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Vol. 6, Number 2, February-March 2009

Modelling the Behaviour of Technicians and Fundamentalists in the Shanghai Stock Market
Imad Moosa and Larry Li
Monash University and Latrobe University
Abstract Ɩ Full Text
This paper provides empirical evidence on the role of fundamentalists and technicians in the Chinese stock market. Three econometric models are used to differentiate the stock price effect between the actions of traders who act on the basis of fundamental analysis and those acting on the basis of technical analysis. The models are estimated using randomly selected monthly and daily data on the stock prices of one hundred companies listed on the Shanghai Stock Exchange. The results reveal that both fundamentalists and technicians have roles to play in stock price formation, although technicians appear to play a more important role. This result holds even if the government intervention is allowed for. Some explanations are presented for the dominance of technicians.
Keywords: Technical analysis, Fundamentalists, Share prices, Shanghai exchange, Government intervention
JEL Classification: D53, G24

The Role of Bank Loans and Deposits in the Monetary Transmission Mechanism In Malaysia
Salina Kassim and M. Shabri A. Majid
International Islamic University of Malaysia
Abstract Ɩ Full Text
This study attempts to determine the importance of the banking sector in the monetary transmission process in a developing economy. The study analyzes the Malaysian data focusing on three sample periods: the entire sample period (1989:01-2006:12); the pre-crisis period (1989:01-1996:12); and the post-crisis period (1999:01-2006:12). To achieve this objective, the study relies on two tests: first, the auto-regressive distributed lag (ARDL) model for the long-run relationship among the variables and second, the impulse response functions and variance decomposition analysis for the short-run relationship among the variables. The finding shows that both bank deposits and loans play crucial roles in the monetary transmission process in the economy, suggesting evidence for the money endogeneity theory of post-Keynesian economists. In particular, bank deposits and loans are shown to provide an important link from monetary policy to output. This underscores the importance of ensuring the soundness of banking system as a pre-requisite to economic stability in the absence of such market based tools as market-based actions on exchange rate or interest rates as monetary stabilisation tools.
Keywords: Monetary transmission, Bank loans, Bank deposits, Auto-regressive distributed lag model; Impulse response functions, Variance decompositions
JEL Classifi cations: E42, E51, G21

Monetary Integration in East Asia: Why Does it Take so Long?
Mariusz K. Krawczyk
Ryukoku University, Japan
Abstract Ɩ Full Text
The launch of the economic and monetary union in Europe and the 1997 financial crisis that underscored the disadvantages of currently employed exchange rate regimes raised questions about the feasibility of a similar monetary unification project for East Asia. Being one of the most dynamically growing regions in the world, East Asia has the potential for a successful implementation of a monetary union. The paper examines why, despite substantial political emphasis being placed on the issue of monetary integration, the progress to date has been slower than could be expected. The major finding is that, although East Asia may actually benefit from establishing its monetary union in the long run, a specific political culture that prevails in the region and misconceptions about the sequencing of the process prevent the East Asian monetary union from materialising. Possible short and mid-term policy solutions follow.
Keywords: Monetary union, East Asia, Sequencing monetary reforms, Monetary unification
JEL Classifications: E42, E52

Risk-Adjusted Returns of American Depositary Receipts on Chinese and Indian Stocks
Onur Arugaslan and Ajay Samant
Western Michigan University
Abstract Ɩ Full Text
This study evaluates the risk-adjusted performance of American Depositary Receipts (ADRs) on shares of stock of Chinese and Indian fi rms. The first part of the study examines the nature of Chinese and Indian ADRs (based on depositary bank, sponsorship status, industry classification and listing). The second part of the study evaluates the performance of these ADRs using statistical measures grounded in modern portfolio theory. Returns are adjusted for the degree of total risk and systematic risk inherent in each ADR, and the securities are then ranked on the basis of risk-adjusted performance. Two relatively new evaluation metrics, the Modigliani and Sortino measures, are used. The objective of the study is to provide documentation to global investors who are contemplating participation in Chinese and Indian stock markets via depositary receipts.
Keywords: ADRs, Portfolio choice, Investment decisions, Emerging markets
JEL Classifications: G15, G11, F30

