Union Movement in Late 19th Century

During 1870 through 1900 workers joined together; responding to the power of their employers caused by the growth of industrialization. The worker did not always have the luxury of leaving after eight hours of work, the right to representation, or the even the right to work in a safe environment. The working people of nineteenth century America had to unite in struggle to achieve the gains that are often taken selfishly and taken for granted today. There were many successes and failures in organized labor; the successes were often obtained through the loss of the worker, often through lost wages, jobs, or even death. The organization structure of the union during 1870 through 1900 went through different cycles and strategies to achieve what they wanted. One of the first effective regional organized unions was the Knights of Labor formed in 1869. The knights took in not only skilled workers but also any worker that could be truly classified as a producer. The knights took their peek in 1885 when strikes against Union Pacific, Southwest System, and Wabash railroads attracted public sympathy and succeeded in preventing a reduction in wages, at this time they boasted a membership of 700,000. 1886 was a troubled year for labor relations. There were nearly 1,600 strikes involving 600,000 workers, with the eight-hour day being the important item for all of the strikes. Failure of some of the strikes and internal conflicts between the skilled workers and the unskilled led to a decline in the Knights popularity and influence. Another organization called the Federation of Organized Trades and Labor Unions created a constitution that other unions could adhere to. This constitution met in Pittsburgh on Nov. 15 1881 and was created by representatives of the cigar makers, the printers, the merchant seamen, steel workers, carpenters and local units of the Knights of Labor. One of the most important items in the constitution created by the FOTLU recommended that the legal eight-hour work day be an objective for every union to achieve. The FOTLU thus accelerated a strong national push for a shorter work week. The AFL grew from 140,000 in 1886 to nearly on million by 1900. With these strengths in numbers they often preferred striking over political action. The struggle for workers rights, wage increases and protests against wage cuts were often unsuccessful resulting in violence and death. Chicago workers were agitating for the eight-hour work day for months. On May 1st and 2nd 1886 were eighty thousand workers went on strike, bringing most of Chicago†s manufacturing to a standstill. On May 3rd a fight between hundreds of strikers and non-union replacements broke out. Chicago police quickly moved in to restore order, leaving four unionists dead and many wounded. Angered by the deadly force of the police a group of anarchists called on workers to arm themselves and participate in the massive protest demonstration in Haymarket Square on May 4. Only 3,000 members assembled and started out peacefully until late evening when someone still not known to this day threw a bomb that killed seven policemen and injured 67 others. Even though no evidence was ever found about who threw the bomb four anarchists were found guilty and sentenced to death. Ever since the Haymarket square symbolized for radicals and trade unionists everywhere the injustice of a capitalistic society but also associated negatively unions as un-American, criminalistic, and violent. Many other activists died or received injuries for their cause all around the country. In July of 1877 strike riots halted the movement of U. S. railroads. After a few weeks of shutting down most of countries railroad system federal troops were sent in to try to end the nationwide strike. This resulted in more violence and death; in Chicago for example federal troops killed 30 workers and wounded over 100. On June 14, 1877 in Pennsylvania ten coal-mining activists were hanged. October 1887 the Louisiana militia shot 35 unarmed black sugar workers striking to gain a dollar-per-day wage and lynched two strike leaders. 1894 federal troops killed 34 American Railway Union members in Chicago attempting to break a strike. July 1892 three hundred Pinkerton guards helped introduce scabs into the workplace by opening fire on striking Carnegie mill steel workers, this resulted in the death of seven guards and eleven strikers. The idea of demonstrations was often to get the attention of management to show that they mean business and can†t be pushed around so easily. New York garment workers won the right to unionize after a seven-month strike. They secured agreements for a closed shop, and firing of all scabs. Striking miners in Idaho dynamited the Frisco Mill. Leaving it to ruins, getting the attention they wanted. The popularity and growth of unions everywhere showed companies that they are not going to walk over their workers as easily as they did in the past. Although union demonstrations resulted in workers being injured, dead or fired they set the way for unions in the future to be successful in their endeavors. These demonstrations were successful in the fact that they showed management and companies that the American worker can unite and be heard as one voice rather than a mass of passive workers that would take any injustice given to them. It is to these unions that we owe many of the benefits and rights we see and use today, such as fighting injustices such as biases and discrimination, winning the right to representation and collective bargaining, and the right for education for every child.

M.A. Project Work

Publication Month & Year :  July 2009 Authors:  Mora Sowjanya & Dr. Lokanandha Reddy Irala Industry:  Automobiles Region:  India Abstract: The objective of this case study is to illustrate the lessons of capital investment decisions through Tata Motor’s Nano project. In 2003, Ratan Tata, chairman of Tata Group, announced his vision of designing a safe and affordable car for the common man. However, right from its inception, the project had gone through several hurdles.Finally, overcoming all the financial, technical and social challenges, Nano, acclaimed as the world’s cheapest car, was launched amidst much hype and attention from all sections of media. While giving a brief on the entire journey of Nano from the origin of the idea to its launch, the case study highlights the importance of quantitative and qualitative factors in the evaluation of capital investment decisions.Besides, it provides the learning opportunities to discuss the nature of the capital budg eting decisions and its various types. Pedagogical Objectives: * To understand the nature of Tata’s Nano project and analyse the sequence of events that marked the launch of Nano * To derive relevant capital investment lessons from the way Nano project was conceived, handled and executed * To debate on the role of qualitative parameters in capital investment decisions and weighing the magainst quantitative analysis.Keywords :  Initial Capital Outlay; Qualitative Factors; Capital Investments; Irreversible projects; Capital Budgeting; Strategic; Long-term planning; MBA; Corporate Finance; Financial Management; Finance for Managers; Business Finance; Principles of Financial Management; Course Case Maps; Course Case Packs; Managerial Finance; Financial Management Course Case Pack; Financial Management Course Case capital budgeting of tata motors,  capital budgeting of tata nano,  capital budgeting technique of tata nano,  tata motors capital budgeting,  capital budget o f tata motors,  capital budgeting of tata pdf,  tata com motor from capital budeting,  tata com from capital budeting,  capital budgeting statement of tata motors,  capital budgeting of tata motors of 2012,  capital budgeting of tata motors in pdf,  capital budgeting of tata steel,  showing capital budgeting of tata motors,  capital budget of tata,  capita budget of tata moters,  capital budget of tata nano,project report capital budgeting of tata motors,

Renaissance Women, Hallmarks, Art

The Hallmarks of the Renaissance a. Individualism b. Secularism c. Antiquity d. Skepticism 2. Renaissance Art Renaissance Women – Men married younger women – Resulted in many widows – Women could inherit property – In charge of nurturing children O Some say that's why the arts.. – Upper class women enjoyed high degree of freedom – Still expected to obey husbands- still unequal Isabella detest (First Lady of the Renaissance) – Window – Leader of Mantra – Patron of the arts – Founds school of girls O Liberal arts O Learn poetry and literatureO Dancing – O Music O To entertain Catherine De Medici – Italian married into – Three sons became king of France – Controls the law – Architecture O Wing to the Louvre Laura Cerate – University of Pravda O Moral education – Wrote letters about life Christine De Paisa – â€Å"The City of Ladies† O Should carve out own place in society O If they don't give place in society, should leave and create our own The Hallmarks of the Renaissance Antiquity: a renewed interest in ancient Greek and roman civilizations. Italians copied the ancient Roman lifestyle The study of the Greek and Roman classics led to humanism Humanism: the attempt to understand human nature through a study of pagan antiquity and Christian thought. – humanists believed that there were no limits to what human beings could accomplish- HUMANS CAN DO ANYTHING! Individualism: Medieval people usually saw themselves as members of a group. (Asia- group; West- themselves) – Renaissance people believed in individual will and genius. Secularism: One becomes concerned with materialism rather than religion. – People became more concerned about money and the accumulation of wealth.Interested in pleasure and the enjoyment of life on Earth Renaissance Art Anatomy – humanism – Humanism was represented by a renewed interest in man – Expressed in art through a renewed interest in anatomy – Dad Vinci – dissected corpses illegally! – Michelangelo sculpture of David demonstrates the detailed attention paid to anatomy O Classical Greek style Perspective – vanishing point – Disappearing lines – Horizontal lines Antiquity – Greek and Roman Allegory of Spring The School of Athens O Plato and Aristotle O World up and down – Reading – Discussions Love of Nature

Feminism Short Stories Essay Example | Topics and Well Written Essays - 1250 words

Feminism Short Stories - Essay Example The stories, considered further on, represent social turmoil experienced by women, who lived in the nineteenth century. Thesis: a moral oppression and social bounds imposed on the main characters of Charlotte Perkins Gilman and Nathanial Hawthorne reflect negative impacts caused on physical and emotional condition of women. â€Å"The Yellow Wallpaper† by Charlotte Perkins Gilman Therefore, we will focus on the ways the main characters from these short stories fought against their oppression. There were different physical and emotional conditions among these women. The first short story â€Å"The Yellow Wallpaper† by Charlotte Perkins Gilman represents an emotional and moral degradation of the main character of the story. In her intentions, she tries to reveal a woman hiding behind yellow wallpapers of the room. She tries to climb up the wallpapers and at the same time she tries to escape from oppressing reality. This woman is positioned as a â€Å"hysterical woman†, which means her unusual behavior for the society of the nineteenth century. This woman is able to make some notes in her diary about the oppressing circumstances happening to her life. She is unable to take care of her child and she feels depressed. At the same time, this woman is locked in the room, which was a child room. In her despair she pulls off all the wallpapers: â€Å"I've got out at last†¦.and I've pulled off most of the paper so you can't put me back!† (Gilman). At this moment the author shows to us the way her husband faints. In other words, she shows that this man could not remain conscious. He cannot take control over his emotions, the same way like women do. Therefore, his wife maybe is not too weird; she just was oppressed by social stereotypes and behavioral templates. Once she gets rid of these ties, she becomes free. There is much more behind her life and her inner feelings and emotions. Her emotions are oppressed and her inner self experiences de gradation. Nevertheless, she manages to pull all her efforts and direct her power on overcoming the most challenging moments in her life. She makes changes in the room; she releases an imagined woman from the wall and in such a way she releases herself from a â€Å"yellow wall† or social oppression. She finally manages to cope with her emotional burden and the fact that her husband faints in her face, means that this woman defeats him. Unfortunately, the heroine of another short story does not have so much power. Nathanial Hawthorne, â€Å"The Birthmark† In another short story written by Nathanial Hawthorne, â€Å"The Birthmark†, Georgiana has a birthmark on her cheek. This imperfect trait makes her husband insane, because he is obsessed with having an ideal wife. The author tells exactly about the most acute problem, oppressing the modern women: their physical ideal form. There is only appearance, which should be followed by a woman. Another factor, determining behavior of Aylmer is his occupation. He is a perfect scientist and he is sure that a man is able to take control over nature. The birthmark on the face of his wife looks like a hand. His husband makes her remove this â€Å"dreadful hand†. He made his life drink the elixir. She dies and the birthmark disappears from her face. He was not focused on love to his wife; he was focused on love to his work. He wanted to make his wife perfect and he reached his goal. The author shows to the readers that Aylmer is a selfish individual. He

The Role of a Financial Manager Essay Example | Topics and Well Written Essays - 1250 words

The Role of a Financial Manager - Essay Example This essay explores the field of finance that is a very important part of every modern business organization, and financial considerations lie at the heart of all crucial business decisions. The researcher focuses on describing of the position named Financial Manager that is the person usually responsible for supervising and keeping in existence the organization’s financial policies and history. The role of a Financial Manager is to analyze financial information and generate financial reports that will assist the organization in decision-making, business progress and elaborate planning procedures. The FM is the pivotal figure in the two halves of the financial circle involving an organization – one involving the movement of money from investors into the organization, and the other half including the movement of money from the organization to the same investors. Nearly every business organization today, whether in the private or public sector, employs at least one Financ ial Manager. His or her duties vary slightly according to the size of the organization. However, this essay describes a typical Financial Manager who is required to perform 5 roles – that of a Controller, Treasurer, Credit Manager, Cash Manager and Risk & Insurance Manager. The researcher also explores the FM role in a multinational corporation and his duties in a branch of a bank or other financial institution. It is also mentined that the most important decisions of FM are those relating to financing, investment and asset management.

