Department of Finance

1. A novel cluster HAR-type model for forecasting realized volatility

Author:Yao, XZ;Izzeldin, M;Li, ZX


Abstract:This paper proposes a cluster HAR-type model that adopts the hierarchical clustering technique to form the cascade of heterogeneous volatility components. In contrast to the conventional HAR-type models, the proposed cluster models are based on the relevant lagged volatilities selected by the cluster group Lasso. Our simulation evidence suggests that the cluster group Lasso dominates other alternatives in terms of variable screening and that the cluster HAR serves as the top performer in forecasting the future realized volatility. The forecasting superiority of the cluster models are also demonstrated in an empirical application where the highest forecasting accuracy tends to be achieved by separating the jumps from the continuous sample path volatility process. (C) 2019 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.
2. Do Auditors Respond to Media Coverage? Evidence from China

Author:Gong, SX;Gul, FA;Shan, LW


Abstract:SYNOPSIS: This paper examines whether news coverage of client firms is associated with their audit fees. Using data from China listed firms during 2004-2013, we find that high coverage client firms are on average charged higher audit fees, irrespective of the media tone. This positive association is stronger for large auditors than for small auditors, and for bad news than for good news. The main results hold for both state-owned enterprises (SOEs) and non-SOEs, and for both politically connected and non-connected firms. The results are robust after controlling for the effects of information asymmetry, auditor choice, internal corporate governance, and alternative measurements of the key variables. Overall, our evidence is supportive of the view that auditors assess high coverage clients as higher risk audits requiring greater audit efforts. We conclude that the financial news media plays a disciplining role in China through its potential to trigger reputational sanctions and regulatory action.
3. Corporate Hedging and the High Idiosyncratic Volatility Low Return Puzzle

Author:Chng, MT;Fang, V;Xiang, V;Zhang, HF


Abstract:The literature offers various explanations to either support or refute the Ang et al. (2009) high idiosyncratic volatility low return puzzle. Fu (2006) finds a significantly positive contemporaneous relation between return and exponential generalized autoregressive conditional heteroskedastic idiosyncratic volatility. We use corporate hedging to shed light on this puzzle. Conceptually, idiosyncratic volatility matters to investors who face limits to diversification. But limits to diversification become less relevant for firms that consistently hedge. We confirm the main finding in Fu (2009), but only for firms that do not consistently hedge. For firms that adopt a consistent hedging policy, idiosyncratic volatility, whether contemporaneous or lagged, is insignificant in Fama-MacBeth regressions, controlling for size, book-to-market, momentum, liquidity, and industry effects.
4. Return predictability of variance differences: A fractionally cointegrated approach

Author:Li, ZX;Izzeldin, M;Yao, XZ


Abstract:This paper examines the fractional cointegration between downside (upside) components of realized and implied variances. A positive association is found between the strength of their cofractional relation and the return predictability of their differences. That association is established via the common long-memory component of the variances that are fractionally cointegrated, which represents the volatility-of-volatility factor that determines the variance premium. Our results indicate that market fears play a critical role not only in driving the long-run equilibrium relationship between implied-realized variances but also in understanding the return predictability. A simulation study further verifies these claims.
5. The economic significance of CDS price discovery

Author:Xiang, V;Chng, MT;Fang, V


Abstract:Between 2005 and 2009, we document evident time-varying credit risk price discovery between the equity and credit default swap (CDS) markets for 174 US non-financial investment-grade firms. We test the economic significance of a simple portfolio strategy that utilizes fluctuation in CDS spreads as a trading signal to set stock positions, conditional on the CDS price discovery status of the reference entities. We show that a conditional portfolio strategy which updates the list of CDS-influenced firms over time, yields a substantively larger realized return net of transaction cost over the unconditional strategy. Furthermore, the conditional strategy's Sharpe ratio outperforms a series of benchmark portfolios over the same trading period, including buy-and-hold, momentum and dividend yield strategies.
6. The liquidity of the London capital markets, 1825-70(dagger)

Author:Campbell, G;Turner, JD;Ye, Q


Abstract:This article examines the liquidity of the London capital markets in the decades following the liberalization of UK incorporation law. Using comprehensive stock and bond data, we calculate a measure of market liquidity for the period 1825-70. We find that stock market liquidity trended upwards but bond market liquidity did not increase over the sample period. Stock market liquidity during our sample period was partially influenced by the bond market, rather than fluctuations in economic output. In our analysis of the cross-sectional determinants of individual stock liquidity, we find that firm size and the number of issued shares were important determinants of liquidity. Finally, we find little evidence of an illiquidity premium, which is consistent with the view that investors did not price liquidity in this nascent market.
7. Project-Level Disclosure and Investment Efficiency: Evidence From China

Author:Chen, JA;Cheng, XS;Gong, SX;Tan, YC


Abstract:Different from studies that use rough proxies for aggregate accounting information quality to investigate its impact on investment efficiency, we construct a project-level measure of disclosures pertaining specifically to firms' ongoing and future investments, using a large sample of Chinese listed firms. We first validate this measurement of project-level investment disclosure, finding that more detailed investment disclosures are associated with stronger market reactions, particularly among strong-governance firms. Furthermore, we find that project-level disclosure is associated with higher future investment efficiency for strong-governance firms, but not for weak-governance firms. Investigations into underlying channels reveal that well-governed firms with more investment disclosures face less financial constraints and are more likely to abandon poorly performing investments. Cross-sectional analyses suggest that project-level disclosure and governance play a more important role in settings where firms have stronger incentives for opportunistic disclosure. Overall, our evidence indicates that project-level disclosure interacts with corporate governance to impact investment efficiency. The results have implications for disclosure regulation and practice.
8. What moved share prices in the nineteenth-century London stock market?

