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Journals >>
Finance
Economics
The IUP Journal of Financial Economics

March '11
Articles

Unexpected Correlations in Fama-MacBeth Methodology Outcomes

-- Laurent Cavenaile, David Dubois and Jaroslav Hlávka

This paper examines the Fama-MacBeth test of asset pricing models through its application to the Fama and French model. The Fama and French 25 sorted portfolios, 30 industrial portfolios and their combination have been used. The data of monthly observations span over the period 1963-2008. Fama-MacBeth results reject the validity of the Fama and French model, but the presence of unexpected correlation casts doubt on these results.

© 2011 IUP. All Rights Reserved.

Capital Asset Pricing Model: Evidence from the Stock Exchange of Mauritius

-- Subadar Agathee Ushad

The aim of this paper is to examine whether the Capital Asset Pricing Model (CAPM) is able to explain the stock returns in the Mauritian stock market. The sample in the present study consists of all securities listed on the official market of the Stock Exchange of Mauritius (SEM). Using data from 1998 to 2007, the study provides minor support for the three-moment CAPM, with no significant support for either the two-moment or the four-moment CAPM in the case of SEM.

© 2011 IUP. All Rights Reserved.

Illiquidity Premium and Stylized Equity Returns

-- Arshad Hassan and Muhammad Tariq Javed

This study examines the relationship between illiquidity premium and equity returns in Pakistani equity market for the period 2000:6 to 2007:6 by using Fama and French (1992 and 1993) methodology. This is the first study that explores the relationship between illiquidity premium and equity returns in Pakistan by employing a large sample of more than 250 stocks listed on the Karachi Stock Exchange. An analysis of the results reveals that illiquidity premium is priced by market and it is significantly negatively related to equity market returns. It means that high liquidity stocks earn higher return in comparison to low liquidity stocks. Traditional Capital Asset Pricing Model (CAPM) is found to be valid as market factor is significant in explaining portfolio returns. However, the explanatory power of the two-factor model is 5% higher than the explanatory power of conventional CAPM. These results are in line with the findings of Hwang and Lu (2007) for the UK market and Eun and Huang (2007) for the Chinese equity market. However, empirical evidence contradicts that of Amihud and Mendelson (1986) who argue that low liquidity stocks earn higher return as compensation for taking illiquidity risk. As illiquidity premium exists in equity markets, so decision makers should consider it along with market premium in making decisions regarding investment, financing and valuation of financial instruments. The results are important, in the sense, that they can facilitate investors in efficient resource allocation.

© 2011 IUP. All Rights Reserved.

Trade Settlement Failures in US Bond Markets

-- Susanne Trimbath

This study estimates the total value of trade settlement failures in the US bond markets. Analyzing data from multiple sources, it shows that the value of settlement failures is rising. Regulatory and market efforts to reduce the problem have been largely unsuccessful. In April 2008, fails to deliver in bond markets reached a peak value of $600 bn, a fail rate of nearly 9%. The resulting loss of tax revenue on payments in lieu of interest (on tax-exempt municipal and Treasury securities) is found to be $42 mn per year to the federal government and $271 mn per year to the states. The loss of use of funds to investors as a result of securities paid for but not received is found to be $7 bn per year.

© 2011 IUP. All Rights Reserved.
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Automated Teller Machines (ATMs): The Changing Face of Banking in India

Bank Management
Information and communication technology has changed the way in which banks provide services to its customers. These days the customers are able to perform their routine banking transactions without even entering the bank premises. ATM is one such development in recent years, which provides remote banking services all over the world, including India. This paper analyzes the development of this self-service banking in India based on the secondary data.

The Information and Communication Technology (ICT) is playing a very important role in the progress and advancement in almost all walks of life. The deregulated environment has provided an opportunity to restructure the means and methods of delivery of services in many areas, including the banking sector. The ICT has been a focused issue in the past two decades in Indian banking. In fact, ICTs are enabling the banks to change the way in which they are functioning. Improved customer service has become very important for the very survival and growth of banking sector in the reforms era. The technological advancements, deregulations, and intense competition due to the entry of private sector and foreign banks have altered the face of banking from one of mere intermediation to one of provider of quick, efficient and customer-friendly services. With the introduction and adoption of ICT in the banking sector, the customers are fast moving away from the traditional branch banking system to the convenient and comfort of virtual banking. The most important virtual banking services are phone banking, mobile banking, Internet banking and ATM banking. These electronic channels have enhanced the delivery of banking services accurately and efficiently to the customers. The ATMs are an important part of a bank’s alternative channel to reach the customers, to showcase products and services and to create brand awareness. This is reflected in the increase in the number of ATMs all over the world. ATM is one of the most widely used remote banking services all over the world, including India. This paper analyzes the growth of ATMs of different bank groups in India.
International Scenario

If ATMs are largely available over geographically dispersed areas, the benefit from using an ATM will increase as customers will be able to access their bank accounts from any geographic location. This would imply that the value of an ATM network increases with the number of available ATM locations, and the value of a bank network to a customer will be determined in part by the final network size of the banking system. The statistical information on the growth of branches and ATM network in select countries.

Indian Scenario

The financial services industry in India has witnessed a phenomenal growth, diversification and specialization since the initiation of financial sector reforms in 1991. Greater customer orientation is the only way to retain customer loyalty and withstand competition in the liberalized world. In a market-driven strategy of development, customer preference is of paramount importance in any economy. Gone are the days when customers used to come to the doorsteps of banks. Now the banks are required to chase the customers; only those banks which are customercentric and extremely focused on the needs of their clients can succeed in their business today.

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