Little tokyo, los angeles Essay Example | Topics and Well Written Essays - 2500 words

Little tokyo, los angeles - Essay Example These men worked as laborers in ranches, road building, gardens and laundry. They faced heavy discrimination in the late 19th century. However, despite the discrimination, Chinese people occupied greater positions, especially, in the laundry and agricultural sector. As a result, they expanded their territory hence acquiring more blocks and buildings. In addition, their population also increased to 3000. However, over the years, the Exclusion Act Laws restricted any large increase in growth. These laws prohibited the Chinese people from owning land, and it forced them to lease or rent units for their homes and businesses. Between 1890 and 1910, Chinatown comprised 15 streets and alleys, and the building units were about 200 units. Apart from this space, Chinatown also had three temples, a theatre, its own newspaper, and a telephone exchange. In addition, the town had few women; therefore, the Exclusion Act was lifted so that Chinese women and children could also immigrate over to join the Chinese men present in Los Angeles (Cho, 14-26). This resulted to community organization. Since the government prohibited the Chinese to have ownership of their personal property, few of them improvised and maintained their properties. This resulted to a decline in the appearance of the old Chinatown. The Chinese did not mind about how the town looked, for instance, they never paved the streets during the end of the old Chinatown. In the end, the Chinese lost all their property because they gave up fighting for whether or not they legally owned the lands they had dearly paid for. In addition, all the improvements and payments had been rendered private. Therefore, there existed no valid proof of anything in consideration to land. As a result, the Chinese were forced to leave their homes, hence the collapse of the old Chinatown (Cho, 27). Fortunately, this collapse resulted to the formation of the new Chinatown; two years after the

Assignment II Essay Example | Topics and Well Written Essays - 500 words

Assignment II - Essay Example This happens in the situation of securitization. The quality of the collateral can therefore be a credit for investors who can securitize them as many times as they can. Credit enhancement is a technique aimed at reducing default or risk of default. This is done through processes such as prioritizing tranches. Credit risk causes all non-agency securities to engage in credit enhancement. Credit enhancement of securities requires additional support against defaults. Specific security rating agency determines the amount of credit enhancement needed based on specific rating. There are two general types of credit enhancement mechanisms namely external and internal credit enhancement mechanisms. Overcollateralization refers to a state in which the collateral value is more than the par value of the issued securities. For instance, if securities of par value $10 million is issued and at collateral carries a market value of $12 million during the time of issuance of the security, there will be an overcollateralization of $2 million. This process can also be used to absorb losses; hence it may act as an internal credit enhancement. Senior-Subordinate Structure enhances credit tranching while the subordinate bond classes support the senior bond classes in terms of credit. For example, bonds are classified into three classes namely A (Senior), B (Subordinate) and C (Subordinate) with par values of $90million, $8 million and $2 million respectively. Bonds A and B are both credit enhanced by class C. No, the correlation of default among pooled assets doesn’t need to be highly positive. A highly positive correlation +1 indicates that assets in a pool face the same level of risk. Therefore, if there is a default in one class of assets then there will be a high chance of default among other assets in the same pool. Assume that there is a pool of loans that have been securitized.

Analysis of the Allegory Of The Cave, Delphic Quest, and Aristotle's Essay

Analysis of the Allegory Of The Cave, Delphic Quest, and Aristotle's On The Soul - Essay Example Eventually a prisoner is released and the allegory details his progression out of the cave and into higher states of knowledge. It’s abundantly clear that the prisoners shackled in the cave represent humans at beginning stages of cognitive knowledge. Plato urges the reader to consider the prisoners’ predicament in terms of knowledge, ‘Now consider what would happen if their release from the chains and the healing of their unwisdom should come about in this way.’ As the prisoner is released from the shackles and realizes that the fire and statues have caused the shadows, he has then metaphorically passed from the imagining stage of reason to the belief stage, as evidenced in N. Jordan’s chart. However the prisoner is still unaware of the world outside the cave and as he exits the cave he gradually becomes privy to a higher stage of cognitive development, â€Å"At first it would be easiest to make out shadows, then the images of men and things reflected in water, and later on the things themselves. After that, it would be easier to watch the heavenly bodies and the sky itself † As the prisoner exits the cave, man is correspondingly shown to have entered the thinking stage of cognitive development, where mathematical concepts are implemented through reason to construct and understand the world. The prisoner then enter the final stage of cognitive development where they witness the actual objects that witness the cave from the outside, the actual objects that cause the reflections in the water, and ultimately the sun itself, â€Å"And now he would begin to draw the conclusion that it is the sun that produces the seasons and the course of the year and controls everything in the visible world.† This final stage is the Form of the Good, this seems to correspond to Plato’s concept of the idealized forms and Socrates concept that the unexamined life is not worth living, to conclude that the

Unit Journal for International Relation Essay Example | Topics and Well Written Essays - 1750 words

Unit Journal for International Relation - Essay Example Because of these changes, state sovereignty will never be absolute. State sovereignty means that the state has the absolute power to control over its internal affairs that happen within the boundary of its territory, free from outside state interference, and has the complete authority to govern its people (Wang, 2004)iii. Today, each country is obliged to observe the international laws. Therefore, there will always be some instances wherein a sovereign country should seek external assistance from outside sources before it can make a final political decision. For example, before China opened its door to international trading, this country did not bother to establish a close political and economic relations with Europe. Likewise, Europe was not interested in establishing international relations with China. Because of global trading, the is an on-going political and economic relations between these two countries. Therefore, neither one of these two countries should make political, socia l, and economic decisions that could hurt or weaken the relationship between the two countries (Taneja, 2010)iv. Question two: Define poverty. Can it be eradicated? The basic human needs are not limited to food, clean drinking water, and shelter but also education, access to health care services, and work opportunity. Once the basic human needs are not met, poverty is said to be present. With this in mind, poverty is actually referring to a poor living condition wherein people have insufficient basic human needs that are necessary for a higher quality of life (UNDP, 1997)v. Because of the continuously increasing population growth around the world, socio-economic problems related to poverty also significantly increases. Among the few well-know economic concepts that could clearly explain the increase of inequality in terms of income distribution and work opportunities is capitalism. Under a capitalized economy, business people in general gather a group of laborers in exchange with mi nimum wage. Since businessmen could earn a large sum of profit out of the lower income population, the gap between the rich and the poor increases over time (Botha, 2003)vi. Through education, poverty rate can be reduced but not totally eradicated. According to Bhalla (2006, p. 23), India and China are two of the biggest countries around the world that chose not participate in the global economy started to open its market outside the country since 1980s. Eventually, the active participation of Chinese and Indians in the global market resulted to a significant reduction on the number of people who are experiencing poverty. Since a lot of people who used to live below the poverty line were given the opportunity to work, the number of people who were experiencing poverty was significantly reduced from 1.3 billion in 1980 down to 500 million in 2000 (Bhalla, 2006, p. 22). Question three: Identify and explain the challenges for policy makers when dealing with population growth. Policy ma kers are facing challenges when it comes to controlling the population growth. One of the most common challenges involves the cultural and religious controversy with regards to the use of birth control methods. In line with this, Boadu (2002)vii revealed that the Catholic, Mormons, and Baptists religion are strongly against the use of artificial contraceptives.

Engine performance and Efficiensy Coursework Example | Topics and Well Written Essays - 1250 words - 1

Engine performance and Efficiensy - Coursework Example Theoretically, it is the difference between the gross and net thrust (Momentum drag = Gross thrust – Net thrust). It is computed as: Net thrust is a positive aerodynamic force that causes propulsion of an aircraft in air. It is represented as a summation nozzle thrust and momentum of the jet’s motion. It is a resultant propulsion force produced by the jet engine used in providing thrust (speed) to the aircraft. It is the difference between the gross thrust and the momentum drag on the engine of an aircraft (Net thrust = Gross thrust – Maximum drag). It is usually denoted by T and is calculated as follows: The engine thrust is affected by the flow of air into the engine and is thus a change in the rate of airflow results to a change in the resultant thrust. With net thrust, the increase in the aircrafts speed results to an increase for air fed into the engine, resulting to a higher output. With static thrust, the environmental factors tend to determine the ability of the craft to cause motion. With static thrust, the air speed is kept constant and is not affected by the crafts motion thus differing from the net thrust. b) Calculate the net thrust of a turbo jet flying at 150 M/S with an air mass flow of 50 Kg/S and a jet stream velocity of 300 M/S with a chocked nozzle. The residual gas pressure in the jet stream is 45 KPa gauge, the nozzle area is 0.2M2. Net thrust = gross thrust – momentum drag (T = mVj + Aj (Pj - Pam) – mVi) where Pam is the ambient air pressure in question. Form this equation an increase in the ambient air pressure, while holding all other factors constant results to a decrease in the net thrust of the engine, which being the denominator of the SFC formula results to an increase in the resultant value of the specific fuel consumption. As indicated by the new SFC equation Propulsive efficiency = (2Vi) / (Vi + Vj), where Vi is the speed of the exhaust gases and Vj is the incoming air speed. Increasing the speed of the gas

