Market Structure and Return Volatility: Evidence from the Hong Kong Stock Market

There is no consensus about the cause for higher volatility at the market open than at the market close in the U.S. market. As an order–driven, nonspecialist market, the Hong Kong stock market provides a useful setting for an examination. If halt of trade were the major cause of higher open–to–open volatility, the open–to–open volatility in the Hong Kong market would be higher. However, this is not observed. The autocorrelation of the open–to–open return series also indicates that the temporary price deviation at the market opening is not significant. We view these findings as consistent with the specialist argument.     

The impact of the Japanese market on the intraday Hong Kong stock returns

This paper examines the impact of the price movement of the Japanese market on the Hong Kong market. We find that the Hong Kong stock prices react rapidly to the return information of the Japanese market. The evidence also indicates that the large price movement of the Japanese market can be used as an indicator for the Hong Kong market. The price reaction of the Hong Kong market is instantaneous and takes place in the opening minutes of the afternoon session. However, there is no excess profits when the transactions costs are included. Finally, the Hong Kong market has a significantly higher turnover when the Japanese market is open.     

Market closure effects on return, volatility, and turnover patterns in the Hong Kong index futures market

This paper examines the market closure effect of the Stock Exchange of Hong Kong (SEHK) on the intraday behaviour of the index futures contract which continues to trade for 5–15 min after the close of the SEHK. The behaviour of the index futures market in Hong Kong is consistent with the contagion model of King and Wadhwani (1990) in that the close of the SEHK leads to an immediate downturn in the return, volatility, and turnover in the index futures market. The long period of nontrading before the morning also leads to a higher morning volatility and turnover.     

Interday and intraday volatility: Additional evidence from the Shanghai Stock Exchange

After examining both the interday and intraday return volatility of the Shanghai Composite Stock Index, it was found that the open-to-open return variance is consistently greater than the close-to-close variance. Examining the volatility of interday returns and variance ratio tests with five-minute intervals reveals an L-shaped pattern, or more precisely, two L-shaped patterns, starting with a small hump during both the morning and the afternoon sessions, with the morning session having a much higher interday volatility than the afternoon session. This L-shaped interday volatility is supported by the similarly shaped intraday volatility pattern. This result suggests that the high volatility of intraday returns for the market open is not entirely due to the trading mechanisms (call auction in the market opening) but also due to both the accumulated overnight information and the trading halt effect. The five-minute breaks after the auction and blind auction procedures are the two major driving forces which exaggerate the high intraday volatility observed at the market open.

Stock market structure and volatility

The procedure for opening stocks on the NYSE appears to affectprice volatility. An analytical framework for assessing themagnitude of the structurally induced volatility is presented.The ratio of variance of open-to-open returns to close-to-closereturns is shown to be consistently greater than one for NYSEcommon stocks during the period 1982 through 1986. The greatervolatility at the open is not attributable to the way in whichpublic information is released since both the open-to-open returnand the close-to-close return span the same period of time.Instead, the greater volatility appears to be attributable toprivate information revealed in trading and to temporary pricedeviations induced by specialist and other traders. The impliedcost of immediacy at the open is significantly higher than atthe close. Other empirical evidence in this article documentsthe volume of trading at the open, the time delays between theexchange opening and the first transaction in a stock, the differencein daytime volatility versus overnight volatility, and the extendto which volatility is related to trading volume.     

Simultaneous volatility transmissions and spillover effects: U.S. and Hong Kong stock and futures markets

Contemporaneous transmission effects across volatilities of the Hong Kong Stock and Index futures markets and futures volume of trade are tested by employing a structural systems approach. Competing measures of volatility spillover, constructed from the overnight U.S. S&P500 index futures, are tested and found to impact on the Hong Kong asset return volatility and volume of trade patterns. The examples utilize intra-day 15-min sampled data from this medium-sized Asia Pacific equity and derivative exchange. Both the intra- and inter-day patterns in the Hong Kong market are allowed for in the estimation process.     

Does Trading Volume Contain Information to Predict Stock Returns? Evidence from China's Stock Markets

This paper examines empirical contemporaneous and causal relationships between trading volume, stock returns and return volatility in China's four stock exchanges and across these markets. We find that trading volume does not Granger-cause stock market returns on each of the markets. As for the cross-market causal relationship in China's stock markets, there is evidence of a feedback relationship in returns between Shanghai A and Shenzhen B stocks, and between Shanghai B and Shenzhen B stocks. Shanghai B return helps predict the return of Shenzhen A stocks. Shanghai A volume Granger-causes return of Shenzhen B. Shenzhen B volume helps predict the return of Shanghai B stocks. This paper also investigates the causal relationship among these three variables between China's stock markets and the US stock market and between China and Hong Kong. We find that US return helps predict returns of Shanghai A and Shanghai B stocks. US and Hong Kong volumes do not Granger-cause either return or volatility in China's stock markets. In short, information contained in returns, volatility, and volume from financial markets in the US and Hong Kong has very weak predictive power for Chinese financial market variables.     

