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Abstract:
In Asia, NASDAQ's success has helped prompt Singapore (SESDAQ), Japan (JASDAQ), Taiwan (TAISDAQ) and South Korea (KOSDAQ) to set up or formalize their own second board markets in the 1980s and early 1990s. In 1999, Malaysia (MESDAQ) and Hong Kong (GEM) also set up their second board markets. Given the growing importance of these second board markets, we examine whether there is any evidence of spillovers from NASDAQ returns and volatilities to Asian second board market returns and volatilities and whether the cross-country spillovers are strong relative to domestic spillovers from the corresponding main board markets. For this purpose, we employ EGARCH models, dynamic causality tests, and VAR-based forecast error decompositions using daily data of a recent sample period that includes the Asian financial crisis of 1997 and up to April 20, 2001.

We find that, first, there is strong evidence of lagged returns and volatility spillovers from the NASDAQ market to the Asian second board markets when we exclude contemporaneous main board market returns. Second, there is strong evidence of contemporaneous and lagged returns and volatility spillovers from the local main board markets to the corresponding second board markets. However, even in the presence of contemporaneous main board market returns, there remain substantial spillovers from the lagged NASDAQ returns and volatilities to Asian second board market returns and volatilities. These findings are not sensitive to whether we use U.S. dollar-based data or local currency-based data.

Given the difference in the trading hours between the NASDAQ and Asian stock markets, we attempt to alleviate this concern by using some available intra-day return data and Canadian return data. The findings seem quite robust: There is substantial information spillover from the NASDAQ to Asian and Canadian second board markets. These findings indicate the existence of substantial cross-country industry effect (or meteor shower effect) as well as domestic market effect (or heat wave effect) and imply that both country diversification and industry diversification are important.

Abstract:
The dynamic effect of idiosyncratic risk on market returns has been debated recently. Previous studies examine the effect based on a regression of excess returns on one-lagged volatility. We claim this approach provides only a partial, limited picture of the dynamic effect of idiosyncratic risk that tends to be persistent over time. By correcting for the serial correlation in idiosyncratic volatility, we find a significant positive effect of idiosyncratic volatility. Unlike previous studies, this finding is robust with respect to various firm size portfolios, sample periods, and measures of the idiosyncratic risk. We further find that idiosyncratic volatility affects stock market returns beyond its effect through revisions in the present value of future cash flows and expected discount rates, and the idiosyncratic volatility contains fundamental factors as well as nonfundamentals. This suggests mispricing of the stock market in its response to idiosyncratic risk, and there may be some measurement problems with idiosyncratic risk, which may be related to non-diversifiable risk.

Abstract:
Given the growth in the importance and popularity of share repurchases, we use an alternative time-series approach to test various hypotheses on share repurchases and dividends. Each hypothesis is formulated based on a Vector Autoregression (VAR) of relevant variables and characterized as restrictions on the VAR, thus providing a measure of the empirical validity. By investigating both share repurchase and dividend payout policies in a time-series VAR context, we account for the dynamic and multi-dimensional nature of the two payout policies. Therefore, our analysis provides a comprehensive understanding of various hypotheses of dividends as well as those of share repurchases. Our findings can be summarized as follows. First, share repurchases do not contain additional information about future earnings, whereas dividend changes do. Second, share repurchases are significantly related to the undervaluation, whereas dividends are not. Third, share repurchases are strongly associated with temporary components of earnings, whereas dividends are not. Fourth, share repurchases and dividends are not perfect substitutes. They are both complements and substitutes.

share repurchase, dividends, VAR identification

Abstract:
We investigate whether accusations by the popular press regarding the potential destabilizing force of sovereign wealth fund (SWF) investment have merit. We find uncompensated risk at both the firm- and market-level. Firm volatility decomposition suggests that total risk, systematic risk, and idiosyncratic risk are not compensated at the same level following SWF investment as they were preceding it. Overall, we find a decrease in return without a corresponding decrease in risk as a result of SWF investments. In a limited Granger causality analysis, we find that SWF investment Granger-causes the firm level return/risk relation to deteriorate for some firms. Analysis falls short of demonstrating that the media Granger-causes the poor performance. These findings suggest that SWF investment could indeed be potentially destabilizing.

Sovereign wealth fund, Risk, Return

Abstract:
This paper explores the determinants of B-share discounts in the Chinese stock market based on a unique regulatory change in 2001. We find that the B-share discounts declined substantially after the lifting of restrictions on foreign ownership in China, but the H-share discount remained virtually unchanged. Using the intraday data, we find that information flows from the B-share markets to the A-share markets increase significantly after the event, because domestic investors rush into the B-share markets. Using various cross-sectional analyzes, we also find that relative supply and behavior factors such as relative spread (or liquidity) and relative risk affect the discounts throughout the sample period.