Presidential and Parliamentary Systems of Government Essay Example for Free

Presidential and Parliamentary Systems of Government Essay Introduction and Main Distinguishing Features of Both Systems: A presidential system of government is one in which there is a head of government, i.e. the executive branch, who is separate from the legislature and is not accountable to it. Generally, the legislature does not hold power to dismiss the executive. This system can be traced back to the monarchal system in the medieval ages which countries such as France, England and Scotland followed where the Crown held all executive powers and not the parliament. When the office of the President of the United States was created, this system of separate powers of the executive and legislature was replicated in the U.S. Constitution. In contrast, a parliamentary system is different from the above because its executive branch of government needs the direct or indirect backing of the parliament to stay in power, which is generally expressed through a vote of confidence. However, the mechanism of checks and balances is different from one found in a presidential republic because there is no distinct separation of powers between the legislature and the executive. In parliamentary systems, the head of government and the head of state are distinct entities, where the former is the prime minister and the latter is an elected president or a hereditary monarch. The U.K. follows a parliamentary form of government, where the prime minister and the cabinet govern using their executive power on a daily basis, but actual authority is held with the head of state.[1] In distinguishing between presidential and parliamentary systems, three points must be considered. First, in a presidential system the head of government (the president) is elected for a fixed term and will serve this unless there is the unusual and exceptional process of impeachment, whereas in a parliamentary system the head of government (prime minister or equivalent) is dependent on the confidence of the legislature and thus can be removed (along with the whole government) by a motion of no-confidence. Second, in a presidential system the head of government (the president) is popularly elected, if not literally directly by the voters then by an electoral college popularly elected expressly for this purpose, whereas in a parliamentary system the head of government (prime minister or equivalent) is selected by the legislature. Third, in a presidential system there is effectively a one-person non-collegial executive, whereas in a parliamentary system the executive (i.e., the cabinet) is collective or collegial.[2] For his part, Sartori like Lijphart, makes three basic points in that ‘a political system is presidential if, and only if, the head of state (president) i) results from popular election, ii) during his or her pre-established tenure cannot be discharged by a parliamentary vote, and iii) heads or otherwise directs the governments that he or she appoints’. There are two distinctions between Lijphart and Sartori worth noting here. First of all, Lijphart refers to the president as the head of government whereas Sartori refers to him or her as the head of state. Second and related, Sartori conceives of the government as being broader than the individual president. As such, Sartori rejects as too narrow the notion ‘that the head of state must also be the head of government’ in favor of a looser notion that authority flows from the president down – perhaps via a separate head of government.[3] Mainwaring attributes two distinguishing features to a presidential democracy. First, the head of government is elected independently of the legislature in the sense that legislative elections and post-election negotiations do not determine executive power. In countries where the chief executive is selected by the legislature, not as a second alternative when the popular vote does not produce a clear winner but as the fundamental process, the system is either parliamentary (the vast majority of cases) or a hybrid (as in Switzerland). Post-election negotiations that determine which parties will govern and which will head the government are crucial in many parliamentary regimes, but they are not part of the selection process of chief executives in presidential systems. The chief executive in a presidential democracy is usually elected by popular vote, although some countries, notably the United States, have an electoral college rather than direct popular elections. Even so, in the United States, the popular vote has a virtually binding effect on Electoral College votes. In other presidential systems, including those in Argentina, Bolivia, and Chile (before 1973), the congress votes for a president if there is no absolute majority in the popular vote. Yet the popular vote is the first criterion, and in Argentina and Chile, tradition has dictated that congress will select the candidate with the most popular votes. Note that it must be the head of government-not simply the president-who is elected by popular vote or an electoral college. In Austria, Iceland, and Ireland, the president is elected by direct popular vote but has only minor powers and is therefore not the head of government.[4] The second distinguishing feature of presidential democracies is that the president is elected for a fixed period of time. Most presidential democracies allow for impeachment, but this practice is rare and does not substantially affect the definition because of its extraordinary character. The president cannot be forced to resign because of a no-confidence vote by the legislature, and consequently, the president is not formally accountable to congress. In a parliamentary system, in contrast, the head of government is elected by the legislature and subsequently depends on the ongoing confidence of the legislature to remain in office; thus the time period is not fixed.[5] Implications for Policy Making and Democracy: Whether a regime is parliamentary or presidential has a major impact on significant aspects of political life: how executive power is formed, relationships between the legislative and the executive branches, relationships between the executive and the political parties, the nature of the political parties, what happens when the executive loses support, and arguably even prospects for stable democracy and patterns of domination. The proponents of presidential claim that presidential systems claim that such systems ensure that the presidents power is a legitimate one because the president if, in most cases, elected directly by the people. The United States follows a different system in which the president is elected by an electoral college but is still considered to be popularly elected. Parliamentary executives can not claim to be elected via a direct vote of the people. Separation of powers is another benefit which the presidential system provides because it established the executive branch and the legislative as two distinct structures which allows each body to supervise and oversee the other and prevents abuse of the system. In a parliamentary system, the executive is not separate from the legislature, reducing the chances of criticism or scrutiny, unless a formal condemnation in the form of a vote of no confidence takes place. Hence, in a parliamentary system, a prime ministers unethical deeds or instances of misconduct might never be discovered as Woodrow Wyatt (former British Member of Parliament) said while writing about the famous Watergate scandals during the presidency of Richard Nixon, dont think a Watergate couldnt happen here, you just wouldnt hear about it.[6] In a parliamentary system, even though the option of a vote of no confidence is available, it is an option resorted to only in extreme cases. It is considered extremely difficult to influence or stop a prime minister or cabinet who has already decided to pass legislation or implement measures. Voting against important legislation is tantamount to a vote of no confidence, as a consequence of which the government is changed after holding of elections. This is a very tedious process because of which it is a rare occurrence in some parliamentary countries. Britain for example has only rarely undergone such a situation. Therefore, it is often believed that in a parliamentary system, because of the lack of separation of powers, the Parliament can not actually exercise any real control over the executive. However, there can be a downside to separation of powers. Presidential systems can lead to a situations where the President and Congress both evade blame by passing it to the other. In the words of former Treasury Secretary C. Douglas Dillon as he described the United States, The president blames Congress, the Congress blames the president, and the public remains confused and disgusted with government in Washington.[7] Woodrow Wilson agreed in his thesis, Congressional Government in the United States, as he said, †¦how is the schoolmaster, the nation, to know which boy needs the whipping? . . . Power and strict accountability for its use are the essential constituents of good government. . . . It is, therefore, manifestly a radical defect in our federal system that it parcels out power and confuses responsibility as it does. The main purpose of the Convention of 1787 seems to have been to accomplish this grievous mistake. The `literary theory of checks and balances is simply a consistent account of what our constitution makers tried to do; and those checks and balances have proved mischievous just to the extent which they have succeeded in establishing themselves . . . [the Framers] would be the first to admit that the only fruit of dividing power had been to make it irresponsible.[8] Separation of Powers has mixed implications. It can lead to gridlock, i.e. when it becomes next to impossible to pass items on the partys agenda because the legislature is almost equally divided, usually an occurrence in the U.S. when the Senate and House of Representatives are dominated by opposing parties. However, the upside to gridlock is that it often prevents radical policy changes. Another problem with the presidential system is that while it is inherently stable because the president is elected for a fixed term, this also compounds the issue of the presidency being a zero-sum game, where winner takes all. As Linz (1990, 56) states, The danger that zero-sum presidential elections pose is compounded by the rigidity of the presidents fixed term in office. Winners and losers are sharply defined for the entire period of the presidential mandate†¦losers must wait four or five years without any access to executive power and patronage. The zero-sum game in presidential regimes raises the stakes of presidential elections and inevitably exacerbates their attendant tension and polarization. Parliamentary elections can also lead to one party winning an absolute majority, in most scenarios a number of parties gain representation through these elections. Power is often shared and coalitions are formed, as a consequence of which the position holders give due weight to the needs and interests of smaller parties. In turn, these parties expect a certain share in power and as is obvious, are stakeholders in the overall system, instead of non-entities. Now if, as is the case in presidential systems, one sole person believes that he has independent authority and a popular mandate, he might start to develop a tendency towards authoritarianism. When he develops such notions about his standing and role, he will not react appropriately to the inevitable opposition to his policies, finding it annoying and unsettling, as would a prime minister who considers himself a mere representative of a temporary governing coalition and not the sole voice of the nation. Hence the examples of Venezuela and Colombia, where when democracy was reestablished in times of great political instability, and when the written constitutions warranted a presidential government, the leaders of chief political parties opted for consociational agreements whereby the rigid, winner-take-all consequences of presidential elections were softened.[9] While stability is often touted as one of the prime advantages of the presidential system, it is simply another word for rigidity. On the other hand, parliamentarism lends a certain element of flexibility to the political process. Advocates of presidentialism might reply that this rigidity is actually a plus because it prevents the uncertainty and instability so definitive of parliamentary politics. Under parliamentary government, after all, a number of entities, even rank-and-file legislators, can choose to adopt basic changes, cause realignments and shifts, and, most importantly, make or break prime ministers. But it must be remembered that while the need for authority and predictability might serve as justifications for presidentialism, there can be a myriad of unexpected developments- anything from the death of the incumbent to serious errors in judgment committed under the pressure of adverse political circumstances – that often lead to the presidential rule being less predictable and often weaker than that of a prime minister. The latter can always make efforts to bolster up his legitimacy and authority, be it through a vote of confidence or the dissolution of parliament and the consequential new elections. Also, a prime minister can be changed without it necessarily leading to a major regime crisis.[10] Conclusion: The above analysis has largely favored a parliamentary system over a presidential one. However, one must remember that success regimes, regardless of the amount of thought and care gone into their design, are determined by the extent of support they manage to arrest from society at large, its major forces, groups and institution. Public consensus therefore is a basic need, which confers legitimacy to the authority of the regime, and this is achieved only by the power which is attained lawfully and in a democratic fashion. Regimes also depend to a large extent on the ability and aptitude of their leaders to govern, to arouse trust and to respect the boundaries of the power they hold. Every country has unique aspects that one must take into account-traditions of federalism, ethnic or cultural heterogeneity, and so on. Both systems have their pros and cons, even parliamentary systems can suffer grave crises. Hence, countries must consider their own individual past, present and future, in order to determine which system has the greater probability of success. References Hardin, Charles. 1989. A Challenge to Political Science. PS: Political Science and Politics 22(3): 595-600. Lijphart, Arend, ed. 1992. Introduction in A. Lijphart (ed.), Parliamentary versus presidential government. Oxford: Oxford University Press. Linz, Juan. 1990. The Perils of Presidentialism. Journal of Democracy (Winter): 51-69. Mainwaring, Scott and Shugart, Matthew. 1997. Juan Linz, Presidentialism, and Democracy: A Critical Appraisal. Comparative Politics 29(4): 449-471. Mainwaring, Scott. 1990. Presidentialism in Latin America. Latin American Research Review 25(1):157-179. Sartori, Giovanni. 1994. Neither presidentialism nor parliamentarism, in J.J. Linz A. Valenzuela (eds.), The failure of presidential democracy, vol. 1: Comparative perspectives. Baltimore, MD: Johns Hopkins University Press. Thomas, Jo. Oct. 9 1988. The fate of two nations. The New York Times. Wilson, Woodrow. 1886. Congressional Government: A Study in American Politics. The New Englander 45(192). [1] Mainwaring, Scott and Shugart, Matthew. 1997. Juan Linz, Presidentialism, and Democracy: A Critical Appraisal. Comparative Politics 29(4): 449-471. [2] Lijphart, Arend, ed. 1992. Introduction in A. Lijphart (ed.), Parliamentary versus presidential government. Oxford: Oxford University Press. [3] Sartori, Giovanni. 1994. Neither presidentialism nor parliamentarism, in J.J. Linz A. Valenzuela (eds.), The failure of presidential democracy, vol. 1: Comparative perspectives. Baltimore, MD: Johns Hopkins University Press. [4] Mainwaring, Scott. 1990. Presidentialism in Latin America. Latin American Research Review 25(1):157-179. [5] Linz, Juan. 1990. The Perils of Presidentialism. Journal of Democracy (Winter): 51-69 [6] Thomas, Jo. Oct. 9 1988. The fate of two nations. The New York Times. [7] Hardin, Charles. 1989. A Challenge to Political Science. PS: Political Science and Politics 22(3): 595-600. [8] Wilson, Woodrow. 1886. Congressional Government: A Study in American Politics. The New Englander 45(192). [9] Linz, Juan. 1990. [10]   Linz, Juan. 1990.

