- International Finance
A. Measuring International Economic Linkages with Stock Market Data, Journal of Finance, (joint with John Ammer), 1996, 51, 1743-1764.
H. Are the Foundations Solid for Emerging Market Real Estate? Real Estate Finance, Winter, 1998
J. "Excess Risk Premium in Asian Banks".
A. Measuring International Economic Linkages
with Stock Market Data, Journal of Finance, (joint with John Ammer),
1996, 51, 1743-1764.
This paper develops a new framework for measuring
financial and real economic linkages between countries. We employ a variant
of the Campbell and Shiller (1988) log-linearization method to decompose
domestic and foreign equity return innovations into components associated
with news about dividend growth, interest rates, exchange rates, and future
equity risk premiums. This decomposition enables us to determine the extent
to which common real and financial shocks contribute to covariation between
the returns on different national stock markets. In an application to our
methodology to data from 15 countries from 1974 to 1990, we find that news
about future dividend growth in two countries is more highly correlated
than contemporaneous output measures. This suggests that there are lags
in the international transmission of real economic shocks.
B. Living with the "Enemy":An Analysis of Foreign Investment in the Japanese Equity Market, Working Paper, (joint with Yasushi Hamao)
This paper studies the impact of foreign investment
on domestic financial markets. It examines the empirical validity of some
protectionist claims used by regulators to restrict foreign investment.
These people argue that 1) trading by foreign investors tends to increase
market volatility more than domestic investors, 2) foreign investors have
sophisticated investment technology to which domestic investors do not
have access so that domestic investors tend to "lose" to foreign investors,
and 3) foreign investors tend to be short term investors whose investments
are mostly driven by expectation of short-term gains rather than long-term
fundamentals such as corporate dividend growth. We find there is no evidence
supporting these claims from the Japanese experience. To the contrary,
we find that foreign investors tend to be long-term contrarian players
in the market and their presence helps to improve liquidity in the Japanese
market. Our results support the general theme of the GATT agreement that
free trade in the financial service sector is beneficial to domestic markets.
C. What Makes the Stock Market Jump?---An Analysis of Political Risk on the Hong Kong Stock Returns, Working Paper, (joint with Harold Kim)
Little work has been done to characterize the
empirical effects of political events on financial markets. In this paper,
we develop a components- jump volatility model to investigate the possible
market impact of political risk. The model operates by identifying jump
return dates, which are then associated with political events, allowing
us to measure the market return and volatility effects of political announcements.
Hong Kong serves as the ideal case study, for several reasons: the political
situation is fluid, unpredictable, and characterized by the occurrence
of definitive events, and the market movements are volatile. Our results
show that political developments in Hong Kong have a significant impact
on its market volatility and return. Our results have some interesting
implications for option pricing and political risk management.
D. The Rule of Law and equity Returns: Some Evidence from International Data (with H. Liao)
This paper provides an empirical study on the
relationship between legal protection and asset pricing, using data from
both developed and emerging market countries. We find the rule of
law does matter. We discover a significant positive relationship
between asset returns and the rule of law. Our results suggest that
the degrees of legal protection affect a country's systematic risk and
other risk measures. This gives the possibility that a country may
be able to significantly increase its credit rating by improving its rule
of law. We also find that, while levels of economic freedom
are significantly related to GDP growth, they do not appear to directly
affect equity market risks. Moreover, our study indicates that asset
pricing measures, such as price--earnings multiples and dividend yields
may not serve as good proxies for non- financial risk measures such as
levels of economic freedom and rule of law in emerging markets.
E. Evidence on the Integration of International Real Estate Markets and the Benefits of Diversification, Real Estate Economics, 1997 (joint with Crocker Liu)
In this paper, we study whether international real estate markets are integrated through comparing the predictable components of excess real estate returns in seven countries. We find that we are able to predict excess real estate returns with common U.S. state variables. This predictability due to common components of expected excess returns provides evidence that the international real estate markets are integrated. Even though real estate is moderately to highly correlated with stocks in each country, we find that investors should include the real estate of various countries together with its stocks for their efficient portfolios to have a low to moderate level of risk.
F: Strategic Returns to International Diversification,
(with J. Ammer), European Financial Management, 1996.
This paper computes the systematic risk exposure to major global risks on G-7 country major stock indices. It provides a new way for understanding the sources of systematic risk.
G: Asian Real Estate Market: Institutional
Investors� Perspective, Submitted to Real Estate Finance
This paper conducts an in-depth analysis of Asia's real estate market. Before the Asian crisis, institutional investors expressed strong interest in exploring investment opportunities in developing countries. This interest had emerged as a result of the rapid growth of international trade and the recognition that attractive opportunities may offer returns commensurate with risk and enhance diversification benefits. The present deepening crisis in Asia has led many investors to question this wisdom of Asian real estate investment. My analysis here strikes a more positive note. While many crisis economies may go through a painful 3-5 year de-leveraging process and economic adjustment, the long-term prospects for Asian real estate market remain good.
H: Are the Foundations Solid for Emerging
Market Real Estate? Real Estate Finance, Winter 1998
This study performs a fundamental study of Asian real estate market after the 1997 crisis. Our analysis suggests the foundation of emerging market real estate is still quite solid, despite some structural problems, such as excessive market speculation and political risks. Therefore, they should be included in the construction of any well-diversified portfolio.
I. The Japanese Investment Race", (with S.
Foresi and Y. Hamao), 1997, Japan and World Economy, forthcoming.
This paper studies the investment behavior of Japanese firms. We find their investment displays a "herding type" behavior. The paper also develops a framework for studying the interaction among industrial firms in the same industry.
J. "Excess Risk Premium in Asian Banks".
This paper uses an asset pricing methodology to examine whether Asian bank stock prices may reveal some of the excess risks in the banking industry. Using an asset pricing model that allows time-varying risk premia to be estimated, we find some evidence of excess risk premiums on Asian banks. We find the pricing discrepancy from the asset pricing model are related to a country's degree of economic freedom and corruption level. We discover a positive relationship premium for most Asian banks, especially in those countries where corruptions are rampant. Our findings are therefore consistent with the view that crony banking in Asia distort market mechnism and led to inefficient financial intermediation.
K. Institutional
factors and Real Estate Returns ---- An Asset Pricing Study, with H. Liao,
conditional acceptance at Journal of the Asian Real Estate Society, 1998
This paper provides an empirical study on the relationship between institutional factors and real estate pricing, using data from both developed and emerging market countries. We find the rule of law and degrees of economic freedom does matter in real estate returns, especially in emerging markets.