Forecasting Bull and Bear Markets: Evidence from China

This article extends previous empirical research to forecast Chinese bull and bear stock markets by using three types of binary probit time series models, which are static, autoregressive, and dynamic autoregressive models. This study shows that the dynamic auto regressive model performs the best both in- and out-of-sample. The inflation and market return variables significantly affect the market forecast. The dynamic autoregressive model has successfully forecast the bull and bear markets since 2007. The investment strategy based on this model performs better than the simple buy-and-hold strategy, especially after the Chinese government reformed the non-tradable shares in 2005.     

Testing for Mean-Variance Spanning with Short Sales Constraints and Transaction Costs: The Case of Emerging Markets

We propose regression-based tests for mean-variance spanning in the case where investors face market frictions such as short sales constraints and transaction costs. We test whether U.S. investors can extend their efficient set by investing in emerging markets when accounting for such frictions. For the period after the major liberalizations in the emerging markets, we find strong evidence for diversification benefits when market frictions are excluded, but this evidence disappears when investors face short sales constraints or small transaction costs. Although simulations suggest that there is a possible small-sample bias, this bias appears to be too small to affect our conclusions.     

Identifying Bull and Bear Markets in Japan

This study investigates the returns and volatility of bull and bear markets as represented by the Tokyo Stock Price Index (TOPIX). Our results show that bull markets are characterized by high returns and low volatility and that the opposite is true for bear markets. Further, this study uncovers a relationship between the duration of bull and bear markets and the point at which the TOPIX has turned from bull to bear and vice versa. Our results indicate that a bull or bear market has a higher probability of continuing as the duration of market’s current trend lengthens. If a bull or bear market trend persists for more than nine months, its probability of continuing approaches 1. Conversely, the transition from a rising to a declining market, and vice versa, is more likely to occur when the previous trend has persisted for less than nine months.     

Inflation Targeting Around the World

This paper examines the inflation record of twenty-nine inflation- and noninflation-targeting economies. Both industrial and emerging market economies are considered. Empirical evidence is based on a comparison of actual and forecasted inflation, an econometric analysis that estimates changes in inflation persistence, and an estimate of the probability of a breach in the inflation target as a proxy for the fragility of the targeting regime. I find that inflation persistence has fallen in only a handful of emerging market economies. However, the inflationtargeting regime is not especially fragile in emerging market economies. As these economies gain experience with inflation targets and respond appropriately to forecast errors generated by the private sector, the likelihood of breaches in the target ranges tends to fall.     

Corporate Ownership Around the World

We use data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. We find that, except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means's image of ownership of the modern corporation. Rather, these firms are typically controlled by families or the State. Equity control by financial institutions is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in management.     

Noise Momentum Around the World

We argue that arbitrageurs will strategically limit their initial investment in an arbitrage opportunity in anticipation of further mispricing caused by the deepening of noise traders' misperceptions. Such ‘noise momentum’ is an important determinant of the overall arbitrage process. We design an empirical strategy to capture noise momentum in a two‐period generalized error correction model. Applying it to a wide range of international spot‐futures market pairs, we document pervasive evidence of noise momentum around the world.     

REIT Short Sales and Return Predictability

We examine REIT short sale transactions and show REITs are shorted less frequently than non-REITs. Results also show short sellers are less able to predict negative future returns for REITs, relative to non-REITs, which is consistent with increased pricing efficiency for REITs and suggests REIT assets are more transparent. In a broader context, these results suggest differences in transparency across asset types influence the effectiveness of short selling. Results showing REIT short sellers are contrarian imply traders target REITs that are performing well instead of underperforming REITs, suggesting restrictions on REIT short sales should be re-evaluated.     

Short Sales and Option Listing Decisions

We find that stocks with higher levels of prelisting short activity have a greater probability of option listing. These results are driven by the prelisting short activity of market makers, which suggests that exchanges believe that stocks with greater short selling will provide option market makers a better opportunity to hedge with short sales in the spot market. We also confirm that after options are listed, stocks with more prelisting short activity have more option trading activity. These results indicate that option exchanges strategically list options for stocks they believe with generate high trading volume thereby maximizing the profits of exchange members.     

Board Structures Around the World: an Experimental Investigation

We model and experimentally examine the board structure–performancerelationship. We examine single-tiered boards, two-tiered boards,insider-controlled boards, and outsider-controlled boards. Wefind that even insider-controlled boards frequently adopt institutionallypreferred rather than self-interested policies. Two-tiered boardsadopt institutionally preferred policies more frequently buttend to destroy value by being too conservative, frequentlyrejecting good projects. Outsider-controlled single-tiered boards,both when they have multiple insiders and only a single insider,adopt institutionally preferred policies most frequently. Inthose board designs where the efficient Nash equilibrium producesstrictly higher payoffs to all agents than the coalition-proofequilibria, agents tend to select the efficient Nash equilibria.     