Purchasing Power Parity; Does It Exist Essay Example for Free

Purchasing Power Parity; Does It Exist Essay Introduction   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The Purchasing Power Parity doctrine is perhaps one of the most controversial financial theories. Over the years, it has had its ebbs and flows, with proponents expositing several mathematical and statistical formula to strengthen the theory, while critics have severally condemned the utility of the theory; however, according to Belassa1 the doctrine has managed to survive nevertheless. Belassa argues that, though in somewhat ambiguous terms, the doctrine has been invoked as early as during the Napoleonic wars, the christening and explanation of the doctrine came from Prof. Gustav Cassel during the First World War and was popularized after the Second World War. The author further posits that interests in the theory tend to be invoked when existing exchanges rates were thought to be unrealistic and there was, therefore, a search for what is considered equilibrium rates2.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Perhaps one of the controversies that have built up around the Purchasing Power Parity starts with the issue of definition. Different authors tend to come up with their own definition (version) of the theory, and as a result, the theory has come to mean different things to different authors3. Before looking at some of the conceptualizations of the theory that has generated over time, it is pertinent, to first examine the theory as was professed by its author Prof. Gustav Cassel.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Bunting4   presents the first exposition of the theory in Cassels’s Money and Foreign Exchange after 1914, which he said was one of the earliest and best explanation of the theory by the author.   Bunting explains that the concept of purchasing power parity was borne out of the need to establish what determined exchange rates in Europe after the era of gold standard was gone, that is, when national currencies were on inconvertible basis. On this basis, Cassel explains that considering the fact that the primary reason a country’s currency is in demand in a foreign country is the need to purchase goods produced in that country. Thus, when normal, unrestricted trade between [two] countries have been established over time, the exchange rates become fixed relative to the purchasing power of each currency domestically, and as long as this domestic purchasing power of the currencies do not change, nothing will happen to the exch ange rates5. Further, the theory states that when the currencies of these countries undergo inflation, the â€Å"the normal rate of exchange will be equal to the old rate multiplied by the quotient of the degree of inflation in the one country and in the other†6. While this explanation describes the basic skeleton of the theory, there have been several adjustments and modifications of the meanings and concept of the theory as several authors tend to strengthen or criticize it. Some of these adjustments to the meaning of the theory will suffice to buttress this point.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Everett and his colleagues7   attempting to measure currency strengths and weakness with the purchasing power parity concept, posited that as long as there is unrestricted trades, exchange rates of currencies tend to obey the purchasing power of the currencies. In this regard, they succinctly conceive the theory to mean thus regardless of how currencies are denominated, when adjusted for units; all currencies tend to command the same basket of goods8. This definition is similar to that adopted by Klein et al.9, who likened the purchasing power parity doctrine to the law of One Price with the explanation that an identical good (or service) would command the same price, measured in a given numeraire system, all over the trading world10.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Belassa, however, gave a more elaborate explanation of the purchasing power doctrine, differentiating between the relative and absolute interpretations of the theory. According to him, the absolute version of purchasing power parity theory argues that when purchasing power parities are calculated as a ratio of consumer goods prices for any pair of countries, the result reflects the equilibrium rates of exchange. On the other hand, the relative version of the theory asserts that, when compared to a period when equilibrium rates prevailed, changes in the relative prices of goods would indicate the necessary adjustments in exchange rates11. In a sense, one can infer from these definitions that the absolute version of the theory seeks to establish ‘equilibrium’ exchanges rates between any pair of countries based on purchasing power of their currencies, while the relative version intends to measure the over and undervaluation of currencies at any period in time12.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Despite the controversies surrounding the validity and utility of this theory, recently, authors have sought to clothe the doctrine in â€Å"the garments of respectability† and in this regard, several statistical materials have been presented that more accurately reflects the relationship between power of currencies and exchange rates, as conceived in the theory 13. The purpose of this paper is, therefore, to examine some of the literatures regarding the theory and perhaps to infer from these, the implications and future research possibilities of the theory. Literature Review   Balassa, Bela (1964). The Purchasing-Power Parity Doctrine: A Reappraisal.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Belassa14 apparently belongs to the group of authors that intend to strengthen the validity and utility of the purchasing power parity doctrine. He begins by first differentiating between absolute and relative versions of the theory, as explained above. He, however, asserted that the doctrine as postulated by Cassel tends towards the absolute version when he states that the rate of exchange between two countries will be determined by the quotient between the general levels of prices in the two countries15. Further, he explains that theory as invoked by another author indicates that the German mark was undervalued against the dollar, while the mark too was overvalued, and the Austrian shilling, Danish crown and Dutch guilder all undervalued, by extending the theory to the currencies of less developed countries, their currencies appears to be undervalued against the dollar. The author contends that the deviation from the calculated exchanges were too much to be caused by errors.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   In the bid to correct the perceived weakness in the theory, Belassa created a new model for the theory by introducing non-traded goods (services) into the traditional two-country, two-commodity model of the theory. This model of the theory is strengthened by the following assumptions; that there is only one limiting factor – labor, and constant input coefficient. Also, under the assumption of constant marginal rates of transformation, countries with relative higher productivity levels will experience higher relative price of non-traded commodity compared to another. From these propositions, the author posit that income levels play a significant level in the calculation of purchase powers and that purchasing power parities will be more closely related to exchange rates when prices are expressed in terms of wage units.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   From this equation, the author posit that if we were to assume production of traded goods relative to non-traded goods constitutes the major difference in international productivity, currencies of country with higher productivity will appear to be overvalued using purchasing power parity calculations. However, if per capita income was to be used as a representative of levels of productivity, the ratio of purchasing power parity to exchange rate will be an increasing reflection of income levels   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   In providing empirical confirmation the proposed relationship between purchasing power parity, exchange rates and income levels, the author argues thus: â€Å"if differences in tastes do not counterbalance differences in productive endowments, there will be a tendency in each country to consume commodities with lower relative prices in larger quantities†16 . The result is that the purchasing power of country II’s currency will be undervalued if country I’s consumption pattern is used as weights and overestimated if country II’s consumption is used. This is shown in the tables below.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The second table above shows the comparison of the cost of household services in the United States and Italy for 1950. The author argue that after conversion at exchange rates, domestic services in Italy seem to cost about one-fifth of their United states’ price, barber and beauty shops cost one-fourth, laundry and dry cleaning the same cost. In the same vein, purchasing power equivalents for household services was 391 lira at US weights and 165lira at Italian weights. These figures confirm, the author argues, that services (non-traded goods) cost more, relatively, in countries with higher income levels. Thus, it buttresses the relationship between purchasing power parity, exchange rates and income levels. Bunting, H.   Frederick (1939). The Purchasing Power Parity Theory Reexamined.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Bunting18, while conceding that the purchase power parity doctrine has been severally criticized, further adds his criticism by, according to him, submitting the theory to an improved statistical test. The basis of the argument set forth in this paper is that though the author of the doctrine of purchasing power parity discussed some likely exceptions to the theory, which could account for the differences observed between actual exchanges rates and parity calculated rates, several other exceptions that render the theory impracticable exists.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The author proffered an elaborate definition (explanation) of the theory, as conceived by Cassel and the proposed relationship between purchasing power of currencies and their exchange rates. Further, he went on to summarize the major exceptions to the general rule into seven main points, as discussed by Cassel in his book; Money and Foreign Exchange After 1914. Accordingly, he explained that exchange rates are expected to deviate from the calculated rates if, domestic prices fluctuate in relation to one another, due to any series of factors; tariffs and/or shipping costs change in relation to those prevalent in the base year used for the calculation; obstructions to trade other tariffs and shipping costs becomes operational during the year under consideration; sudden devaluation of currency occurs during the transition period; the activities of speculators affect exchange rates; governments are in need of foreign exchange, for example to pay international debts; and the base year or general price index is not properly selected, as defects in the price index used or the base year could cause predictive error in calculated rates. In sum, Bunting posits that though these exceptions are many and powerful, they do not fully subsume factors/reasons responsible for differences in actual rates and calculated rates.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   In this regard, the author asserts that the critique of the theory can be simplified by considering problems of price levels and direction of change. On the issue of price level, he argues that, problems with choice of base year and the commodities that should make up the price indices to be used in the calculation shows ambiguity in the theory. First, with base year determination, the author argues that Cassel’s contention that it is only if we know the exchange rate which represents a certain equilibrium that we can calculate the rate which represents the same equilibrium at an altered value of the monetary units of the two countries19 i.e. we can only calculate the equilibrium rate now if we know the rate at a particular ‘base’ year; is faulty because there is no such thing in international trades. He argues that the fact that international economic conditions do not persist for long means that a given base year can only be reasonably used to measure relative price changes for only a short period of time.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   On the commodity prices to be included in the price index, Bunting also faults Cassel’s insistence that ‘general’ price index should be used, arguing that not all goods are traded internationally. Thus changes in commodities not traded internationally can, therefore, have no effect on foreign country’s evaluation of a country’s currency. Further, on the direction of change, the author argues that Cassel’s contention that â€Å"when currencies are not on a convertible specie standard it is parities which determine exchange rates†20   tend to overlook the possibility that the direction of change could be the reverse i.e. price levels may be caused by changes in exchange rates. Thus, while Cassel concedes that the actions of speculators could cause changes in exchange rates without necessary price changes; there are several other factors that are capable of inducing change in exchange rates. Bunting mentions the following factors; Government monetary policies – alterations of central bank rates, stabilization funds, international government loans; Private international loans and special considerations such as large corporations transferring their capital holdings from one country to the other to protect their profits, or tourist expenditures and immigration remittances, which both involve the purchase of foreign currencies with no regard for the purchasing power of the currencies involved.