The effectiveness of cross-currency hedging

This study examines the effectiveness of cross-currency hedging compared to that of forward hedging and money market hedging. It is demonstrated that cross-currency hedging is not only less effective than forward and money market hedging but also that it is totally ineffective unless the exchange rate of the exposure currency and that of the third currency are highly correlated. The results indicate that for an effective crosscurrency hedging a correlation coefficient of 0.50 is required. This kind of correlation reduces the variance of the rate of return on the unhedged position by about 25 per cent

Cross-currency hedging as an alternative to forward and money market hedging in an emerging financial market

This study examines the effectiveness of cross-currency hedging compared to that of forward hedging and money market hedging, using the Kuwaiti dinar as a base currency. It demonstrates that cross-currency hedging is not effective because the exchange rate arrangement produces low exchange rate correlations. A policy recommendation based on the findings is that the hedging function can benefit enormously from the existence of sophisticated financial markets

The capital asset pricing model (CAPM): the history of a failed revolutionary idea in finance? Comments and extensions

The capital asset pricing model (CAPM) states that assets are priced commensurate with a trade-off between undiversifiable risk and expectations of return. The model underpins the status of academic finance, as well as the belief that asset pricing is an appropriate subject for economic study. Notwithstanding, our findings imply that in adhering to the CAPM we are choosing to encounter the market on our own terms of rationality, rather than the market's

The frequency and severity of operational losses: a cross-country comparison

We examine the proposition that cross-country differences in the factors determining the frequency and severity of operational losses lead to cross-country differences in the distribution and incidence of operational loss events in terms of frequency and severity. For this purpose, we consider 4388 operational loss events covering 11 countries or country groups. The results reveal differences with respect to the type of loss events prevailing in each country or country group as well as differences with respect to the dominance of events of certain type in a particular business line and corporate entity type

An operational risk profile: the experience of British firms

This study provides an analysis of 163 operational loss events experienced by a variety of British firms over the period 1999-2008. 10 different hypotheses are tested to examine the distribution of loss severity and frequency with respect to business line, event type and corporate entity type. We also test hypotheses on the relation between loss severity and the decline in the market value of the announcing firm and whether or not the decline in market value is greater if the loss results from internal fraud. The results indicate that loss severity does not depend on firm size, that the decline in market value bears no stable relation to the loss amount and that they decline in market value relative to the loss amount is positively related to firm size

A reappraisal of the meese-rogoff puzzle

Several explanations have been put forward for the Meese and Rogoff puzzle that exchange rate models cannot outperform the random walk in out-of-sample forecasting. We suggest that a simple explanation for the puzzle is the use of the root mean square error (RMSE) to measure forecasting accuracy, presenting a rationale as to why it is difficult to beat the random walk in terms of the RMSE. By using exactly the same exchange rates, time periods and estimation methods as those of Meese and Rogoff, we find that their results cannot be overturned even if the models are estimated with time-varying coefficients. However, we also find that the random walk can be outperformed by the same models if forecasting accuracy is measured in terms of the ability to predict direction, in terms of a measure that combines magnitude and direction and in terms of profitability

The monetary model of exchange rates is better than the random walk in out-of-sample forecasting

It is demonstrated that the monetary model of exchange rates is better than the random walk in out-of-sample forecasting if forecasting accuracy is measured by metrics that take into account the magnitude of the forecasting errors and the ability of the model to predict the direction of change. It is suggested that such a metric is the numerical value of the Wald test statistic for the joint coefficient restriction implied by the line of perfect forecast. The results reveal that the monetary model outperforms the random walk in out-of-sample forecasting for four different exchange rates

Fire or ice? A critical assessment of the underlying views

A debate is raging on whether the U.S. is likely to experience hyperinflation (fire) or deflation (ice) as a result of post-crisis policies, particularly quantitative easing. Views have been put forward to suggest that the U.S. is heading towards ice, while others suggest that fire is the destination. There are also those who envisage either fire or ice, depending on how much is done to combat deflation. These views are assessed critically to reach the conclusion that, on the balance of probabilities, it seems that the U.S. is more likely heading towards fire

The Basel III controversy: A critical assessment of the views of Australian regulators

This paper critically examines the arguments put forward by Australian regulators in favour of Basel III and the Basel accords, more generally. We argue that Basel II contributed significantly to the Global Financial Crisis (GFC) and the European crisis. We also suggest that Basel III is not a 'great leap forward' when compared with Basel II, its provisions will not make banks more resilient, its architects have not learned much from the GFC and that the international unification of banking regulation is a flawed idea