time to maturity brennan and schwartz 2 rubinstein and cox 7 and parkinson 6 have developed numerical solutions for the price of an american put numerical solutions are expensive and do not provide much intuition naturally an analytic solution would be much preferred unfortunately pricing the american put requires solving a formidable and presumably intractable boundary value problem

integration vs segmentation in the canadian stock market this paper examines the issue of integration versus segmentation of the canadian equity market relative to a global north american market we compare the international and domestic versions of the capm and find that integration or the mean variance efficiency of the global market index is rejected by the data segmentation is the preferred model based on a maximum likelihood procedure correcting for thin trading we further divide the sample into securities that are interlisted in canada and the u s and those that are not integration is rejected for both groups which indicates that the source of segmentation can be traced to legal barriers based on the nationality of issuing firms empirical studies of international capital markets have left the issue of segmentation versus integration largely unresolved yet the question of national or international pricing of assets has crucial implications for financial decisions if national stock markets are segmented then international portfolios should display superior risk adjusted performance because some of the priced domestic systematic risk is diversifiable also with segmentation many irrelevance propositions for corporate financial strategy break down home firms face optimal hedging decisions as well as optimal foreign versus home borrowing decisions finally criteria for capital budgeting decisions will be quite different under national and international pricing the purpose of this paper is to shed some light on this integration versus segmentation question for the canadian equity market vis a vis a global north american market in this paper integration is defined2 as a situation where investors earn the same risk adjusted expected return on similar financial instruments in different national markets the key problem of course is the pricing

explaining intergovernmental grants australian evidence the dodo suddenly called out the race is over and they all croded round it panting and asking but who has won lewis carroll alice s adventures in wonderland

corporate bond price data sources and return risk measurement to date a number of studies involving the use of bond prices and or returns have utilized the published prices of trades on the new york and other exchanges these exchange quotes reflect the odd lot activities of individual investors and account for only a negligible portion of the trading in listed issues in contrast the vast majority of listed corporate trading occurs over the counter and involves round lot trades between institutions given differences in market characteristics odd lot exchange prices may differ substantially from those in the round lot institutional market this study compares exchange quotations from moody s bond record with prices assigned by merrill lynch s institutional pricing service and uses each set of prices to calculate return and risk measures institutional merrill lynch bond prices are shown to be systematically greater than exchange moody s prices in addition bond returns based on merrill lynch prices are shown to yield significantly higher beta and r 2 estimates as well as significantly lower standard deviation and residual risk estimates

are correlations of stock returns justified by subsequent changes in national outputs abstract in an integrated world capital market the same pricing kernel is applicable to all securities we apply this idea to the stock returns of different countries we investigate the underlying determinants of cross country stock return correlations first we determine for a given measured degree of commonality of country outputs what should be the degree of correlation of national stock returns we propose a framework that contains a statistical model for output and an intertemporal financial market model for stock returns we then attempt to match the correlations generated by the model with measured correlations our results show that under the hypothesis of market segmentation the model correlations are much smaller than observed correlations however assuming world markets are integrated our model correlations can be matched with observed correlations

the value of early exercise in option prices an empirical investigation previous studies in the valuation of american options apparently undervalue the right of early exercise this study uses actual prices from the cboe s s p 100 option instead of model generated values deviations from the theoretical put call parity relationship are caused by the possibility of early exercise these deviations are used to infer the value of early exercise the actual value of early exercise is both statistically and economically significant as expected from theoretical considerations the value of early exercise for put options is greater than for call options

state government expenditures in a federal system cost and revenue equalization effects in australia all federal systems entail some degree of fiscal equalization australia has the most comprehensive system in the world its unique feature being cost equalization the effects of this on state government behaviour are not clear the procedures used in australia for cost and revenue equalization are employed to develop a model of state government expenditures the model aims to explain both total expenditure and its allocation across types of government services the empirical results suggest that without revenue equalization state taxes would adjust to maintain current state expenditures some cost equalization effects are also found

option pricing when the variance is changing the monte carlo method is used to solve for the price of a call when the variance is changing stochastically

an analytic approximation for the american put price for options on stocks with dividends in a recent paper johnson 7 has given an analytic approximation to the american put price that delivers values that are very close to numerical solutions the limitation to the johnson approximation is that it is only applicable to put options on stocks without cash dividends this study modifies the johnson approximation to value options on stocks that have one exdividend date prior to the option expiration date and these approximation values are compared to the analytic solutions provided by the geske and johnson 6 american put option pricing model the approximation values are generally very close to the analytic solutions