Market segmentation, Chinese stock markets, Information flow

Abstract:
We provide and implement an alternative regression model based on the Granger causality test, to test the market timing and pseudo-market timing hypotheses with international data. The model takes into account the equity issues' possible feedback to past market returns and examines whether timing is based on information asymmetry. We find evidence of the market timing of equity issues in developed, common law, opaque, less corrupt, and strong property rights markets, but little evidence in less developed, civil law, transparent, more corrupt, and weak property rights markets, suggesting that market timing exists and that it is due to information asymmetry.

equity issues, market timing, information asymmetry, international evidence

Abstract:
We investigate the daily relation between returns and the trading of Shanghai Stock Exchange 180 stocks by institutional and individual investors. We find that there is a positive relation between returns and the trading of institutions and individuals. Both individuals and institutions trade, buy, and sell more if past returns are high, although overall such activity is more strongly related to lagged trades than lagged returns. On the other hand, the institutional imbalance is negatively related to the lagged market returns, which implies that institutions tend to be contrarian traders. Second, we find that past individual trading has predictive power whereas past institutional trading only has a long-run predictive power for market returns. Institutional trading also Granger-causes the returns of the two large stock quintiles, and individual trading Granger-causes the returns of several of the small and medium-sized portfolios. Further analysis reveals that, trading of the individual investors is influenced more by trading of institutional investors, while trading of the institutional investors are mainly influenced by shocks from its past trading and shocks from market returns. Finally, we find that institutional trading in the largest quintile leads institutional trading in the smallest quintile, but no such lead-lag relation is found for individual trades. These results suggest that although individuals dominate trading within most of the quintiles, institutional trading, and especially the trading of large stocks, conveys more information and increases the speed of price adjustments.

Stock returns, Institutional and individual trading, Emerging market

Abstract:
This paper develops an approach to decompose farmland price time series into three components: permanent fundamental component, temporary fundamental component, and nonfundamental component. This decomposition is useful for studying the importance of fundamental versus nonfundamental factors in explaining farmland price behavior and the dynamic response of farmland price to shocks to each of these components, among other issues. The approach is applied to annual Iowa farmland prices over the 1922-1994 sample period.

Abstract:
We claim that regressing excess returns on one-lagged volatility provides only a limited picture of the dynamic effect of idiosyncratic risk, which tends to be persistent over time. By correcting for the serial correlation in idiosyncratic volatility, we find that idiosyncratic volatility has a significant positive effect. This finding seems robust for various firm size portfolios, sample periods, and measures of idiosyncratic risk. Our findings suggest stock markets mis-price idiosyncratic risk. There may be some measurement problems with idiosyncratic risk that could be related to nondiversifiable risk.

Abstract:
Empirical evidence on the signaling hypothesis of dividends
is weak and mixed. Some recent studies find that dividend
changes reflect mostly current and past earnings but not
future earnings. We provide a model in which not all dividend
changes contain new information about future earnings. Some
dividend decisions are backward looking (noninformation or
nonsignaling events). Other dividend decisions are forward
looking (information or signaling events). The model helps
identify the two types of dividend changes and predicts that
the market will respond strongly only to forward-looking
dividend changes. We provide evidence consistent with the
implications of the model.

Abstract:
We develop an empirically tractable dynamic model of discrete dividend policy based on an inter-temporal coarse signaling framework in which dividend adjustments signal only substantial variations in the permanent earnings of the firm. Our theoretical framework relates the extent of dividend smoothing to the information content of dividends and also generates refutable predictions on the determinants of high or low smoothing by firms. Using an empirical methodology developed to test our predictions, we show that dividend smoothing is positively associated with factors that adversely impact the investor demand for the firm's shares. These factors include risk factors such as earnings variance, low liquidity, and high probability of bankruptcy, as well as the expected return on capital investment by the firm.

Abstract:
This paper investigates the response of stock prices to dividend shocks in a bivariate model of stock prices and price-dividend spreads. Dividend process is modeled as the sum of a permanent component and a temporary component. By using the stock price valuation (present value) model, the two components are related to stock prices. The stock market responds significantly not only to permanent shocks to dividends, but also to temporary shocks to dividends. Furthermore, initial responses of stock prices to the temporary shocks are as strong as those to the permanent shocks. As a result, substantial variation in stock prices is due to the temporary shocks. This finding provides empirical support for the imperfect information hypothesis that emphasizes the failure of investors to clearly distinguish between the two components of dividends, and also suggests that the observed mean-reverting behavior of stock returns should be explained by incorporating a significant temporary component into stock prices. The price-dividend spreads are primarily accounted for by the temporary shocks to dividends, and respond strongly to them, suggesting that, in response to the temporary shocks to dividends, stock prices respond excessively relative to dividends.

Abstract:
We study market segmentation in China's stock markets, in which local firms issue two classes of shares: class A shares available only to Chinese citizens and class B shares available only to foreign citizens. Significant stock price discounts are documented for class B shares. We find that the price difference is primarily due to illiquid B-share markets. Relatively illiquid B-share stocks have a higher expected return and are priced lower to compensate investors for increased trading costs. However, between the two classes of shares, B-share prices tend to move more closely with market fundamentals than A-share prices. Therefore, we find A-share premia rather than B-share discounts in China's markets.

Abstract:
We account for the relation between stock returns and inflation with two independent disturbances: supply shocks and demand
shocks. Supply shocks reflect real output shocks and cause a negative relation between stock returns and inflation, while demand shocks are mainly due to monetary shocks and generate a positive relation between stock returns and inflation. We show, both theoretically and empirically, that the stock return-inflation relation varies over time and across countries, depending on the relative importance of the two types of shocks. Our empirical evidence is based on pre- and post-war periods in the U.S., as well as the post-war period in the U.K., Japan, and Germany.

Abstract:
This paper investigates the hypothesis that dividend changes are determined by changes in some measure of permanent earnings. The analysis employs two measures of permanent earnings and takes into account the nonstationarity of dividend and earnings series. This study finds that dynamic dividend behavior is accounted for primarily by changes in permanent earnings. Dividends respond strongly to permanent changes in earnings without any significant overreaction, whereas they respond little, if at all, to transitory changes in earnings. The findings also suggest that the Partial Adjustment Hypothesis, which assumes managers partially adjust dividends to a target dividend, performs better when the target dividend level is proportional to permanent earnings than when it is proportional to current earnings.