Review of Pacific Basin Financial Markets and Policies

This paper investigates the behavior of stock returns and volatility in 10 emerging markets and compares them with those of developed markets under different measures of frequency (daily, weekly, monthly and annual) over the period January 1, 2002 to December 31, 2006. The ratios of mean return to volatility for emerging markets are found to be higher than those of developed markets. Sample statistics for stock returns of all emerging and developed markets indicate that return distributions are not normal and return volatility shows clustering. In most cases, GARCH (1, 1) specification is adequate to describe the stock return volatility. The significant lag terms in the mean equation of GARCH specification depend on the frequency of the return data. The presence of leverage effect in volatility behavior is examined using the TAR-GARCH model and the evidence indicates that is not present across all markets under all measures of frequency. Its presence in different markets depends on the measure of frequency of stock return data.

This empirical study utilizes four static hedging models (OLS Minimum Variance Hedge Ratio, Mean-Variance Hedge Ratio, Sharpe Hedge Ratio, and MEG Hedge Ratio) and one dynamic hedging model (bivariate GARCH Minimum Variance Hedge Ratio) to find the optimal hedge ratios for Taiwan Stock Index Futures, S&P 500 Stock Index Futures, Nikkei 225 Stock Index Futures, Hang Seng Index Futures, Singapore Straits Times Index Futures, and Korean KOSPI 200 Index Futures. The effectiveness of these ratios is also evaluated. The results indicate that the methods of conducting optimal hedging in different markets are not identical. However, the empirical results confirm that stock index futures are effective direct hedging instruments, regardless of hedging schemes or hedging horizons.

This study establishes a dynamic model under real options analysis to analyze the optimal timing decision of information technology (IT) investments when the output price for firms is stochastic and benefits of IT investments are arisen from the increasing output price, increasing sale, and cost savings. We derive the closed form expression of the timing of IT investments and furthermore prove that IT investments rise at an increasing rate in economic booms and fall in economic busts. This study finds that increasing (decreasing) price volatility will delay (advance) the timing of IT investments. Increasing IT investments, however, may not delay the timing of IT investments. In addition, the decreasing (increasing) efficiency and increasing (decreasing) depreciation of IT investments will delay (advance) the timing of IT investments.

The purpose of this paper is to provide a systematic analysis of the development of the Chinese stock market in the first 10 years. It can be a lesson to both researchers and investors on China's stock market. In this paper, the author first shares his own experience from involvement in policy making and regulation inspections in developing China's stock market. Then, based on observations at the market as well as academic research findings that he conducted with his colleagues, the author discusses eight major problems that should be addressed in order to build a mature stock market in China to support the sustainable development of China's economy.

This paper examines the intraday performance of contrarian strategies using data from 438 listed stocks on the Taiwan Stock Exchange in 2004. The results indicate significantly positive abnormal returns for the contrarian strategies. For the whole trading day, the contrarian strategies earn an average abnormal return of at least 0.18% for all strategies, and above 0.3% in 24 out of the 36 contrarian strategies prior to transaction costs. Moreover, the contrarian profit increases from a formation period of five minutes to 10 minutes, and then declines toward a longer formation period of 60 minutes. This pattern suggests that price reversals occur around 10 minutes into the formation period. The intraday analysis also indicates that the abnormal returns earned by the contrarian strategies are higher in the opening and the closing intervals than in the middle of the trading day. Finally, the results indicate that price reversals occur for both prior losers and prior winners, with prior winners experiencing larger price reversals than prior losers when the holding period becomes longer. However, the above results of profitable abnormal returns are based on gross returns before transaction costs were deducted. When reasonable explicit trading costs are considered, none of the 36 contrarian strategies produce any "free lunches" for investors.

This paper investigates the investment preference of foreign institutional investors across different industries in Taiwanese stock market. By employing the idea of Fama and French (1992) three-factor model with investment strategy, the investment preference is a function of beta value, company size, book-market ratio and investment strategy. Our empirical results find that foreign institutional investors in all five industries adopt momentum strategies in their investment preference. Next, in each industry, investment preference has a long-run equilibrium relationship with beta value, company size, book-market ratio, and investment strategy. Moreover, in the electronic, financial, and steel industries, foreign institutional investors' investment preference has corrective power in the short-run. Further, the results of the Granger causality test reveal that the investment preference has a uni-directional leading relationship with beta value in the financial and textile industries. While in case of the steel industry, investment preference and beta value have a bi-directional causal feedback relationship. Industries where company size leads investment preference include electronics, finance, and steel. Book-market ratio leads investment preference only in the textile industry. Generally speaking, in each industry, company size is among the predominant factors that foreign institutional investors take into account when making decisions. The influences of beta value and investment strategy on investment preference do not appear significant. That is, the investment strategy under consideration does not make a difference for investment preference.

This study proposes a resources deployment portfolio (RDP) approach to decomposing return on equity (ROE) for business analysis. The five components are return on operating equity (RoOE), return on financial equity (RoFE), return on other equity (RoXE), return on influencing equity (RoIE), and R&D intensiveness (R&DI). Empirical results demonstrate that RDP decomposition offers substantial improvement over DuPont decomposition in explaining market valuation. Confirming the perceived sustainability, RoOE is the most consistently significant component for both long-term and short-term value creation. In line with prior research findings, R&DI is generally significant in contributing to long-term value creation but is not significant for short-term value creation.