SCH OF ECONOMICS & FINANCE



Researcher : Bai C

Project Title:The system of incentives for managers with multitasks: theory and evidence from Chinese state-owned enterprises
Investigator(s):Bai C
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:01/2003
Abstract:
To contribute to the general economic literature on incentive issues in firms rather than policies about firms in China.




Researcher : Carverhill AP

Project Title:Non-parametric modelling of the term structure of interest rates, using Eurodollar futures
Investigator(s):Carverhill AP
Department:School of Business
Source(s) of Funding:Seed Funding for New Staff
Start Date:08/2002
Abstract:
To model the Term Structure of Interest Rates, that is the ways in which interest rates of various maturities move, and the equilibrium relationships between then, taking as data the Eurodollar futures prices, and using a non-parametric modelling approach.


Project Title:2007 China International Conference in Finance The Smirk in the S&P500 Futures Options Prices:a Linearized Factor Analysis"
Investigator(s):Carverhill AP
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:07/2007
Abstract:
N/A




Researcher : Chan AWH

List of Research Outputs

Chan A.W.H., Postgraduate Teaching Awards 2008-09 for Taught Postgraduate Programmes in Hong Kong from the Faculty of Business and Economics, HKU, Faculty of Business and Economics, The University of Hong Kong. 2009.
Cheung H. and Chan A.W.H., Education and competitiveness economy: How do cultural dimensions fit in?, Higher Education. Springer Science+Business Media B.V., 2010, 59, no.5: 525-541.


Researcher : Chan K

Project Title:Changes in research and development expenditures and firm performance
Investigator(s):Chan K
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:03/2008
Completion Date:07/2010
Abstract:
There is an extensive body of literature suggesting that the market is slow to react to the information contained in the corporate events. For example, Loughran and Ritter (1995) find that firms underperform various benchmarks in the five years following equity issuance. Ikenberry, Lakonishok and Vermaelen (1995) find that firms experience a positive return drift in the four years after the buyback programs. Studies in other corporate decisions, such as stock mergers (Loughran and Vijh, 1997), spin-offs (Desai and Jain, 1999), stock splits (Ikenberry and Ramanth, 2002), and debt offerings (Spiess and Affleck-Graves, 1999), also reveal a long-term abnormal return pattern following the announcements. It seems that the motivation underlying these corporate policies is predicated on the notion of managerial timing and the ability of managers to identify when the firm's stock is mispriced. In this project, we focus on a less explored event – changes in research and development (R&D) expenditures. Why examining the changes in R&D might be interesting? First, companies doing R&D, especially for technological firms with intensive R&D, generally have few tangible assets. There is great uncertainty involved in these R&D investments and their success is highly unpredictable, making the valuation of these firms very difficult (Chan, Lakonishok and Sougiannis, 2001). This is even more so for firms with R&D changes. Moreover, Daniel and Titman (2006) argue that investors tend to misprice the intangible information of firms. Second, the accounting treatment of immediately expensing R&D expenditures distorts the reported earnings and reduces the informativeness of current earnings to predict future earnings. Investors who fixate their valuation on the bottom-line income will misprice the stock due to their ignorance of long-term impact of R&D on firm performance. Third, the R&D changes, especially R&D decreases, do not have a clear event-date and managers generally do not make public announcements for such decisions (Chan, Martin, and Kensinger, 1990). Finally, the R&D changes represent an investment decision which has a real impact on firms' future strategy and profitability (Eberhart, Maxwell, and Siddique, 2004). The last two points make the examination of R&D changes sharply different from the other corporate events considered in the existing literature. The objective of this project is to examine the long-run firm performance around the changes in R&D expenditures. While there is a large body of literature studies the relation between the level of R&D and firm performance, only a handful of prior papers examine the R&D increases and no previous work looks at R&D decreases. Eberhart, Maxwell, and Siddique (2004) find that firms experience significantly positive abnormal stock returns and abnormal operating performance following large increases in R&D expenditures. However, Eberhart et al. do not control for the positive association between the level of R&D and subsequent stock performance, a finding documented in the recent literature (Lev and Sougiannis, 1996, and Chan, Lakonishok, and Sougiannis, 2001). Therefore, it's not evident whether the positive abnormal performance following R&D increases is due to the high level of R&D investment or the incremental predicting power of increased R&D expenditures. Moreover, Chan, Lakonishok and Sougiannis (2001) show that the stock returns of high R&D firms are linked to the past performance. So, we cannot be assure if the significant returns after R&D increases are related to the reversal of firms’ past poor performance. One purpose of this project is to examine the impact of R&D changes on firm performance while controlling for the abovementioned issues and other important factors (such as accruals (Sloan, 1996), liquidity (Pastor and Stambaugh, 2003), and asset growth (Cooper, Gulen, and Schill, 2007)) in cross-sectional stock returns. There are a number of reasons why changes in R&D expenditures are related to future firm performance. However, the direction of this association is not clear. For example, managers may perceive a better (worse) investment opportunity and thus increase (decrease) the R&D spending. As a result, the changes in R&D will be positively related to firms’ future performance – firms with R&D increases will experience encouraging stock returns while firms with R&D decrease will generate poor subsequent performance. Alternatively, managers may suffer the agency problem and undertake negative NPV projects (Jensen, 1986). Accordingly, the R&D increases may represent an over-investment problem which hurts firm value, and R&D decreases reduce unprofitable projects and improve firm value. This suggests a negative relation between the R&D changes and firm performance. The goal of this project is to empirically test the relation between changes in R&D expenditures and firm performance, and sort out reasons why R&D changes affect future stock returns. References Bushee, B., 1998. The influence of institutional investors on myopic R&D investment behavior. Accounting Review 73, 305-333. Chan, L., Lakonishok, J., Sougiannis, T., 2001. The stock market valuation of research and development expenditures. Journal of Finance 56, 2431-2456. Chan, S.H., Martin, J., Kensinger, J., 1990. Corporate research and expenditures and share value. Journal of Financial Economics 26, 255-276. Cooper, M.J., Gulen, H., Schill, M., 2007, Asset growth and the cross-section of stock returns. Journal of Finance, forthcoming Daniel, K., Titman, S., 2006. Market reactions to tangible and intangible information. Journal of Finance 61, 1605-1643. Desai, H, Jain, P., 1999. Firm performance and focus: long-run stock market performance following spinoffs - The case of voluntary spinoffs. Journal of Financial Economics 54, 75-101. Eberhart, A., Maxwell, W., Sidique, A., 2004. An examination of long-term abnormal stock returns and operating performance following R&D increases. Journal of Finance 59, 623-650. Grullon, G., Michaely R., 2004. The information content of share repurchase programs. Journal of Finance 59, 651-680. Hall, B., 1993. The stock market valuation of R&D investment during the 1980s. American Economic Review 83, 259-264. Ikenberry, D., Lakonishok, J., Vermaelen, T., 1995. Market underreaction to open market share repurchases. Journal of Financial Economics 39, 181-208. Ikenberry, D., Sundaresh R., 2002. Underreaction to self-selected news events: The case of stock splits. Review of Financial Studies 15, 489-526. Jensen, M., 1986. Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review 76, 323-329. Lev, B., Sougiannis, T., 1996. The capitalization, amortization and value-relevance of R&D. Journal of Accounting and Economics 21, 107-138. Loughran, T., Ritter, J.R., 1995. The new issues puzzle. Journal of Finance 50, 23-51. Loughran, T., Vijh, A.M., 1997. Do long-term shareholders benefit from corporate acquisitions? Journal of Finance 52, 1765-1790 Pastor, L, Stambaugh, R., 2003. Liquidity risk and expected stock returns. Journal of Political Economy 111, 642-685. Sloan, R., 1996. Do stock prices fully reflect information in accruals and cash flows about future earnings? Accounting Review 71, 289-315. Spiess, K., Affleck-Graves, J., 1999. The long-run performance of stock returns following debt offerings. Journal of Financial Economics 54, 45-73.


Project Title:Market timing and the cost of raising equity through seasoned equity offerings
Investigator(s):Chan K
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:08/2008
Abstract:
1) Examine the relation between the SEO firms' CFD ratios and their cost of raising equity to test if underwriters are able to discern SEO quality. 2) Test whether there is a link between the CFD ratio and the long-run performance of SEOs.


List of Research Outputs

Chan K., Lin Y. and Wang Y., Best paper award, International Conference on Economics, Finance and Accounting. 2010.
Chan K., Lin Y. and Wang Y., Market valuation of decreases in R&D expenditures, IEFA international conference, Taipei, Taiwan. 2010.
Chan K., Chen H., Hu S. and Liu Y., Share repurchase and personal interests, European Financial Management Symposium Asian Finance. 2010.
Chan K., Ikenberry D., Lee I. and Wang Y., Share repurchases as a potential tool to mislead investors, Journal of Corporate Finance (Lead article). 2010, 16 (April): 137-158.


Researcher : Chan W

Project Title:HKU Overseas Fellowship Awards 2009-10
Investigator(s):Chan W
Department:Sch of Economics & Finance
Source(s) of Funding:HKU Overseas Fellowship Awards
Start Date:09/2009
Abstract:
To visit the Department of Economics in the University of Delhi, India to conduct research on dowry and welfare of women, and to collect more recent data for comparison between India and China to formulate a general model of marital transfers that transcends cultural boundaries.


Project Title:The Effect of Dowry on the Welfare of Women
Investigator(s):Chan W
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:09/2009
Abstract:
1) To explore the structure of marital transfers in India. 2) To analyze the impact of different components of dowry on the welfare of women in India.




Researcher : Chen K

Project Title:Demographics and Hours Worked in the U.S.
Investigator(s):Chen K
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:10/2009
Abstract:
The purpose of this paper is to assess the quantitative importance of changes in demographics, fiscal policy and total factor productivity in explaining the medium term fluctuations in hours worked.


List of Research Outputs

Chen K., Imrohoroglu A. and Imrohoroglu S., A quantitative assessment of the decline in the U.S. current account, Journal of Monetary Economics. Elsevier, 2009, 56, Issue 8: 1135-1147.


Researcher : Ching STF

List of Research Outputs

Ching S.T.F., A Unique Maximal Domain for Strategy-Proofness without Pareto Efficiency, The Second Taiwan-Dutch and International Conference on Game Theory. 2009.


