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Papers Presented at the Eighth Annual Conference

Papers Presented at the Sixth Annual Conference

Previously Posted Papers

Market Information, Market Regulation, IPO Underpricing and Returns Volatility in Chinese Stock Markets
(April 1996)

Dongwei Su and Belton M. Fleisher
Department of Economics, The Ohio State University

E-mail: su.24@osu.edu
WWW Homepage: http://www.econ.ohio-state.edu/Su/dsu1.html


This paper studies the nature and causes of volatility of
stock-market returns in China. We specify an empirical model to capture
the effect of market information, market regulation, and IPO underpricing
on changes in daily stock-market returns. In addition to gaining a deeper
understanding of the behavior of Chinese stock markets, an important
purpose of our study is to derive useful policy implications for
stock-market regulatory authority.

In our basic model, time-series of changes in stock-market returns
are regressed on both local and global information variables. Local
variables include the lagged change in six-month Chinese treasury bond
rate, lagged dividend yield, and lagged exchange rate change. Global
variables include the world stock-market yield (MSCI world index return)
in excess of the 30-day U.S. Treasury Bill rate, the Hong Kong Hang Seng
index returns in excess of the 30-day U.S. Treasury Bill rate, the change
in term structure spread (U.S. ten-year Treasury bond yield minus the
30-day U.S. Treasury Bill rate), and the daily change in 30-day U.S.
Treasury Bill rate.

Our empirical model of the Chinese stock market is then estimated
under three basic alternative formulations of the error generation
process. The three processes are : (1) Generalized Autoregressive
Conditional Heteroskedasticity, or GARCH(1,1) process; (2) Semi-parametric
Autoregressive Conditional Heteroskedasticity, or SPARCH process; (3)
Asymmetric GARCH process. Under the GARCH process, we take into
consideration three error distributions, namely, Gaussian normal
distribution, standardized-t distribution, and generalized error
distribution (GED). All the parameters are estimated using maximum
likelihood. after comparing the goodness-of-fit of all the
specifications, asymmetric GARCH fits the data best.

We then apply the best fitted specification to the study of policy
implications. We focus on three issues: (1) Has the removal of limits on
daily price changes increased the stock return volatility? Shall the
government reintroduce the daily price limits? (2) Do stock returns
across different geographic markets and across different types of shares
tend to respond to common news and factors? Shall the government permit
dual listing of shares and eliminate multiple share categories? (3) What
is the relationship between IPO underpricing and stock returns volatility?
What can the government do about it?

Index

Ownership Restrictions and Stock Prices: Evidence from Chinese Markets
(April 1996)

Dongwei SU, Department of Economics, The Ohio State University

E-mail: su.24@osu.edu or visit his WWW homepage
WWW Homepage: http://www.econ.ohio-state.edu/Su/dsu1.html


One of the most important characteristics of China's new stock markets
is the difference in IPO pricing between A shares and other non-Chinese
shares (B, H, N shares). A shares are only listed in China and can only
be purchased by Chinese citizens. Non-Chinese shares can only be owned by
foreign investors. All of the non-Chinese shares have IPO prices that are
less than those of the corresponding A shares, despite the fact that they
have the same yield and voting rights as the Chinese A shares. This study
develops and tests a one-period capital asset pricing model (CAPM) to
explain the difference in IPO pricing for A and non-Chinese shares under
one-way domestic ownership restrictions, assuming price-making behavior of
Chinese firms. The model is an extension to Stulz and Wasserfallen's
model (The Review of Financial Studies, 1995). Two propositions are
derived from the model. The first proposition is for the existence of
price discrimination. The second proposition establishes sufficient
conditions for A shares premia. The paper shows that A share premia
depend on: (1) domestic and foreign investor's absolute risk aversion
coefficients; (2) the risk-free rates across countries; (3) the
correlation of non-Chinese shares returns with international financial
factors; (4) the beta-coefficients of non-Chinese shares with respect to
the global financial factors. The model is then tested using data on
Chinese stock market, which consists of daily market indices for A shares
and B shares, daily stock prices for all listed companies in both security
exchanges in China, as well as information on dividend distribution, stock
splits, rights issues and other pertinent accounting information.

Index

When and Why are Thrifts Resolved?
(Presented at the Third Annual Conference of the Chinese Finance Association,
September 1996, New York, New York)

Lin Guo, Boston College & Suffolk University

E-mail: guoli@bcvms.bc.edu


This paper is the first to model empirically a FSLIC-insured
institution's length of insolvency. The length of insolvency is defined as the
time interval between an institution's starting date of becoming insolvent and
its beginning date of being resolved. Analyzing the determinants of the
timing of insolvency resolution bears directly on the cost efficiency of
capital forbearance policies.

We assume that a deposit institution maximizes its net worth, and that
the top regulatory manager minimizes the costs of resolving insolvent
institutions under various regulatory constraints. Using this framework,
we develop the following testable hypotheses: (1) if regulators are
faithful agent of taxpayers, ceteris paribus, they should first resolve
those institutions with lower capital ratios and higher percentages of
speculative investments to minimize the resolution costs; and (2)
economic, political, bureaucratic, informational and legal constraints
faced by regulators prevent them either from resolving insolvent
institutions promptly or from following the social-cost minimizing
sequence.