the allocative efficiency of government expenditure some comparative tests this paper examines whether observed government expenditures are consistent with optimising behaviour in australia portugal sweden and the u k expenditures are treated as intermediate goods producing desired outputs e g health education security conditional on demographic variables these outputs are arguments in an objective function optimised subject to a budget constraint optimisation then implies testable homogeneity symmetry and negativity restrictions on the derived demand functions these were estimated using the deaton muellbauer aids system on time series data for four categories of expenditure in each country and the restrictions tested with both homogeneity and symmetry being accepted for sweden

the rationality of early exercise decisions evidence from the s p 100 index options market this study provides a comprehensive empirical analysis of the early exercise bistoty of sp but we show that a substantal number of these decisions are clearly irratonal since it would bave been possible to realize a larger riskless net cash jlow by seuling unlike p us studies of early exercise our tests of efflciency and the rationat decions tbatpresumably lead to eficient markets are model independet we also provide evidence concerning the relatve significance of dividends and the wild card to index optonpricing models and introduce and document the importance of the opton to exercise and avoid the indirect costs oftbe spread we alsofind evidence of a significant day of tbe week exercise effect and present some likely explanations for that effect

exchange rate and foreign inflation risk premiums in global equity returns abstract we test for the pricing of exchange rate and foreign inflation risk in equities our tests are motivated by the empirical implications of the models of solnik 1974b solnik b 1974b the international pricing of risk an empirical investigation of the world capital market structure journal of finance 365 377 as revised by sercu 1980 sercu p 1980 a generalization of the international asset pricing model revue de l association francaise de finance 1 91 135 grauer et al 1976 grauer f litzenberger r stehle r 1976 sharing rules and equilibrium in an international capital market under uncertainty journal of financial economics 3 233 256 and adler and dumas 1983 adler m dumas b 1983 international portfolio choice and corporation finance a synthesis journal of finance 38 925 984 both exchange rate and foreign inflation risk factors can explain part of the within country cross sectional variation in returns our results have important implications for hedging exchange rate risk they also demonstrate that home bias at least in us equity portfolios cannot be the result of us investors efforts to hedge their domestic inflation

households foreign currency borrowing in central and eastern europe abstract foreign currency loans represent an important feature of recent financial developments in ceecs this might pose a serious challenge for macroeconomic stability against this background we study the determinants of foreign currency loans of households using data on the behavior of households in nine ceecs our results reveal that foreign currency loans are driven by households lack of trust in the stability of the local currency and in domestic financial institutions moreover special factors including remittances and expectations of euro adoption play an important role in selected regions the financial crisis reduced foreign currency borrowing but there is some indication this effect might be only temporary

additional evidence on integration in the canadian stock market this paper reexamines the integration of the canadian and u s stock markets in the 1977 86 period that is relatively free from capital controls the study employs both the capm and the apt frameworks under both models the evidence is consistent with segmentation in the 1977 81 subperiod but supports integration in the 1982 86 subperiod using the apt framework we also find that the canadian stocks interlisted on the u s exchanges and nasdaq are priced in an integrated market and segmentation is predominant for the non interlisted canadian stocks in a study using an international capm framework jorion and schwartz 1986 find strong evidence of segmentation in the pricing of canadian stocks relative to a north american market comprising the canadian and u s stock markets the rejection of integration holds for canadian stocks that are interlisted on the u s stock exchanges and nasdaq as well as for domestic canadian stocks that are listed only on the canadian stock exchanges their results are surprising since the canadian and u s economies are highly integrated and the structure and regulation of security markets in the two countries are similar as well the canadian stocks interlisted on the u s stock exchanges list under the same regulation as the domestic u s stocks thus ex ante we would expect the canadian and u s stock markets to be integrated especially for the interlisted stocks 1 this study reexamines the integration in the canadian market employing both the capm and the apt frameworks since tests of market integration are joint tests of a specified model and market integration a relevant question is whether the two models produce different inferences pertaining to the integration issue in addition we explore this issue in a period that is

fiscal illusion and the grantor government empirical studies indicate that unconditional intergovernmental grants have a flypaper effect several authors have modeled recipient government spending under fiscal illusion to explain this phenomenon in short grants reduce the perceived marginal cost of recipient government output this paper develops a more general model of illusion that incorporates the grantor government thereby eliminating inconsistencies encountered in previous models the more general model implies that grant finance increases the perceived marginal cost of grantor government output thus grant induced illusion should have two effects an increase in recipient output and a decrease in grantor output the empirical work supports this hypothesis

