Local risk factors in emerging markets: Are they separately priced?

We provide new evidence on the pricing of local risk factors in emerging stock markets. We investigate whether there is a significant local currency premium together with a domestic market risk premium in equity returns within a partial integration asset pricing model. Given previous evidence on currency risk, we conduct empirical tests in a conditional setting with time-varying prices of risk. Our main results support the hypothesis of a significant exchange risk premium related to the local currency risk. Exchange rate and domestic market risks are priced separately for our sample of seven emerging markets. The empirical evidence also suggests that although statistically significant, local currency risk is on average smaller than domestic market risk but it increases substantially during crises periods, when it can be almost as large as market risk. Disentangling these two factors is thus important in tests of international asset pricing for emerging markets.     

An international CAPM for partially integrated markets: Theory and empirical evidence

This article proposes a theoretical testable capital asset pricing model for partially segmented markets. We establish that if some investors do not hold all international assets because of direct and/or indirect barriers, the world market portfolio is not efficient and the traditional international CAPM must be augmented by a new factor reflecting the local risk undiversifiable internationally. We also introduce a suitable framework to test this model empirically. Using a sample of six emerging markets and three mature markets, we find that the degree of stock market integration varies through time and that most of the sample emerging markets have become more integrated in the recent years. The local risk premium for emerging markets represents the most important component of the total risk premium, but its relative importance has decreased recently. Differently, the total risk premium for developed countries is largely driven by global factors.     

International Housing Markets and the U.S. Subprime Crisis

We propose a novel decomposition approach to study the degree of co-movement of international housing markets while distinguishing among different economic drivers. We find that the housing market variability for an average country was mainly driven by the common housing risk premium components during the years leading up to the 2007–08 subprime financial crisis. A decrease in the common housing risk premium was followed by a housing boom and economic expansion in the United States prior to the crisis. Our findings add to the understanding of the role of common risk factors across international housing markets before the crisis.     

Liquidity risk and stock returns around the world

The recent global financial crisis demonstrates that market liquidity is a prominent systematic risk globally. We find that local liquidity risk, in addition to the local market, value and size factors, demands a systematic premium across stocks in 11 developed markets. This local pricing premium is smaller in countries where the country-level corporate boards are more effective and where there are less insider trading activities. We also discover that global liquidity risk is a significant pricing factor across all developed country market portfolios after controlling for global market, value, and size factors. The contribution of this risk to the return on a country market portfolio is economically and statistically significant within and across regions.     

Factor pricing in commodity futures and the role of liquidity

This paper empirically investigates the pricing factors and their associated risk premiums of commodity futures. Existing pricing factors in equity and bond markets, including market premium and term structure, are tested in commodity futures markets. Hedging pressure in commodity futures markets and momentum effects is also considered. This study combines these factors to discuss their importance in explaining commodity future returns, while the literature has studied these factors separately. One of the important pricing factors in equity and bond markets is liquidity, but its role as a pricing factor in commodity futures markets has not yet been studied. To our knowledge, this research is the first to study liquidity as a pricing factor in commodity futures. The risk premiums of two momentum factors and speculators’ hedging pressure range from 2% to 3% per month and are greater than the risk premiums of roll yield (0.8%) and liquidity (0.5%). The result of a significant liquidity premium suggests that liquidity is priced in commodity futures.     

Optimal Portfolio Choices, House Risk Hedging and the Pricing of Forward House Transactions

This paper develops a utility indifference model for evaluating various prices associated with forward transactions in the housing market, based on the equivalent principle of expected wealth utility derived from the forward and spot real estate markets. Our model results show that forward transactions in the housing market are probably not due to house sellers?? and buyers?? heterogeneity, but to their demand for hedging against house price risk. When the imperfections of real estate markets and the risk preferences of market participants are taken into consideration, we are able to show that the idiosyncratic risk premium, which mainly depends on the participants?? risk preferences and the correlation between the traded asset and the real estate, is a remarkable determinant of house sellers?? and buyers?? forward reservation prices. In addition, we also find that the market clearing forward price usually will not converge toward the expected risk-neutral forward price. The sellers?? or buyers?? risk aversion degrees and market powers are also identified to play crucial roles in determining the clearing forward price.     

