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China Finance Review International
Number of Followers: 7  
 
  Hybrid Journal Hybrid journal (It can contain Open Access articles)
ISSN (Print) 2044-1398
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  • Driving factors of merger momentum in China: empirical evidence from
           listed companies
    • Pages: 235 - 253
      Abstract: China Finance Review International, Volume 9, Issue 2, Page 235-253, May 2019.
      Purpose The purpose of this paper is to study merger momentum and its driving factors in China by sampling 376 listed bidders from 2008 to 2013. Design/methodology/approach The empirical model captures the dependency of market reaction on recent merger and stock market states. The independent variables are designed from two dimensions, i.e. at the level of market-wide as an integral and bidder-specific as individuals. Furthermore, both the market and bidding firms contain merger momentum and market momentum, respectively. Findings The empirical results show that there is merger momentum in the market. Particularly, merger momentum is significant both in short run and long run for the mergers with cash payment, which supports the synergy effect. It also implicates the mergers with stock driven by investor sentiment. Besides, investors’ over-optimism is significant in the bull markets while managerial hubris is found in the bear markets. Research limitations/implications The driving factors for merger momentum in China are complex. Three impacts with different effects interact with one another. They are investor sentiment and managerial hubris with negative effects resulting in reversal abnormal return in the long run, and synergies with positive shocks resulting in no reverse at all. The limitation of the paper is insufficient analysis of the mergers financed by stocks, which will be the focus for future study. Practical implications The conclusions of the study help to intensify the understanding of the immature and unnormalized capital market in China. The empirical analyses give some inspiration and suggestions to three parties in the market, i.e. investors, bidding firms and regulators, respectively. Originality/value There are three contributions. The first one is to provide a novel model to identify how these different effects work on the merger momentum. The second one is the measurement of investor sentiment from different perspectives. The last but most important one is the new findings with novel explanations, which proves that the impacts on merger momentum are complex.
      Citation: China Finance Review International
      PubDate: 2019-01-07T12:43:20Z
      DOI: 10.1108/CFRI-06-2017-0153
       
  • Investor sentiment, market competition and trade credit supply
    • Pages: 284 - 306
      Abstract: China Finance Review International, Volume 9, Issue 2, Page 284-306, May 2019.
      Purpose The purpose of this paper is to study the influence of investor sentiment on the supply of trade credit, and further explores the difference of the effect of investor sentiment on the supply of trade credit in the environment of strong market competition and weak market competition. Design/methodology/approach The authors use panel estimation techniques to examine the impact of investor sentiment in the Chinese securities market on the supply of corporate trade credit. Findings This paper finds that investor sentiment has positive impact on trade credit through three channels of motivation, willingness and ability. At the same time, this paper finds that investor sentiment has stronger impact on enterprises in strong market competition than enterprises in weak market competition. Research limitations/implications This paper expands the research on the influence of virtual economy on the real economy, analyzes the difference of the influence of investor sentiment on the supply of trade credit under different market competition conditions. Practical implications The paper perfects the mechanism of trade credit decision-making at this stage, and provides more evidence for the virtual economy to act on the real economy. Social implications This paper provides a theoretical basis for the government functional departments to use the investor sentiment to play a positive role in trade credit to improve the market competition and guide the development of China’s capital market in the direction of rationalization and health. Originality/value In combination with market competition environment and industry characteristics, this paper investigates external irrational factors and studies how investor sentiment affects trade credit supply.
      Citation: China Finance Review International
      PubDate: 2019-03-13T11:44:48Z
      DOI: 10.1108/CFRI-07-2018-0060
       
  • Fat-tailed stochastic volatility model and the stock market returns in
           China
    • Abstract: China Finance Review International, Ahead of Print.
      Purpose The purpose of this paper is to investigate how the selection of return distribution impacts estimated volatility in China’s stock market. Design/methodology/approach The authors use a Bayesian analysis of fat-tailed stochastic volatility (SV) model with Student’s t-distribution, and conduct an out-of-sample test with realized volatility. Findings Empirical analysis results indicate that fat-tailed SV model performs better in capturing the dynamics of daily returns. The authors find that asymmetry, holiday and day of the week effects are detected in estimated volatility. However, the out-of-sample comparison shows that fat-tailed SV models fail to outperform SV models with normal distribution in fitting and predicting realized volatility. Originality/value The contribution of this paper to existing literature is twofold. First, it proves that fat-tailed SV models with Student’s t-distribution perform better than normally distributed SV models in fitting daily returns of China’s stock market. Second, this paper takes asymmetry, holiday and day of the week effects into consideration at the same time in the fat-tailed SV model.
      Citation: China Finance Review International
      PubDate: 2019-06-26T09:51:32Z
      DOI: 10.1108/CFRI-03-2018-0028
       