Researcher : Chiu SYW

Project Title:Dissecting a Centralized College Admission Scheme
Investigator(s):Chiu SYW
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:07/2007
Completion Date:12/2009
Abstract:
In this research, we plan to reexamine the classic centralized admission scheme with a relaxation of schools' preferences so that schools' preferences may be priority-dependent. We want to investigate students' optimal reporting strategies as well as under what situations a school' s average quality of student intake is higher when its preferences are priority-dependent.


Project Title:A Theory of Intergroup Relation: with Applications to the Decline of Class and Diversity and Economic Performance
Investigator(s):Chiu SYW
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:07/2009
Abstract:
To construct a game theoretic framework of group cooperation and competition ; to study the decline of class in a framework where group identity can be potentially shaped under education, propaganda, etc.; to study the relationship between ethnic diversity and economic performance in a framework where individuals prefer to work with members of their own ethnic gorups rather than with non-members


Project Title:The 69th International Atlantic Economic Conference Globalization and Democratic Recession
Investigator(s):Chiu SYW
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:03/2010
Completion Date:03/2010
Abstract:
N/A


List of Research Outputs

Chiu S.Y.W., Assistant Eidtor, In: David W K Yeung; Steffen Jørgensen; Leon A Petrosjan; Jerzy Filar, International Game Theory Review. World Scientific, 2010.


Researcher : Chu KC

List of Research Outputs

Chu K.C. and Wong K.P., Progressive Taxation and Corporate Liquidation Policies with Mean-Reverting Earnings, Economic Modelling. Elsevier, 2010, 27: 730-736.


Researcher : Chung KS

Project Title:Robust Implementation in Extensive-Form Mechanisms
Investigator(s):Chung KS
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:03/2007
Abstract:
This project belongs to the literature of robust mechanism design, to which I have made some contribution before. Robust mechanism design is economists’ recent reaction to the two-decade long literature of mechanism design. Mechanism design, in turn, is one of the most important applications of game theory. Game theory is concerned of predicting how rational people behave in strategic interactive situations (also known as “games”). Mechanism design goes one step further: it is concerned of how to design games such that players’ predicted behavior in those games would satisfy certain nice properties. Examples of mechanism design include designing auctions such that bidders do not shade their bids, and designing contracts such that contracting parties do not behave opportunistically in the future. Applications of mechanism design include the design of sprectrum auctions by the U.S. government, the design of pollution reduction pledges scheme by the U.K. government, the design of student-university matching mechanism by the Turkish government, etc. The problem with the traditional mechanism design literature is, paradoxically, rooted in its tremendous success. Over the past two decades, economists have successfully design games that are too good to be true. For example, Cremer and McLean (1985, Econometrica) constructed a powerful (auction) game that could help the auctioneer to extract the whole share of trade surplus and leave nothing to the bidders; and Jackson, Palfrey, and Srivastava (1994, Games and Economic Behavior) constructed a powerful game that could help contracting parties to prevent all future opportunistic behavior. None of these designs changed the world, of course, as they never made it into the real world. The reason was that even the economists who designed them found them counter-intuitive, so much so that no one dares to sell them to the real world with straight face. The whole mechanism design literature is hence in jeopardy. To restore its credibility, economists need to explain why the theory would sometimes deliver counter-intuitive results. Without such an explanation, we would not know when we should and when we should not trust the theory’s conclusion, and we would be left with no choices other than tossing out the theory in its entirety. As we now understand it, the problem arises from some “common-knowledge” assumptions hidden in the theory. “Common-knowledge” assumptions refer to assumptions that certain facts being known to everyone, known to everyone that those facts are known to everyone, known to everyone that it is know to everyone that those facts are known to everyone…, ad infinitum. If asked, most economists would proclaim that they never meant to assume something like that. But they assumed them nevertheless, and often did so without being aware of it. It turned out that these assumptions were the driving force of most of the counter-intuitive results in the literature. For example, Neyman (2004, Journal of Economic Theory) showed that Cremer and McLean’s (1985) result was not robust to relaxation of these common-knowledge assumptions. Similarly, in Chung and Ely (2003, Econometrica), my colleague and I also showed that Jackson, Palfrey, and Srivastava’s (1994) result was not robust to relaxation of these common-knowledge assumptions. These recent studies have now been collectively called the literature of robust mechanism design. The literature of robust mechanism design inspires a new ways to do mechanism design: one should lay bare all the hidden common-knowledge assumptions, and make those assumptions only if he really means it. For example, in Chung and Ely (forthcoming, Review of Economic Studies), my colleague and I re-did the optimal auction design exercise using this approach, and showed that when only minimal common-knowledge assumptions were imposed, a cautious auctioneer should indeed use an auction that we had already seen used a lot in the real world. Bergemann and Morris (2005, Econometrica) re-did the efficient mechanism design exercise and obtained similar results. The so-called “implementation theory” is a special case of mechanism design. Although I shall defer the details to Section VI, it suffices to say that this sub-literature needs to be completely re-done as well. Bergemann and Morris (2006, working paper) started the first step, and obtained a negative result. They found that, when only common knowledge of rationality was assumed, one could design games to solve the implementation problem only if a stringent condition, first identified by my colleague and I in Chung and Ely (2003, working paper), was satisfied. However, Bergemann and Morris’ (2006) result is not yet definitive, because they considered only a very special kind of games: static games. Static games are games that have no time dimension, and do not take time to unfold. The reason they focused on static games was totally accidental --- in the previous literature, it is indeed a theorem that focusing on static games is without loss of generality. What Bergemann and Morris (2006) forgot was that this theorem no longer holds under the new approach. My objective in this project is therefore to revisit the implementation problem, using the new approached inspired by the literature of robust mechanism design, and allow for all extensive-form games instead of only static games.




Researcher : Gao X

Project Title:Pricing and trading of SEOs
Investigator(s):Gao X
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:09/2008
Abstract:
This research project is a follow-up of my dissertation. My dissertation looks at the marketing of seasoned equity offerings (SEO). This project will look at the difference in trading behaviour and underpricing between traditional SEOs and accelerated SEOs, which include bought deals and accelerated bookbuilt SEOs. Accelerated SEOs are generally underwritten much faster than traditional SEOs so we want to investigate if there is any difference in investors’ trading strategy prior to the offer. In particular, a shorter underwriting period means there is less time for investors to digest the information and execute transactions. If investors in deed, trade differently before the two types of SEOs, this may affect the underpricing in different ways.


Project Title:Mutual Fund Brokerage Commissions and Soft Dollars
Investigator(s):Gao X
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:10/2009
Abstract:
1) Our empirical analysis has two major goals. The first one aims to document the magnitude of commissions, to explore the determinants of fund commissions, and the relation among the commissions, other fund expenses, and the fund performance. This should be of great interest to both investors and academics. In particular, there is no clear theoretical prediction about the relation between commissions and performance. On one hand, if managers only trade when it is profitable, more trading should lead to both higher commissions and better performance. On the other hand, if managers are frequently forced to trade to meet investors’ liquidity needs, such transactions incur higher commissions and hurt the fund’s performance. It is likely that both profit-oriented and liquidity-oriented trades occur. With commissions data on a large sample of US funds, we can find out the cross sectional difference in the commission-performance relation. 2) Our second goal is to investigate the use of soft dollars. Mutual funds have the fiduciary duty to minimize these trading costs. But if a fund chooses a soft dollar broker, such as a traditional full-service broker, the actual trading costs are bundled with other services provided by the broker or a third party. The commonly provided service is analyst research on securities. So the fund may pay considerably higher commissions than the marginal cost of trade execution in exchange for services and this practice is usually referred to as ‘soft dollars’. The SEC has issued several guidelines on soft dollars and soft dollars still remain a controversial practice these days. We are interested in the characteristics of funds that voluntarily disclose their usage of soft dollars and whether using soft dollars has any impact on the fund performance. This study will provide a better understanding of mutual funds soft dollar practices and may have some policy implications. If mutual funds tend to abuse the use of soft dollars and soft dollars increase investors’ cost of owning mutual funds, the SEC should consider further restrictions on the services that can be purchased with the fund assets or even prohibit the use of soft dollars.


List of Research Outputs

Gao X. and Lin T.C., Do Behavioral Needs Influence the Trading Activity of Individual Investors? Evidence from Repeated Natural Experiments, International Symposium on Financial Engineering and Risk Management 2010 (FERM 2010). 2010.


Researcher : Hau TD

List of Research Outputs

Hau T.D., Implementing Congestion Charging, Joint Transport Research Centre Round Table Discussant, International Transport Forum and the OECD, Paris, France, February 4-5, 2010. 2010.
Hau T.D., Pricing for Road Use Externalities, Invited Speaker, Seminar on Environmentally Friendly Transport System, The Chartered Institution of Highways and Transportation, Hong Kong Branch, June 5, 2010. 2010.
Hau T.D., Road Pricing: An Economic Approach, Plenary Session Speaker, Innovations in Pricing of Transportation Systems: Conference & Workshop, invited by the University of Florida, Gainesville, Orlando, Florida, May 13-14, 2010. 2010.


Researcher : Huang Y

List of Research Outputs

Zhang J. and Huang Y., The CBOE S&P 500 Three-Month Variance Futures, Journal of Futures Markets. 2010, 30(1): 48-70.


Researcher : Jao YC

Project Title:Financial reform in Hong Kong
Investigator(s):Jao YC
Department:Sch of Economics & Finance
Source(s) of Funding:Other Funding Scheme
Start Date:09/2000
Abstract:
To examine the background, rational, and implementation of reform measures in the financial sector of Hong Kong, 1970-2000, and to evaluate their implications for Hong Kong's economic restructuring and position as an international financial centre.




