Volatility and Returns in the Philippine Stock Market

Rodolfo Q. Aquino

Excessive volatility creates so much noise that it makes market informational efficiency difficult to attain. An informationally inefficient market then makes Pareto or allocative efficiency a hit or miss proposition. Using two measures of the cost of volatility, this paper concludes that stock return volatility is much too high relative to the equity risk premium in the local stock market. Thus, controlling this volatility may be desirable to the extent that market trading is not constrained. Most of stock returns volatility appears to be price-driven as against event- or error-driven. Thus, any measure to dampen volatility must address this particular source.

An Options Analysis of Deferred Payment Plans

Bienvenido M. Aragon

Deferred payment plans (DPPs) are quite common for high value items such as real property, cars, etc. Discounted cash flow (DCF) analysis has been the traditional technique for analyzing DPPs. This usually involves computing the effective interest rate implicit in the arrangement. This approach ignores the real options embedded in the arrangement. An options analysis of DPPs may yield useful insights that may not be evident in DCF analysis. As the paper will show, a DPP is equivalent to a call option with an extendible life and a declining exercise price. This approach is particularly useful when the DPP is being used to acquire an asset for investment or speculative purposes.  The binomial option pricing model (BOPM) will be used to value the options in simple DPPs and to analyze how the option value reacts to changes in several variables. Overall, the results are consistent with option pricing theory.

Structural Macroeconomic Modeling Exercises for Corporate Planning

Carlos C. Bautista

This paper presents a simple, easy–to–use structural macroeconometric model designed to generate quarterly forecasts of four key macroeconomic variables ­– the exchange rate, the interest rate, the inflation rate and the GDP growth rate. The model’s appeal is the ease by which timely forecasts, based on sound economic principles, can be made. This is important from a corporate planner’s perspective especially when macroeconomic events heavily influence the direction of a firm’s growth. The model is estimated by ordinary least squares using quarterly Philippine data from 1981:1 to 2000:3. Historical simulations, both static and dynamic, were conducted to gauge the tracking ability of the model.

The first sample application makes a forecast of the four variables for the year 2001 based on the recently concluded EDSA II and assumptions on other exogenous variables: liquidity follows its trend growth; CPSD/GDP = – 4 percent and CA/GDP = 9 percent. The unprecedented discrete movement of the exchange rate from 54.7 to 47.5 pesos per dollar shifts the end–of–year forecast of 2.3 percent GDP growth to 3.1 percent. The second example computes for the 2001 growth rate that is compatible with a government deficit of 225 billion pesos. Growth with this deficit level turns out to be 2.7 percent. Monte Carlo simulations were conducted so that forecast confidence intervals can be obtained.

Stock Dividends and Share Prices

Arthur S. Cayanan

Given the information asymmetry between the management of a company and its stockholders, it has been argued that stock dividend declarations have information content, even if such declarations are not accompanied by any distribution of the company’s cash resources. A general explanation for this is premised on the hypothesis that stock dividend declarations signal the earnings potential of a firm. This study investigates the effects of stock dividend declarations on share prices on and around the announcement dates using Philippine data. Applying the “market adjusted returns” model, the findings show that no abnormal returns are observed on and around the announcement dates. This implies that stock dividend declarations do not convey any information about the earnings of a firm. 

Development of a Model and Measurement Instrument for Structured/Processual Behavior

Manuel C. Dioquino, Jr.

An instrument developed to measure a leader’s reaction to change and based upon a conceptualized continuum of structured versus processual behavior is presented in this paper. The responses of 146 managers from 7 companies were used to statistically validate the measurement tool. The instrument has the potential for use by practitioners to determine who should lead change efforts and how they should lead these efforts.

Locating in University-Related Technology Parks:

An Exploratory Study

Ben Paul B. Gutierrez

This research explores the factors important in the choice of a technology park location. After drawing out potential factors from the literature and from local experts, a questionnaire was designed and fielded among local prospective investors to the park. Results reveal that local information technology organizations place more value to economic considerations rather than university-related locator-factors. The paper ends with the implications of the study for the conceptualization of the University of the Philippines Diliman Science and Technology Park.

The Human Resource Management Function and Perceptions of Organizational Performance

Vivien T. Supangco

This study looked into the strategic management of the HR function in terms of the sophistication of its human resource management plan and its focus on practices that have greater strategic value. Results from a sample of 71 firms in Metro Manila showed that there is a positive relationship between sophistication of the human resource management plan and perceptions of organizational performance and the degree to which firms undertake HR practices with greater strategic value. In addition, it was also found that such transformational HR practices were positively associated with perceived organizational performance. The resource-based theory of the firm was invoked to explain these relationships.

Market Structure in the Philippine Financing Company Sector

Helena Agnes S. Valderrama

This paper finds that qualitative information obtained from a survey on the product emphasis and clients served by financing companies show the existence of strong market segmentation in the sector. Medium-sized and large financing companies have a different set of product offerings and clients from small financing companies. Using profit-cost margins or return on sales as a performance indicator, statistical tests confirm at a 96.5% level of significance that the two samples do not come from the same population.

The Herfindahl Index and 4-firm concentration ratio were used to quantify the degree of concentration in the financing company sector. The study finds that as a whole, the financing company sector is highly concentrated, with 6 companies out of over 150 accounting for about 50% of the market. The market segment consisting of medium-sized and large financing companies is oligopolistic in structure, while that of small financing companies is more competitive. Higher price-cost margins are documented for the former sub-sector, strengthening the finding that the market structure of medium-sized and large financing companies is not that of perfect competition.

At least two factors are proposed as explanations for the high degree of concentration in the sector: 1) economies of scale brought about by access to cheaper funds through affiliated companies, principally parent companies which are big universal banks, and 2) product differentiation due to access to a ready borrowers market.

Forecasting the Peso-Dollar Exchange Rate:

Structural vs. Time Series Models

Joel C. Yu

This paper compares the predictive power of different models of the peso-dollar exchange rate. Structural and time series models were estimated using monthly data from 1980 to 1998; out-of-sample forecasts for the period 1999 and 2000 were generated from the different models.

Using root mean square error as the principal criterion, findings show that in the short term (i.e., three-, six- and twelve-month forecasts), the random walk model outperforms all the alternative models considered in this study. In contrast, the structural monetary model had the worst performance despite the fact that these were based on the actual realized values of the independent variables.

For the 24-month forecast, the structural monetary model had a marked improvement in forecast accuracy. Yet, it continues to pale in comparison to the performance of the models that are based on the random walk, the random walk with drift, and the purchasing power parity model.