  • Investor attention is a risk pricing factor' Evidence from Chinese
           investors for self-selected stocks
    • Abstract: China Finance Review International, Ahead of Print.
      Purpose The purpose of this paper is to empirically examine whether investor attention is a significant risk pricing factor. Design/methodology/approach Using investor attention data from Eastmoney.com, which provides for each stock the number of investors whose watch list includes that stock on a daily basis, this paper constructs a “heat” factor based on the change in investor attention and a “market exposure” factor based on the proportion of attention on a given stock over the attention to all stocks. Using the Fama−MacBeth two-step regression and a rolling analysis, this study examines the ability of the investor attention factor to explain market returns. Findings The empirical results show that there exists a risk premium for the “heat” factor and “market exposure” factor that is significantly different from zero. This finding shows that investor attention can systematically influence stock returns, making it a significant risk pricing factor. Practical implications This paper’s research on the risk pricing factors of investor attention can help investors to rationally build investment portfolios, avoid risks and form a sound investment concept, which will further reveal the information recognition mechanism of the capital market and standardize the information disclosure behavior of listed companies. Originality/value This paper provides evidence that investor attention is a risk pricing factor for the stock market. There are “heat” factors and “market exposure” factors in the Chinese stock market that significantly affect the purchasing behavior of individual investors.
      Citation: China Finance Review International
      PubDate: 2019-03-28T03:55:23Z
      DOI: 10.1108/CFRI-11-2017-0218
       
  • The nonlinear characteristics of Chinese stock index futures yield
           volatility
    • Abstract: China Finance Review International, Ahead of Print.
      Purpose The purpose of this paper is to consider that the model of volatility characteristics is more reasonable and the description of volatility is more explanatory. Design/methodology/approach This paper analyzes the basic characteristics of market yield volatility based on the five-minute trading data of the Chinese CSI300 stock index futures from 2012 to 2017 by Hurst index and GPH test, A-J and J-O Jumping test and Realized-EGARCH model, respectively. The results show that the yield fluctuation rate of CSI300 stock index futures market has obvious non-linear characteristics including long memory, jumpy and asymmetry. Findings This paper finds that the LHAR-RV-CJ model has a better prediction effect on the volatility of CSI300 stock index futures. The research shows that CSI300 stock index futures market is heterogeneous, means that long-term investors are focused on long-term market fluctuations rather than short-term fluctuations; the influence of the short-term jumping component on the market volatility is limited, and the long jump has a greater negative influence on market fluctuation; the negative impact of long-period yield is limited to short-term market fluctuation, while, with the period extending, the negative influence of long-period impact is gradually increased. Research limitations/implications This paper has research limitations in variable measurement and data selection. Practical implications This study is based on the high-frequency data or the application number of financial modeling analysis, especially in the study of asset price volatility. It makes full use of all kinds of information contained in high-frequency data, compared to low-frequency data such as day, weekly or monthly data. High-frequency data can be more accurate, better guide financial asset pricing and risk management, and result in effective configuration. Originality/value The existing research on the futures market volatility of high frequency data, mainly focus on single feature analysis, and the comprehensive comparative analysis on the volatility characteristics of study is less, at the same time in setting up the model for the forecast of volatility, based on the model research on the basic characteristics is less, so the construction of a model is relatively subjective, in this paper, considering the fluctuation characteristics of the model is more reasonable, characterization of volatility will also be more explanatory power. The difference between this paper and the existing literature lies in that this paper establishes a prediction model based on the basic characteristics of market return volatility, and conducts a description and prediction study on volatility.
      Citation: China Finance Review International
      PubDate: 2019-03-14T11:59:02Z
      DOI: 10.1108/CFRI-07-2018-0069
       
  • Execution costs, investability, and actual foreign investment in emerging
           markets
    • Abstract: China Finance Review International, Ahead of Print.
      Purpose This paper focuses on execution costs as liquidity measure. Execution costs are related to volatility and are an important component of a firm’s cost of capital. The purpose of this paper is to examine whether emerging market firms have lower execution costs when they face less restrictions on foreign investment and when they have more foreign shareholders. Design/methodology/approach The authors begin by documenting the cross-sectional behavior of execution costs. The authors then obtain preliminary evidence on the interaction between execution costs, the investability index and actual foreign investment. These results foreshadow those the authors obtain with the regression analysis. The ordinary least square results show that more investable firms have lower execution costs after the authors control for firm size, stock price, return volatility, industry effects and country effects. This evidence is very robust and highly significant. Direct foreign ownership (FO) in emerging market firms also appear to be associated with lower execution costs. The economic benefit from lowering the investability index on trade execution costs is highly significant. Findings Using a large cross-sectional sample from 23 emerging markets, the authors show that firms with more ex ante restrictions on FO, measured by the investability index, have lower execution costs, such as quoted spreads (QS) and effective spreads (ES), after the authors control for firm size, stock price, return volatility, industry factors and country effects. In addition, direct FO in emerging market firms appears to be associated with lower execution costs. However, ex ante restrictions on FO dominate the influence of direct FO. For a 0.5 increase in the investability index in the range of 0–1, the QS will be reduced by 17 percent of the mean QS, and the ES will be reduced by 12 percent of the mean ES from the sample stocks. Originality/value There are important differences between the approach and most of the financial liberalization studies. First, whereas most of the earlier studies are conducted at the level of country or market analysis, the investigation is at the level of individual stocks. Second, the authors focus on a cross-sectional association that avoids a criticism leveled at time series analyses. Over-time studies often use specific time points to represent financial liberalization watersheds. This approach can be misleading when financial liberalizations are viewed as processes that unfold over time. Third, the proxies for financial openness are available not only for individual firms across markets, but the authors also make a distinction between potential and actual foreign investment. The authors further categorize actual foreign investment into direct and indirect FO.
      Citation: China Finance Review International
      PubDate: 2019-03-01T09:01:26Z
      DOI: 10.1108/CFRI-04-2018-0030
       
