Review of Pacific Basin Financial Markets and Policies

This paper examines relative performance of alternative asset pricing models using individual security returns. The standard multivariate test used in studies comparing the performance of asset pricing models requires the number of stocks to be less than the number of time series observations, which requires grouping stocks into portfolios. This results in a loss of disaggregate stock information. We apply a different statistical test to overcome this problem and to investigate relative performance of alternative asset pricing models using individual security returns instead of portfolio returns. Our findings suggest that a parsimonious six-factor model that includes the momentum and orthogonal value factors outperforms all other models based on a number of measures as well as the average $F$-test. Unlike the standard multivariate test, we find that the average $F$-test has superior power to discriminate among competing models and does not reject all tested models.

This paper aims to investigate the degree of financial integration by employing Markov Switching (MS) technique. It further examines the influence of financial integration on the real sectors by employing GMM approach. The finding indicates following outcomes; (1) the financial markets of ASEAN$+$3 economies are weakly integrated during pre-agreement periods; (2) the degree of financial integration improves during post-agreement period in which financial integration has positive influence on the real economy; (3) higher degree of financial integration indicates a positive influence on the real economies. Finally, this study offers policy implication for stabilizing the real economy.

Asymmetric autoregressive conditional heteroskedasticity (EGARCH) models and asymmetric stochastic volatility (ASV) models are applied to daily data of Peruvian stock and Forex markets for the period of 5 January 1998–30 December 2011. Following the approach developed in [Omori, Y, S Chib, N Shephard and J Nakajima (2007). Stochastic volatility with leverage: Fast likelihood inference. Journal of Econometrics, 140, 425–449], Bayesian estimation tools are used with Normal and $t$-Student errors in both models. The results suggest the significant presence of asymmetric effects in both markets. In the stock market, negative shocks generate higher volatility than positive shocks. In the Forex market, shocks related to episodes of depreciation create higher uncertainty in comparison with episodes of appreciation. Thus, the Central Reserve Bank faces relatively major difficulties in its intention of smoothing Forex volatility in times of depreciation. The model with the best fit in both markets is the ASV model with Normal errors. The stock market returns have greater periods of volatility; however, both markets react to shocks in the economy, as they display similar patterns and have a significant correlation for the sample period studied.

We investigate the bid–ask bounce effect on estimation of idiosyncratic volatility (IVOL) from asset pricing perspective using a comprehensive country-specific sample. We find that the idiosyncratic volatility–return relationship remains significant while controlling for stock size. However, the explanatory power of IVOL disappears completely when stock liquidity is controlled for. These findings support our argument that the bid–ask bounce effect on pricing of IVOL is strongly influenced by stock liquidity. Our results indicate that mid-price is the “true” price to measure IVOL of the least liquid stocks in the Australian stock market.

This paper investigates the linkages of Chinese yuan to other currencies before and after the yuan devaluation on 11 August 2015. Linear regression analysis shows that only a few of the 14 currencies considered are significantly affected by the devaluation. However, the devaluation of Chinese yuan has been associated with larger fluctuations in these currencies and the occurrence of extreme positive and negative returns. The regression method may under estimate the tail dependence between currencies, as financial data are usually non-normally distributed, especially when extreme event occurs. We apply the Archimedean copulas to capture the presence of lower and upper tail dependence between the exchange rate returns of Chinese yuan and the selected currencies, and found dependencies not revealed by the linear regression analysis. The extreme returns after the Chinese yuan devaluation have resulted in higher dependence with the selected currencies. While the dependence structure was dominated by risks due to unusual currency gains before the devaluation, the market responses to large losses and gains have become more symmetric after the devaluation.

This paper investigates the roles played by technicians and fundamentalists in the emerging stock market of Kuwait. The impact on stock prices of traders whose actions are founded on technical analysis is differentiated from the impact of traders whose actions are based on fundamental analysis. This differentiation is performed by formulating, estimating and testing a model relating changes in stock prices to the actions of fundamentalists, technicians and the government. Both technicians and fundamentalists are found to contribute to stock price determination, with the former contribution appearing more significant, even when accounting for governmental intervention. Some explanations for these findings are presented.

The Basel Committee on Banking Supervision (BCBS) states that in addition to the fact that it lacks simplicity, the Advanced Measurement Approach (AMA) must be discarded because the flexibility of AMAs does not narrow as envisioned prior. This paper discusses whether this judgment of the BCBS holds for the Chinese banking industry. We first review the development of operational risk data collection and AMAs in China over the past decade. Then, capital requirement results for Chinese banks based on these datasets and approaches are summarized and analyzed. It is shown that along with the accumulation of operational risk data and the refinement of AMAs, operational risk results for the Chinese banking industry have shown a clear trend of convergence that is exactly opposed to judgments of the BCBS. Therefore, the removal of the AMA from regulatory frameworks may not be reasonable.