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Subjecting the purchasing power parity theory to statistical tests, the author presents his result in the graphical form shown below. In the charts below, Franco-American exchange rates were compared for 1920s and 1930s. The solid line represents calculated rates while the broken line labeled no lag represents actual rates. The differences exhibited between the actual and calculated rates for the statistical test constitute discrepancy in the theory. The 1month, 2months and 3months lag periods were allowed in the assumption that time should be allowed for changes in purchasing power parities to effect a change in exchange rate, thus the 1-3months lag should show more correlation with the actual rates, however, this was not the case. The author concludes that proponents of the theory should simply recognize the fact that the theory as it stand is defective and needs to be refined. The authors of this paper proffered answers to criticisms of the validity and utility of the purchasing power parity theory, and especially to the claims that though the theory worked relatively in the 1920s, it failed in the 1970s by some other authors. Davutyan and John21 contend that possible reasons for the apparent failure of the purchasing power theory to predict exchange rates accurately when figures from the 1970s are used could include the fact that relatively to 1920; monetary policies were more coordinated in the 1970s. They therefore, assert that it is the coordination of monetary policies, not the failure of the purchasing power parity theory that causes conventional statistical tests to reject the validity of purchasing power parity for the 1970s. Providing evidence to support their claims, the authors posit that if we are to assume that there are no obstructions to trade, i.e. all goods are tradable and effective arbitrage refers to the relative version of the purchasing power theory, as explained by Bellassa22 above. In consolidating their argument, the authors contend that purchasing power parity tend to fail under two instances: when arbitragers fail to respond to profitable opportunities or when transaction costs and other impediments inhibit trades. However, they contend that the first factor might not be feasible, so the latter appears to be more important. Elucidating on the second factor, Davutyan and John   posit that under the assumption of zero transaction costs all goods are tradable, when this assumption is listed, goods could be divided into two categories, tradables with zero transaction costs and non-tradables with high transaction costs. Thus, in the absence of transaction costs, arbitrage keeps relative prices of tradable goods across countries equal, but this is not the case between non-tradables as well as between tradables and non-tradables. Therefore, when there are economic shocks, the equation above holds tradables but not for non-tradables. Furthermore, the authors contend that even with tradables, while the zero transaction costs is convenient in theory, it is not always so in reality. The fact is that relative transaction cost differs between countries and this too, tends to introduce errors into the purchasing power parity calculation, as with the non-tradables.   Another source of error in purchasing power calculation, according to the authors, is unequal weights used for calculation. They argue that in the second equation above, the weights in the price index are the same for both countries; however, using CPI or wholesale price index or GNP deflators would violate the requirement for similar weights and could introduce error into the measurement. To support their claims, the authors present the data in the table below, where R2 and estimate of the regression coefficient supports the argument that purchasing power parity works.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Everett24 and his colleagues presented a practical and working model of the purchasing power parity theory and argued that by using this model of the theory to calculate exchange rates, currency strengths and weakness can be measured. Defining purchasing power parity, the authors contend that the primary concept of the theory is that when the forces of price mechanism are unrestricted, exchange rates tend to conform to the purchasing power of currencies. Thus, instead of price levels adjusting to exchange rates, the reverse is the case. In this regard, the authors assert that while this general idea of the theory applies to a world of floating exchange rates, their model of the purchasing power theory can be adapted to a variety of exchange rate regimes, such as managed floats, crawling pegs and fixed exchange rates.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   In explaining this model of the purchasing power parity, the authors refer to what they called the parity chart. As shown below, the chart is derived thus: the horizontal axis measures time from a chosen time of origin – the base year; while the vertical axis measures two things, one, the difference in the percentage of the purchasing power of currencies and two, the percentage change in the actual exchange rate from the base year. While the dotted line represents the actual/observed exchange rates, the parity (solid) line represents parity (calculated) exchange rates over time.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Using the two country model to explain the ‘parity chart’, the authors explain that if we assume that there are no restrictions to trade, and the perfect base time, under this scenario, if the change in the purchasing power of country A’s currency differs from that of country B, the parity line in the chart above will have a positive or negative slope, depending on the sign of the difference between the purchasing power of the currencies under consideration. Further, if actual exchange rates were to be plotted on the same chart, the slope should conform closely to that of the parity line. What can be inferred from this explanation is that the parity line in the chart closely reflects the expected change in exchange rates that should follow changes in the purchasing power of country currencies.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   To support their claims that the parity chart can be used to measure changes in exchange rates under any type of exchange rate regime, the authors presented empirical results of several currencies with different exchange rate regimes, these included the German mark-a more or less freely floating exchange rate; Spanish peseta-a strictly managed exchange rate; Colombian peso-a crawling peg currency; and South African rand-a fixed exchange rate25. The result for the German mark is presented below:   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The authors explain that the vertical axis measures the percentage deviation from the calculated rate. While the line representing the inflation factor shows a fairly steady rise, in line with the well known fact of relatively lower rates of increases in the West German price level compared with most other countries, the line representing the exchange rate, on the other hand, shows no apparent trend, reflecting the fact that the exchange rates of West Germanys trading partners vis-à  -vis the dollar on a trade-weighted basis may have moved in opposite directions. These two factors when compounded, yields the parity line.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   After presenting empirical results for all the four representative countries listed above, the authors concluded that an indepth examination of the parity chart and line indicates that the parity line provides an effective and informed judgment about future currency movements. Further, that if â€Å"the parity rate diverges from the actual rate, this indicates that the currency is presently either over- or undervalued, and will therefore have to adjust, the longer the persistence of such a divergence, the more likely that an adjustment will occur soon†26.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   This is another study that attempted to strengthen the validity and utility of the purchasing power parity doctrine. These authors, in this study, posited that purchasing power parity could be used to derive a more effective simulation or projection of world economy. Admitting that the theory has come to mean different thing to different writers, the authors adopted the law of ‘one price’ definition of the theory, which explains that an â€Å"identical good or service would command the same price, measured in a given numeraire system, all over the trading world†27.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The authors further state that though there are several controversial issues about the theory, such as what category of goods should be included in the calculation or what time should be used as origin/base in the calculation, they assert that any detailed exchange rate modeling system should obey the purchasing power parity rule, in the long run. Statistically estimating the movement of exchange rates in relation to the purchasing power parity principle for the 1970s, the authors presented the following formula:   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   According to the authors, this formula states that the â€Å"U.S. dollar terms, should have a common rate of change across all countries, namely, the U.S. rate of change of export prices†28. Thus, if the exchange rates during this time, had moved in accordance with the principle of purchasing power parity, then the estimates of: would be consistent with the hypothesis of purchasing power parity. Where a =O; b = -1.0; c = +1.0; eit =additive random error. Scatter diagrams of the data points of the two equations above are shown below. Conclusively, the authors assert that judging by these statistics, all the regression estimates in the charts above passed significance tests. Thus, it could be deduced that the relationship between purchasing power of currencies and the actual exchange rates was tightest for members of the EMS, but slightly less tight when the UK is included. Based on this evidence, the authors believe that their contention that, on average, purchasing power parity movements approximately reflects actual exchange rates in the 1970s has been adequately justified, and as a result, it could be generalized that calculations of purchasing power parity could be used in predicting movements of exchange rates.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   John29 proffered answers to criticisms concerning the predictive errors observed with exchange rates calculated from purchasing power parity. They observed that studies carried out by several authors indicate that for several countries, the predictive error of purchasing power parity during the 1970s followed what they referred to as ‘random walk’ i.e. whatever the deviation between the parity rate and actual rates observed this month, next month it is likely to increase as decrease.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   In this regard, the author argued that the basic idea behind the purchasing power parity doctrine is that in the long run, the differences between the parity rates and the actual exchange rates tend to disappear and the tow rates are equated. They argue that, though economic shocks, in whatever guise, could, in the short term, drive the actual rate from the parity rates, but in the absence of new shocks, the price mechanism tend to equate the tow rates, in the long run. Based on this argument, the author contend that predictive errors for purchasing power parity should not perform a random walk, instead there should be a gradual decline or increase towards the actual rate.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Supporting their claims that predictive errors in purchasing power parity does not perform random walk in the long run; the authors presented the results of empirical studies of several countries using data for over seventy years.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Following the same path with paper reviewed above, Yeager30 also sought to strengthen the validity and utility of the purchasing power parity theory. He started off his argument with the basic assumption that people primarily value currencies for what could be bought with it, based on this assumption, he argues, it is safe to presume that in an unrestricted market, people will tend to exchange such currencies for their relative purchasing powers. The author admits that the theory, in its basic form, as stated above, is loose and ambiguous, he posits, however, that the theory performs tow main functions. First, the theory gives an expression of what the equilibrium exchange rates should be for currencies, however crude this rate appears. And two, the theory act like a stabilizing force for exchange rates. Explaining this second function, he assert that when for any reason, actual exchange rates deviate from the equilibrium rates, the theory describes pressures at work tending to check and reverse this random departures from the range of equilibrium rates.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The author provides this example to buttress the point made above about the stabilizing powers of the parity theory:   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Let us suppose, for example, that prevailing exchange rates unmistakably   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   undervalue the British pound in relation to the purchasing powers of the pound   Ã‚  Ã‚   and of foreign currencies.   