asset pricing in partially segmented markets evidence from the finnish market this paper analyzes asset pricing in a partially segmented market where citizens of a small country are allowed to hold only their domestic securities whereas the rest of the investors foreigners are essentially allowed to hold all securities in this market setting it may occur that the citizens of the small country are willing to pay less for their domestic securities than are the foreign investors the paper derives equilibrium required rates of return for different investors in this market setting which perfectly occurred in finland and tests this equilibrium model using data from the finnish stock market empirical results are consistent with the hypotheses derived from the model several studies see e g solnik 1974a and grauer and hakansson 1987 have shown that investors should diversify internationally as by so doing they can reduce the risk of their portfolio without lowering the expected return this implies that if the citizens of a certain country are by legal restrictions prohibited from holding foreign securities they may require a higher rate of return on the domestic securities than the foreign investors do this may happen because the domestic investors cannot diversify away the specific country risk in the same way that the foreign investors can thus if we could observe the prices which the foreign and domestic investors are willing to pay for these domestic securities we would expect them to differ because of this diversification effect the finnish law prohibited finnish investors from investing in foreign securities until 1986 while simultaneously allowing foreign investors to own up to 20 of the shares of any finnish company moreover since 1984 the helsinki stock exchange hse has separately quoted the prices for the unrestricted shares which can be owned both by foreign and domestic investors and for the restricted shares owned solely by domestic investors thus the market setting depicted in the previous paragraph occurred perfectly in finland during the years 1984 and 1985 in this paper our objective is to develop and test an asset pricing model which takes into account the legal restrictions in the finnish stock market in section i we specify the market structure in the finnish stock market in more detail by explaining the relevant legal restrictions affecting the market we also present some descriptive statistics on the prices of the restricted and the unrestricted on

the exchange rate exposure of u s multinationals this article examines the exposure of u s multinationals to foreign currency risk evidence is presented that the relationship between stock returns and exchange rates differs systematically across multinationals given these results the study focuses on the determinants of exchange rate exposure the comovements between stock returns and the value of the dollar is found to be positively related to the percentage of foreign operations of u s multinationals copyright 1990 by the university of chicago

an empirical examination of the pricing of american put options this study is an ex post performance test comparing the accuracy of an american model to a european model for valuing listed options specifically the geske and johnson american put valuation model is compared with the black and scholes european put model on average both models undervalue relative to market prices put options however the geske and johnson model values are significantly closer to market prices than are the black and scholes values

partially segmented international capital markets and international capital budgeting abstract evidence suggests that international capital markets are neither fully integrated nor completely segmented there is however currently no general method available for computing the required return on corporate investments in such capital markets this paper uses a model of partially integrated international capital markets to derive optimal international capital budgeting rules we show how capital budgeting rules depend on the level of investor costs to cross border investment both directly and also indirectly through the portfolio specialization they induce we explain how required returns differ for different companies raising capital in such markets and how these costs of capital may be estimated we also explain how these differences in required returns can be consistent with general equilibrium and the effect they have on incentives for foreign direct investment

exposure to exchange rate movements abstract this paper suggests an approach to measuring a firm s exposure which depends on the stochastic relationship between the firm s real rate of return and exchange rate movements using a simplified two country model exposure is shown to depend on the extent to which individual asset prices adjust with exchange rates the distribution of such adjustments between countries and the relationship between domestic inflation and exchange rate movements while the distribution of real and nominal positions across countries is also a determinant of exposure it is shown that purely domestic firms no foreign assets or liabilities will typically be exposed

the effects of market segmentation and investor recognition on asset prices evidence from foreign stocks listing in the united states non u s firms cross listing shares on u s exchanges as american depositary receipts earn cumulative abnormal returns of 19 percent during the year before listing and an additional 1 20 percent during the listing week but incur a loss of 14 percent during the year following listing we show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing our tests provide support for the market segmentation hypothesis and merton s 1987 investor recognition hypothesis the globalization of u s capital markets has accelerated dramatically in the past decade increasing numbers of companies from overseas have chosen to either raise capital through global equity issues or prepare for future capital raising by way of cross listings on u s exchanges as of 1997 about 1 300 non u s companies have listed their shares for trading on the new york stock exchange nyse the american exchange amex the national association of securities dealers automation quotation nasdaq system or