A Note on the Intraday Patterns of Initial Public Offerings: Evidence from Hong Kong

This paper examines the intraday patterns of IPOs in Hong Kong during the period 1995–1998. The results reveal that the well‐known under‐pricing phenomenon of IPOs occurs only at the opening trading of new issues and vanishes afterwards. The return volatility of IPOs is found to be high during the first trading session, and declines rapidly during the rest of the first trading day until the end of the trading day. The intraday return volatility of IPOs is found to follow a double U‐shape pattern, which is similar to that of the general market. A great deal of trading activity was recorded during the first five minutes of the trading day. Consistent results are obtained for IPOs registered during the pre‐crisis and post‐crisis periods. This paper has practical implications for investors. Investors can benefit from the under‐pricing only if they subscribe for new shares in the primary market. There is, however, no profit‐making opportunity for day traders who buy shares on the first trading day. This shows that the Hong Kong market is efficient in adjusting for the IPO under‐pricing. In addition, it is likely that, because of Hong Kong's share allotment method, only big investors who apply for large numbers of shares can benefit from this under‐pricing phenomenon.     

Stock Price Behavior over Trading and Non-trading Periods: Evidence from the Taiwan Stock Exchange

This paper examines the stock price behavior in the trading and non-trading periods for stocks listed on the Taiwan Stock Exchange over 1971-96. The results indicate that the trading-time return variances are higher than the non-trading-time return variances especially for the larger trading-volume quintiles. This result is consistent with the private information hypothesis. Moreover, open-to-open return variances are higher than close-to-close return variances. Since both the opening and the closing transactions are conducted by the call auction procedure, the results are consistent with the trading halt hypothesis but not with the trading mechanism hypothesis.     

A behavioural explanation to the asymmetric volatility phenomenon: Evidence from market volatility index

This study examines how the behavioural explanations, in particular loss aversion, can be used to explain the asymmetric volatility phenomenon by investigating the relationship between stock market returns and changes in investor perceptions of risk measured by the volatility index. We study the behaviour of India volatility index vis‐à‐vis Hong Kong, Australia and UK volatility index, and provide a comprehensive comparative analysis. Using Bai‐Perron test, we identify structural breaks and volatility regimes in the time series of volatility index, and investigate the volatility index‐return relation during high, medium and low volatility periods. Regardless of volatility regimes, we find that volatility index moves in opposite direction in response to stock index returns, and contemporaneous return is the most dominating across the four markets. The negative relation is strongest for UK followed by Australia, Hong Kong and India. Second, volatility index reacts significantly different to positive and negative returns; negative return has higher impact on changes in volatility index than positive return across the markets over full‐sample and sub‐sample periods. The asymmetric effect is stronger in low volatility regime than in high and medium volatility periods for all the markets except UK. The strength of asymmetric effect is strongest for Hong Kong and weakest for India. Finally, negative returns have exponentially increasing effect and positive returns have exponentially decreasing effect on the changes in volatility index.     

What makes the stock market jump? An analysis of political risk on Hong Kong stock returns

This paper employs a components-jump volatility filter to investigate the possible market impact of political risk. The filter operates by identifying jump return dates, which are then associated with political events, allowing us to measure the market return and volatility effects of political announcements. Our empirical results show that political developments in Hong Kong have a significant impact on its market volatility and return. The results have some interesting implications for option pricing and political risk management.     

Specialist participation and limit orders

We present a market microstructure model to examine specialist's strategic participation decisions in a security market where there are noise traders, limit order traders, an insider and a specialist. We argue that the specialist's participation rate depends on the depth of the limit book and its uncertainty. In particular, the specialist has incentives to trade against the market trend when the limit book depth is low and to trade with the market trend when the depth is high. Moreover, the specialist's participation rate is positively related to the limit book depth uncertainty and the asset price volatility, but is negative related to the average trading volume. We also discuss the specialist's participation strategies under the NYSE regulation that prohibits the specialist from trading with the market trend.     

在岸人民币市场与香港离岸人民币市场联动关系的实证研究

作为国际金融中心,香港为内地的发展提供了举足轻重的金融服务。近年来,我国政府力推人民币国际化,具有完备金融市场的香港成为构建离岸人民币中心、促进人民币国际化进程的排头兵。香港已经建成了规模庞大的离岸人民币市场,这一市场的波动和走势对在岸人民币市场的干扰和影响不可轻视,关乎在岸人民币市场的稳定和国家金融安全。文章分析了在岸人民币市场即期汇率、远期汇率与香港离岸人民币市场即期汇率、远期汇率之间的关系,发现两两之间并不总是存在引导关系。     

Causality in volatility and volatility spillover effects between US, Japan and four equity markets in the South China Growth Triangular

In examining co-movement across international stock markets, previous researchers usually pre-determine the direction of causation and neglect the Chinese equity markets. In this study, we examine the spillover effects of volatility among the two developed markets and four emerging markets in the South China Growth Triangular using Chueng and Ng's causality-in-variance test. Several findings deserve mention: (1) the Japanese stock market affects the US stock market and there is a feedback relationship between the Hong Kong and US stock market. (2) Markets of the SCGT are contemporaneously correlated with the return volatility of the US market. (3) Econometric models constructed according to the results of variance-in-causality tests have greater explanatory power than the conventional GARCH(1,1) model. (4) Using the return volatility of foreign exchange as a proxy for informational arrival can explain excess kurtosis of a stock return series, especially for the less open emerging market. (5) Geographic proximity and economic ties do not necessarily lead to a strong relationship in volatility across markets.     

