Review of Pacific Basin Financial Markets and Policies

In this paper, we develop a consumption-based asset pricing model motivated by prospect theory, where habit formation determines the endogenous reference point. This exploits the similarity between habit formation and prospect theory. Both emphasize that the investor does not care about the absolute amount of gain or loss, but rather compares the gain or the loss experienced to a benchmark. The results show that when taking people's loss averse attitude over consumption into consideration, our model is capable of resolving the equity premium puzzle.

Using data from the Taiwanese stock market, an emerging market, this paper documents positive changes in liquidity and volatility around seasoned equity offerings (SEOs). These findings are consistent with the uncertain signal hypothesis that investors with diverse views on the information content of SEOs are likely to induce larger trading activity and subsequent higher stock return volatility. We also provide direct evidence that changes in liquidity is positively associated with stock price adjustment. However, the relations among liquidity, volatility and price movements appear to rely on how SEOs are conducted. A practical implication is that managers may influence liquidity and stock price movement through their choice of SEOs issuing methods.

The correlation structure amongst selected Asia-Pacific equity markets is examined using the Constant Correlation multivariate GARCH (CC-MGARCH) model, the Dynamic Conditional Correlation multivariate GARCH (DCC-MGARCH) model, and an Exponentially-Weighted Moving Average (EWMA) correlation measure. The markets of Australia, Hong Kong, Japan and Singapore are analyzed from 1990 to 2001 and dynamic nature of the correlation is captured and explained. We find that global as well as regional factors contribute to the correlation spikes. Extreme volatility does not necessarily result in extreme correlations between some markets and there is higher comovement between markets since the Asian financial crisis. We also find that despite common periods of high volatility, there is still economic justification for diversification within this region.

This study examines the motive for stock repurchase. We examine four hypotheses — undervaluation, signaling, free cash flow, and optimal leverage hypotheses — using both short-run and long-run market reactions. We find that the undervaluation hypothesis is most consistent with both short-run and long-run tests. Improvement in operating performance following repurchase suggests the signaling hypothesis. However, the signaling hypothesis is supported only in the long-run test, not the short-run test, suggesting that market underreaction exists to the signaling initially. Of the control variables, the target purchase ratio and ownership by the largest shareholders are found significant, suggesting that the magnitude of repurchase and the ownership increase motive by the largest shareholders are also important factors that explain the repurchase.

Using the event study method, Karceski et al. (2000) and Shin et al. (2003) determined that investors expected bank mergers to adversely impact some of the borrowing firms. Earlier studies on the effects of banking merger on borrower have not sufficiently considered the relationship between the economic conditions of the borrowers and the wealth effect of the bank mergers. Using the events study method, we investigated whether the news of several bank mergers between Japanese banks affected the market value of financially distressed borrowers. We found that news of bank mergers brought about a positive wealth effect on financially distressed borrowers.

This study constructs a valuation model from which an option-adjusted spread approach is employed to value individual mortgage servicing contracts for both adjustable rate and fixed rate mortgages. The valuation model is comprised of an exogenous OTS prepayment model, a stochastic interest rate process, and other servicing fees and costs, all of which jointly determine the servicing contract's future net cash flows and the rate at which to discount these cash flows. The sensitivity of the price of mortgage servicing rights to the changes in the economic environment is also analyzed. This work is potentially useful for servicers not only servicing mortgages but also servicing other types of loans in order to examine servicing policy-related issues.

In 1949 Shanghai was the leading international financial center (IFC) in Asia. Recently the push of Shanghai to regain its long lost status of a regional IFC has begun to attract widespread interest. This paper first draws upon the IFC literature to highlight the factors that are considered to be important in determining the potential of a city to emerge as an IFC. Shanghai's progress is then measured against these criteria and is also placed in a comparative perspective by measuring against Hong Kong and Singapore.

Recent years have witnessed phenomenal growth in both the number and size of US based international equity mutual funds. While the benefits of international diversification are well documented in the literature, empirical research relating to the performance of international mutual funds has been limited and contradictory. The purpose of this study is to examine the impact of political risk on the risk-adjusted returns of international mutual funds using a modified event study methodology. More specifically, the dummy variable event study methodology using portfolios rather than individual funds is used. This methodology addresses the problems of multiple event days and calendar clustering. The macro political risk event of interest is the Iraqi invasion of Kuwait. Results of the study suggest that shareholders of international equity mutual funds earn significant abnormal returns in the face of political turmoil.