Researcher : Lau SH

Project Title:Economic Impacts of Fertility and Mortality Changes: Decomposing Demographic Dividend
Investigator(s):Lau SH
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:08/2008
Abstract:
(1) To propose a semi-parametric way to obtain a one-to-one correspondence between changes in age-specific mortality rates to a change in life expectancy, which enables a tractable analysis of the economic effects of mortality changes based on empirical age-specific mortality rates within a general equilibrium framework. (2) To propose a way to analyze the economic effect of fertility changes in terms of empirical total fertility rate in an overlapping-generations model capturing birth and child-rearing activities. (3) To analyze the effects of fertility and mortality changes on aggregate saving and capital accumulation in industrial countries and newly industrializing economies (NIEs), by incorporating the demographic features mentioned in (1) and (2) into a macroeconomic model with life-cycle saving and neoclassical production technology. (4) To decompose the demographic dividend at different time horizons into a component due to the age structure (first demographic dividend) and one due to a change in individual behavior (second demographic dividend). (5) To analyze the demographic dividend of the NIEs in light of their rapid demographic changes, and to compare the time path of demographic dividend with that of industrial countries with demographic transition lasting for a couple of centuries.


Project Title:Cross-Game Learning and Teaching in Repeated Games: A Laboratory Study
Investigator(s):Lau SH
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:06/2009
Abstract:
Repeated game models have been widely used by economists to study how “the shadow of the future” may enhance cooperation. According to the folk theorem in repeated games (Fudenberg and Maskin, 1986), when players are sufficiently patient, infinite repetition (or finite repetition with random termination) enables players to support cooperative behavior—for example, making contributions in a public good game—as equilibrium, even when such cooperative behavior is not an equilibrium in the one-shot game. The folk theorem, however, only shows that cooperation can be supported as equilibrium, but is silent about how such equilibrium may arise. One justification of equilibrium analysis of repeated game is that if players play a repeated game sufficiently often, then players may learn how to adopt the right strategy to support cooperation. This “learning” justification raises the empirical question of whether and how learning in repeated game may occur. Furthermore, some sophisticated players may anticipate that others will learn from their experiences, and hence may choose their behavior so as to teach others to learn to play an equilibrium that they prefer. Using the assignment game and the battle of sexes game, this project will use the laboratory method to address the novel questions of cross-game teaching in repeated games. Consider first the assignment game, which has been widely studied in the common-pool resources literature (Ostrom et al., 1994). In this game (see Figure 1 in Section VII), two fishermen independently decide to go to one of two fishing spots. The good spot has a value of h, and the bad spot has a value of l, where h>l>0. If they choose different spots, each fisherman will obtain the respective value of the spot. If they choose the same spot, they will split the value of the spot. We further assume that h>2l, so that the good spot is much better than the bad spot. In this game, the two asymmetric outcome–(Tough, Soft) and (Soft, Tough)– maximize the sum of the players’ payoffs, where Tough and Soft denote choosing Good Spot and Bad Spot, respectively. A player, however, prefers the asymmetric outcome in which he/she plays Tough to the other asymmetric outcome in which he/she plays Soft. Furthermore, when h>2l, Tough is the dominant strategy for each player. Hence, (Tough, Tough) is the unique equilibrium in the one-shot assignment game. If this game is played repeatedly, one might expect that a rotation scheme, in which the fishermen take turns going to the good spot, will eventually be adopted. In fact, Berkes (1992) reports that fishermen in Turkey employ a turn-taking scheme to allocate fishing spots. Now consider the battle of sexes game (hereafter BOS), which has been used by economists to study entry into a market of natural monopoly (Dixit and Shapiro, 1986) and network externality (Besen and Farrell, 1994). In the BOS (see Figure 2 in Section VII), a couple wants to spend an evening together, but the wife (player one) prefers to attend a ballet performance, while the husband (player two) prefers to attend a football match. If they both choose Ballet, player one gets h, and player two gets l (where h>l>0). If they both go to the football match, player two gets h, and player one gets l. If they choose different activities, each gets 0. Similar to the assignment game, the two asymmetric outcomes–(Tough, Soft) and (Soft, Tough)–maximize the sum of the players’ payoffs, where Tough and Soft denote one’s preferred action and Soft denote one’s less preferred action. As in the assignment game, a player prefers the asymmetric outcome in which she plays Tough to the other asymmetric outcome. However, different from the assignment game, when players fail to coordinate on an asymmetric outcome in the BOS, each now gets zero instead of a positive payoff. This implies that even in the one-shot BOS, both (Tough, Soft) and (Soft, Tough) can be supported as Nash equilibria. Moreover, as Luce and Raiffa (1957, p. 94) point out, if this game is played repeatedly, payers may use turn taking to share the gain from intertemporal cooperation. In Cason et al. (2008), we find that significant learning and teaching occurred when subjects play the repeated assignment game with random termination in the laboratory. Building on this result, this project will use the laboratory method to study cross-game learning using a combination of the assignment game and the BOS. Note that if players can transfer their knowledge about from one game to the other effectively, then it enhances the learning justification of equilibrium analysis for repeated games. This is because even if a player is playing a particular repeated game for the first time, he/she may still know how to adopt the right strategy to support cooperation if he/she has played a “similar” game before. We shall investigate cross-game learning by looking at two different treatments. In the Cross Game treatment, players first play the repeated assignment games three times, and then play the repeated BOS four times (see section VII for details). In the Pure BOS treatment, players play the repeated BOS seven times. In the Cross Game treatment, players experience a change in the repeated game they play when moving from earlier matches to later matches. On the other hand, in the Pure BOS treatment, they always play the repeated BOS. We shall examine whether players are less able to learn to use turn taking to facilitate cooperation, as well as less likely to teach others to use turn taking strategy, in the Cross Game treatment compared to the Pure BOS treatment, given that they face a more difficult learning environment in the Cross Game treatment. References: See Section VII.


Project Title:2010 Annual Conference of the Royal Economic Society Fertility and mortality changes in an overlapping-generations model with realistic demography
Investigator(s):Lau SH
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:03/2010
Completion Date:03/2010
Abstract:
N/A


List of Research Outputs

Gan Z. and Lau S.H., Demographic structure and overlapping generations: A simpler proof with more general conditions, Journal of Mathematical Economics. 2010, 46 (No. 3): 311-319.
Lau S.H., Associate Editor, Singapore Economic Review . 2010.


Researcher : Lin TC

Project Title:Detecting Price Barriers
Investigator(s):Lin TC
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:10/2009
Abstract:
1. Offer a new way to detect the effects of the stock price barriers: The existing literature mainly studies expected return based on the technical trading rules. In contrast, we will also study the change of second moments when stock prices are around the barriers. If the stock price temporarily deviates from its fundamental value around the defined barriers, this could imply a short-term comovement breakdown between the return of the stock and the market. Hence, the change in the market beta can help identify the existence of price barriers. Detecting barriers by second moments has several merits over the existing approaches. Using second moments has more statistical power than focusing on direct return predictability, which we illustrate using a simple simulation exercise. The precision of estimation is typically higher for variance and covariance. Our preliminary results do show significant decreases in the beta, total and idiosyncratic return variance when the price approaches the barriers. Turning to the case of special round numbers, current studies on such psychological barriers are typically testing whether trailing digits of price are uniformly distributed. The uniformity test is specific to these price barriers. Our approach, instead, can be applied to detect all kinds of price barriers beyond the trailing digits. The change of beta also provides an interesting economics interpretation in terms of a temporary comovement breakdown. Besides, the influence of the price level on systematic risk is itself intriguing. 2. Offer a complete picture of the price behavior around the barriers: Most studies only focus on the return predictability or trading profits after the market indices break through the barriers. Intuitively, the effect of price barriers should not be limited to the dynamics after the breakthrough or stock indices. We thus will study the price movements both before and after the breakthrough for individual stocks. Interestingly, the preliminary result shows a stronger and consistent effect on second moments before the breakthrough while the effects on the first moment are more pronounced after the breakthrough. 3. Report the risk-adjusted returns based on the trading rules: We will study the risk-adjusted returns rather than raw returns by controlling for known risk factors like size, book-to-market price ratio, and momentum. Even if investors expect a drift in raw returns after the breakthrough, we do not have a strong prior whether it comes from a change in alpha, beta, or both. Our approach can make a distinction between them. In addition, both alpha and beta may also be affected by past returns in the short-run. It is thus important to take momentum or reversal effects into account when evaluating the risk-adjusted returns. 4. Understand the causes of the price barriers: From the previous literature, we have observed that stock prices deviating from the fundamentals when the price levels are around the some barriers. The natural next step is to understand what might be the possible causes for the phenomenon. One possible explanation is the limits to arbitrage. Intuitively, if a stock is difficult to be sold short or has no liquid option market, investors cannot express their negative opinions without holding the stock. Therefore, limits of arbitrage due to short-sales constraints or lack of stock put options may prevent exploitation of this “mispricing”. We would like to investigate whether the level of short selling or the availability of option market is correlated with the price barriers. For instance, we can study the time-series behavior of implied volatility around price barriers. As stock price gets closer to the barrier, the implied volatility of out-of-the-money calls should go down (and perhaps it should go up again after breakthrough). For another example, we can investigate the cross-section behaviors of the strike prices. As stocks get closer to barrier, out-of-the-money call prices (or puts in case of support) should decrease in price (or implied volatility) relative to in-the-money calls, and also relative to option prices of other stocks that are not close to barrier.


Project Title:The 8th NTU International Conference on Economics, Finance and Accounting (2010 IEFA) How the 52-Week High and Low Affect Beta and Volatility
Investigator(s):Lin TC
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:06/2010
Completion Date:06/2010
Abstract:
N/A


List of Research Outputs

Driessen J.J.A.G., Lin T.C. and Phalippou L., A New Method to Estimate Risk and Return of Non-Traded Assets from Cash Flows: The Case of Private Equity Funds , EFA 2007 Ljubljana Meetings Paper AFA 2008 New Orleans Meetings Paper Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market NBER Working Paper No. W14144 . 2009.
Driessen J.J.A.G., Lin T.C. and Van Hemert O., How the 52-Week High and Low Affect Beta and Volatility , The 8th NTU International Conference on Economics, Finance and Accounting (2010 IEFA) . 2010.
Gao X. and Lin T.C., Do Behavioral Needs Influence the Trading Activity of Individual Investors? Evidence from Repeated Natural Experiments, International Symposium on Financial Engineering and Risk Management 2010 (FERM 2010). 2010.


