Mohammad Khoshnevisan, Griffith University, Queensland, Australia
Saed Nahvandi, Deakin University, Melbourne, Australia
Sukanto Bhattacharya, Alaska Pacific University, USA
Morteza Bakhtiary, Research Center of Science and Technology in Medcine (RCSTIM), Teheran, Iran

Abstract. Financial decision making mechanism have not been identified. Using event-related fMRI without MR compatible switch which can be performed by all MRI system which has only Echo Planar Imaging (EPI) feature, we examined financial decision-making task with three risk levels in two participates. We saw activation regions differences between risk-seeking and risk-aversion selection in addition to larger activated regions in selection funding in comparison with no selection. Thus, consideration of anticipatory neural mechanisms may add predictive power for economic decision-making.

Burhan F. Yavas, College of Business and Public Policy, California State University, Dominguez Hills, Carson, USA
Fahimeh Rezayat, College of Business and Public Policy, California State University, Dominguez Hills, Carson, USA

Abstract. We study global equity market integration utilizing daily closing price data (January 2001-January 2004) from five selected Exchange-Traded Funds (ETF). Standard & Poor's 500 (SPY), Ishares Taiwan (EWT), Ishares Australia (EWA) , Ishares Spain (EWP) and Ishares Austria (EWO) are used to represent the U.S., and the four emerging countries, two from Asia and two from European equity markets, respectively. We analyze the correlations between the five return series and examine how the returns on a single ETF are affected by the other four ETF returns in order to evaluate the case for portfolio diversification. We also study the stability of equity market interdependence after an exogenous shock. While the findings indicate that the interdependences among the five markets are significant, there is still room for international portfolio diversification. For example, investing in Austria provides diversification benefits for American, Taiwanese and Australian investors. Investors from Taiwan can realize benefits by investing in Europe and in Australia but not in the US. Austrian investors, on the other hand, can diversify portfolios by investing in the US, Taiwan and Australia. Finally, the study of the effect of the Iraq war on the co-movement of the equity markets provides mixed results for the hypothesis that the international market correlations increase after an exogenous shock.

Abstract. Managing assets and liabilities of banks requires giving adequate attention to profitability, risk, and liquidity. Hence, should the central bank attempt to regulate the quantity of bank loans by means of direct control? The current study is an attempt to provide a systematic, quantitative measure of the efficiency effect of direct lending controls in the commercial banking industry of the Gulf region. This issue is relevant and timely since it is expected that central banks in the Gulf region may follow the central bank of Kuwait in introducing new financial measures to control lending. Moreover, the use of the general composite model and utilization of the deterministic and the stochastic functions make this analysis the most complete and sophisticated testing available for researching the impact of direct lending controls. The empirical findings confirm the necessity of direct lending controls to ensure the efficient functioning of the banking sector in the Gulf region. The results suggest that banks that have loans-to-deposits ratios greater than 80% sacrifice approximately 46% of their technically efficiency as a result of reaching the point of diminishing returns on loan accounts.

Foreign Direct Investment and Macroeconomic Changes in CEE Integrating in to the Global Market
Lucyna Kornecki, Department of Economics, Finance, and Information System, College of Business, Embry-Riddle Aeronautical University (ERAU)

Abstract. This study relates to the post communist era in the Central and Eastern Europe (CEE) and focuses on foreign direct investment (FDI) as a factor facilitating the globalization process while stimulating economic growth in the host countries. The first part of this study describes the globalization process and inward FDI performance index (CEE vs. World). The second part reflects macroeconomic changes in the post communist CEE and examines macroeconomic indicators, including GDP per capita, economic growth rate, unemployment and inflation. The third section focuses on the association between inward FDI stock and economic growth in the CEE. This study found a positive correlation between inward FDI stock and economic growth for each examined CEE country. This research will be extended in the future to determine the importance of FDI in economic growth of the CEE countries.