卖空交易、市场行情与股价崩盘风险

本文构建了"暴涨暴跌"市场行情指数以区分股市异常波动与非异常波动行情,利用我国融资融券交易试点及五次扩容事件作为自然实验,精确分离出卖空交易对股价崩盘风险的独立效应。研究发现,虽然融资交易的杠杆效应会增大股价崩盘风险,但是卖空交易显著降低了股价崩盘风险;市场行情对卖空交易和融资交易的影响机制存在差异,"暴涨暴跌"市场行情加大了融资交易的杠杆效应对股价崩盘风险的增大程度,却显著提升了卖空交易对股价崩盘风险的降低作用。本文拓展了卖空交易经济功能的研究,并区分了股市异常波动(暴涨暴跌)和非异常波动行情对卖空交易降低股价崩盘风险功能的影响,研究结论对于完善融资融券制度、促进卖空交易功能发挥、完善资本市场监管具有重要的政策含义。     

Electronic Finance: Reshaping the Financial Landscape Around the World

In recent years, the emergence of electronic finance—especially online banking and brokerage services, and new trading systems—has reshaped the financial landscape around the world. This paper reviews these developments and finds that they are greatly impacting the structure of and competition in financial services industries and will have a large impact on incumbents. Its assessment of how e-finance, and globalization more generally, affects countries highlights the need for changes in four financial sector policy areas—safety and soundness, competition policy, consumer and investor protection, and global public policies—to mitigate risks and reap as much as possible the potential benefits of e-finance.     

Gains from Mergers and Acquisitions Around the World: New Evidence

Using a global M&A data set, this paper provides evidence that the empirical observations relating public acquisitions to, at best, zero abnormal returns, and their stock-financed subset to negative abnormal returns for acquiring firms around the deal announcement are not unanimous across countries. Acquirers beyond the most competitive takeover markets (the United States, United Kingdom, and Canada) pay lower premia and realize gains, while share-for-share offers are at least non-value-destroying for their shareholders. In contrast, target shareholders within these markets gain significantly less, implying that the benefits generated are more evenly split between the involved parties.     

Dividend Yields and Stock Returns: Evidence of Time Variation between Bull and Bear Markets

This study documents persistent shifts in the relationship between stock returns and dividend yields over bull and bear markets. The shift in this relationship appears as a separate effect, distinct from the January effect, and after controlling for firm size and systematic risk. After controlling for these other factors, dividend yield is positively related to return during bear markets but negatively related to return during bull markets. This time-varying relationship between dividend yield and stock return helps to explain the anomalous results of earlier studies.     

Short Sales Constraints and Momentum in Stock Returns

Abstract:   We show that stock characteristics identified by D'Avolio (2002) provide a reliable index of the mostly unobservable short sales constraints. Specifically, we find that this index is positively related to the level of short interest and to short selling costs implied by the disparity in prices in the options and stock markets, and is negatively related to future returns. Using this index, we show that the magnitude of momentum returns for the period 1984 to 2001 is positively related to short sales constraints, and loser stocks rather than winner stocks drive this result. We conclude that short sales constraints are important in preventing arbitrage of momentum in stock returns.     

Debt Tax Shields Around the OECD World

Taxes affect a company’s optimal capital structure, value, and cost of capital, but their impact depends on the tax regime of the country where the company operates. The OECD classifies the tax regimes of its member countries in seven groups. In this paper we offer a general model that encompasses those seven groups. We show that tax benefits of debt vary significantly across tax systems, and that using either Modigliani and Miller’s (1963) or Miller’s (1977) formulas in other tax regimes can lead to quantitatively important mistakes. We also find a significantly positive relationship between average leverage in OECD countries and our indicator of tax shields.     

Options,Short Sales,and Market Completeness

This paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales. The significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling. We also find significant effects on option prices, related to the short interest in the underlying stock. We then present evidence that options also increase information efficiency. Earlier work, that is replicated and extended here, has suggested that short sale constraints cause stock prices to underweight negative information. Options appear to reduce that effect.     

Short Sales Restrictions and Kinks on the Mean Variance Frontier

With a short sales restriction, there may be switching points along the mean variance frontier corresponding to changes in the set of assets held. Traditional wisdom holds that each switching point corresponds to a kink, while Ross has claimed that kinks never occur. This paper shows that the truth lies between the two views, since the efficient frontier may or may not be kinked at a switching point. There is some indication that kinks are rare, since a kink corresponds to a portfolio in which all assets have the same expected return.     

Futures Markets and Informational Efficiency: A Laboratory Examination

Through the use of laboratory market methodology, the effect of a futures market on the time path of asset prices is studied and competing models of asset pricing are analyzed. With replication of market conditions, the predictions of a rational expectations equilibrium model are relatively accurate whether or not futures markets are present. However, the presence of futures markets increases the speed with which an efficient equilibrium is achieved. While this more rapid adjustment can increase the variance of spot market prices as they move to equilibrium, this increased variance reflects efficiency gains due to better information.