Auditor Market Share,Product Differentiation and Audit Fees

This study examines the effects of auditor market share and product differentiation on audit fees. Previous studies have attributed the price premium charged by the Big Eight (the Big Six in the present study) to Big Eight product differentiation. However, such a price premium could be partly due to monopoly pricing. In the present study, the Hong Kong audit market provides a unique setting in which a non-Big Six local auditor has a market share comparable to those of the third and fourth largest Big Six firms. This makes it feasible to control for the effects of market share via matching. Also, the wide disparity among the Big Six firms ‘market shares in Hong Kong makes it feasible to test for the effects of market power on audit fees. The results show that, consistent with prior studies, the Big Six audit firms charge higher audit fees than non-Big Six firms in the small auditee, but not the big auditee, market. This suggests that similar economic forces to those other audit markets are also at work in Hong Kong. Despite the Big Six firms’ widely different market shares, there was no price differentiation among them. Yet there was a Big Six price premium over the large local firm with a similar market share to those of two of the Big Six. Together, these results suggest that the Big Six price premium is a result of product differentiation rather than monopoly pricing.     

Pricing mortgage insurance contracts under housing price cycles with jump risk: evidence from the U.K. housing market

Previous studies have investigated the determinants of housing price cycles in the housing market; however, we observed the phenomenon of housing price jumps in the 2007 subprime crisis. This paper presents a discussion on the housing price cycle and abnormal price jumps to describe the behavior of housing prices in the United Kingdom. The empirical results show that the impact factors of housing cycles are market risk and the switching factor. Furthermore, the impact factors of jump risks include the bursting of the housing bubble and financial crises. Therefore, in this paper, we employ the Markov switching model with jump risks to value the MI contracts and analyze the influences of housing price cycles, jump risks, risks of market interest rate, and the prepayment risks on MI premiums. The results of sensitivity analysis show that more volatile housing price index returns, as well as longer periods of higher volatility in housing prices, raise MI premiums. Moreover, the MI premium is positively related to the absolute value of the average jump amplitude and the shock frequency of abnormal events. There is the tradeoff between the market interest rate and the prepayment risk. The influences of market interest rate are different on MI premium with/without prepayment risks.     

中国住房市场波动的影响因素研究——基于租金收益率的方差分解

基于资产定价的视角,本文通过将标准的动态戈登增长模型和传统的住房使用成本模型相结合,建立了一个关于住房市场租金收益率的动态住房使用成本模型。该模型将租金收益率分解为购房的预期资金成本、预期购房相对于租房的风险溢价和预期未来租金增长率三个部分的现值之和。进一步,本文将该模型应用于京沪广深四大城市的季度数据,并使用方差分解方法来考察国内住房市场动态波动的影响因素及其相对重要性。本文结果表明,资金成本变动在四大城市的住房市场波动中为最重要的影响因素,而租金在住房市场波动中虽然存在着一定的影响作用,但并不如资金成本显著。此外,本文还发现,不能直接观测得到的购房相对于租房的风险溢价也是影响国内住房市场的一个不可忽视的重要因素。值得注意的是,近年四大城市居民租房面临的风险相对于购房正日益上升。     

Risk and return in residential spatial markets: An empiric and theoretic model

The paper is concerned with price and rent fluctuations in predominantly owner-occupied residental real estate. It presents the owner-occupier household as a housing consumer as well as an investor. It conjectures that since risk and return are known to be positively related in financial markets, they might also be thus related in residential real estate markets. If that is so, neighborhoods that are known to yield high returns will be the ones less price and rent stable than low yielding ones.The Capital Asset Pricing Model is not helpful in explaining a possible risk/return relationship in housing markets. Its major assumption about portfolio diversification is contrary to the nature of owner-occupied residential real estate. An owner occupier household, by definition, holds one unit of the asset and acts simultaneously as an investor and consumer of housing. For the capital market investor, investment and consumption decisions are separable. Therefore, a new theoretical model of consumer choice is proposed. Tel-Aviv price and rent data during a volatile market period are used for testing the main risk/return conjecture as well as other related hypotheses stemming from the model. The findings lend support to the conjecture and shed light on possible spatial determinants of owners' risk.     

