"We use data from surveys involving 300 Scandinavian financial market professionals and 213 university students to conduct three controlled experiments in which we manipulate the background information given to subjects. We find a very large anchoring effect in the students' long-term stock return expectations, that is, their estimates are influenced by an initial starting value. Professionals show a much smaller anchoring effect, but it nevertheless remains statistically and economically significant, even when we restrict the sample to more experienced professionals. We also find that the professionals are not conscious of the impact of historical returns on their expectations." Copyright (c) 2008 Financial Management Association International..

This paper empirically examines the strategic asset allocation and the asset/liability issues in the Finnish defined benefit pension funds. The results indicate that there is a relationship between the liability structure and the asset allocation. While pension funds with younger participants have more equity exposure, more mature pension funds have more fixed income investments.Wide dispersion in asset allocations is also found between the funds. One fund holds its entire portfolio in fixed income securities, whereas other funds have none or only few fixed income holdings. Equity investments also vary dramatically, ranging from 0 % to over 70 % of the asset allocation. The same applies to investments in a sponsor, real estate investment, and money market investments. A portion of these different asset allocations is explained by the liability structure, but another part remains unexplained. The other variables affecting strategic asset allocation of a pension fund are not obvious, but they could include factors such as regulatory environment, historical reasons, mean-variance optimization instead of ALM, sponsor's own preferences or pension fund's irrationality. Analyzing these factors would be a fruitful topic for further research. Additionally, international comparisons would be a fruitful topic for further investigation. * Corresponding author. The unique data set is collected from the Finnish Centre for Pensions (ETK) and from the Insurance Supervisory Authority (ISA), and the authors are grateful for both institutions for providing the access to the data. We would like to thank Eric Deighton, Seppo Ika¨heimo, Markku Kaustia, Matti Keloharju, Samuli Knupfer, Tuomo Vuolteenaho, three anonymous reviewers and the Editor Steven Haberman for helpful comments and suggestions. In addition, the co-operation with Citigroup is gratefully acknowledged.

No abstract

No abstract

Futures market officials are confronted with the difficult task of setting appropriate margin levels that must balance the costs of trader default and the benefits of increased market liquidity. One way to guard against default is prudent margin setting practices designed to protect futures positions from extreme price movements. The objective of this research is to extrapolate the probabilities of encountering extreme price movements by applying statistical extreme value theory to the Finnish stock index futures market. The extreme value technique is found to be appropriate since it generates theoretical margin violation probabilities that closely follow the empirical probability distribution. The extrapolated results provide decision makers information on extreme events that have not yet occurred.stock index futures, margin setting, extreme value statistics

This study employs questionnaire survey and financial accounting data to extend earlier empirical work on the foreign exchange (FX) exposure management practices of Finnish industrial firms. The paper concentrates on: (i) the form that FX corporate hedging policy takes; (ii) the control of FX procedures and trading; and, (iii) our respondents' perceptions about their ability to predict FX rate changes for hedging decisions. Our results indicate that the extent to which firms hedge FX exposure depends on the type of exposure and the form that FX hedging policy takes. Also, a significant number of the firms pursue FX hedging strategies on the expectation of attaining trading profits and this strategy appears to be accommodated within their FX policies. This feature is not explicitly demonstrated in previous studies. Finnish firms hedge a much higher proportion of both transaction and translation exposures compared to economic exposure. We partly attribute this emphasis to the requirements of the Finnish Accounting Act, which came into effect in 1993. The organisational, historical and financial settings of the firms also have significant impacts on exposure management practices. The overall implication of those results is that firms respond to changes in the financial, economic and regulatory environments in which they operate.

The interest rate policies of Finnish firms appear risk aversive, but hedging decisions are influenced by market view. Managers find they can forecast trends in interest rate development, and employ the forecasts in the choice of debt and hedging instruments. The use of risk assessment methods and hedging instruments are related to firm size but not to leverage. Most frequently employed hedging instruments are interest rate swaps and forward rate agreements. The respondents find their firms' interest rate risk management is successful, but performance is seldom measured against an explicitly defined benchmark.

INTRODUCTIONne way to approach the test of options and futures market efficiency is to look for 0 the presence of risk-free arbitrage opportunities in the spirit of Jensen (1978). Most option valuation models, including the famous Black and Scholes (B&S) model, are based on an arbitrage argument. In a continuous time framework, the arbitrage equilibrium is easily determined by a continuous hedging strategy. However, in an incomplete market with only finite opportunities to revise portfolios, no preference-free option price can be constructed with a portfolio of stocks and bonds. Thus, Galai (1983) argues that testing market efficiency with the B&S model is more likely testing the validity of the model itself.In the discrete time case, Merton (1973) has developed certain boundary conditions for options by using simple dominance argument. Arbitrage strategies based on these conditions do not require continuous portfolio revision but rather the positions are assumed to be held until the expiration. Underlying the establishment of these rational boundaries is the idea of "nondominance" among financial assets. As Galai (1983) has stated, the market cannot be shown to be inefficient (or nonsynchronous) for these weak conditions assumptions, and, at the same time, efficient for compatible but stronger assumptions. Therefore, in a new market it makes sense to start the research with these weaker conditions. This is particularly the case with options written on a stock index.Most research to date involves call options. Indeed, relatively little has been written about put options. Galai (1983) attributes this to the relatively small volume of put trading and the existence of put-call parity.' Perhaps the most important reason, however, is the well-known fact that American put options on even non-dividend-paying stocks may be exercised before maturity. With puts on dividend-paying stocks, the early exercise is even more difficult to assess. Generally, it is more difficult to price American options since early exercise may be optimal before some ex-dividend dates. The pricing becomes even more difficult when stock index options are concerned. In addition, most of the research on options has focused on stock options. Little empirical work has been done with index options. This probably is due to the shorter history of index related products and the difficulties in trading with the index [Evnine and Rudd (1985); Cotner and Horrell (1 989)].'For the put-call parity and put-call-futures parity relations, see Moriarty, Phillips, and Tosini (1Y81).