香港股市与内地股市的联动性研究

本文分3个阶段考察了香港回归以来,香港股市和内地股市之间的联动关系及其变化。协整分析表明,香港股市和内地股市之间存在长期的均衡关系,这种均衡关系在内地资本市场实行股权分置改革后更趋于稳定。Granger因果检验表明,香港回归以来香港股市和内地股市之间的引导关系在经历B股开放和股权分置改革后发生了变化。脉冲响应函数分析从动态的角度进一步验证了香港股市和内地股市之间的引导关系及其变化,并深入分析了单个变量的波动或冲击对其自身及另一变量的影响程度。     

STOCK MARKET OPENNESS AND MARKET QUALITY: EVIDENCE FROM THE SHANGHAI–HONG KONG STOCK CONNECT PROGRAM

We study the impact of capital market openness on high-frequency market quality in China. The Shanghai–Hong Kong Stock Connect program (SHHKConnect) opens China's stock market to foreign investors and offers a natural experiment to investigate this question. Using a difference-in-differences approach, we find that market liberalization leads to lower quoted spread, lower effective spread, lower market depth, and higher short-term volatility. Our findings imply that opening the markets to more sophisticated foreign investors is associated with higher competition and more cross-market arbitrage activities, narrowing the spread and reducing liquidity providers’ profits, but increasing the price impact and short-term volatility of connected stocks.     

Stock market closure and intraday stock index futures market volatility: “contagion”, bid–ask bias or both?

Chang et al. [Journal of Business 68 (1) (1995) 61] examine the impact of the closure of the New York Stock Exchange (NYSE) on S&P500 stock index futures traded on the Chicago Mercantile Exchange. They document a decline in futures market volatility immediately after the close of the NYSE, and an increase 15 minutes later when the futures market closes. They attribute this to contagion–i.e. a decline in information transfer from equities to futures markets following the closure of the underlying market. This paper examines the impact of the extension of trading hours in Hang Seng Index futures traded on the Hong Kong Futures Exchange on the 20 November, 1998 to 15 minutes after the close of the underlying market (the Stock Exchange of Hong Kong). Using the unique natural experiment provided by this change, a pattern similar to US markets is documented for the Hang Seng Index Futures following the change in trading hours. This provides strong evidence that the intraday pattern in volatility is caused by market closure. Unlike US futures exchanges, price reporters on the floor of the Hong Kong Futures Exchange collect quote data in addition to trade data. This data facilitates a test of another plausible microstructure explanation for the observed behaviour–bid–ask bounce associated with trading activity. This paper provides evidence that bid–ask bounce also explains part of the observed intraday behaviour in price volatility.     

上海和香港两地股市联动性研究--基于GARCH模型的分析

本文基于经济基础假说和市场传染假说两大基础理论,将股票收益率分解为开盘收益率和收盘收益率,运用GARCH．M模型研究了上海股市和香港股市之间的联动关系。结果显示,两大股市存在相互影响的联动关系,但是上海对香港股市的影响要强于香港对上海股市的影响,反映出两地之间的紧密经济关系及大陆对香港地区经济影响日益增强的现实。     

Overconfidence among option traders

The investor overconfidence theory predicts a direct relationship between market‐wide turnover and lagged market return. However, previous research has examined this prediction in the equity market, we focus on trading in the options market. Controlling for stock market cross‐sectional volatility, stock idiosyncratic risk, and option market volatility, we find that option trading turnover is positively related to past stock market return. In addition, call option turnover and call to put ratio are also positively associated with the past stock market return. These findings are consistent with the overconfidence theory. We also find that overconfident investors trade more in the options market than in the equity market. We rule out explanations other than investor overconfidence, such as momentum trading and varying risk preferences, for our findings.     

How cross-listings from an emerging economy affect the host market?

We study the impact of mainland Chinese listings in Hong Kong on the quality and development of the Hong Kong equity market. At the macro-level, we find that the increasing presence of mainland Chinese stocks in Hong Kong increases the size, trading volume, and its link with the China and world markets but reduces the overall volatility of the Hong Kong stock market. At the firm level, the increase affects the market quality, resulting in lower turnover rate, higher Amihud illiquidity ratio, and higher spread for non-mainland Chinese firms. Furthermore, such an increase in presence causes Hong Kong stocks to move in a more synchronized way and reduces these firms investment sensitivity to stock price movement, implying deterioration in the information environment. As a whole, the increasing presence of Chinese companies in Hong Kong brings benefits to the Hong Kong market, yet not without cost.