Sources of the stock price fluctuations in Chinese equity market

This paper proposes a latent factor approach based on a state–space framework in order to identify which factor, if any, dominates price fluctuations in the Chinese stock markets. We also illustrate the connection of such stock price decomposition with several general equilibrium asset pricing models and show that the decomposition results can potentially offer useful insights with regard to the empirical relevance of asset pricing models. We use quarterly data of the Chinese A-Share equity market over the period 1995Q3–2011Q1 and find that the estimates of the state–space model suggest that the expected return is the primary driving force behind price fluctuations in the Chinese stock market. We show that the time-varying expected returns appear to be counter-cyclical and this result seems to be consistent with the habit formation model of Campbell and Cochrane [1999. By force of habit: A consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 107, no. 2: 205–51.]. However, we also note that there is a great deal of uncertainty with respect to this variance decomposition due to the resulting small signal-to-noise ratio in the estimated state–space model.     

Is the audit services market competitive following Arthur Andersen's collapse?

This study investigates whether audit markets remain competitive in the wake of Arthur Andersen's demise and merger with Ernst & Young to create the Big Four. We conduct the study estimating audit fee models using Australian audit market data from both 2000 and 2003 to determine whether there is any evidence of cartel pricing either before, or subsequent to, the merger. In both years, we find evidence of a Big N price premium when estimating an audit fee model across all clients, and when we estimate the model separately across large and small client market segments. This evidence is consistent with product differentiation by Big N auditors and competitive markets.     

Pricing currency risk in the stock market: Evidence from Finland and Sweden 1970-2009

We investigate the role of currency risk on stock markets in two interlinked Nordic countries exhibiting a gradual move from fixed to floating exchange rates. We apply the Ding and Engle (2001) covariance stationary specification in a multivariate GARCH-M setup to test a conditional international asset pricing model. Using a sample period from 1970 to 2009, we find that the currency risk is priced in both stock markets, and that the price and the risk premium are lower after the floatation of the currencies, especially for Finland. We also find the cross-country exchange rate shock from Finland to affect the price of currency risk in Sweden, but not vice versa. Finally, we discuss some of the potential issues in applying multivariate GARCH-M specifications in tests of asset pricing models.     

The world price of liquidity risk

This paper empirically tests the liquidity-adjusted capital asset pricing model of Acharya and Pedersen (2005) on a global level. Consistent with the model, I find evidence that liquidity risks are priced independently of market risk in international financial markets. That is, a security’s required rate of return depends on the covariance of its own liquidity with aggregate local market liquidity, as well as the covariance of its own liquidity with local and global market returns. I also show that the US market is an important driving force of global liquidity risk. Furthermore, I find that the pricing of liquidity risk varies across countries according to geographic, economic, and political environments. The findings show that the systematic dimension of liquidity provides implications for international portfolio diversification.     

An International Asset Pricing Model with Time-Varying Hedging Risk

This paper employs a two-factor international equilibrium asset pricing model to examine the pricing relationships among the world's five largest equity markets. In addition to the traditional market factor premium, a hedging factor premium is included as the second factor to explain the relationship between risks and returns in the international stock markets. Moreover, a GARCH parameterization is adopted to characterize the general dynamics of the conditional second moments. The results suggest that the additional hedging risk premium is needed to explain rates of return on international equities. Furthermore, the restriction that the coefficient on the hedge-portfolio covariance is one smaller than the coefficient on the market-portfolio covariance can not be rejected. This suggests that the intertemporal asset pricing model proposed by Campbell (1993) can be used to explain the returns on the five largest stock market indices.     

