The impacts of large trades by trader types on intraday futures prices: Evidence from the Taiwan Futures Exchange

We find that China's P/E ratio is comparable to that of the U.S. S&P 1500 index, a broad based index covering large, middle, and small capitalization firms. We provide an explanation as to why China's seemingly low P/E ratio is not surprising in light of the economic growth that it has experienced. Specifically, we show that (i) the P/E ratio is negatively associated with earnings volatility in both the Chinese and U.S. stock markets with an economically significant magnitude; and (ii) historical earnings volatility is considerably higher in China than in the U.S. Higher earnings volatility in China offsets higher growth prospect in setting the P/E ratio, making its P/E ratio much closer to what is observed empirically than otherwise implied by its growth rate.     

Extreme return–volume dependence in East-Asian stock markets: A copula approach

A copula approach is used to examine the extreme return–volume relationship in six emerging East-Asian equity markets. The empirical results indicate that there is significant and asymmetric return–volume dependence at extremes for these markets. In particular, extremely high returns (large gains) tend to be associated with extremely large trading volumes, but extremely low returns (big losses) tend not to be related to either large or small volumes.     

Re-Examining Variance-Bounds Tests for Asset Prices

The hypothesis of market efficiency is typically rejected by standard variance-bounds tests which assume stationary asset prices. A number of researchers, however, argue that tests used in previous studies are inappropriate since asset prices appear to be generated by nonstationary processes. In this paper, we propose a regression-based variance-bounds test that is valid when the asset price is an integrated process. We apply this test to annual U.S. data over the 1889 to 1985 sample period using measures of the perfect-foresight price constructed from a nonlinear asset-pricing equation that allows for a stochastic discount parameter. The results suggest that the data appear consistent with a version of the efficient-market hypothesis detailed in this paper.     

Do foreigners facilitate information transmission in emerging markets?

Using the degree of accessibility of foreign investors to emerging stock markets, or investibility, as a proxy for the extent of foreign investments, we assess whether investibility has a significant influence on the diffusion of global market information across stocks in emerging markets. We show that greater investibility reduces price delay to global market information. We also find that returns of highly investible stocks lead those of noninvestible stocks because they incorporate global information more quickly. These results are consistent with the idea that financial liberalization in the form of greater investibility yields informationally more efficient stock prices in emerging markets.     

On the Efficiency of Conditional Heteroskedasticity Models

This paper discusses how conditional heteroskedasticity models can be estimated efficiently without imposing strong distributional assumptions such as normality. Using the generalized method of moments (GMM) principle, we show that for a class of models with a symmetric conditional distribution, the GMM estimates obtained from the joint estimating equations corresponding to the conditional mean and variance of the model are efficient when the instruments are chosen optimally. A simple ARCH(1) model is used to illustrate the feasibility of the proposed estimation procedure.     

Empirical Indicators of Currency Crises in East Asia

The paper is concerned with identifying useful indicators of the probability of currency crises in Indonesia, Malaysia, the Philippines, South Korea and Thailand over a period of 22 years, where a currency crisis is defined as a large and infrequent devaluation of a local currency. The leading crisis indicators include international and domestic factors; but they are dominated by the leading indicators from the financial sector, such as the ratio of short-term debt to foreign reserves, the ratio of M2 to foreign reserves, and the indicator representing a regional contagion effect. This result is interpreted as pointing to external illiquidity together with adverse shifts in the market sentiment as the likely catalyst for the 1997–98 East Asia crisis.     

Testing the permanent-income hypothesis: new evidence from West-German states (Länder)

This paper investigates whether time-series data from 11 West-German states (L?nder) provide evidence in accord with the implication of the permanent-income hypothesis (PIH) for the stochastic relationship between consumption and income innovations. The empirical results do not support this hypothesis, in the sense that the response of consumption to income innovations is found to be much weaker than is predicted by the PIH. Moreover, for each individual state as well as for Germany as a whole, the response was found to be asymmetric, being stronger for negative than positive income innovations. This evidence of asymmetry is consistent with a model in which consumers are liquidity constrained.

On the Stability of Long-Run M2 Demand in Japan

In this study we examine the stability of long-run broad money demand in Japan. In contrast to previous studies of Japanese broad money demand, we use a series of tests designed specifically to test for structural instability in the presence of I(1) processes. According to these tests, the Japanese broad money demand function appears to be stable over a period of financial innovation and deregulation.
JEL Classification Numbers: E41, C22.     

Do Chinese publicly listed companies adjust their capital structure toward a target level?

We study the determinants of capital structure for 650 Chinese publicly listed companies over the period from 1999 to 2004. We posit that a firm's decision on capital structure is inherently dynamic, and estimate the resulting dynamic capital structure model. The main findings of the paper are as follows: (i) Chinese firms adjust toward an equilibrium level of debt ratio in a given year at a very slow rate; (ii) firm size, tangibility and state shareholdings are positively associated with firm's leverage ratio, while profitability, non-debt tax shields, growth and volatility are negatively related to firm's leverage ratio; (iii) lagged profitability has a negligibly small and positive impact on firm's leverage ratio; (iv) for a firm experiencing a large reduction in its leverage ratio only about 11% of the discrepancy between its desired and actual leverage level is eliminated within a year (compared to more than 18% for full firm sample); (v) extending the basic model to allow for both the target level and the speed of adjustment to be endogenously determined, we find that Chinese firms tend to adjust faster if they are farther away from the equilibrium leverage level; and lastly (vi) extending the sample period to cover the earlier periods starting from 1993, when the Chinese stock markets were first developed, results in a slower speed of adjustment for firms in the below target sample.     

The return premiums to accruals quality

Using a battery of look-ahead-bias free measures of accruals quality (AQ), we find a strong and long-lasting negative relation between future returns and AQ. In decile portfolios that rank on AQ, a hedge portfolio that goes long in the lowest decile and short in the highest decile generates an annualized, risk-adjusted return of 4–12 % over 1-month to 5-year horizons, depending on the AQ measure and the portfolio weighting scheme. The return premiums associated with AQ are, (1) robust to a wide range of AQ measures, (2) robust to a battery of return-informative variables, and (3) not driven by low-priced or small stocks, earnings shocks, or the fourth-quarter effect. The documented premiums are consistent with the information uncertainty effect where firm uncertainty is negatively related to future returns.