Author:Campbell, G;Quinn, W;Turner, JD;Ye, Q


Abstract:Using a new weekly blue-chip index, this article investigates the causes of stock price movements on the London market between 1823 and 1870. We find that economic fundamentals explain about 15 per cent of weekly and 34 per cent of monthly variation in share prices. Contemporary press reporting from the London Stock Exchange is used to ascertain what market participants thought was causing the largest movements on the market. The vast majority of large movements were attributed by the press to geopolitical, monetary, railway-sector, and financial-crisis news. Investigating the stock price changes on an independent list of events reaffirms these findings, suggesting that the most important specific events that moved markets were wars involving European powers.
9. A two-stage Bayesian network model for corporate bankruptcy prediction

Author:Cao, Y;Liu, XQ;Zhai, J;Hua, S


Abstract:We develop a Bayesian network (LASSO-BN) model for firm bankruptcy prediction. We select financial ratios via the Least Absolute Shrinkage Selection Operator (LASSO), establish the BN topology, and estimate model parameters. Our empirical results, based on 32,344 US firms from 1961-2018, show that the LASSO-BN model outperforms most alternative methods except the deep neural network. Crucially, the model provides a clear interpretation of its internal functionality by describing the logic of how conditional default probabilities are obtained from selected variables. Thus our model represents a major step towards interpretable machine learning models with strong performance and is relevant to investors and policymakers.
10. Why Do Firms Pay Dividends?: Evidence from an Early and Unregulated Capital Market

Author:Turner, JD;Ye, Q;Zhan, WW

Source:REVIEW OF FINANCE,2013,Vol.17

Abstract:Why do firms pay dividends? To answer this question, we use a hand-collected data set of companies traded on the London stock market between 1825 and 1870. As tax rates were effectively zero, the capital market was unregulated, and there were no institutional stockholders, we can rule out these potential determinants ex ante. We find that, even though they were legal, share repurchases were not used by firms to return cash to shareholders. Instead, our evidence provides support for the information-communication explanation for dividends, while providing little support for agency, illiquidity, catering, or behavioral explanations.
11. Editorial: Finance and risk management for international logistics and the supply chain


Source:Finance and Risk Management for International Logistics and the Supply Chain,2018,Vol.

12. Rookie independent directors and corporate fraud in China


Source:Finance Research Letters,2021,Vol.

Abstract:This paper examines whether rookie independent directors (RIDs) have an effect on corporate fraud in Chinese public companies. In firm-level analysis, we find that the presence of RIDs increases the likelihood of corporate fraud. In director-level analysis, we reveal that rookie independent directors are less likely to dissent using the voting records collected from company announcements. And the cost of dissension for RIDs is the higher likelihood of losing current board seats, compared with seasoned independent directors. Our results are robust to alternative variables about the existence of RIDs, the IV approach and the conditional model.
13. Do stock markets lead or lag macroeconomic variables? Evidence from select European countries

Author:Camilleri, SJ;Scicluna, N;Bai, Y


Abstract:This study examines the connections between stock prices and key macroeconomic indicators: inflation, industrial production, interest rates, money supply and select interactions between the latter group of variables. Such links are evaluated through vector-autoregressions (VARs) on monthly data spanning over the period 1999-2017, for Belgium, France, Germany, Netherlands and Portugal. We check whether such relations are confirmed across different sub-periods and also adopt a non-parametric approach by using a Pesaran-Timmermann test. We find different contemporaneous and lead-lag relationships between stock prices and the selected variables, although there are variations across countries. VAR models indicate that stock prices significantly lead inflation across all countries during the sample period and in most cases this relationship was positive. In addition, stock prices significantly lead industrial production in four of the sampled countries and these relationships were positive as well. Contrary to long-established finance theories, we did not find numerous significant links between interest rates and stock indices; however the interaction between interest rates and money supply was a leading indicator of stock prices in France, Germany and Portugal.
14. Asymmetries, causality and correlation between FTSE100 spot and futures: A DCC-TGARCH-M analysis