Foreigners -say Americans- will offer dollars for   Ã‚  Ã‚  Ã‚  Ã‚   pounds to buy British goods at bargain prices. Britons will offer relatively few pounds for dollars to buy, American goods at their apparently high prices.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Unmatched attempts to sell dollars and buy pounds will bid the exchange rate toward the equilibrium level.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   In the same light, the author evaluates some of the numerous objections raised about the theory and posits that in most of these objections, the stabilizing pressures aspect of the theory has been mostly ignored. In sum, the author concludes that most of the discrepancies observed in purchasing power parity rates are due to â€Å"inappropriate base periods; disequilibrium exchange rates (including base-period rates), often imposed by official pegging; tariffs, quotas, and other interferences with trade, payments, and exchange rates.31†   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Wyman32   extends the utility of the purchasing power parity further, by applying the concept of the doctrine to calculating gains or losses incurred by holding foreign items, such as foreign currencies or goods. Relating purchasing power parity to currency changes, the author explain that purchasing power is related to the exchange rates of currencies, in that, differential rates of inflation between, say the United States and a foreign country, influences the exchange rates between the monetary units if each country. Putting this definition into an equation, he states that the calculation of the purchasing power parity can be illustrated thus: If the exchange rate between the United States and a foreign country is 20FC = $1 where FC denotes a unit of ‘foreign currency’, if during the year, the US price level index changed from 100 to 110 and that of the foreign country changed from 100 to 120, the purchasing power parity rate can be calculated by determining an adjustment factor that would be applied to the exchange rate. The adjustment factor is calculated as:   ÃË†t à · Øt = the adjustment factor for period t or (120,100t 110,100) = 1.0909 where ψt =   the price-level ratio in the United States defined as the general price-level index at   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   the end of period t divided by the general price-level index at the beginning of   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   period t Øt = the price-level ratio in the foreign country defined as the general price-level index at   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   the end of period t divided by the general price-level index at the beginning of   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   period t   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Explaining this formula, the author assert that when the adjustment factor is applied to the exchange rate, for the example above, result is FC 20x 1.0909 = FC 21.8182=$1. So, if the actual exchange rate at the end of the time t is at the calculated rate of FC 21.8182 to $1, investors in either country will maintain their purchasing power relative to each other, however, if for example, the exchange rate was to be at FC 22 to $1, FC would have depreciated more than is necessary to maintain the purchasing power parity, and so US investors in need of the foreign currency would have exchanged the currency at a loss. The author went on to establish a multiequation system that can be employed in analyzing potential gains and losses in foreign exchange, based on the purchasing power parity concept. Ruble, L. William (1961). A Comparison of the Parity Ratio with Agricultural Net Income Measures: 1910-1958. Journal of Farm Economics, 43(1):101-112. And Stine O. C. (1946). Parity Prices. Journal of Farm Economics, 28(1):301-305.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   These two works covered a slight different aspect of purchasing power parity. They were focused on the purchasing power of farmers, comparing prices changes in farm and non-farm products, and thus, what farmers are paid for their farm products and what they have to pay to buy non-farm products.   Stine33   explains that in the years after the first World War, when the purchasing power parity concept was birthed and first applied as measurement in of changes in purchasing power, marked changes in general price levels was observed, as expected, however, it was also observed that farm products declined more rapidly and farther compared to non farm products. As a result, what farmers had to pay for products they buy was considerably different from what they earn from the sells of farm products.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Ruble34   supporting this line of argument, argues that since the prices received by farmers and prices paid by farmers affect the livelihood and wellbeing of the farming family, the parity ratio provides a good indicator of the standard of living of farmers. Further, contends that the level of the parity ratio is expected to give   good indication of the following methods of estimating the standard of living of farmers: Net money income per capita, per farm, or per worker. Net real income per capita, per farm, or per worker. Income of farmers compared to income of non-farmers on a per   Ã‚  Ã‚  Ã‚  Ã‚   capita or per worker basis (the parity income concept)   Ã‚  Ã‚  Ã‚  Ã‚   However, data and result of empirical studies was presented to measure the relation between the parity ratio and the well being of farmers suggests that the parity ratio might not indeed properly reflects the general well being of farmers, if the well-being of farmers in general is expressed by the per capita, per farm, or per worker net income, real or money. In arriving at the figures in the table, the parity ratio was correlated separately with the per capita net agricultural income of the farm population, the net income of farm operators from farming per farm, and the net income of farm workers from farming per worker, income from all sources, and deflated by the index of prices paid by farmers for family-living items (1917-19 = 100) Summary   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   There is no denying the fact that the Purchasing Power Parity doctrine is an important theory in the financial world. It is true that a lot of controversies have been generated about its validity and utility, but it is also true that several authors have been able to categorically prove its validity, and more importantly, utility, in an array of fields. Just as the theory has come to mean different thing to different authors, it has also carved for itself, different functions, depending on the perspective one adopts. It is not surprising, therefore, that authors have been able to apply the doctrine to a number of endeavors, as seen in the reviews above.   Ã‚  Ã‚  Ã‚  Ã‚   In its most basic form, the concept argues that people primarily need currencies of other countries for the purpose of buying goods/commodities of that country. Therefore, people will only be prepared to exchange currencies for its relative worth. Here lies the relationship between purchasing power parity and the exchange rates of currencies i.e. when it is suspected that a currency is under or over valued, market forces will tend to force the rate back to the equilibrium level. Equilibrium here describes the rate achieved after trades have occurred between two countries, uninterrupted, for a certain period of time and a common exchange rate has been established, as a result.   Ã‚  Ã‚  Ã‚  Ã‚   From this very basic understanding of the theory, as proposed by the author Prof. Gustav Cassel, several modifications, adjustments, and extension of the theory have been proposed and proved. For example, Bellasa fine tuned the predictive value of the theory by modifying the basic two-country, two-commodity model, to include considerations for non-traded goods (services) and the per capita income of each country, which, he argues, play crucial role in the purchasing power of currencies. Klein and his colleagues   modified the theory and employed it in simulating/projecting changes in world economy; Everett and others , also modified the theory and proved it to be useful in appraising strengths and weaknesses of countries’ currencies; while John   showed that the predictive errors in rates calculated with the purchasing power parity concept could be as a result of  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   faults inherent in the calculation methods and data.   Ã‚  Ã‚  Ã‚  Ã‚   From the foregoing, one can only infer that purchasing power parity is still an important financial concept. Although, further academic and research efforts should be geared towards resolving some of the objections raised against the theory. It is obvious that criticism of the theory will further help to strengthen it, in the future, as we have seen it done in the past. Most of the objections raised have been somehow addressed, even if not completely resolved. One can, thus conveniently conclude that with time, the theory might be better fine tuned and become more effective at explaining and predicting exchange rates of currencies. Endnotes Balassa, Bela (1964). The Purchasing-Power Parity Doctrine: A Reappraisal. Ibid p.584 Klein, R. Lawrence, Shahrokh Fardoust and Victor Filatov (1981). Purchasing Power Parity in Medium Term Simulation of the World Economy; Balassa, Bela (1964) Bunting, H. Frederick (1939). The Purchasing Power Parity Theory Reexamined Bunting (1939) provided almost a word-for-word definition and explanation of the theory as postulated by Cassell. The author gives a better idea of the original theory Ibid p.283 Everett, M. Robert, Abraham M. George and Aryeh Blumberg (1980). Appraising Currency Strengths and Weaknesses: An Operational Model for Calculating Parity Exchange Rates. Ibid p.80 Klein et al., 1981 Ibid   p.486 Belassa, 1964 p.584-585 This is personal opinion based on the definition of the absolute and relative PPP proffered by Bellasa, 1964 Ibid Ibid Belassa, 1964 p.585 quoting Cassel in his book Money and Foreign Exchange After 1914. Ibid   Ibid p.587 Bunting,   H. Frederick (1939). The Purchasing Power Parity Theory Reexamined. Bunting, 1939 p.285 quoting Cassel in his book Money and Foreign Exchange After 1914. Bunting, 1939 p.288 Davutyan, Nurhan and John Pippenger (1985). Purchasing Power Parity Did Not Collapse During the 1970s Balassa, 1964 Davutyan and John, 1985 p.1151 Everett, M. Robert, Abraham M. George and Aryeh Blumberg (1980). Appraising Currency Strengths and Weaknesses: An Operational Model for Calculating Parity Exchange Rates. Ibid p.84 Ibid p.90 Klein, R. Lawrence, Shahrokh Fardoust and Victor Filatov (1981). Purchasing Power Parity in Medium Term Simulation of the World Economy. p.486 Ibid p.487 John, Pippenger (1982). Purchasing Power Parity: An Analysis of Predictive Error Yeager, B. Leland   (1958). A Rehabilitation of Purchasing-Power Parity Ibid p.529 Wyman E. Harold (1976). Analysis of Gains or Losses from Foreign Monetary Items: An Application of Purchasing Power Parity Concepts. Stine O. C. (1946). Parity Prices Ruble, L. William (1961). A Comparison of the Parity Ratio with Agricultural Net Income Measures Bibliography Balassa, Bela (1964). The Purchasing-Power Parity Doctrine: A Reappraisal. The Journal   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   of Political Economy, Vol. 72:6 pp. 584-596. Bunting,   H. Frederick (1939). The Purchasing Power Parity Theory Reexamined.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Southern Economic Journal, Vol. 5:3. pp. 282-301. Davutyan, Nurhan and John Pippenger (1985). Purchasing Power Parity Did Not   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Collapse During the 1970s. The American Economic Review, Vol. 75:5.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   pp.1151-1158. Everett, M. Robert, Abraham M. George and Aryeh Blumberg (1980). Appraising   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Currency Strengths and Weaknesses: An Operational Model for Calculating   Ã‚  Ã‚   Parity Exchange Rates. Journal of International Business Studies, Vol. 11:2. pp.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   80-91. John, Pippenger (1982). Purchasing Power Parity: An Analysis of Predictive Error. The Canadian Journal of Economics, Vol. 15:2, pp. 335-346. Klein, R. Lawrence, Shahrokh Fardoust and Victor Filatov (1981). Purchasing Power   Ã‚  Ã‚   Parity in Medium Term Simulation of the World Economy. The Scandinavian   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Journal of Economics, Vol. 83: 4 pp. 479-496. Ruble, L. William (1961). A Comparison of the Parity Ratio with Agricultural Net   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Income Measures: 1910-1958. Journal of Farm Economics, Vol. 43:1. pp. 101-  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   112. Stine O. C. (1946). Parity Prices. Journal of Farm Economics, Vol.28:1. pp.301-305. Wyman E. Harold (1976). Analysis of Gains or Losses from Foreign Monetary Items: An   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Application of Purchasing Power Parity Concepts. The Accounting Review, Vol.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   51: 3. pp. 545-558. Yeager, B. Leland   (1958). A Rehabilitation of Purchasing-Power Parity. The Journal of   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Political Economy, Vol. 66:6, pp. 516-530.