Researcher : Liu Q

Project Title:Measuring the impact of corporate governance in China
Investigator(s):Liu Q
Department:Sch of Economics & Finance
Source(s) of Funding:Small Project Funding
Start Date:11/2004
Abstract:
To systematically examine the dynamic interactions between various corporate governance mechanisms and important corporate decisions in the listed companies in China.


Project Title:Allied Social Sciences Associations (ASSA) 2006 Conference Stock Market Information Production and CEO Incentives Does Competition Encourage Unethical Behavior? The Case of Corporate Profit Hiding in China
Investigator(s):Liu Q
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:01/2006
Abstract:
N/A


Project Title:33rd Annual Meeting of the European Finance Association 2006 Predicting Stock Market Returns with Aggregate Discretionary
Investigator(s):Liu Q
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:08/2006
Abstract:
N/A


Project Title:Institutions, Financial Development, and Corporate Investment: Evidence during Chinas Reform Era'
Investigator(s):Liu Q, Arner DW, Siu AKF
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:09/2007
Abstract:
To map out the "implied'' costs of capital perceived by firm managers (a measure for investment efficiency) by ownership (SOEs, collective, private, mixed-ownership, and foreign), by region, and by industry. To follow the Chinese firms' investment efficiency for the next 5-10 years as well, which allows us to better understand the dynamics of the Chinese economic reform. To establish empirical evidence that non-state firms in China in general have a higher investment efficiency than the state sector; and that firms in regions with market-prone institutions tend to face less financing constraints and enjoy higher investment return. To gauge the deadweight loss of the mis-allocation of capital in the Chinese economy, and to estimate the potential value augmentation of reforming institutions and improving the efficiency of financial system. To better understand how different financing channels work in the Chinese economy, i.e., formal vs. informal, based on the surveyed data. To suggest a new methodology to study the firm-level investment efficiency in China. To suggest a series of policy implications which help to improve the overall institutions and financial development in China, which tighten the links between the corporate behavior and institutional context. To obtain a large database of the Chinese firms during the reform era, which can be leveraged by other researchers as well.


List of Research Outputs

Kang Q. and Liu Q., Information-based stock trading, executive incentives, and the principal-agent problem, Management Science. 2010, 56 (4): 682-698.
Kang Q., Liu Q. and Qi R., The Sarbanes-Oxley Act and corporate investment: a structural assessment , Journal of Financial Economics. 2010, 96 (2): 291-305.
Liu Q., GRF Earmarked Competitive Research Grant (HK$319,125), 2010 – 2012, RGC. 2010.


Researcher : Liu X

List of Research Outputs

Liu X., Transmission Mechanism Of Monetary Policy In China, 2009.


Researcher : Liu Z

List of Research Outputs

Meng R. and Liu Z., What Do Managers Do When Immune from Hostile Takeover Threats? , AsianFA-NFA 2008 International Conference. 2010.


Researcher : Lo P

Project Title:Strategic Voting in Multi-candidate Races
Investigator(s):Lo P
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:09/2008
Abstract:
1) I propose both a private value model and a partial common value model to study multicandidate elections under plurality rule. I plan to characterize the set of equilibria in these two settings respectively and study how voters respond to their private information. 2) With the characterization of equilibria, I can conduct comparative statics on how the voting outcome changes with candidates' characteristics, eg. policy choices, perceived ability differences, and precision of information available to the voters. 3) Lastly, I plan to compare equilibrium outcomes between the private value setting and the partial common value setting. This will give insight into the effect of the different natures of incomplete information captured in the two settings.




Researcher : Luo D

List of Research Outputs

Tang Y., Luo D. and Wang S.Q., Model Specification, Data History, and CDO (Mis)Pricing, Best Paper Award, Financial Management Association (FMA) Annual Meetings . 2009.
Tang Y., Luo D. and Wang S.Q., Model Specification, Data History, and CDO (Mis)Pricing, China International Conference in Finance. 2009.
Tang Y., Luo D. and Wang S.Q., Model Specification, Data History, and CDO (Mis)Pricing, International Symposium on Risk Management and Derivatives. 2009.


Researcher : Luo X

List of Research Outputs

Luo X. and Zhang J., The Term Structure of VIX, 2010 Financial Management Association (FMA) European Conference, June 9-11, 2010, Hamburg, Germany. 2010.
Luo X. and Zhang J., The Term Structure of VIX, International Risk Management Conference (IRMC) 2010, June 3-5, 2010, Florence, Italy. 2010.


Researcher : Luo Y

Project Title:Risk Sensitivity Meets Rational Inattention
Investigator(s):Luo Y
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:08/2007
Completion Date:08/2009
Abstract:
Set up a risk-sensitive permanent income model with RI and solve it explicitly. Examine how the combination of RI and RS affects optimal consumption and saving behavior. Specifically, I plan to discuss the implications for precautionary savings and the marginal propensity to consume out of permanent income. Examine whether this model can better reconcile the excess smoothness and excess sensitivity features of aggregate consumption with the observed stochastic processes of labor income in the US data. Explore the welfare effects of RI and RS in this permanent income model and compute the welfare loss due to deviating from the full-information path and higher risk aversion. Explore some policy implications for the Hong Kong economy.


Project Title:The Current Account and Macroeconomic Adjustment under Rational Inattention
Investigator(s):Luo Y, Yuen CW
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:01/2008
Abstract:
The primary objective of this project is to examine how limited information-processing capacity (the rational inattention hypothesis) affects the joint dynamics of consumption, investment, and the current account in an otherwise stylized intertemporal current account (ICA) model and then makes the model better explain the data. The standard rational expectations version of the intertemporal current account model generally fails to match some important observed facts: (i) the excess smoothness of aggregate consumption, (ii) the dynamic effects of exogenous incomes on the current account, (iii) the volatility of actual current accounts, and (iv) the relative responses of investment and the current account to stochastic productivity shocks. We expect that the proposed study can provide some evidence regarding to the issue of whether and to what extent information-processing capacity can make the model better explain the joint behavior of consumption, investment, and the current account we observe in the data.


Project Title:Robustness, Inventories, and Production Fluctuations
Investigator(s):Luo Y
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:06/2009
Abstract:
The primary objective of this project is to examine the aggregate implications of the preference for robustness (that is, the concern about model misspecification) on inventories and production fluctuations in a otherwise standard production smoothing model. We propose a linear-quadratic robust control model in which firms are concerned about the possibility that their model is misspecified and thus make production and inventories decisions that maximize discounted expected profits given the worst-possible case, and examine the following key issues: (1) How the introduction of the preference for robustness affects firms' optimal decisions on production and inventories given exogenous sales? (2) Can the introduction of the preference for robustness improve the production-smoothing model's performance in the following aspects that the standard models failed to explain: (i) The relative volatility of production and sales, (ii) The correlation between sales and inventory change, (iii) The persistence of inventory movements, and (iv) Slow adjustment speeds of inventories. (4) What's the implication for the counter-cyclical macroeconomic policy? Does the model with model misspecification provide a better framework for policy analysis?


Project Title:Incomplete Information Diffusion, Durables Consumption, and Inertial behavior
Investigator(s):Luo Y
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:09/2009
Abstract:
1) Set up two information-constrained permanent income models (RI and SE) with durables consumption and solve them explicitly. 2) Solve for explicit optimal consumption rules under RI and SE, respectively; obtain the dynamics of aggregate non-durables and durables consumption after aggregating across all consumers. 3) Explore the stochastic properties of non-durables and durables under RI and SE at both individual and aggregate levels; compare the model's predictions with their empirical counterpart in the micro and macro U.S. data. 4) Calculate the welfare losses due to RI of a consumer whose channel capacity follows some specific distributions as well as the welfare loss due to SE for the consumer; finally, we use the distribution of channel capacity to recover the exogenous updating probability by equating the two welfare losses.


List of Research Outputs

Luo Y., Gong L. and Zou H., A Note on Entrepreneurial Risk, Capital Market Imperfections, and Heterogeneity, In: William A. Barnett, Macroeconomic Dynamics. UK and USA, Cambridge University Press, 2010, 14: 16.
Luo Y. and Young E., Asset Pricing under Information-processing Constraints, 9c0d0e571e0b3e2f94f4797b3">Economics Letters. Amsterdam, Netherlands, Elsevier, 2010, 107: 26-29.
Luo Y. and Young E., The Wealth Distribution and the Demand for Status, In: William A. Barnett, Macroeconomic Dynamics. 40 West 20th Street, New York, NY, Cambridge University Press, 2009, 13: 1-30.