Author:Tao, J;Green, CJ


Abstract:We use DCC-TGARCH-M to study asymmetries in the conditional variance in FTSE100 spot and futures returns before and after cost-reducing market microstructure changes on the London Stock Exchange and the London International Financial Futures Exchange. We find bidirectional causality-in-mean and that negative shocks have a larger impact on the conditional variances than positive shocks. There is little evidence of causality-invariance. The results support a risk premium explanation of asymmetric volatility before the microstructure changes; afterwards, there is evidence of a risk premium effect in futures but a momentum effect in spot. Following the microstructure changes, the speed at which the markets absorbed news increased, as did the asymmetric volatility effect of bad news. We also document regular temporary declines in the conditional correlations following contract expiration. This is consistent with the increased uncertainty following expiration, when investors' attention switches to the next near contract, and the no-arbitrage linkage between spot and futures is temporarily reduced. (C) 2012 Elsevier Inc. All rights reserved.
15. Modelling systems with a mixture of I(d) and I(0) variables using the fractionally co-integrated VAR model

Author:Yao, XZ;Izzeldin, M;Li, ZX

Source:ECONOMICS LETTERS,2019,Vol.181

Abstract:We propose a filtration technique for making inference in systems with I(0) and I(d) variables using the fractionally co-integrated vector autoregressive (FCVAR) model with long memory in the co-integrating residuals. Superior predictions for the I(0) variable are demonstrated using simulations. (C) 2019 Elsevier B.V. All rights reserved.
16. Watch out for bailout: TARP and bank earnings management

Author:Fan, YY;Huang, YC;Jiang, YX;Liu, FH


Abstract:We study the impact of the recent government bailout, called Trouble Asset Relief Program (TARP), on bank accounting quality. By adopting a difference-in-difference (DID) method, we find a significantly positive impact of TARP on earnings management of recipient banks, compared with their non-recipient peers. Further, we observe that TARP-recipient banks engage more in earnings-decreasing manipulation rather than earnings-increasing manipulation. This behavior is more obvious for those banks that voluntarily request for TARP funds. Also, participant banks change their accounting strategy to manipulate earnings upwards after TARP funds are paid back. Our findings confirm our hypothesis that TARP-recipient banks are motivated to manipulate downwards (or hide some earnings) to obtain further favorable treatment by the program administrators. (C) 2020 Elsevier B.V. All rights reserved.
17. Managerial multi-tasking, Team diversity, and mutual fund performance

Author:Chen, JJH;Xie, L;Zhou, S


Abstract:This study examines the impact of multi-tasking teams on fund performance. We find that while managerial multi-tasking has a negative impact on fund performance, teamwork can mitigate the adverse effect associated with managerial multi-tasking, which is indicative of superior performance of funds managed by multi-tasking teams. More importantly, it is the characteristics of the multitasking team that contribute to these superior results, which can be attributed to network cognitive diversity, suggesting that extended networks, facilitated by indirectly-connected managers via local teammates, can largely enhance the scale of cognitive diversity, thus generating significant gains through information pooling and integration. In assessing possible mechanisms for the observed superior performance, we find evidence of improved decision-making induced by network cognitive diversity through both transmission and sharing of value-relevant information, and speedy information diffusion.
18. An empirical study strategically assessing the role of the state government in corporate governance, ownership and performance of SOEs

Author:Pak,Donald Henry Ah;Ding,Xiaoming

Source:China and the Global Economy in the 21st Century,2012,Vol.

19. Modelling temperatures in shanghai using fractional brownian motion


Source:Far East Journal of Mathematical Sciences,2012,Vol.70

Abstract:In this study, daily average temperatures in Shanghai over the last twenty years are modelled with a view towards application to weather derivatives. For this purpose, a mean-reverting Ornstein-Uhlenbeck (OU) process driven by Fractional Brownian Motion (FBM) is used. The estimated Hurst parameter shows that temperature dynamics deviate from the assumptions of Brownian motion and that option prices using FBM are significantly higher compared to the model with an OU process driven by Brownian motion. The motivation for using FBM is the long-range temporal dependence and the normality of temperature fluctuations observed for Shanghai temperatures. Standard call and put options on a temperature index (Heating/Cooling Degree Days [HDDs/CDDs]) for Shanghai are priced using a Monte Carlo simulation of the proposed model with fitted parameters. © 2012 Pushpa Publishing House.
20. Financial Transparency, Media Coverage, and Momentum in China

Author:Chen, SH;Cao, XP;Lin, KB;Huang, JB;Zhang, YB;Lin, HW


Abstract:This paper digests the influences of financial transparency and media coverage in the Chinese stock market. In China, media performs under a regulatory system and media information is regarded as the direction of news. In addition, the Chinese market is dominated by retail investors and financial information is always manipulated, so the reliability of financial information is quite intriguing. The effect of ostensible financial information on the stock market through the media hype is a crucial issue. We employ media and transparency to analyze over 3,000 stocks in China. First of all, the Chinese stock market is characterized by significantly negative momentum profit and thus exhibits price reversal. However, when high media coverage and high transparency jointly come into play, the significantly negative momentum profit turns to be significantly positive. This dramatic change alters the price reversal to be price momentum. By contrast, low media coverage and low transparency still result in price reversal.
Total 45 results found
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