Exchange Rate Behaviour of East European Transitional Economies
Catherine S. F. Ho
University Technology MARA, Malaysia
Abstract Ɩ Full Text
Eastern European countries, which are candidates for accord into the Exchange Rate Mechanism (ERM) and the eventual move towards Euro, fi nd exchange rate management a tedious challenge. This paper examines the underlying factors that move exchange rates and helps us to contribute towards streamlining policies and strategies in moving these countries forward. The new findings on exchange rate determinants for this group of transitional economies are based on parity factors as well as non-parity factor effects. The evidence that emerges from this paper is that non-parity factors including economic growth rate, current account and capital flows are significantly correlated with exchange rates. The results are robust whichever data set is used, high-frequency and low-frequency data sets.
Keywords: Exchange rates, Prices, Trade and capital fl ows, Foreign debt, Reserves, Growth
JEL Classification: F31, F32, C33, E31, F43

Does Noise Signal Affect Flipping Activities?
Chong Fen Nee, Ruhani Ali and Zamri Ahmad
University Technology MARA Sarawak and
University Sains Malaysia
Abstract Ɩ Full Text
In this paper, we report the explanatory power of noise signal and fundamentals on flipping activities of share trading. Flipping is defined as the percentage of opening day trading volume divided by the number of shares offered on the first trading day (Miller and Reily, 1987, and Aggarwal, 2003) in an offer for sale. It is affected by investors’ opinion about, for example, the new issue’s future prospect on the first listing day. The initial premium which is defined as the difference between the opening price and the offer price divided by the offer price is used as a proxy for noise signal. Using initial public offers listed on the Main Board of Bursa Malaysia during the period of 1991 to 2003, we find support for the relationship between noise signal and flipping activity in the immediate aftermarket as evident in several models tested as well as the bullish and bearish market models. Among the fundamental factors included in this study, bigger size of offer was found to discourage flipping activities.
Keywords: Initial public offers, Flipping, Traded volume, Issue size
JEL Classification: G12

Interest Rate and Foreign Exchange Risk Exposures of Australian Banks: A Note
Abul F. M. Shamsuddin
University of Newcastle, Australia
Abstract Ɩ Full Text
The abolition of most government controls over the Australian financial system in the 1980s, the advent of a flexible exchange rate regime in 1983 and the globalisation of the financial system in the 1990s have created new opportunities for Australian banks but exposed them to new sources of risk. This study estimates systematic risk exposure of publicly listed Australian banks with respect to market, interest rate and foreign exchange rate using a GARCH-in-Mean model. Not surprisingly, the results suggest that nearly all banks exhibit varying degrees of market risk exposure. However, stock returns of large banks are highly sensitive to interest rate changes, while most small banks are almost immune to both interest and exchange rate changes.
Keywords: Interest rate risk, Foreign exchange rate risk, Australian Banks
JEL Classifi cation: G12, G21

Separate Legal Entity Under Syariah Law and its Application on Islamic Banking in Malaysia: A Note
Zainal A. Zuryati, Mohamed Yusoff and
Ahmad N. Azrae
University Utara Malaysia
Abstract Ɩ Full Text
The principle of separate legal entity – that is, after the incorporation of a company, it is regarded as an artificial person or juridical person who has the rights and responsibilities similar to a living person - has been widely accepted and applied in the world of business, trade and industry. In Malaysia, an Islamic banking institution is incorporated under the Companies Act 1965 where after its incorporation, it becomes a legal entity separated from its members and shareholders. In the case of Bank Islam Malaysia Berhad v. Adnan bin Omar (1994), the court held that Bank Islam Malaysia Berhad is a corporate institution created by statute. This case has been decided based on civil law system, not under the Islamic legal system. Since the products offered by an Islamic banking institution is solely in harmony with Islamic principles, one fundamental legal question yet to be resolved is whether the principle of separate legal entity is recognised under the Syariah law. This paper aims to discuss the issue of separate legal entity in Islam and its application to the Islamic banking institutions.
Keywords: separate legal entity, Islamic banking institutions, Syariah, juridical person, company
JEL Classification: K29

Market Risk VaR Historical Simulation Model with Autocorrelation Effect: A Note
Wantanee Surapaitoolkorn
SASIN Chulalunkorn University, Thailand
Abstract Ɩ Full Text
The modern market risk model using Value at Risk (VaR) method in the banking area under the BASEL II Accord can take different forms of simulation. In this paper, historical simulation will be applied to the VaR model comparing the two different approaches of Geometric Brownian Motion (GBM) process and Bootstrapping methods. The analysis will use correlation plots and examine the effects of the autocorrelation function for stock returns.
Keywords: BASEL II Accord, Market Risk Model, VaR Model, Stochastic Process, Historical Simulation, Bootstrapping
JEL Classification: C15, C51, C88

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