The market price of risk of the variance term structure

In this paper I examine the market price of risk of the variance term structure. To this end, the S&P 500 option implied variance term structure is used as a proxy for aggregate variance risk. Principal component analysis shows that time variation in the variance term structure over the 1996–2012 period can be explained mainly by two factors which capture changes in the level and slope. The market price of risk of each factor is estimated in the cross-section of stock returns. The slope of the variance term structure is the most significant factor in the cross-section of stocks returns and carries a negative risk premium. The slope factor has also some predictive ability over long horizon equity returns.     

The conditional relation between dispersion and return

The main goal of this paper is to examine the conditional pricing effect of return dispersion on the cross section of returns. We observe a systematic conditional relation between dispersion and return even after controlling for market, size and book-to-market factors. However, we find that return dispersion risk is asymmetrically priced with a significantly positive premium observed during periods of large market gains only. The findings are found to be robust to alternative conditional specifications of market returns, suggesting asymmetric pricing effect of the return dispersion factor. We provide alternative explanations for the systematic risk captured by the return dispersion factor and discuss implications for portfolio management and corporate decisions.     

Spot price modeling and the valuation of electricity forward contracts: The role of demand and capacity

We propose a model where wholesale electricity prices are explained by two state variables: demand and capacity. We derive analytical expressions to price forward contracts and to calculate the forward premium. We apply our model to the PJM, England and Wales, and Nord Pool markets. Our empirical findings indicate that volatility of demand is seasonal and that the market price of demand risk is also seasonal and positive, both of which exert an upward (seasonal) pressure on the price of forward contracts. We assume that both volatility of capacity and the market price of capacity risk are constant and find that, depending on the market and period under study, it could either exert an upward or downward pressure on forward prices. In all markets we find that the forward premium exhibits a seasonal pattern. During the months of high volatility of demand, forward contracts trade at a premium. During months of low volatility of demand, forwards can either trade at a relatively small premium or, even in some cases, at a discount, i.e. they exhibit a negative forward premium.     

股票停牌、涨跌停与ETF定价效率——基于上证50ETF日度数据的实证研究

本文应用中国股市2007年至2011年的数据,研究了上证50ETF市场价格和基金净值的相关关系,以及折溢价水平及其影响因素。基于ETF的申购赎回和交易机制,在成分股涨跌停板和停牌期间,由于ETF二级市场价格具有价格发现功能,ETF市场价格可能较大偏离(形式上的)ETF净值,造成ETF的异常折溢价,而此类异常折溢价并不是真正的套利机会。另外,上证50ETF的市场价格与基金净值存在显著同步变动的关系;在涨跌停板和停牌期间之外,上证50ETF的折溢价水平低于套利所需的交易成本。本文研究表明,上证50ETF具有较高的定价效率。     

House Price Index Construction in the Nascent Housing Market: The Case of China

Most existing house price index construction methods are developed mainly based on transaction data from the secondary housing market, and are not necessarily suitable for the nascent housing markets where a predominant portion of housing transactions are new units. Using the booming market in China as an example, we evaluate and compare the performances of three most common house price measurement methods in the newly-built housing sector, including the simple average method without quality adjustment, the matching approach with the repeat sales modeling framework, and the hedonic modeling approach. Our analyses suggest that the simple average method fails to account for the substantial complex-level quality changes over time of sales during our sample period, and the matching model fails to control for the effect of developers’ pricing behaviors when adopted in the newly-built sector, hence both are downward biased. Based on this finding, we apply a hedonic method, which allows us to control for both quality changes over time of sales and developers’ pricing behaviors, to 35 major newly-built housing markets and provide the first multi-city constant-quality house price index in China. The new index reveals that the current Chinese housing market is facing a greater risk of mispricing than reported by the existing official metrics.