Researcher : Meng R

Project Title:What do managers do when immune from hostile takeover threats?
Investigator(s):Meng R
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:03/2010
Abstract:
This project will adopt the Delaware’s mid-1990s antitakeover regime shift as a natural experiment to study how takeover impediments affect entrenched managers’ decisions on corporate financing, investment, and ultimately affect firm value. Due to the separation of ownership and management in corporations, managers may not work in the best interests of shareholders (Jensen and Meckling, 1976). Consequently, there are managerial agency costs; managers make sub-optimal corporate investment and financing decisions to maximize their own private benefits. On one hand, in the literature of corporate investment, Jensen (1986)’s agent theory of free cash flows predicts that entrenched managers have incentives to over-invest in activities of empire-building and corporate diversification to make them more entrenched. On the other hand, in the literature of corporate financing, the models of capital structure with managerial entrenchment predict that entrenched managers have incentives to use less debt and rebalance capital structure less often than optimal for shareholders (e.g., Grossman and Hart,1982; Stulz, 1990; Hart and Moore, 1995; and Morellec, Nikolov, and Schurhoff, 2008). The reason is because lower debt obligations of coupon payments and principles lead to lower chances of bankruptcy as well as higher free cash flows at managers’ discretion. Both lines of research imply that the use of debt can discipline managers. So, if a manager is able to choose debt policy totally at his wish, he will choose a low debt level. However, managers are also disciplined by hostile takeover threats as argued by Jensen (1993). If a manager does not do a competent job, the firm can be targeted by potential buyers and the manager could be replaced during the acquisition process. As a result, a manager may voluntarily take on debt to defend hostile takeovers. Indeed, Novaes and Zingales (1995), Zwiebel (1996) and Morellec (2004) construct models in which managers use debt not because it benefits shareholders but because it reduces the threat of a hostile takeover. Therefore, managers’ incentives to use debt and to invest in empire-building activities should change with the antitakeover environment. In a takeover-friendly jurisdiction, managers should use a higher debt and decrease inefficient investment, which further boosts firm value. Oppositely, if changes in state laws shield firms from takeover threats, managers should reduce the use of debt and increase corporate investment, which further destroys firm value. The Delaware’s mid-1990s validation of the poison pill in conjunction with a staggered board completely immunes Delaware firms with a staggered board from hostile takeovers. It provides a natural experiment along with a natural control sample of non-Delaware firms and Delaware firms without a staggered board to test the implications of the impacts of the takeover impediments. In particular, this project aims to answer the following questions. • How do exogenous changes in antitakeover legal environment affect the managers’ incentives to use debt for self-discipline and affect their incentives to rebalance capital structure? • If takeover impediments lead to a reduction in the use of debt, how do corporate managers accordingly change their corporate investment decisions? • What are the implications on firm value? • Are the impacts of takeover impediments more concentrated among firms with weaker corporate governance before the antitakeover regime shift? The case of the Delaware’s mid-1990s antitakeover regime shift has been discussed from the law perspective by Gilson (2001) and Bebchuk, Coates and Subramanian (2002), and has been used by Bebchuk and Cohen (2005), Rauh (2006) and Low (2009) among others to study the implications of corporate governance. The pass of the court ruling of Moore Corp Ltd vs. Wallace Computer services (1995) essentially make Delaware firms with a staggered board to be immune from hostile takeover threats. A staggered board is a certain type of board structure adopted by many U.S. firms. Comparing to a unitary board, a staggered board stratifies the entire board into sub-classes and guarantees that only one class of directors can be replaced at each annual meeting. For example, the most common staggered board structure has three classes. It indicates that only one third of the directors can be replaced every year. A poison pill is a rights plan that entitles shareholders to dilute the value of the position of a bidder who acquires a large block. Prior to the development and adoption of the poison pill defense, staggered boards were considered only a mild takeover defense because they did not impede the acquisition of a control block. The introduction and acceptance of the poison pill, however, transformed the market for control, considerably enhancing the antitakeover power of staggered boards. Before 1995, Delaware has friendly takeover law. Delaware Supreme Court was not in favor of the target’s poison pill and allowed shareholders to decide for themselves whether to accept a hostile bid. Without poison pill, staggered board structure would be just like an “emperor’s new clothes.” This friendly takeover landscape changed markedly in 1995. The Delaware Supreme Court’s ruling in Moore Corp Ltd vs. Wallace Computer services (1995) legitimized the use of poison pill in conjunction with a staggered board. Since then, the Delaware firms with staggered boards have a “Just Say No defense” to hostile takeover bids (Wall Street Journal, 1996, 1997). Bebchuk, Coates, and Subramanian (2002) find that not a single hostile bidder managed to win control against a target with an effective staggered board in the five-year period from 1996 to 2000. In addition, Rauh (2006) shows a decrease in the probability of takeover for Delaware firms after 1996. Subramanian (2004) argues that the series of takeover events have eliminated Delaware’s distinctiveness as a takeover-friendly jurisdiction. This “Just Say No defense” is effective only for the Delaware firms with a staggered board, not for the non-Delaware firms and the Delaware firms without a staggered board. So, the latter group naturally serves as a control group in our study.


List of Research Outputs

Meng R. and Wong K.P., Multinationals and Futures Hedging: An Optimal Stopping Approach, Global Finance Journal. Elsevier, 2010, 21: 13-25.
Meng R. and Liu Z., What Do Managers Do When Immune from Hostile Takeover Threats? , AsianFA-NFA 2008 International Conference. 2010.


Researcher : Shea KL

Project Title:Should tax be damaged dependent in correcting externalities
Investigator(s):Shea KL
Department:Sch of Economics & Finance
Source(s) of Funding:Other Funding Scheme
Start Date:09/2002
Abstract:
To compare the efficacy of three tax forms, namely, a fixed amount of tax, a tax that depends on the damage inflicted by externalties and one that depends on the fine.


Project Title:Ad Valorem tariff versus specifid tariff
Investigator(s):Shea KL
Department:Sch of Economics & Finance
Source(s) of Funding:Other Funding Scheme
Start Date:09/2002
Abstract:
To examine if ad valorem tariff and specific tariff are equivalent under duopoly.




Researcher : Shi L

List of Research Outputs

Chang E.C., Shi L. and Zhang J., Is Warrant Really a Derivative? Evidence from the Chinese Warrant Market, 2009 China International Conference in Finance (CICF2009), July 7-10, 2009, Guangzhou, China. 2009.
Chang E.C., Shi L. and Zhang J., Is Warrant Really a Derivative? Evidence from the Chinese Warrant Market, Invited lecture at Guanghua School of Management in Peking University, Beijing, October 20. 2009.
Chang E.C., Shi L. and Zhang J., Is Warrant Really a Derivative? Evidence from the Chinese Warrant Market, Invited lecture at School of Mathematical Sciences in South China Normal University, Guangzhou, 8 July. 2009.


Researcher : Song FM

Project Title:Corporate Governance and Market Valuation in China and Hong Kong
Investigator(s):Song FM, Zhang JJ
Department:Sch of Economics & Finance
Source(s) of Funding:The University of Hong Kong Foundation Seed Grant
Start Date:07/2003
Abstract:
To develop extensive knowledge and expertise in the field of China and Hong Kong's corporate governance; to play an important role in the reform of corporate governance in China and Hong Kong.


Project Title:Microstructure of Hong Kong stock exchanges: order aggressiveness, volume, and liquidity
Investigator(s):Song FM, Chung RCK
Department:Sch of Economics & Finance
Source(s) of Funding:Small Project Funding
Start Date:11/2004
Abstract:
To introduce the order aggressiveness as a proxy for asymmetric information to explain spread. The dataset used in this study will be compiled from Trade Record and Bid and Ask Record from HKSE.


Project Title:China Business and Economics
Investigator(s):Song FM
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding for Strategic Research Theme
Start Date:06/2008
Completion Date:05/2011
Abstract:
n/a


Project Title:22nd Annual Australasian Finance and Banking Conference Determinants of Bank Cross-border M&As:Bank regulation and regulatory arbitrage
Investigator(s):Song FM
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:12/2009
Completion Date:12/2009
Abstract:
N/A


List of Research Outputs

Chow C.K.W., Song F.M. and Wong K.P., Investment and the Soft Budget Constraint in China, International Review of Economics and Finance. Elsevier, 2010, 19: 219-227.
Lin C., Lin P. and Song F.M., The role of property right protection and government in corporate R&D in China, Journal of Development Economics. 2009.
Song F.M. and Tao L., Do Small Traders contribute to Price Discovery? Evidence fro Hong Kong Hang Seng Index, Journal of Futures Markets. 2010.


Researcher : Suen WC

Project Title:Delay as a Mechanism to Improve Collective Decision Making
Investigator(s):Suen WC
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:10/2008
Abstract:
1) Study a class of bargaining problems in which information aggregation is a serious concern. 2) Construct models of repeated voting in which delay can potentially improve the quality of collective decisions and raise the ex ante welfare of negotiating parties. 3) Investigate into equilibrium strategies and the dynamics of the bargaining process. 4) Provide a formal model that can address the effects of bargaining deadlines on bargaining behavior and bargaining outcomes.


List of Research Outputs

Chan J. and Suen W.C., Media as Watchdogs: The Role of News Media in Electoral Competition, European Economic Review. 2009, 53: 799-814.
Damiano E., Li H. and Suen W.C., First in Village or Second in Rome?, International Economic Review. 2010, 51: 263-288.
Suen W.C., Mutual Admiration Clubs, Economic Inquiry. 2010, 48: 123-132.


Researcher : Tang Y

Project Title:On the Role of Credit Rating Agencies in the Subprime Crisis
Investigator(s):Tang Y
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:06/2008
Completion Date:06/2010
Abstract:
The ongoing subprime crisis has already claimed significant damage to the world financial markets. As of April 2008, financial institutions lost over $260 Billion (more than Hong Kong’s 2007 GDP of $207 Billion). The International Monetary Fund estimated the total loss could eventually reach $1000 Brillion. This crisis affected not only large institutions, but also individuals and households too. Thousands of people are being laid off. Countless homes are being foreclosed. Despite the widespread impact, little is understood about the causes of the subprime crisis. This issue is important because the answer is important to prevent future crisis. In this research project, I uncover a potential major cause for the subprime crisis by investigating the behaviour of credit rating agencies. Specifically, I examine credit rating agencies’ conflicts of interest in collateralized debt obligations (CDOs) markets. CDOs are the major financial product involving subprime investments. CDO managers pay rating agencies to get the desired ratings. On one hand, rating agencies need to provide objective ratings for market participants. On the other hand, rating agencies rely on the rating business for revenue. This research demonstrates how rating agencies handle this inherent conflict of interest.


Project Title:Understanding the 2007/2008 Credit Crisis: Collateralized Debt Obligations (CDO) Credit Ratings
Investigator(s):Tang Y
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:09/2009
Abstract:
1) Our first objective is to provide a full account of the CDO structuring and valuation process. With a good understanding of market practice, we can investigate potential factors contributing to the performance of CDO credit ratings. 2) So far most of our information on CDO is on the market or firm aggregate level. After collecting CDO level data, we will be able to provide a detailed description of CDO historical rating and collateral asset quality. 3) By comparing CDO ratings and the underlying collateral quality, we will be able to understand how the CDO credit ratings were derived. We will further discuss the accuracy of the ratings relative to a benchmark (Vasicek’s portfolio credit risk model). 4) With information on the model inputs and parameter assumptions, we will explain what contributed to the difference between actual ratings and the benchmark model predictions. 5) Using actual asset performance data and CDO investor required yield, we could test whether the performance of CDO rating was due to bad luck or agency conflicts. We will further investigate how agency conflicts evolve through the life of the CDOs.