The Effect of Political Events on the Pakistan Stock Exchange 1947-2001
Ephraim Clark, Middlesex Business School and Germe Esa-Esc-Lille, The Burroughs, London
Omar Masood, University of East London, Duncan House Stratford, London
Radu Tunaru, Cass Business School, City University, London

Abstract. In this paper, we apply Bayesian hierarchical modelling and Markov Chain Monte Carlo (MCMC) techniques to primary data collected from interviews with 200 prominent historians, economists, politicians, government officials, investors, senior bankers, stock market analysts and other individuals involved in the Pakistani stock markets to measure Pakistan's political risk and its effect on the stock market from 1947 to 2001. We find that the probability of a major political event affecting the stock market in any year is high, averaging 1.5 events per year with a risk premium of between 11.725 and 16.725%. Interestingly, we also find that there is no time trend and thus, that political risk is neither increasing nor decreasing.

The stock market reaction to Australian convertible debt issues: New evidence
J. P. Fenech, Department of Accounting and Finance, Monash University

Abstract. This paper examines the stock price reaction to the announcement of convertible debt issuance in Australia. A significant positive price reaction is recorded and this result is in contrast to market price reactions in other countries. It also contrasts with previous Australian studies that used an early dataset. A possible reason for such a different result is the change in institutional environment that came about at the turn of the century that caused investors to react differently to firms that issue convertible debt. This change in market reaction has also been evidenced in other jurisdictions (Japan and the Netherlands) where institutional changes occurred. An analysis of the determinants of the announcement effect yields a number of contributions. The agency and informational hypothesis does not fully support the positive market reaction. In fact the market reaction is in contrast with the Myers and Majluf (1984) equity information asymmetry model where larger issues result in larger positive abnormal returns. The growth proxy yielded positive returns and this is in line with the equity information asymmetry model of Ambarish (1987). Similar results were recorded with the level of institutional involvement and results are in line with the Brous and Kini (1994) equity effective monitoring hypothesis. No support was found for the Lucas and McDonald (1990) preannouncement price runup as insignificant results were reported. Furthermore the financial distress hypothesis and the tax benefit hypothesis where found to suggest that they significantly infer the size and magnitude of the market reaction to firms that issue CD.

Funds of Hedge Funds: a Comparison among Different Portfolio Optimization Models implementing the Zero-Investment Strategy
Rosella Giacometti, university of Bergamo, Italy
Svetlozar T. Rachev, University of Karlsruhe (Germany), KIT, University of California, Santa Barbara (USA)
Frank J. Fabozzi, Yale School of Management, USA
Vito Sessa, University of Bergamo, Italy
Luca Musicco, University of Bergamo, Italy

Abstract. Hedge funds are alternative investment vehicles where the fund manager's is to general positive returns regardless of the market conditions. A fund of hedge funds is a portfolio of hedge funds generally characterized by positive return and a high degree of diversification. In this paper, we analyze two portfolio optimization models for constructing a fund of hedge funds. Both models, which we refer to as the two-step model and the single-step model, are based on a zero-value strategy, a strategy which combines long and short selling in order to attain (ignoring margin and the cost of short selling) a zero initial investment equal to 0. The principal difference between the two models is the selection techniques of the funds included in the long/short portfolio. The two-step model requires as the first step the classification of the funds into winner and loser groups according their historical performance as is done in the literature on momentum strategies. After the pre-selection step, the model is solved via linear programming, the model's second step. The single-step model avoids the pre-selection of hedge funds at the cost of introducing binary variables to exclude the possibility that a hedge fund is present in both the short and long portfolios. Both models are solved with respect to a set of scenarios, based either on historical scenarios, or forecasted scenarios generated by GARCH modeling. Combining the two models and the two sets of scenarios, we end up with four strategies. Finally, we evaluate the ex post one-year performance of the four strategies with monthly portfolio rebalancing using hedge fund data from that encompasses the sub-prime crisis.

