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The International Journal of Banking and Finance (IJBF) Vol. 10 No.1 March 2013

Market Conditions and Fund Flows: Evidence from Hedge Funds
Wen-Hsiu Chou (Florida International University, USA), Dongmin Ke (Kean University, USA) Danielle Xu (Gonzaga University, USA/Hanken School of Economics, Finland)
Abstract Ɩ Full Text
This paper investigates whether market conditions affect fund investor behaviour in the hedge fund industry, especially the volatility in the up and down markets. Using a sample of 5,254 individual hedge funds from January 1994 to December 2009, we find that hedge fund investors tend to invest less during up and down-volatile markets. They also adopt different investment strategies in these two market conditions. When market is calm and relatively predictable, there is almost no difference in their behaviors between up and down markets. We also find that smart money effect exists over both 3- and 12-month periods under all market conditions except volatile markets. A further investigation suggests that the observed smart money effect is largely driven by hedge fund performance persistence, which is present and significant is quiet markets only. The findings are relevant to portfolio theories concerning investor recognition of upside and downside volatilities.
Keywords: Hedge funds, flow sensitivities, smart money effect, performance persistence, time-varying performance, downside/upside volatility
JEL Classification: G11, G23

Modeling Credit Risk: An Application of the Rough Set Methodology
Reyes Samaniego Medina and Maria Jose Vazquez Cueto
Pablo de Olavide University, Spain and Seville University, Spain
Abstract Ɩ Full Text
The Basel Accords encourages credit entities to implement their own models for measuring financial risk. In this paper, we focus on the use of internal ratings-based (IRB) models for the assessment of credit risk and, specifically, on one component that models the probability of default (PD). The traditional methods used for modelling credit risk, such as discriminant analysis and logit and probit models, start with several statistical restrictions. The rough set methodology avoids these limitations and as such is an alternative to the classic statistical methods. We apply the rough set methodology to a database of 106 companies that are applicants for credit. We obtain ratios that can best discriminate between financially sound and bankrupt companies, along with a series of decision rules that will help detect operations that are potentially in default. Finally, we compare the results obtained using the rough set methodology to those obtained using classic discriminant analysis and logit models. We conclude that the rough set methodology presents better risk classification results.
Keywords: Rating, credit risk, basel accords sets
JEL Classification: G21, G32

Economic Freedom, Macroeconomic Fundamentals and Foreign Direct Investment in Fast Emerging Brics and Malaysia
Catherina S.F. Ho, Noryati Ahmad and Hayati Mohd. Dahan
Universiti Teknologi MARA, Malaysia
Abstract Ɩ Full Text
This study investigates the major factors that determine the inflow of foreign direct investment (FDI) into fast emerging countries: Brazil, China, India, Russia, South Africa (BRICS) and Malaysia. Two sets of factors are identified: macroeconomic and country specific fundamentals. The period of analysis is 1977-2010. The study provides empirical evidence that economic growth, government consumption and trade openness are vital for FDI. In addition, country specific infrastructure quality and economic freedom are also critical factors in determining FDI for this group of countries. Our findings have significant policy implications for the growth and development of these countries, particularly through foreign direct investments.
Keywords: FDI, trade openness, economic freedom, macroeconomic fundamentals
JEL Classification: F21, F31, F41, F43

Leverage, Maturities of Debt and Stock Performance
Tristan Nguyen and Alexander Schüβler
WHL Graduate School of Business and Economics, Germany and HHL Leipzig Graduate School of Management, Germany
Abstract Ɩ Full Text
We add to the prior literature that test the influence of total leverage on stock returns by focusing on an extended ratio, namely, ‘Total Debt to (Total Capital + Long Term Debt)’, TD/(TC+LTD)’, the ratio henceforth. Further, and in contrast with others, we account for different maturities of debt. The link between this ratio and stock returns for periods of one to sixty months are considered for Germany, the UK and the US. We control for beta and form quintiles based on the ratio to compute mean returns. Our findings indicate a robust negative relation between the ratio and returns for Germany and the UK. In these two markets, the lowest ratio-quintile performs better that the highest ratio-quintile for all the periods studied. Interestingly, the results for the United States are less clear. Due to a number of known factors, market efficiency might be higher in the US than in the other two markets.
Keywords: Stock returns, leverage, debt maturity, long term debt, short term debt
JEL Classification: G11, G12, G17

Determing the Role of Debt in the Economy and a New Approach for Solving Sovereign Debt Crises
Munawar Iqbal
King Abdel Aziz University, Saudi Arabia
Abstract Ɩ Full Text
This paper aims to begin a dialogue on how to seek a longer term solution to the sovereign debt problems in general and those of EU in particular. Although the history of debt crises is quite old, none of the several solutions proposed and tried in the past have been successful to curb recurring debt crisis. This issue has assumed critical importance as the Eurozone debt crisis, which followed after the 2007-09 global financial crisis. Several governments have been outvoted in Europe due to this crisis and the cohesion of Eurozone is at stake. A rethinking on debt creation and its macroeconomic effects are being seriously studied. It seems that traditional options available to policy makers have lost much of their luster. It is high time that unconventional measures may have to be offered for consideration to provide longer term solution. This paper is a brief on the Islamic approach to the role of debt, and has potential to limit debt creation in the long term. We present some basic tenets of that approach referring in particular to the current developed nation sovereign debt crisis.
Keywords: Sovereign debt, islamic finance, debt overhang, asset backing, leveraging and growth.
JEL Classification: H63

The Relationship between Risk Propensity, Risk Perception and Risk-Taking Behaviour in an Emerging Market
Fazelina Sahul Hamida, Gary John Rangelb, Fauziah M. Taiba, and Ramayah Thurasamya,
aUniversiti Sains Malaysia and bMonash University Malaysia
Abstract Ɩ Full Text
This paper reports evidence to support a relationship between risk propensity, risk perception, and risk-taking behaviour of investors in an emerging market. Primary data were gathered using a validated structured questionnaire, which was self-administered by respondents: there were 162 investors from 8 stockbroking companies. A multiple regression was used to test the direct and indirect effects of the identified behavioural characteristics on investment decision. Risk propensity was found to be positively related to risk-taking behaviour whereas risk perception was negatively related to risk-taking behaviour. It was further found that risk perception partially mediates the effect of propensity to take risk. This suggests that the perceptual framing of a situational context in the investors’ thought processes reduces but it does not totally overwhelm the innate personality traits with respect to either the investor’s risk-seeking or risk-averseness. The tendency to engage in risky behaviour is more psychological in nature. The implications of the research are further explored.
Keywords: Risk propensity, Risk perception, Risk-taking behaviour, Empirical study
JEL Classification: D81, G02

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