Project Title:20th Anniversary Conference on Financial Economics and Accounting A Little Knowledge Is A Dangerous Thing: Model Specification, Data History, and CDO (Mis)Pricing
Investigator(s):Tang Y
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:11/2009
Completion Date:11/2009
Abstract:
N/A


Project Title:Why did Hong Kong investors buy minibonds?
Investigator(s):Tang Y
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:05/2010
Abstract:
Hong Kong people would have felt much better as one of the most robust economies against the credit crisis, had the minibond investors not been protesting routinely since Lehman Brothers bankruptcy. (Concurrent to this writing on November 15, 2009, the Lehman Brother’s Victims Association is holding a demonstration against the chief executive and the government of Hong Kong.) How should the government solve this problem? While the ultimate answer involves legal, political, and financial aspects, the motive and initiation of the minibond investment is of paramount important. Did investors actively seek the investments knowing all the risk-return profiles of the securities? Or investors made involuntary decisions, possibly under the influence of the distributor? If investors are themselves responsible for the investment decision, then the government should not blame the distributors but increase efforts of investor education. Otherwise, investors should receive their due compensation and government should strengthen regulation. We propose to empirically examine the determinants of investor’s portfolio allocation decisions in structured products represented by minibonds. Did investors understand the risk-return profiles of minibonds when investing in them? Individual investors' appetite for structured products is puzzling from several aspects. First, a security will be included in an investor's portfolio only if it is on the efficient frontier. However, evidence from U.S., U.K., Germany, Swiss, among others, shows that structured products are massively overpriced. Second, structured products are financial innovations with little historical performance data and much ambiguity. Ambiguity averse investors would avoid such investments. Third, CDOs and other structured products have capped returns but substantial downside due to default risk. Such feature does not match investors' preference for positive skewness. One potential (easy) explanation for individual investors' seemingly suboptimal investments in structured products is that investors misunderstood them and simply followed the fads. The remaining question is whether the investment mistakes were made by investors themselves (investment was ''pushed'' by investors) or induced by the product issuers (investment was ``pulled'' by issuers). It is no surprise that bounded rational investors could make suboptimal investment decisions. However, even perfectly informed investors may rebel conventional wisdoms. On the other hand, CDOs could be mis-sold to investors by investment banks and other financial intermediaries. It is important to distinguish these two alternatives for security design and market regulation. If investors make mistakes, will financial literacy help? Furthermore, through which channels, intelligence or education, will financial literacy help investors make better investment decisions? We hypothesize that more financial literate investors are better positioned to resist investment sophistry. We proceed to explore the role of financial literacy. John Y. Campbell, in his 2006 American Finance Association (AFA) Presidential Address, summarizes empirical evidence on household finance and argues that poorer and less well educated make investment mistakes. Furthermore, some financial products are exploiting naive investors. Our empirical analysis on education and IQ could provide evidence his conjecture.


List of Research Outputs

Chang E.C., Tang Y. and Zhang M., Financial Literacy and Household Investments in Structured Financial Products, 2010 Five Asian Universities Joint Conference, January 29, 2010, Hong Kong. 2010.
Chang E.C., Tang Y. and Zhang M., Financial Literacy and Household Investments in Structured Financial Products, 2010 Hitotsubashi-Thammasat Conference on Asian Financial Market, May 2-3, 2010, Hua Hin, Thailand. 2010.
Chang E.C., Tang Y. and Zhang M., Financial Literacy and Household Investments in Structured Financial Products, The 17th Conference on the Theories and Practices of Securities and Financial Markets, December 11-12, 2009, Kaohsiung, Taiwan. 2009.
Griffin J. and Tang Y., Did subjectivity play a role in CDO credit rating?, Best Paper Award, 17th Annual Conference on the Theories and Practices of Securities and Financial Markets, National Sun Yat-Sen University. 2009.
Tang Y. and Yan H., Market Conditions, Default Risk, and Credit Spreads, Journal of Banking and Finance. 2009, 34: 724-734.
Tang Y., Luo D. and Wang S.Q., Model Specification, Data History, and CDO (Mis)Pricing, Best Paper Award, Financial Management Association (FMA) Annual Meetings . 2009.
Tang Y., Luo D. and Wang S.Q., Model Specification, Data History, and CDO (Mis)Pricing, China International Conference in Finance. 2009.
Tang Y., Luo D. and Wang S.Q., Model Specification, Data History, and CDO (Mis)Pricing, International Symposium on Risk Management and Derivatives. 2009.


Researcher : Tse CY

Project Title:Search and Matching in a Spatial Economy  Middlemen, Agglomeration Economies, and the Growth of Cities as Commercial Centers in Economic Development
Investigator(s):Tse CY
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:10/2009
Abstract:
1) To study how individuals would choose to become specialist middlemen out of spatial considerations, and the role specialist middlemen play in mitigating trade costs arising from distance and space. 2) To study how agglomeration economies can be the results of enhanced trading opportunities in denser locales. 3) To study the growth of cities as trading hubs in economic growth and development when industrial production becomes increasingly land intensive due to the gradual and continuous diffusion of heavy machinery in production and inventory management over time. 4) In each part, there shall be important policy implications from the analysis on the urban forms that would be most conducive to trade, productivity, and economic growth.


List of Research Outputs

Tse C.Y., Journal of Economics. Wien, Austria, Springer Wien New York, 2010, 84.
Tse C.Y., Thick Market Externalities in a Spatial Model, In: D.P. McMillen Y. Zenou, Regaional Science and Urban Economics. Amsterdam, Holland, Elsevier, 2010, 40: 92-105.


Researcher : Tse KS

List of Research Outputs

Chau K.W., Wong S.K., Yiu C.Y., Tse K.S. and Pretorius F.I.H., Do unexpected land auction outcomes bring new information to the real estate market?, Journal of Real Estate Finance and Economics. 2010, 40: 480-496.


Researcher : Vere JP

Project Title:Research Output Prize
Investigator(s):Vere JP
Department:Sch of Economics & Finance
Source(s) of Funding:Research Output Prize (in Faculty)
Start Date:10/2008
Abstract:
To identify and recognize the best research outputs in different faculties.


Project Title:26th Conference of the American Committee on Asian Economic Studies Intergenerational Earnings Mobility in Hong Kong
Investigator(s):Vere JP
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:03/2010
Completion Date:03/2010
Abstract:
N/A


List of Research Outputs

Vere J.P., Editorial Board (Executive Editor), In: M. Dutta, Journal of Asian Economics. 2009.
Vere J.P., Implications of Hong Kong's Statutory Minimum Wage Policy, Provisional Minimum Wage Commission. 2010.
Vere J.P., Special Topic Enquiry on Earnings Mobility 2008-2009, Economic Analysis and Business Facilitation Unit, Financial Secretary's Office. 2009.
Vere J.P., Special Topic Enquiry on Earnings Mobility, 26th Conference of the American Committee for Asian Economic Studies (ACAES), 5-6 March 2010.
Vere J.P., The Right Sums, South China Morning Post. 2010, 66(165): A9.


Researcher : Wang SQ

List of Research Outputs

Tang Y., Luo D. and Wang S.Q., Model Specification, Data History, and CDO (Mis)Pricing, Best Paper Award, Financial Management Association (FMA) Annual Meetings . 2009.
Tang Y., Luo D. and Wang S.Q., Model Specification, Data History, and CDO (Mis)Pricing, China International Conference in Finance. 2009.
Tang Y., Luo D. and Wang S.Q., Model Specification, Data History, and CDO (Mis)Pricing, International Symposium on Risk Management and Derivatives. 2009.


Researcher : Wong KP

Project Title:The 14th Annual International Conference on Real Options Tax Convexity, Investment, and Capital Structure
Investigator(s):Wong KP
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:06/2010
Abstract:
N/A


List of Research Outputs

Broll U. and Wong K.P., Banking Firm and Hedging over the Business Cycle, Portuguese Economic Journal. Springer, 2010, 9: 29-33.
Broll U., Welzel P. and Wong K.P., Export and Strategic Currency Hedging, Open Economies Review. Springer, 2009, 20: 717-732.
Chow C.K.W., Song F.M. and Wong K.P., Investment and the Soft Budget Constraint in China, International Review of Economics and Finance. Elsevier, 2010, 19: 219-227.
Chu K.C. and Wong K.P., Progressive Taxation and Corporate Liquidation Policies with Mean-Reverting Earnings, Economic Modelling. Elsevier, 2010, 27: 730-736.
Meng R. and Wong K.P., Multinationals and Futures Hedging: An Optimal Stopping Approach, Global Finance Journal. Elsevier, 2010, 21: 13-25.
Wong K.P., Investment and the Soft Budget Constraint in China, The 4th RGC Public Lecture---Science of Financial Analysis---jointly held with the Hong Kong Science Museum. 2010.
Wong K.P., The Effects of Irreversibility on the Timing and Intensity of Lumpy Investment, Economic Modelling. Elsevier, 2010, 27: 97-102.


