Emerald | China Finance Review International | Table of Contents

International diversification benefits: An investigation from the perspective of Chinese investors

literatinetwork@emeraldinsight.com (Chonghui Jiang, Yongkai Ma, Yunbi An) — Fri, 02 Aug 2013 00:00:00 +0100

Abstract

Purpose - The main purpose of this paper is to investigate whether Chinese investors can benefit from international diversification and where these benefits are to be found.Design/methodology/approach - This paper applies an expanding optimization procedure (Brandt et al., 2009), which is different from the econometric methods or Monte Carlo simulations adopted in many empirical investigations in the literature. Our analysis is based on various realized portfolios that are set up at different dates in the sample period. Findings - Based on a stream of realized portfolios, we show that Chinese investors can gain substantially in terms of risk reduction as they venture into foreign markets, regardless of the region into which they choose to diversify and whether in-sample or out-of-sample performance is evaluated. However, the optimal strategies under consideration cannot achieve higher out-of-sample expected returns and risk-adjusted returns than does the domestic investment. Originality/value - In contrast with those in the literature, our analysis is based on the out-of-sample performance of a series of realized optimal portfolios. Our method can properly address time-varying correlations that are ignored in most previous research. In addition, this method not only allows us to analyze sizes of diversification benefits but also enables us to examine the major characteristics of international portfolios to gauge the effectiveness of different diversification strategies.

On Credit Spread Change of Chinese Corporate Bonds: Credit Risk or Asset Allocation Effect?

literatinetwork@emeraldinsight.com (Changfeng Cui, Hailong Liu, Yi Zhang) — Fri, 02 Aug 2013 00:00:00 +0100

Abstract

Purpose - Credit spread change is a key issue for investors to earn the excess return from corporate bonds. Generally, there are two kinds of different effects supports the changing of credit spread: asset allocation effect and credit risk change effect. The existing literatures based on US data support credit spread change is driven by credit risk change, however this issue based on Chinese market data has not been investigated clearly.Design/methodology/approach - We adopt Markov regime switching model to investigate the changing mode of the credit spread in Chinese bond market. We select three kinds of variables: the credit risk variables, the asset allocation variables and the liquidity condition variables. With ML estimators we can find the changing mode and further we the study the relationship between the regime swithcing and some observed variables, such as macro economy variables and turnover of stock market.Findings - We find it is driven by asset allocation effect in most time and by credit risk change only in shorter period. Empirical results show that the switching of dominance from one effect to another isn’t closely related with macro-economy variables, but related with the turnover of stock market.Practical implications - These results indicate that in China the credit risk of corporate bonds are relatively low and the corporate bonds are still auxiliary asset for investors.Originality/value - In this paper we have the following two contributions: first, we discuss the asset allocation effect in Chinese bond market and introduce the stock market variables and bank credit variable to describe the asset allocation effect; second, based on Chinese bond market data we find different findings from the existing literatures about US and European bond markets, showing that the changing of credit spread in mostly related with asset allocation effect but not credit risk change.

Exercise price regulation and the timing of ESO reports: Evidence from China

literatinetwork@emeraldinsight.com (Xingyun Dai, Sicong Dai, Kemin Wang) — Fri, 02 Aug 2013 00:00:00 +0100

Abstract

Purpose - Prior research have documented that managers take opportunistic timing activities to influence the exercise prices of executive stock options (ESOs). This paper adds to the literature by investigating whether such behavior is mitigated by the exercise price regulation of China. Design/methodology/approach - Using a sample of 132 ESO reports between 2006 and 2010 in China, we explore whether the regulation takes effect by examining stock price movements and companies’ information disclosures around the report dates.Findings - Consistent with the conjecture that the regulation could not effectively limit managers’ opportunistic behavior, we find that the abnormal returns decrease slowly until 10 trading days before the report dates, increase gradually subsequently, and rise dramatically just after the report dates. Particularly, the return pattern is more pronounced when corporate governance is weaker. We also find that managers opportunistically time ESO reports based on their private information. In particular, more (less) favorable (negative) news announcements occur after the report dates than beforehand. Additionally, compared to earnings announcements, managers prefer to time ESO reports with information about forward-looking earnings and security issuances.Originality/value - These results suggest that the regulation could not effectively constrain managers from influencing the exercise prices. We also provide evidence that imperfect regulations under asymmetric information may lead to additional agency costs, especially when corporate governance is weak. Our findings can contribute to the improvement of regulations on ESOs.

A Dynamic Portfolio Theory Model Based on Minimum Semi-Absolute Deviations Criterion with an Application in the Chinese Stock Markets

literatinetwork@emeraldinsight.com (Li Chen, Heping Pan) — Fri, 02 Aug 2013 00:00:00 +0100

Abstract

Purpose - The purpose of this paper is to prove the effectiveness of Minimum Semi-Absolute Deviations (MSAD) method in dynamic portfolio investment.Design/methodology/approach - In financial investment, the classical static portfolio theory of Markowitz type lacks the dynamic adaptability to the changing market situations. This paper proposes a dynamic portfolio theory which uses MSAD criterion on a moving window to replace the Markowitz’ mean-variance analysis.Findings - Two specific models are developed to test the valid of the MSAD method: the first model constructs a portfolio consisting of Shanghai-Shenzhen 300 Index and a national debt as two contrarian assets; the second model constructs a portfolio consisting of a complete set of 18 Chinese stock sector indices and a national debt. The empirical results of test using 6-year monthly data (2005 to 2010) provide significant evidence that the MSAD method is valid, producing superior returns of investment over the stock index during the test period.Research limitations/implications - The findings in this study clearly highlight valid of the MSAD method in determining the weights of assets in Chinese stock markets.Practical implications - In order to resolve the problem of portfolio investment in Chinese stock markets, the MSAD method with stop loss control strategy can be used for investors to obtain the weights of assets and control the risk.Originality/value - This study analyzes and verifies the effectiveness of the MSAD method in dynamic portfolio investment. The stop loss control strategy designed and used in MSAD method is a pioneering and exploratory experiment.

Noise trading and stock returns: evidence from China

literatinetwork@emeraldinsight.com (Changsheng Hu, Yongfeng Wang) — Fri, 02 Aug 2013 00:00:00 +0100

Abstract

Purpose - The purpose of this paper is to analyze the trading behaviors of retail investors and investigate their impacts on stock returns.Design/methodology/approach - As retail investors are considered as the main noise traders in the capital market, using the trading records of Chinese retail investors from 2005 to 2009, we study their trading preferences and the correlation of their trades. Then, we use a multifactor model to test whether the co-movement of stock returns could be explained by individual sentiment.Findings - Our results show that the small-cap stocks are obviously preferred by retail investors. Meanwhile, the net stock demands of retail investors are systematically correlated, even when we exclude the effect of market risk. In the perspective of the net stock demands, we use BSI to measure the individual sentiment, finding that individual sentiment plays an important role in the formation of the cross-section of stock returns. However, our results imply that BSI is a reverse indicator to predict the future returns, which implies that the trading behaviors of retail investors are irrational.Originality/value - Consistent with behavioral theory, our findings support the viewpoint that stock returns could be affected by the systematic correlated trading of retail investors. To some extent, our findings highlight the need to know more details of individual investors’ trading behaviors through which we can better understand the fluctuations of asset prices.

Editorial

literatinetwork@emeraldinsight.com (Huaiben Zheng) — Fri, 02 Aug 2013 00:00:00 +0100

Abstract

Not available.