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Vol. 11, 2014-2015

Applicability of Basel III Countercyclical Capital Buffer Guidance to Emerging Market Economies: An Exploration
Gopinath Tulasi
Reserve Bank of India
 
Abstract Ɩ Full Text
Basel Committee on Banking Supervision (BCBS) has published its guidance for operating the countercyclical capital buffer. It has, inter alia, recommended that credit-to-GDP ratio could be the buffer guide. This paper argues that BCBS buffer guide is not suitable for Emerging Market Economies (EMEs) for variety of reasons and showcases an alternative buffer guide, reflecting their underlying banking business model. It verifies the historical performance of the alternative buffer guide in the Indian context and finds evidence – supported by the corroborative behaviour of the real sector and asset markets - that the alternative guide tracks credit cycles in India better. The paper demonstrates that the alternative indicator does not adversely impact the structural drivers of credit growth. Accordingly, the paper recommends the alternative countercyclical capital buffer guidance with triggers for the build-up and release of the additional countercyclical capital buffer.
 
Keywords: Countercyclical capital buffers, credit-to-GDP Gap, CD ratio, Credit aggregates, Leverage.
JEL Classification: E58, E61, G21, G28
 

 
Financial Profiles, Dividends and Stock Returns
Abeyratna Gunasekarage
Monash University, Melbourne, Australia
 
Kurt Hes
Independent Credit View AG, Zürich, Switzerland
 
David Power
University of Dundee, United Kingdom
 
Abstract Ɩ Full Text
The aims of this paper are (a) to examine whether changes in dividend can be forecasted from past financial statement information and (b) to investigate whether such forecasts can be exploited to yield abnormal returns. A two-step approach is adopted. First, a logit model is developed to predict one year-ahead changes in dividends. Second, the buy-and-hold returns for a trading strategy based on the dividend forecasts are calculated. The logit model developed has some success in predicting future dividend changes. However, attempts to exploit these predictions proved unsuccessful; a strategy of buying (selling) shares where dividends were predicted to increase (decrease) would earn a negative abnormal return of -2.34% over 24 months. This is one of the first studies to forecast dividend changes for a sample of New Zealand companies using past financial statement data and to test if the market is semi-strong-form efficient with respect to these dividend predictions.
 
Key Words: Dividend; Financial Profiles; Logit Model; Stock Return; New Zealand
JEL Classification: G14
 
International Capital Market Linkages: A Synthesis of Prior Literature
Walid .A. Ahmad
Ain Shams University
 
Abstract Ɩ Full Text
In recent years, financial market integration has become a central theme in international finance literature, due to its important implications for many parties involved. The contribution of research on this topic has been substantial and covered several relevant issues, whether at the micro or macro level. This study presents a detailed review on the literature of capital market integration along with their possible limitations. In addition, a comparison is provided between the different empirical approaches used in investigating the level to which capital markets are integrated. It can be concluded from the literature survey that capital market integration is still a moot point, as the empirical evidence is rather inconclusive. Thus, the potential gains derived from, and limitations of, cross-border diversification are still at the core of the debate; and that perhaps surprisingly this issue is not yet fully resolved.
 
Keywords: Market integration; market segmentation; cointegration analysis; asset-pricing models; Vector Error Correction Modeling (VECM).
JEL: C32, G11, G14, G15, F30.
 

 
The Long Run Relationship Between Stock Indices and Macroeconomic Variables
Yogesh Maheshwari
Indian Institute of Management Indove
 
Abstract Ɩ Full Text
Stock indices are considered to be the barometers of any economy. This study examines the long run equilibrium relationship between stock indices and macroeconomic variables by applying the Johansen and Juselius (1990) Vector Error Correction Framework. It considers sector indices of the Bombay Stock Exchange and select macroeconomic variables for this purpose. The empirical results reveal that the stock indices and the macroeconomic variables are cointegrated and possess a longrun equilibrium relationship. The relationship has been found to be significantly negative with the index of industrial production, rupee-dollar exchange rate, foreign exchange reserves and wholesale price index, but significantly positive with money supply. The results of the study would enable investors and traders in taking informed decisions. They would also help companies in developing a view on the economy so as to facilitate their financial planning process.
 
Keywords: Sector indices, macroeconomic variables, unit root test, Johansen cointegration test, vector error correction model, long run.
JEL Classification: C22, E44, G12, G14

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