Researcher : Xu C

Project Title:Financial regulation, corporate governance, and the government
Investigator(s):Xu C
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:05/2009
Abstract:
Project 1: Financial regulation and corporate governance: theoretical and empirical studies The 2008/2009 financial crisis, as the worst financial crisis since the Great Depression, has posed major challenges to economics, finance and law. The crisis is caused by regulatory failure. Therefore, research on financial regulation is the most urgent and relevant task. However, suspicions on the desirability of financial regulation in general have been very high till the breakout of the current financial crisis. Thus, the debate on the usefulness of financial regulation remains very much unsettled. The Economic Report of the President of the U.S.A. in 2003 reflects this situation, "whether SEC enforced disclosure rules actually improve the quality of information … remains a subject of debate among research almost 70 years after the SEC's creation." Famous theoretical arguments against financial regulation were made that speculation is a stabilizer for markets (Friedman, 1953); law enforcement based on private litigation through courts can achieve the first best (Becker, 1971); whereas regulation serves for interest groups, thus incurs a net cost to the society (Stigler, 1971; Posner, 1974). Empirically, Stigler (1964) claimed that financial regulation did not improve financial market. This work is followed by a large number of scholars in economics, finance and law. This literature serves as the intellectual base for a quarter centaury’s deregulation since the 1980s. Far beyond the deregulation policy the impact of this literature effectively stopped serious research on financial regulation on fundamental new problems. This project intends to tackle both theoretical and empirical problems of financial regulation. The theory aspect concerns effective law enforcement. The most basic law enforcement device is courts. In modern financial markets and many other places, however, laws are also enforced by regulators. This project seeks answers to the following questions: Why have regulators become prominent law enforcers in financial markets? Are there conditions under which regulators may be better law enforcers than courts? Conversely, if regulators are effective law enforcers, why have they not replaced courts completely and why don't they play a role in some areas of the law, such as the enforcement of fiduciary duties in corporate or trust law? More generally, under what condition should courts be the primary law enforcers and when might the creation of regulators be superfluous or even harmful? What can regulators do and what are their limits? Answers to these questions are important for the design of legal/regulatory systems and for understanding law enforcement mechanisms. These questions have become more pressing in light of the inability of the global legal system to prevent regulatory failures, which eventually lead to the global financial crisis. The empirical part of the project will investigate the impact of financial regulation on reducing volatility of the financial market. The 1929 and the 2008 financial crises are the worst in finance history. A major characteristic of these crises is the huge volatilities. Indeed the major purpose of financial regulation is to prevent financial crisis, i.e. to reduce market volatility. For this purpose, the key ingredient of the laws and regulations introduced in the New Deal, the first financial regulation in the world, is to ban market manipulation (before the New Deal there was no law dealing with manipulation, insider trading and misrepresentations). The objective of the empirical part of the project is to establish the impacts of the financial regulation introduced in the New Deal on volatility of the financial market. Project 2: National, regional and corporate governance in China The Chinese economic reform has more than doubled China’s economic growth. China is transformed from a centrally planned economy into a mixed market economy. This reform has created world-record breaking large scale and prolonged fast growth, and has reduced poverty at an unparallel scale. Today’s China is the world’s largest producer and largest consumer of many conventional industrial staples and high tech products and has the world’s largest foreign reserves. However, in sharp contrast to the spectacular performance, it has been reported that from the view point of standard wisdom, such as Washington Consensus or the recent literature on institution, the Chinese institutions in government, corporate governance, law and finance, look notoriously weak. According to the conventional wisdom, the government should protect private property rights, enforce contracts and should be separated from business. However, the Chinese government has a deep involvement in business. There is no clear separation between government and business. Applying commonly accepted standards, China is in general below average for rule of law or for governance quality. Recent growing literatures on institutions and reforms demonstrate a general consensus among economists that a market-oriented reform should focus on institutional building. Nevertheless, a vital challenge faced by China is how to build these requisite institutions, and how to carry out the reforms. Indeed, if the government was able to design and to implement reforms, which in turn could solve all the problems to make markets work, then why can’t the government solve all the economic problems directly without bothering markets? What is the boundary of the government? This project will provide a new conceptual framework to synthesize existing literature and to provide new analysis and new evidence to tackle these challenges. This project will also address many important policy questions. What are the key current economic problems in China and how might these problems be best addressed given China’s institutions? Is China’s growth sustainable under regional decentralization?


List of Research Outputs

Xu C., Academic advisory committee member, China Economic Quarterly. 2009.
Xu C., Academic committee member, China Journal of Finance. 2009.
Xu C., Academic committee member, China Public Administration Review. 2009.
Xu C., Co-editor, Annals of Economics and Finance. 2009.
Xu C., Co-editor, China Journal of Economics. 2009.
Xu C., Co-editor, Journal of Asian Law and Economics. 2009.
Xu C., Editorial Board member, Bi-jiao (Comparative Studies). 2009.
Xu C., Editorial Board member, China Economic Review. 2009.
Xu C., Editorial Board member, Economic Systems. 2009.
Xu C., Editorial Board member, Jing-ji She-hui Ti-zhi Bi-jiao (Comparative Socio-Economic Systems). 2009.
Xu C., Editorial Board member, Journal of Emerging Market Finance. 2009.
Xu C., Invited as a panelist , Conversation with George Soros at HKU, University of Hong Kong. 2010.
Xu C., Invited lecture, "Reflections on Transition" the United Nation University - World Institute for Development Economics Research (UNU-WIDER), other speakers include Janos Kornai, Gerard Roland, Jan Svejnar, etc.. Helsinki, 2009.
Xu C., Invited lecture, Institute for China Studies (ICS) at Seoul National University, Seoul. 2009.
Xu C., Invited panelist, "The Global Think Tank Summit" Beijing. 2009.
Xu C., Invited speech , 中国经济结构的基本问题及结构调整的基本动力, China’s Economy, the Next 30 Years: International Symposium; other invited speakers include Stephen S. Roach (Chairman of Morgan Stanley Asia), Gao Shangquan, Yu Yongding, etc., organized by The Research Center of Shanghai Municipal Government and Shanghai Development Research Foundation . 中国经济:未来30年”(国际研讨会 上海发展研究基金会及上海市人民政府发展研究中心), Shanghai, 2009.
Xu C., Invited speech at “Institutions in Development and Transition: Honoring the 80th Birthday of Wu Jinglian”, other invited speakers include Eric Maskin (2007 Nobel Prize), Masa Aoki (President of the International Economic Association), Janos Kornai (former President of the IEA), Guido Tabalini (President of the European Economic Association), Lawrence Lau (President of the CUHK), etc., . Beijing, 2010.
Xu C., Invited speech “Policy implications from China's reform for North Korea” at an international summit on economic and political issues; other invited speakers include, Colin Powell (former US State Secretary), Hyun-Song Shin (President’s senior advisor and Princeton), etc.; the summit includes a dinner meeting with President Lee Myung-bak in the Presidential Palace. Seoul, Korea, 2010.
Xu C., Invited speech “Response Restoring Financial Regulation”, 回复金融责任性的监管, The Global Think Tank Summit, other speakers include James Mirlees, Martin Feldstein, Olivier Blanchard, Wu Jinglian, Larry Lau, Jeffery Sachs, etc., organized by CCIEE (the largest think tank in China) and CICC(the largest investment bank in China). 全球智库峰会 (中国国际经济交流中心(中国最大的智库)), 中金(中国最大的投行), Beijing, 2009.
Xu C., Invited speech, 后危机时代中国经济结构面对的基本问题及对策, The 2009 CICC Forum “One Year After the Crisis: in Retrospect and in Perspective" other invited speakers include David Dollar (Economic Emissary to China, US Treasury), Zhou Xiaochuan (the governor of the PBC), etc.National Guest House Beijing (钓鱼台国宾馆), 27 Nov 2009 . 2009中金论坛, 《危机一年后:回顾与展望》, Beijing, 2009.
Xu C., Joined with with B-Y Kim and Keun Lee of Seoul National University we have obtained a major grant of 9.3 million HKD equivalent (or 1.2 million USD) (grant R32-2008-000-20055-0) for the years of 2010 to 2014 from the "World Class University" program through the Korea Science and Engineering Foundation funded by the Korean Ministry of Education, Science and Technology. Associated with this the Korean Ministry of Education, Science and Technology awarded me a title of "World Class University Professor". Korea, 2010.
Xu C., NBER (National Bureau of Economic Research). 2009.
Xu C., On Kornai, By Force of Thought: Irregular Memoirs, 思想的力量和人的力量:评科尔奈的自传《思想的力量》, 经济观察报;书评增刊第1期, Beijing, China, 2010, 15-27.
Xu C., On Kornai, By Force of Thought: Irregular Memoirs, 思想的力量和人的力量:评科尔奈的自传《思想的力量》, 比较. 2010, 119-134.
Xu C., President, Asian Law and Economics Association (AsLEA) . 2010.
Xu C., Public lecture at China Europe International Business School. Shanghai, 2009.
Xu C., Public lecture, “Regulate for What? Restoring Financial Responsibility”, Risk, Finance and Modernization: China-Europe Summit (organized and sponsored by the ESRC (the UK government research foundation). Shanghai, 2009.
Xu C., Referee for academic journals, publishers, and research funding proposals, AER, JPE, QJE, REStud, Rand, EER, EJ, Economics Letters, Journal of Public Economics, Journal of Development Economics, Journal of Comparative Economics, Economics of Transition, Economica, Journal of Industrial Economics, JITE, International Finance, Economic Systems, Annals of Economics and Finance, Journal of Development Studies, Chinese Economic Review, China Economic Quarterly, MIT Press, Cambridge University Press, Oxford University Press, the World Bank, ESRC (UK government research funding), RGC (Hong Kong government funding).. 2010.
Xu C., Regulate for What? Restoring Financial Responsibility, Risk, Finance and Modernization: A Chinese-European Summit. Shanghai, Shanghai Public Library, 2009.
Xu C., 后危机时代中国经济结构面对的基本问题及对策, 2009中金论坛,《危机一年后:回顾与展望》, 北京钓鱼台国宾馆, 2009.
Xu C., 中国经济结构的基本问题及结构调整的基本动力, 《中国经济:未来30年》国际研讨会, 上海发展研究基金会及上海市人民政府发展研究中心, 上海万豪酒店, 2009.