Evidence from International Stock Markets

Evidence from International Stock Markets Portfolio Selection with Four Moments: Evidence from International Stock Markets Despite the international diversification suggested by several researchers (e.g. Grulbel, 1968; Levy and Sarnat, 1970; Solnik, 1974) and the increased integration of capital markets, the home bias has not decreased (Thomas et. al., 2004 and Coeurdacier and Rey, 2013) and there is no complete explanation of this puzzle. Furthermore, there are the fastgrowing concerns of investor for extreme risks[1] and the investors preference toward odd moments (e.g. mean and skewness) and an aversion toward even moments (e.g. variance and kurtosis) considered by numerous studies (e.g. Levy, 1969; Arditti, 1967 and 1971; Jurczenko and Maillet, 2006). According to these reasons, this paper propose to investigate whether the incorporation of investor preferences in the higher moments into the international asset allocation problem can help explain the home bias puzzle. The study will allow investor preferences to depend not only the first two moments (i.e. mean and variance) but also on the higher moments, such as skewness and kurtosis, by using the polynomial goal programming (PGP) approach and then generate the three-dimensional efficient frontier. The main objective of the proposed study is to investigate whether the incorporation of skewness and kurtosis into the international stock portfolio selection causes these issues: The changes in the construction of optimal portfolios, the patterns of relationships between moments, and the less diversification compared to the mean-variance model. Since several researchers (e.g. Grulbel, 1968; Levy and Sarnat, 1970; Solnik, 1974) suggest that investment in a portfolio of equities across foreign markets provide great diversification opportunities, then investors should rebalance there portfolio away from domestic toward foreign equities. However, US investors continue to hold equity portfolios that are largely dominated by domestic assets. Thomas et. al. (2004) reported that by the end of 2003 US investors held only 14 percent of their equity portfolios in foreign stocks. Furthermore, Coeurdacier and Rey (2013) also reported that in 2007, US investors hold more than 80 percent of domestic equities. Many explanations have been recommended in the literature to explain this home bias puzzle include direct barriers such as capital controls and transaction costs (e.g. Stulz, 1981; Black, 1990; Chaieb and Errunza, 2007), and indirect barriers such as information costs and higher estimation uncertainty for foreign than domestic equities (e.g. Brennan and Cao, 1997; Guidolin, 2005; Ahearne et. al., 2004). Nevertheless, several studies (e.g. Karolyi and Stulz, 1996; Lewis, 1999) suggests that these explanations are weakened since the direct costs to international investment have come down significantly overtime and the financial globalization by electronic trading increases exchanges of information and decreases uncertainty across markets. Since the modern portfolio theory of Markowitz (1952) indicates how risk-averse investors can construct optimal portfolios based upon mean-variance trade-off, there are numerous studies on portfolio selection in the framework of the first two moments of the return distributions. However, as many researchers (e.g., Kendall and Hill, 1953; Mandelbrot, 1963a and 1963b; Fama, 1965) discovered that the presence of significant skewness and excess kurtosis in asset return distributions, there is a great concern that highermoments than the variance should be accounted in portfolio selection. The motivation for the generalization to higher moments arises from the theoretical work of Levy (1969) provided the cubic utility function depending on the first three moments. Later, the empirical works of Arditti (1967 and 1971) documented the investors preference for positive skewness and aversion negative skewness in return distributions of individual stocks and mutual funds, respectively. Even Markowitz (1959) himself also supports this aspect by suggesting that a mean-semi-variance trade-off [2], which gives priority to avoiding downside risk, would be superior to the original mean-variance approach. While the importance of the first three moments was recognized, there were some arguments on the incorporation of higher moments than the third into the analysis. First, Arditti (1967) suggested that most of the information about any probability distribution is contained in its first three moments. Later, Levy (1969) argued that even the higher moments are approximately functions of the first moments, but not that they are small in magnitude. Several authors (Levy, 1969; Samuelson, 1970; Rubinstein, 1973) also recommend that in general the higher moments than the variance cannot be neglected, except when at least one of the following conditions must be true: All the higher moments beyond the first are zero. The derivatives of utility function are zero for the higher moments beyond the second. The distributions of asset returns are normal or the utility functions are quadratic. However, ample evidence (e.g., Kendall and Hill, 1953; Mandelbrot, 1963a and 1963b; Fama, 1965) presented not only the higher moments beyond the first and their derivatives of the utility function are not zero, but also the asset returns are not normally distributed. Furthermore, several researchers (Tobin, 1958; Pratt, 1964; Samuelson, 1970; Levy and Sarnat, 1972) indicate that the assumption of quadratic utility function is appropriate only when return distributions are compact. Therefore, the higher moments of return distributions, such as skewness, are relevant to the investors decision on portfolio selection and cannot be ignored. In the field of portfolio theory with higher moments, Samuelson (1970) was the first author who recommends the importance of higher moments than the second for portfolio analysis. He shows that when the investment decision restrict to the finite time horizon, the use of mean-variance analysis becomes insufficient and the higher moments than the variance become more relevant in portfolio selection. Therefore, he developed three-moment model based on the cubic utility function which expressed by Levy (1969)3. Following Samuelson (1970), number of studies (e.g. Jean, 1971, 1972 and 1973; Ingersoll, 1975; and Schweser, 1978) explained the importance of skewness in security returns, derived the risk premium as functions of the first three moments, and generated the three-dimensional efficient frontier with a risk-free asset. Later, Diacogiannis (1994) proposed the multi-moment portfolio optimization programme by minimizing variance at any given level of expected return and skewness. Consequently, Athayde and Flores (1997) developed portfolio theory taking the higher moments than the variance into consideration in a utility maximizing context. The expressions in this paper greatly simplified the numerical solutions of the multi-moment portfolio optimal asset allocation problems4. 23 Levy (1969) defines the cubic utility function as U(x) which has the form: U(x) = ax + bx + cx , where x is a random variable and a,b,c are coefficients. This function is concave in a certain range but convex in another. Jurczenko, E. and Maillet, B. (2006) Multi-Moment Asset Allocation and Pricing Models, Wiley Finance, p. xxii. Different approaches have been developed to incorporate the individual preferences for higher-order moments into portfolio optimization. These approaches can be divided into two main groups, the primal and dual approaches. The dual approach starts from a specification of the higher-moment utility function by using the Taylors series expansion to link between the utility function and the moments of the return distribution. Then, the dual approaches will determine the optimal portfolio via its parameters reflecting preferences for the moments of asset return distribution. Harvey et. al. (2004) uses this approach to construct the set of the three-moment efficient frontier by using two sets of returns[3]. The results show that as the investors preference in skewness increases, there are sudden change points in the expected utility that lead to dramatically modifications in the allocation of the optimal portfolio. Jondeau and Rockinger (2003 and 2006) and Guidolin and Timmermann (2008) extend the dual approach in portfolio selection from three- to four-moment framework. A shortcoming of this dual approach is that the Taylor series expansion may converge to the expected utility under restrictive conditions. That is for some utility functions (e.g. the exponential function), the expansion converges for all possible levels of return, whereas for some types of utility function (e.g. the logarithm-power function), the convergence of Taylor series expansion to the expected utility is ensured only over a restricted range6. Furthermore, since Taylor series expansion have an infinite number of terms, then using a finite number of terms creates the truncation error. To circumvent these problems, the primal approach parameters that used to weight the moment deviations are not relate precisely to the utility function. Tayi and Leonard (1988) introduced the Polynomial Goal Programming (PGP), which is a primal approach to solve the goal in portfolio optimization by trade-off between competing and conflicting objectives. Later, Lai (1991) is the first researcher who proposed this method to solve the multiple objectives determining the set of the mean-variance-skewness efficient portfolios. He illustrated the three-moment portfolio selection with three objectives, which are maximizing both the expected return and the skewness, and minimizing the variance of asset returns. Follows Lai (1991) who uses a sample of five stocks and a risk-free asset, Chunhachinda et. al. (1997) and Prakash et. al. (2003) examines three-moment portfolio selection by using international stock indices. Regarding the under-diversification, many studies (e.g. Simkowitz and Beedles, 1978; Mitton and Vorkink, 2004; and Briec et. al., 2007) suggested that incorporation of the higher moments in the investors objective functions can explain portfolio under-diversification. Home bias puzzle is one of the under-diversification. It is a tendency to invest in a large proportion in domestic securities, even there are potential gains from diversification of investment portfolios across national markets. Guidolin and Timmermann (2008)[4] indicate that home bias in US can be explained by incorporate the higher moments (i.e. skewness and kurtosis) with distinct bull and bear regimes in the investors objective functions. Several researchers use the primal and the dual approaches to examine the  international portfolio selection. Jondeau and Rockinger (2003 and 2006) and Guidolin and Timmermann (2008) applied the dual approaches using a higher-order Taylor expansion of the utility function. They provide the empirical evidence that under large departure from normality of the return distribution, the higher-moment optimization is more efficient than the mean-variance framework. Chunhachinda et. al. (1997) and Prakash (2003) applied the Polynomial Goal Programming (PGP), which is a primal approach, to determine the optimal portfolios of international stock indices. Their results indicated that the incorporation of skewness into the portfolio selection problem causes a major change in the allocation of the optimal portfolio and the trade-off between expected return and skewness of the efficient portfolio. Appendix 1 presents methodology and data of the previous papers that study international portfolio selection with higher moments. In the proposed study, I will extend PGP approach to the mean-variance-skewnesskurtosis framework and investigate the international asset allocation problem that whether the incorporation of investor preferences in the higher moments of stock return distributions returns can help explain the home bias puzzle. Since previous research (e.g. Levy, 1972; Singleton and Wingerder, 1986) points out that the estimated values of the moments of the asset return distribution sensitive to the choices of an investment horizon, I will examine daily, weekly, and monthly data sets in the study[5]. The sample data will consist of daily, weekly, and monthly rates of return of five international indices for all available data from January 1975 to December 2016. These five indices cover the stock markets in the main geographical areas, namely the United States, the United Kingdom, Japan, the Pacific region (excluding Japan), and Europe (excluding United Kingdom)[6]. Moreover, the study also use three-month US Treasury bill rates as the existence of the risk-free asset in order that the investor is not restricted to invest only in risky assets. The data source of these indices is the Morgan Stanley Capital International Index (MSCI) who reports these international price indices as converted into US dollar at the spot foreign exchange rate. The MSCI stock price indices and T-bill rates are available in Datastream. The methodology proposed in the study consists of two parts. First, the rate of return distribution of each international index will be tested for normality by using the Shapiro-Wilk test. Then, the PGP approach will be utilized to determine the optimal portfolio in the fourmoment framework. 