foreign currency denominated debt an empirical examination we examine the determinants of debt issuance in 10 major currencies by large u s firms using the fraction of foreign subsidiaries and tests exploiting the disaggregated nature of our data we find strong evidence that firms issue foreign currency debt to hedge their exposure both at the aggregate and the individual currency levels we also find some evidence that firms choose currencies in which information asymmetry between domestic and foreign investors is low we find no evidence that tax arbitrage liquidity of underlying debt markets or legal regimes influence the decision to issue debt in foreign currency

investor base and corporate borrowing evidence from international bonds abstract we examine international bond issues by us firms to study the benefits of investor taste for cross border security issuances we proxy for firms international investor taste with the fraction of prior international bond holding in firms domestic and international bonds and find that international investor demand increases with such taste moreover the offering yield spreads on international bonds are lower than domestic offering yield spreads for these internationally recognized firms and they have higher probability of issuing internationally such international recognition may occur for instance if the diversification benefits of adding the security to investor s portfolio outweigh the negative effects of higher renegotiation costs for international compared to domestic investors

index options the early evidence index options became the most important traded contracts during their first year of existence two contracts namely those on the s p100 and the major markets index have a trading volume which typically surpasses the trading volume in all individual stock option contracts in this paper we examine the pricing of the options on the s p100 and the major markets index using intra day prices we find the options frequently violate the arbitrage boundary put call parity and are substantially mispriced relative to theoretical values our results suggest that tests of option pricing models may be more difficult than previously realized due to nonsynchronous prices even using real time data from the exchanges

on valuing american call options with the black scholes european formula empirical papers on option pricing have uncovered systematic differences between market prices and values produced by the black scholes european formula such biases have been found related to the exercise price the time to maturity and the variance we argue here that the american option variant of the black scholes formula has the potential to explain the first two biases and may partly explain the third it can also be used to understand the empirical finding that the striking price bias reverses itself in different sample periods the expected form of the striking price bias is explained in detail and is shown to be closely related to past empirical findings the black scholes european option pricing model tends to exhibit systematic empirical biases when used to value american call options the reported biases

capital controls and international capital market segmentation the evidence from the japanese and american stock markets the paper focuses on two countries japan and the u s to test the integration of capital markets in japan the enactment of the foreign exchange and foreign trade control law in december of 1980 amounted to a true regime switch that virtually eliminated capital controls using multifactor asset pricing models we show that the price of risk in the u s and japanese stock markets was different before but not after the liberalization this evidence supports the view that governments are the source of international capital market segmentation the notion that world capital markets are perfectly integrated is central to most theoretical developments in both international finance and macroeconomics indeed it also lies behind much of the recent international policy discussion capital markets are integrated if assets with perfectly correlated rates of return have the same price regardless of the location in which they are traded 1 segmentation may arise either because of government impediments to capital movements or because of individuals attitudes or irrationality if the hypothesis that the international capital markets are integrated is rejected there is still an important empirical question left unanswered which is related to the source of segmentation while there is a rich body of theoretical research on international market integration only a few studies have tried to investigate this important question empirically a first group of empirical studies on market integration has generally adopted

credit risk spreads in local and foreign currencies governments corporations and even small firms raise and denominate capital in different currencies we examine the micro level factors that should be considered by a borrower when structuring debt denominated in various currencies this paper will show how the currency composition of debt affects the cost of debt through the interaction with the risk of company s assets we look at the currency mismatch in the firm and analyze its credit spread within a merton s type model with bankruptcy we show that foreign currency borrowing is cheaper when the exchange rate is positively correlated with the return on the company s assets the determining factor is not just whether a given company is an exporter or importer but rather the statistical correlation between the rate of return on the firm s assets and changes in the exchange rate

exchange rate exposure hedging and the use of foreign currency derivatives abstract we examine whether firms use foreign currency derivatives for hedging or for speculative purposes using a sample of s p 500 nonfinancial firms for 1993 we find evidence that firms use currency derivatives for hedging as their use significantly reduces the exchange rate exposure firms face we also find that while the decision to use derivatives depends on exposure factors i e foreign sales and foreign trade and on variables largely associated with theories of optimal hedging i e size and r d expenditures the level of derivatives used depends only on a firm s exposure through foreign sales and trade

valuation of american call options on dividend paying stocks empirical tests abstract this paper examines the pricing performance of the valuation equation for american call options on stocks with known dividends and compares it with two suggested approximation methods the approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the black scholes model is shown to induce spurious correlation between prediction error and 1 the standard deviation of stock return 2 the degree to which the option is in the money or out of the money 3 the probability of early exercise 4 the time to expiration of the option and 5 the dividend yield of the stock a new method of examining option market efficiency is developed and tested