Researcher : Xu J

Project Title:Evolution of Market Confidence and the Joint Dynamics of Volatility and Volume
Investigator(s):Xu J
Department:Sch of Economics & Finance
Source(s) of Funding:Small Project Funding
Start Date:11/2005
Abstract:
The dynamcis of volatility and volume has been found very difficult to explain. Extesnive empirical work have ducumented that 1) volaitlity is asymmetric (Black (1976), Christie (1982), Pindyck (1984), French, Schwert, and Stambaugh (1987), Campbell and Hentschel (1992), Bekaert and Wu (2000), etc.), 2) volaitlity is clsutered (Engle (1982), Bollerslev (1986), etc.), 3) volatility and volume are positively correlated (Karpoff (1987), Lo and Wang (2000), etc.), 4) volume and volatility share similar degree of persistence (Bollerslev and Jubinski (1999), Lobato and Velasco (2000), etc.). These patterns are found to be robust across time and markets. In contrast to the extensive empirical documentations, the finance literature has seen surprisingly scarcity of theoretical work to explain these well documented empirical patterns. Already proposed explanations are found to be insufficient to explain these patterns. In their review of the volatility clsutering literature, Bollerslev, Engle, and Nelson (1994) contrasted the explosion of descriptive volatility research with "the apparent lack of any structural dynamic economic theory explaining the variation of higher order moments", which remains to be correct until today. For other patterns, existing explanations are proposed to explain one or two of them but cannot explain all these patterns simultaneously. Even worse, empiral tests that are designed to investigate their explanatory power produced mixed evidence and provided at best weak support. For asymmetric volatility, the most venerable explanations are the "leverage effect" (Black (1976), Christie (1982)) and "volatility feedback" (Pindyck (1984), Campbell and Hentschel (1992)). These two explanations have been found to be insufficient to explain observed volatility movements (Christie (1982), Poterba and Summers (1986), Schwert (1989), Bekaert and Wu (2000)). For co-persistence of volatility and volume, the mixture of distributions (MDH) hypothesis (Clark (1973), Epps and Epps (1976), Tauchen and Pitts (1983)) is the only well established explanation that has ever been proposed, but empirical tests pointing to contradicting conclusions (Lamoureux and Lastrapes (1994), Richardson and Smith (1994), Anderson (1996)). This project will propose a novel explanation for all four volatility-volume patterns within a unified framework. Specifically, this project link the dynamcis of volatility and volume to the evolution of market confidence. The link is made possible through the negative correlation between the confidence in prior beliefs and the sensitivity to new information. That is, if one is more confident in her prior belief, she is less sensitive to newly observed information. This logic also applied to financial markets as the collection of investors who participate in the market. For financial markets, market confidence can be generally defined as the average confidnece of market participants. So the key issue is to identify the mechanism according to which market confidence evolves and the mechanism according to which the evolution of market confidence is manifested in the movements of volatility and volume. Particularly, it is essential to identify how market confidence co-move with market prices since asymmetric volatility concerns the dynamics of volatility conditional on price movements.




Researcher : Xu Z

Project Title:Capacity Choice to Generate Public Signal (tentative)
Investigator(s):Xu Z
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:10/2009
Abstract:
The project is a theoretical Industrial Organization project. It uses game theory to study how firms choose capacity in a signalling model. This project recognizes that different capacities choices determine the precision (biased to the positive side) of a future public signal: the sales outcome (whether there is a sold-out or not). The objective is to understand and explain phenomena such as 1) a firm with a very popular product does not choose to expand the capacity or to eliminate sold-out. 2) There is non-monotonicity in signalling: both very good and very bad producers choose small capacity, while middle range producers choose large capacity.


List of Research Outputs

Xu Z., Commission Sharing among Agents, 2009 Far East and South Asia Meeting of Econometrics Society. 2009.
Xu Z., Commission Sharing among Agents, Spring 2010 Midwest Theory Conference. 2010.
Xu Z., Commission Sharing among Agents, The 8th Annual International Industrial Organization Conference. 2010.


Researcher : Yuen CW

Project Title:2001 Annual Meeting of the Society for Economic Dynamics Yet Another Long-Run Neutarlity Result: Absence of Tax-Induced Growth Effects under Implicit Intergenerational Contracts
Investigator(s):Yuen CW
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:06/2001
Abstract:
N/A


Project Title:2002 Annual Meeting of the American Economic Association (AEA) Economic Growth and Economic Equality: Some Evidence and a Suggested Interpretation
Investigator(s):Yuen CW
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:01/2002
Abstract:
N/A


Project Title:Monetary Policy under Rational Inattention
Investigator(s):Yuen CW
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:03/2006
Abstract:
PURPOSE The primary objective of this project is to examine how the limited ability of economic entities (such as households and business firms) in processing information, hence their apparent neglect of information relevant to their economic/financial decisions (known as "rational inattention" in the recent literature), determines the dynamic effects of different kinds of monetary policy on macroeconomic activities (esp. inflation and output). KEY ISSUES • In what ways can rational inattention (or information-processing constraints) on the part of households (e.g., in their saving/portfolio decisions) and of firms (e.g., in their pricing and investment decisions) generate more realistic inflation and output dynamics than standard monetary-policy models (esp. New Keynesian sticky-price models and New Classical limited-participation models)? In other words, does rational inattention provide a better framework for monetary-policy analysis? • How does rational inattention affect the macro effects of monetary policy? Among the various kinds of (rule-based and discretionary) monetary policy, we shall consider and compare the following (1) (Taylor-type) interest-rate rules; (2) monetary targeting; (3) inflation targeting; (4) price-level targeting; and (5) nominal-income targeting; • What are the implications of rational inattention for optimal (welfare-maximizing or loss-minimizing) monetary policy?


Project Title:Western Economic Association International (WEAI) 83nd Annual Conference When Farmers Met Shepherds: A Plausible Solution to the Needham Puzzle
Investigator(s):Yuen CW
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:06/2008
Abstract:
N/A




Researcher : Zhang J

Project Title:VIX futures and options
Investigator(s):Zhang J
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:01/2007
Completion Date:12/2009
Abstract:
(1) VIX model, (2) VIX futures market, (3) VIX options market.


Project Title:The Chinese Warrant Market
Investigator(s):Zhang J
Department:Sch of Economics & Finance
Source(s) of Funding:General Research Fund (GRF)
Start Date:12/2009
Abstract:
1) Study whether the warrants in China can be priced by the Black-Scholes formula with historical volatility. 2) Study whether the prices of a warrant and its underlying support the monotonicity, perfect correlation and option redundancy properties satisfied by one-dimensional diffusion option pricing models. 3) Investigate possible risk factors traded in the warrant market by studying the delta-hedged gain of a warrant portfolio and its relation with some macroeconomic factors.


List of Research Outputs

Chang E.C., Shi L. and Zhang J., Is Warrant Really a Derivative? Evidence from the Chinese Warrant Market, 2009 China International Conference in Finance (CICF2009), July 7-10, 2009, Guangzhou, China. 2009.
Chang E.C., Shi L. and Zhang J., Is Warrant Really a Derivative? Evidence from the Chinese Warrant Market, Invited lecture at Guanghua School of Management in Peking University, Beijing, October 20. 2009.
Chang E.C., Shi L. and Zhang J., Is Warrant Really a Derivative? Evidence from the Chinese Warrant Market, Invited lecture at School of Mathematical Sciences in South China Normal University, Guangzhou, 8 July. 2009.
Chang E.C., Zhang J. and Zhao H., The Relation Between Physical and Risk-Neutral Cumulants, 2009 Financial Management Association (FMA) Annual Meeting, October 21-24, 2009, Reno, Nevada, U.S.A. 2009.
Dai M., Li P. and Zhang J., A Lattice Algorithm for Pricing Moving Average Barrier Options, Journal of Economic Dynamics and Control. 2010, 34(3): 542-554.
Hao J. and Zhang J., GARCH Option Pricing Models, the CBOE VIX and Variance Risk Premium, Asian Finance Association (AsianFA) 2010 International Conference, June 29-July 1, 2010, Hong Kong. 2010.
Luo X. and Zhang J., The Term Structure of VIX, 2010 Financial Management Association (FMA) European Conference, June 9-11, 2010, Hamburg, Germany. 2010.
Luo X. and Zhang J., The Term Structure of VIX, International Risk Management Conference (IRMC) 2010, June 3-5, 2010, Florence, Italy. 2010.
Zhang J., Zhao H. and Chang E.C., Equilibrium Asset And Option Pricing Under Jump Diffusion, In: Dilip B. Madan, Mathematical Finance. 2010.
Zhang J., Zhao H. and Chang E.C., Equilibrium Asset and Option Pricing under Jump Diffusion, Invited lecture at Risk Management Institute & Department of Mathematics in National University of Singapore, Singapore, 7 April. 2010.
Zhang J. and Li T., Pricing and Hedging American Options Analytically: A Perturbation Method, Mathematical Finance. 2010, 20(1): 59-87.
Zhang J. and Huang Y., The CBOE S&P 500 Three-Month Variance Futures, Journal of Futures Markets. 2010, 30(1): 48-70.
Zhang J., Zhao H. and Chang E.C., The Relation Between Physical and Risk-neutral Cumulant, Invited presentation at the department of finance and business economics, Macau University, October, 2009. 2010.


Researcher : Zhang JJ

Project Title:The Financial and Operating Performance of Chinese Family-owned Listed Companies
Investigator(s):Zhang JJ
Department:Sch of Economics & Finance
Source(s) of Funding:Seed Funding Programme for Basic Research
Start Date:12/2004
Abstract:
While existing studies often use sector-level data to explain the phenomenal growth in the Chinese private sector, this project attempts to use firm-level data to conduct a comparative study on performance between family-owned and state-owned firms in China. Specifically, we attempt to use the whole population of listed firms for the latest period to analyze their financial performances. W propose five measures: (1) revenue per employee, (2) revenue per unit of cost, (3) net profit per employee, (4) return on assets, and (5) market to book ratio. These measures capture firm's human resource performance, operating efficiency, productivity, economic profitability and market value, respectively. Specifically, we attempt to address the following question: Do different ownership structures lead to different performances? We also plan to control for other firm characteristics, such as size, leverage and industry belonging, in the project. Our predicted results are that family-owned companies will have significantly superior performance as compared to state-owned enterprises.


Project Title:Western Economic Association International (WEAI) 83rd Annual Conference Measuring the Long- and Short-Run Effects of Monetary Policy on Real Economic Activity in China
Investigator(s):Zhang JJ
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:06/2008
Abstract:
N/A


Project Title:8th Biennial Pacific Rim Conference of Western Economic Association International Different Currency Invoices and Exchange Rate Pass-through
Investigator(s):Zhang JJ
Department:Sch of Economics & Finance
Source(s) of Funding:URC/CRCG - Conference Grants for Teaching Staff
Start Date:03/2009
Abstract:
N/A




Researcher : Zhang M

List of Research Outputs

Chang E.C., Tang Y. and Zhang M., Financial Literacy and Household Investments in Structured Financial Products, 2010 Five Asian Universities Joint Conference, January 29, 2010, Hong Kong. 2010.
Chang E.C., Tang Y. and Zhang M., Financial Literacy and Household Investments in Structured Financial Products, 2010 Hitotsubashi-Thammasat Conference on Asian Financial Market, May 2-3, 2010, Hua Hin, Thailand. 2010.
Chang E.C., Tang Y. and Zhang M., Financial Literacy and Household Investments in Structured Financial Products, The 17th Conference on the Theories and Practices of Securities and Financial Markets, December 11-12, 2009, Kaohsiung, Taiwan. 2009.


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