4.1 Testing for normality of return distribution At the beginning of the empirical work, I will test the normality of return distributions of international stock indices and the US T-bill rates. This test provides the foundation for examine the portfolio selection problem in the mean-variance-skewness-kurtosis framework. Although several methods are developed, there is an ample evidence that the ShapiroWilk is the best choice for evaluating normality of data under various specifications of the probability distribution. Shapiro et. al. (1968) provide an empirical sampling study of the sensitivities of nine normality-testing procedures and concluded that among those procedures, the Shapiro-Wilk statistic is a generally superior measure of non-normality. More recently, Razali and Wah (2011) compared the power of four statistical tests of normality via Monte Carlo simulation of sample data generated from various alternation distributions. Their results support that Shapiro-Wilk test is the most powerful normality test for all types of the distributions and sample sizes. The Shapiro-Wilk statistic is defined as where is the i th order statistic (rate of returns), à ¢Ã¢â‚¬ ¹Ã‚ ¯ . à ¢Ã¢â‚¬ ¹Ã‚ ¯ / is the sample mean, are the expected values of the order statistics of independent and identically distributed random variables sampled from the standard normal, and V is the covariance matrix of those order statistics. Note that the values of are provided in Shapiro-Wilk (1965) table based on the order i. The Shapiro-Wilk tests the null hypothesis of normality: H0: The population is normally distributed. H1: The population is not normally distributed.    If the p-value is less than the significant level (i.e. 1%, 5%, or 10%), then the null hypothesis of normal distribution is rejected. Thus, there is statistical evidence that the sample return distribution does not came from a normally distributed population. On the other hand, if the p-value is greater than the chosen alpha level, then the null hypothesis that the return distribution came from a normally distributed population cannot be rejected. 4.2 Solving for the multi-objective portfolio problem Following Lai (1991) and Chunhachinda et. al. (1997), the multi-objective portfolio selection with higher momentscan be examined based on the following assumptions: Investors are risk-averse individuals who maximize the expected utility of their end-ofperiod wealth. There are n + 1 assets and the (n + 1)th asset is the risk-free asset. All assets are marketable, perfectly divisible, and have limited liability. The borrowing and lending rates are equal to the rate of return r on the risk-free asset. The capital market is perfect, there are no taxes and transaction costs. Unlimited short sales of all assets with full use of the proceeds are allowed. The mean, variance, skewness, and kurtosis of the rate of return on asset are assumed to exist for all risky assets for 1,2, à ¢Ã¢â€š ¬Ã‚ ¦ . Then, I define the variables in the analysis as = ,, à ¢Ã¢â€š ¬Ã‚ ¦ , be the transpose of portfolio component , where is the percentage of wealth invested in the th risky asset, = ,, à ¢Ã¢â€š ¬Ã‚ ¦ , be the transpose of whose mean denoted by , = the rate of return on the th risky asset, = the rate of return on the risk-free asset, = a (n x 1) vector of expected excess rates of return, = the expectation operator, = the (n x 1) vector of ones, = the variance-covariance (n x n) matrix of , = the skewness-coskewness (n x n2) matrix of ,= the kurtosis-cokurtosis (n x n3) matrix of . Then, the mean, the variance, the skewness, and the kurtosis of the portfolio returns can be defined as:[7] , , à ¢Ã…  -,[8] Kurtosis = = à ¢Ã…  - à ¢Ã…  - . Note that because of certain symmetries, only ((n+1)*n)/2 elements of the skewnesscoskewness matrix and ((n+2)*(n+1)*n)/6 elements of the kurtosis-cokurtosis matrix must be computed. The components of the variance-covariance matrix, the skewness-coskewness matrix, and the kurtosis-cokurtosis matrix can be computed as follows: à ¢Ã‹â€ Ã¢â‚¬Ëœ, à ¢Ã‹â€ Ã¢â‚¬Ëœ, à ¢Ã‹â€ Ã¢â‚¬Ëœ, à ¢Ã‹â€ Ã¢â‚¬Ëœ, à ¢Ã‹â€ Ã¢â‚¬Ëœ, à ¢Ã‹â€ Ã¢â‚¬Ëœ. Therefore, the optimal solution is to select a portfolio component . The portfolio selection can be determined by solving the following multiple objectives, which are maximizing the expected return and the skewness while minimizing the variance and the kurtosis: , , à ¢Ã…  -, = à ¢Ã…  - à ¢Ã…  - . subject to 1. Since the percentage invested in each asset is the main concern of the portfolio decision, Lai (1991) suggests that the portfolio choice can be rescaled and restricted on the unit variance space (i.e. | 1 ). Under the condition of unit variance, the portfolio selection problem with skewness and kurtosis (P1) can be formulated as follows: , à ¢Ã…  -, (P1) = à ¢Ã…  - à ¢Ã…  - , subject to 1 , 1 . Usually, the solution of the problem (P1) does not satisfy three objectives (, , ) simultaneously. As a result, the above multi-objective problem (P1) involves a two-step procedure. First, a set of non-dominated solutions independent of investors preferences is developed. Then, the next step can be accomplished by incorporating investors preferences for objectives into the construction of a polynomial goal programming (PGP). Consequently, portfolio selection by satisfying the multiple objectives that is the solution of PGP can be achieved. In PGP the objective function ( ) does not contain a portfolio component , it contains deviational variables ( , , ) which represent deviations between goals and what can be achieved, given a set of constrains. Therefore, the objective function ( ) is minimization of the deviation variables ( , , ) to determine the portfolio component . Moreover, if the goals are at the same priority level, the deviations from the goals ( , , ) are non-negative variables. Given an investors preferences among mean, skewness, and kurtosis ( , , ), a PGP model can be expressed as: . subject to à ¢Ã‹â€ - , à ¢Ã…  -à ¢Ã‹â€ - , (P2) à ¢Ã…  - à ¢Ã…  - = à ¢Ã‹â€ - , 1 , 1 , ,, 0 . where à ¢Ã‹â€ - = the extreme value of objective when they are optimized individually, then à ¢Ã‹â€ - |1 , à ¢Ã‹â€ - |1 , and à ¢Ã‹â€ - |1 , = the non-negative variables which represent the deviation of and à ¢Ã‹â€ -, = the non-negative parameters representing the investors subjective degree of preferences between objectives, The combinations of represent different preferences of the mean, the skewness, and the kurtosis of a portfolio return. For example, the higher , the more important the mean (skewness or kurtosis) of the portfolio return is to the investor. Thus, the efficient portfolios are the solutions of problem (P2) for various combinations of preferences . The expected results provided in this section refer to two parts of methodology, the normality test and the international portfolio optimization in four-moment framework. 5.1 The expected results of the normality test Many researches examine the international stock indices and found that most of the stock return distributions exhibit skewness and their excess kurtosis are far from zero. For instance, in the work of Chunhachinda et. al. (1997), the Shapiro-Wilk statistics indicate 5 markets and 11 markets reject the null hypothesis of normal distribution at ten percent significant level, for weekly and monthly data, respectively. Prakash et. al. (2003) use the Jarque-Bera test to trial the normality of each international stock index, their results indicate that for 17 markets for weekly returns and 10 markets for monthly returns reject the null hypothesis of normal distribution five percent significant level. Therefore, I expected that the Shapiro-Wilk tests in the proposed study will be significant and reject the null hypothesis of normality. In other words, the return distributions of international stock markets during the period under study are expected to be non-normal. 5.2 The expected results of the multi-objective portfolio selection 5.2.1 The changes in the allocation of optimal portfolios Chunhachinda et. al. (1997) and Prakash et. al. (2003) both indicated that the incorporation of skewness into the portfolio selection problem causes a major change in the allocation of the optimal portfolio. However, their definitions of a major change are different. Chunhachinda et. al. (1997) found that there is a modification in the allocation when they compare between the mean-variance and the mean-variance-skewness efficient portfolios. However, both types of portfolios are dominated by the investment components of only four markets[9]. On the other hand, Prakash (2003) results show that the structural weights of the mean-variance and the mean-variance-skewness optimal portfolios are dominated by different markets. Therefore, I expected that when I compare between of the mean-variance efficient portfolios, the three-moment efficient portfolios, and the mean-variance efficient portfolios, the percentage invested in each asset will be different in magnitude and ranking. 5.2.2 The trade-off between expected return and skewness Most of the studies of international portfolio selection with higher moments (e.g. Chunhachinda et. al., 1997; Prakash et. al., 2003; Jondeau and Rockinger, 2003 and 2006) reported that the mean-variance efficient portfolios have the higher expected return while the three-moment efficient portfolios have greater skewness. Thus, they indicated that after incorporation of skewness into portfolio selection problem, the investor will trade the expected return of the portfolio for the skewness. More recently, Davies et. al. (2005) applied PGP to determine the set of the four-moment efficient funds of hedge funds and found not only the trade-off between the mean and the skewness, but also the trade-off between the variance and the kurtosis. Thus, I expected to discover the trade-off between the expected return and the skewness and the trade-off between the variance and the kurtosis. In addition, I will also investigate other relationships between the moments of return distribution and report them in both numerical and graphical ways. 5.2.3 The less diversification compared to the mean-variance model. To investigate whether the incorporation of higher moments than the second (i.e. skewness and kurtosis) can help explain the home bias puzzle, I will examine the hypothesis: H0: ZMV à ¢Ã¢â‚¬ °Ã‚ ¤ ZMVSK. H1: ZMV > ZMVSK. where ZMV and ZMVSK are the number of nonzero weights of the mean-variance efficient portfolios and the four-moment efficient portfolios, respectively. If the number of nonzero weights of the mean-variance efficient portfolios (ZMV) is greater than the number of nonzero weights of the four-moment efficient portfolios (ZMVSK), then I will rejected the null hypothesis. This implies that the incorporation of the higher moments into the portfolio decision can help explain the home bias puzzle. However, the results from the literature are mixed. On one hand, several researchers (e.g. Prakash et. al., 2003; Briec et. al., 2007; Guidolin and Timmermann, 2008) provided the evidence that the incorporation of skewness into the portfolio selection causes the less diversification in the efficient portfolio. On the other hand, the results of some studies (e.g. Chunhachinda et. al., 1997; Jondeau and Rockinger, 2003 and 2006) found that when compare with the mean-variance efficient portfolios, the diversification of the higher-moment efficient portfolios seem to be same or even became more diversify. I expected the results to show that the four-moment efficient portfolio is less diversified than the mean-variance one. In other words, the incorporation of the skewness and the kurtosis into the international portfolio selection can help explain the home bias. [1] Jurczenko, E. and Maillet, B. (2006) Multi-Moment Asset Allocation and Pricing Models, Wiley Finance, p. xxii. [2] Semi-variance is a measure of the dispersion of all observations that fall below the average or target value of a data set. [3] The first set consists of four stocks and the second set consists of four equity indices, two commodities, and a risk-free asset. 6 Jurczenko, E. Maillet, B., and Merlin, P. (2006) Multi-Moment Asset Allocation and Pricing Models, Wiley Finance, p. 52. [4] Guidolin and Timmermann (2008) analyze the portfolio selection problem by using the dual approach. [5] Chunhachinda et. al. (1997) and Prakash et. al. (2003) studied the portfolio selection across national stock markets by using two data sets, weekly and monthly data. [6] Guidolin and Timmermann (2008) reported that these markets represent roughly 97% of the world equity market capitalization. [7] I use the derivations of skewness and kurtosis as provided in the textbook Multi-Moment Asset Allocation and Pricing Models of Jurczenko and Maillet (2006) to transform the expectation operators into the matrix terms. [8] Let A be an (nÃÆ'-p) matrix and B an (mÃÆ'-q) matrix. The (mnÃÆ'-pq) matrix Aà ¢Ã…  -B is called the of matrix A and matrix B: [9] The four markets are Hong Kong, Netherlands, Singapore, and Switzerland. These markets have high rankings of the coefficient of variation under the sample period.