Abstract. This paper has examined the dynamics of price discovery between different Taiwan stock index and derivative products (the ETF50, the ETF51, and ETF52) by applying the vector autoregressive (VAR) model. It is easy to show that four series variables are positively in correlation relationships. The finding suggests that ETF51 has the largest return and volatility. Further, it explores at least three number of co-integrating vector among the variables. The stock index and derivative products share co-integration relationship so that they will not wander arbitrarily far from each other. On the other hand, it has demonstrated the methodology of Granger causality to examine the causality linkage among the variables. The leading relation exists in stock index with stronger evidence that stock index leads derivative products. Moreover, according to the decomposition of forecast error variance, stock index is the least influenced by outside force among the four series variables. In other words, stock index is mostly by its own shock, but is less by other variables shock. The stock index variance decomposition can explain more except its own influence. Secondly, they cannot tract consistently out the time path of impulse response. Consequently, investors manage trading strategies in information spillover.

A Month-by-Month Examination of Long-Term Stock Returns
Stephen J. Ciccone, University of New Hampshire, Durham, USA
Ahmad Etebari, University of New Hampshire, Durham, USA

Abstract. This study provides a month-by-month examination of stock returns. The results reconfirm the January Effect and also indicate a powerful anomaly in September. Investing in the CRSP equal-weighted index in only January turns $1 in 1926 to $87.40 by 2006. The second closest month is July, during which $1 grows to $3.11. September is a poor month to invest. The $1 invested in only September decreases to a mere $0.49. The Halloween Effect vanishes once the monthly anomalies are controlled for. The September Effect is also established in four of the five international markets tested.

The Significance of Beta for Stock Returns in Australian Markets
Michael Dempsey, Monash University, Melbourne, Australia

Abstract. We report that betas of portfolios of Australian stocks possess a high level of stability, implying that beta is a meaningful measure of a portfolio's market risk exposure. Further, by allowing broad demarcations of company size and liquidities, we show that beta appears not to be rewarded continuously, but discretely, across thresholds of company size and stock liquidity. We conclude that beta remains relevant in the description of the risk-reward structure of asset pricing in Australian markets.

Standardised strategy assessment as a contribution to banks' corporate ratings
Gunter Amt, Karlsruhe University, Institute of Applied Economics and Management, Karlsruhe, Germany
Hagen Lindstädt, Karlsruhe University, Institute of Applied Economics and Management, Karlsruhe, Germany
Michael Wolff, Karlsruhe University, Institute of Applied Economics and Management, Karlsruhe, Germany

Abstract. The assessment of strategic opportunities and threats has been a key element of corporate ratings to assess companies for their current and in particular future creditworthiness since the enforcement of the new capital regulations for issuing loans in Europe (Basel II). The existing, often inaccurate statement of strategic criteria which is in strong contrast to the high requirements for standardisation in rating models is particularly problematic when considering these strategic aspects. Although a wide range of models already exist to analyse the current financial, profit and liquidity situation, they frequently only reveal the consequences of potential strategies. In contrast models that are better suited to assessing key strategic issues are often inadequately applied as effective approaches are lacking. It is essential to firstly identify and systemise the most important information before developing a suitable framework for assessing the strategy. Then this information must be made assessable in a standardised form. Our contribution is a framework for the strategic analysis of the corporate environment that includes internal strengths as well as external opportunities and threats in a simple, standardised way. The resulting 17 strategic indicators are integrated into a structure equation model that is used to empirically test the interaction postulated in advance between the indicators and strategy assessment. The resulting model not only explains just under 50% of the strategic positioning rating by the companies' own managed but also provides statements on the importance and interaction of various strategic influencing factors.

Ownership, Regulation, Information and the Capital Acquisition Process
Edel Barnes, National University of Ireland, Cork, UK

Abstract. This study examines the seasoned equity issues of companies traded on the London Stock Exchange, in the context of regulatory changes that have allowed UK firms more discretion in choice of issue approach. This has led many firms to issue through placing in preference to a rights issue. We examine the choice of seasoned equity issuance method, focusing on the choice between placings versus rights issues and develop a model to explain the choice of equity issue method that achieves a high level of predictive accuracy. In particular, information that firms disclose around the issuance process has significant explanatory power for issue method choice.