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The International Journal of Banking and Finance (IJBF) Vol. 6 No.1 2009

Usury (Riba) and the Place of Bank Interest in Islamic Banking and Finance
M. Raquibuz Zaman
Ithaca College, United States of America
Abstract Ɩ Full Text
This paper examines the concept of usury or Riba as was understood at the time of the Prophet of Islam and his contemporaries in Mecca and Medina, and what differing interpretations of the term developed in succeeding centuries in Muslim populated countries of the world. It gives a brief summary of the concept of usury in Judaism and Christianity and how this term is equivalent of Riba in Islam. It demonstrates that Riba and interest are not synonymous terms, and that what Islam forbids is usury and not interest. It asserts that, although some interests are usurious, the claim by the contemporary Islamic Banking and Financial institutions, IBFIs, that these institutions are “Islamic” because the term is not used in their transactions, is misleading at best. It ends with the proclamation that true IBFIs are not only feasible, but also are inevitable to serve the needs of the Muslims around the world.
Keywords: Profit sharing, usury, interest, prohibition of usury, Islamic banking
JEL Classification: G12, G21

East Asian Financial Contagion under DCC-Garch
J. H. Cho and A. M. Parhizgari
Florida International University
Abstract Ɩ Full Text
We consider the definition and measurement of contagion by analysing the 1997 East Asian financial crisis in the equity markets of eight countries using dynamic conditional correlation (DCC). Taking Thailand and Hong Kong as alternative sources of contagion, a total of fourteen source-target pairs is analyzed. We define contagion as the statistical break in the computed DCCs as measured by the shifts in their means and medians. In the DCC process, the parameters of each pair of source-target country contagion are allowed to vary and be dictated by the data. Contagion is tested using DCC means and medians difference tests. Our findings indicate the presence of contagion in the equity markets across all the fourteen pairs of source-target countries that are considered.
Keywords: Contagion, east Asian financial markets, dynamic conditional correlation
JEL Classification Codes: G15, F36, C51

Estimating the Early Exercise Premium of American Put Index Options
Ako Doffou
Sacred Heart University, United States of America

Abstract Ɩ Full Text

This paper examines empirically the value of early exercise by testing the ability of two American put valuation models to predict the early exercise premium for the S&P 100 American put options. An accuracy test and a quality test are performed on (1) the MacMillan and Barone-Adesi and Whaley model, and (2) the Carr, Jarrow and Myneni model. The test results show that early exercise premium is significant regardless of moneyness. Moreover, consistent with the theory, the value of early exercise is significantly negatively related to moneyness and interest rates and significantly positively related to time to maturity and to the volatility of the underlying index. Both American put valuation models examined do not fully capture the value of early exercise embedded in American put prices.
JEL Classification: G13
Keywords: Option prices, early exercise, moneyness, S&P American put option

Empirical Determinants of US Equity Flows to Developed Countries: Does Valuation Matter?
Joseph J. French
University of Northern Colorado, United States of America
Abstract Ɩ Full Text
This paper explores a new panel data set on US gross cross-border equity flows to 20 industrialized nations combined with measures of market valuation for the period of 1977-2005. Empirical evidence of imperfect integration across world equity markets indicates that valuation matters. Consistent with relative value trading as a determinant of equity flow patterns, we find that equity flows decrease sharply with host-country market valuations. This paper also finds that equity flows increase sharply with US equity market valuations. The findings of this research suggest that American investors are informed about both domestic markets and foreign markets. Peripheral findings of this research confirm the findings of other researches, but this research is based on a longer sample period. Consistent with existing literature, there is a negative influence of interest rates spreads, and information asymmetries on cross-border trades in equities.
Keywords: Equity flows, cross-border portfolio investment, international markets
JEL Classification: F21, G15, G14, 016, G11

Rational Expectations, Irrational Exuberance: Linkage between U.S. Investors and Pacific-Basin Stock Returns
Rahul Verma
The University of Houston, United States of America
Abstract Ɩ Full Text
We shed new light on the relevance of rational expectations and irrational exuberance of U.S. individual and institutional investors on Pacific-Basin stock returns. We find insignificant effects of irrational exuberance and significant effect of rational expectations on Asian markets with varying degrees of intensity. There are greater responses of Hong Kong, Malaysia, Philippines, and Singapore while weaker linkages with Taiwan, Thailand, and Korea. Overall evidence suggests that rational expectations of institutional investors are transmitted to a greater extent than those of individual investors. These results are consistent with the view that international effects of the U.S. market can be attributed to rational investor sentiments.
Keywords: Stock returns, investor sentiment, VAR model, asia pacific markets
JEL Classification: G12, G14, G22

Financial Liberalization or Financial Development? Tests Using Delphi-Based Index Ofliberalization
Nicolaas Gronewold, Jiangang Peng, Guanzheng Li and Xiangmei Fan
University of Western Australia, Hunan University and Hunan Normal University
Abstract Ɩ Full Text
Most empirical analysis of the finance-growth nexus has used measures of financial development such as the ratio or monetary of financial assets to GDP to measure financial development. We argue that from a policy perspective measures of financial liberalisation or reform are of greater interest and, besides, are less likely to be beset by endogeneity problems which have dogged the empirical growth literature. We develop such a measure by combining the ‘Delphi’ method and principal components analysis to construct an index of financial liberalisation for China. Much of China’s financial development has been policy-driven and we could expect to find a distinct difference, at least in timing, between measures of financial reform and financial development. We compare our financial liberalisation index to a number of standard measures of financial development and find that there is pervasive evidence that financial liberalisation Granger-causes financial development but not vice versa.
Keywords: Financial liberalisation, financial development, economic growth
JEL Classification: G18, O16, O43, O53

International Asset Pricing Models: The Case of ASEAN Stock Markets
Chee-wooiHooy and Kim-leng Goh
University Science Malaysia and The University of Malaya
Abstract Ɩ Full Text
This paper is about the role of economic grouping as it affects international capital asset pricing models, ICAPM. The conventional ICAPM is extended to include the economic grouping, regional and world factors. Inclusion of the economic grouping factor increases the explanatory power of the asset pricing models. Data on ASEAN (Indonesia, Malaysia, Philippines, Singapore and Thailand) stock markets are used in tests of the proposed models. The economic grouping factor turned out to be most important while the regional factor is least important for asset pricing in these stock markets. While four of the markets have higher systematic risk exposure to the economic group, the Singapore market, the largest market, exhibits higher exposure to world risk. The segmentation of emerging markets offers a possible explanation of these results.
Keywords: CAPM, GARCH, integration, market risk, trading bloc
JEL Classification: F360, G120

An Empirical Investigation of New Bond Issue Yield Spreads, Default Risk and Split Ratings
Timothy S. Michael
University of Houston Clarke-Lake, United States of America
Abstract Ɩ Full Text
This paper attempts to explain the yield spreads charged to new corporate debt issues by comparing the initial yields of a set of 3,287 securities issued over eleven years in the US. We use the measure of constant maturity Treasury rates on the day of issue against the Moody’s Aaa Corporate Bond index for the week prior to the issue, and the yield on a daily index of long-term Treasury securities on the issue date. The influences of credit ratings and disagreement between rating agencies as reflected in split ratings and the interactions between these characteristics are measured. The contributions of sinking fund provisions, call or refunding status, overseas issue and contractual security arrangements are evaluated separately. The results support the view that the higher yields are observed when ratings of agencies differ and that factors associated with the issues also are significant drivers of the yield difference.
Keywords: Yield spreads, split ratings, bond index, credit rating effect, terms of debt issues
JEL Classification: E43, G12

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