A two-step hazards model is employed to estimate the conditional
relation between insolvency and resolution and to establish statistically what
variables can explain the length of insolvency. The first equation models
the evolution of a thrift's net worth. The second equation is a hazard
regression that models the timing of insolvency resolution. The net worth
ratio enters the second equation as an explanatory variable. It is
natural to suppose that the depth of insolvency would influence decisions
about the length of time that insolvency is tolerated. This triangular
model allows us to separate the determinants of insolvency from those
determining the timing of the resolution.

As a first step in tracking changes in resolution strategies over time,
we examine insolvency resolutions year by year. The sample covers insolvency
resolutions from October 1985 to September 1989. There were 318
FSLIC-assisted resolutions during this period. To analyze selection bias,
we go beyond the resolved subsample by including insolvent thrifts that
were unresolved in the sample period. The length of insolvency is
censored for these unresolved institutions.

We develop evidence that regulators did not conform to the benchmark
strategy that an "unconflicted" agent would follow in timing insolvency
resolutions. Results are inconsistent with the hypothesis that regulators
simply seek to minimize the losses to the insurance fund. First,
authorities do not first resolve the institutions with lowest net worth
ratios and highest percentages of speculative investments. Second,
regulators also gave more forbearance to larger, older and District 7&9
thrifts. These findings are consistent with the idea that the timing of
insolvency resolution is affected by personal, political and bureaucratic
constraints faced by regulators.

In sum, the results lend support to the view that the timing of
insolvency resolution was subject to layered incentive conflicts between: (a)
private stakeholders in deposit institutions and managers of federal insurance
agencies; (b) managers of federal insurance agencies and government
officials who appoint and oversee them; (c) government officials and the
taxpayers they represent.

Index

Vega-Hedging: An Antidote for Model Misspecification
(Presented at the Third Annual Conference of the Chinese Finance Association,
September 1996, New York, New York)

Ehud I. Ronn and Changneng Xuan, University of Texas at Austin

E-mail: shuan@uts.cc.utexas.edu


This paper demonstrates the desirability of vega-hedging as a solution
to the potential problem of model misspecification. The many and varied
providers of volatility-dependent OTC derivative securities (such as
options) typically hedge their exposure to the underlying asset by
maintaining a delta-neutral position; some augment their hedging by
``managing" their vega exposure. Both hedges require the specification of
the stochastic process for the underlying instrument. Since traders can
never be sure that the process they have postulated is the ``true" model,
we show that vega-hedging is a desirable attribute in reducing tracking
error (or ``daily P\&L variation") for such traders. This paper explains
why option traders, unsure of the accuracy and reliability of their option
pricing model, often vega- and delta-hedge simultaneously, instead of
pursuing the delta-hedging-only policy implied by the Black-Scholes
formula. We conclude that time series-based attempts to estimate the
parameters of the underlying assets' stochastic processes is a misplaced
activity, that regulators should encourage broker-dealers to adopt
vega-hedging strategies, and that organized exchanges should list
long-dated volatility-dependent instruments to provide proper
price-discovery and vega-hedging capability.

Index

Dividend Policy: New Insights from a Comparative Study of Hong Kong and the United States
(Presented at the Third Annual Conference of the Chinese Finance Association,
September 1996, New York, New York)

Thomas J. Chemmanur & Y. Helen Liu: Columbia University

E-mail: yliu@groucho.gsb.columbia.edu


The information content of dividends in U.S. equity market has been well
documented in previous empirical literature. However, an interesting
question remains: Are these effects peculiar to the United States or are
they prominent in economies such as Hong Kong where the tax regime and
institutional features are significantly different? In this paper, we
conduct a comparative empirical study of divident policy in Hong Kong and
the United States. We find that dividend payout ratios vary a lot more in
the U.S. than in Hong Kong. A test of the classical Lintner model shows
that dividends are highly correlated with current year profits in Hong
Kong, while they are highly correlated with previous year dividends in the
U.S. U.S. firms exhibit a much stronger dividend smoothing effect than
Hong Kong firms. there is no significant underperformance or
outperformance relative to the market of Hong Kong equities one year
before, during and after dividend cuts or dividend increases; while there
is severe underperformance by dividend cutting stocks and significant
outperformance by dividend increasing stocks in the year prior to and
during dividend change year for U.S. firms. A logit regression
demonstrates that the significant one-year lagged economic factors for
explanining dividend cut decision in he U.S. are dividend yield, size,
market-to-book ratio and abnormal return, while in Hong Kong the only
significant factor is dividend yield. Our empirical study suggests that
Hong Kong firms adjust dividends more dynamically commensurate with
earnings. Dividends transform information of firm prospects in the U.S.
but dividend signaling seems to be minimal in Hong Kong.
issues.

Index