International finance

Major financial newspapers and financial news programs in the United States, such as the Wall Street Journal and the Financial News Network, often mention macroeconomic data in attempting to predict a potential adjustment in the level of stock market prices. The presentation ofthis data is particularly prevalent when the level of stock market prices is in record territory. However, many believe that there exists no relationship, correlation or causal relationship between the level of stock market prices and macroeconomic indicators, especially in technologically advanced nations. The purpose ofthis paper is to test the efficiency of three international stock markets. If a stock market is efficient, all current information is instantaneously reflected in its price level. Since stock prices in an efficient market reflect all of the available information instantaneously, investors cannot profit by analyzing macroeconomic indicators. Thus, the implication is that there are no immediate profit-making opportunities in efficient markets and there are profit-making opportunities in less efficient markets. If the stock market ofthe United States is proven to be efficient, then the news media is incorrect in its presentation of macroeconomic data in order to predict an adjustment in the stock market.

This study subjects the world's major stock markets to cointegration tests in an effort to respond to the common investigation that the major equity markets tend to move together with the U.S. market. The relationships between the United States and Canada, France, Germany, Japan, and the United Kingdom will be investigated. Not only will the entire period of 1970-1991.3 be examined, but the pre-1987 crash and the post-1987 crash periods as well. In addition, the Chow test will be employed to probe for any structural change occurrence relating to the worldwide stock market crash of October 1987. Evidence of cointegration is found to exist vis-a-vis the U.S. with the U.K. and Germany for the entire period; however, since the crash, only the U.K. and Japan have exhibited equilibrium relations. Absolutely no cointegration was detected for Canada nor France with the U.S. market.

Exchange rate fluctuations create disparate types and degrees of exposure. Cash flows and net income fluctuate as result of exchange rate fluctuations. Consequently, shareholders, debtholders, and management closely monitor exposure. This dissertation investigates characteristics that explain the differential exposure of U.S.-based multinational corporations (MNCs) and examines conditions that influence exposure to shift over time. Operating characteristics that represent economic and accounting exposure are empirically studied to determine their impact on the overall exposure of MNCs. First, the results show that MNCs with imbalances in foreign currency inflows and outflows are more sensitive to exchange rate changes. A simple measure of European involvement is not adequate to assess the level of exposure. Second, it is found that the degree of export sales is a significant determinant of exposure. Third, there is strong support that accounting exposure is relevant. The translation effect on earnings is found to be significantly related to overall exposure. It is feasible that the dynamic nature of the international marketplace and MNC operations influence exposure to shift over time. First, the European Community Exchange Rate Mechanism (ERM) crisis is studied. The ERM crisis provides an opportunity to assess the effects on exposure when a tightly-controlled exchange rate regime becomes more relaxed. Using portfolio returns, U.S.-based MNCs operating in Europe experienced a positive shift in exposure, indicating returns are positively related to a strengthening dollar, following the onset of the ERM crisis. The strength of the dollar is another condition examined. Due to potential asymmetric responses, exposure may shift as the strength of the dollar changes. The asymmetric hedging hypothesis is not strongly supported while there is some support for the asymmetric competitive response hypothesis. The effects of repositioning on exposure are also studied. This analysis differs from the previous analyses of shifts in exposure since repositioning activities are predominantly under management's control. There is some evidence that exposure is a variable that continually changes as repositioning occurs. A subset of MNCs with returns that are negatively affected by a strong dollar displays time-varying exposure due to changes in their imbalance of foreign currency inflows and outflows.