  • The price of official-business collusion
    • Abstract: China Finance Review International, Ahead of Print.
      Purpose The purpose of this paper is to investigate whether the anti-corruption campaign, “Hunting the Tigers,” incurs a significant short-term loss of shareholders’ returns. Design/methodology/approach A sophisticated event study approach is employed. Findings The results show that the “Hunting the Tigers” has incurred a significant short-term loss of investment returns for shareholders in China’s main stock market board. In addition, the beginning of a new assault on China’s official mogul corruption in another round of political anti-corruption cycle after the 18th National Congress of the CPC has reduced this price significantly. Originality/value This finding should be perceived as the price of the corruption of official-business collusion within capital markets in contemporary China.
      Citation: China Finance Review International
      PubDate: 2019-03-01T08:56:07Z
      DOI: 10.1108/CFRI-07-2018-0114
       
  • Third-party underwriting and its effects on credit spreads and earnings
           management
    • Abstract: China Finance Review International, Ahead of Print.
      Purpose The purpose of this paper is to examine the certification and monitoring motivations of third-party underwriting and its effects on credit spreads and earnings management of bank issuers. Design/methodology/approach Ordinary least squares is used to examine the certification and monitoring effects of third-party underwriting. Furthermore, the Heckman two-stage estimation method is used in controlling the endogeneity of sample selection. Findings The authors find that financial bonds underwritten by third-party underwriters bear lower credit spreads due to their credibly ex ante certification and effectively ex post monitoring compared with self-underwriting. Moreover, the certification of third-party underwriters can help to select good quality bond issuers with lower earnings management, and the monitoring function also plays an essential role in constraining the behavior of earnings management after the bond issues. Research limitations/implications The findings in this study suggest that underwriting types (third-party underwriting) will affect financial bond yields and bank issuers’ earnings management. Practical implications On the one hand, the authors should encourage third-party underwriters to actively promote the certification and monitoring functions. For example, given commercial banks the chance to be underwriters when the bond issuers are investment banks, which is not allowed now in China’s financial bond market. On the other hand, the authors should cut off the quid pro quo relations within third-party underwriting because such relations will reduce the certification and monitoring effects of third-party underwriters. Originality/value This is the first study to distinguish the certification and monitoring effects by using unique data from China’s financial bond market. And the authors further investigate the adverse effects of quid pro quo relations (hiring each other as lead underwriters) on the certification and monitoring effects of third-party underwriters.
      Citation: China Finance Review International
      PubDate: 2019-03-01T08:53:04Z
      DOI: 10.1108/CFRI-07-2018-0067
       
  • US and Chinese yield curve responses to RMB exchange rate policy shocks
    • Abstract: China Finance Review International, Ahead of Print.
      Purpose Using a discrete-time version of the arbitrage-free Nelson–Siegel (AFNS) term structure model, the authors examine how yield curves in the US and China react to exchange rate policy shocks as China introduces gradual reforms to make its exchange rate regime more flexible. The paper aims to discuss this issue. Design/methodology/approach The authors characterize the specification of the discrete-time AFNS model, prove the uniqueness of the solution for model identification, perform specification analysis on its canonical form and detail the MCMC estimation method with a fast and reliable prior extraction step. Findings Model decomposition reveals that in the US yield responses, changes in risk premia for medium- to long-term yields dominate changes in yield expectation for short- to medium-term yields, indicating that the portfolio rebalancing effect due to varying risk perception is stronger than the signaling effect due to policy rate expectation. Practical implications The results are helpful in diagnosing market sentiment and exchange rate risk pricing as China further internationalizes its currency. Originality/value The methodology can be easily extended to study yield curve responses to other scenarios of policy shocks or regime changes.
      Citation: China Finance Review International
      PubDate: 2019-02-01T12:01:25Z
      DOI: 10.1108/CFRI-12-2017-0239
       
  • A penalized expected risk criterion for portfolio selection
    • Abstract: China Finance Review International, Ahead of Print.
      Purpose Under the classical mean-variance framework, the purpose of this paper is to investigate the properties of the instability of minimal variance portfolio and then propose a novel penalized expected risk criterion (PERC) for optimal portfolio selection. Design/methodology/approach The proposed method considers not only a portfolio’s expected risk, but also its instability that is quantified by the variance of the estimated portfolio weights. This study tests the out-of-sample performance of various portfolio selection methods on both China and US stock markets. Findings It is very useful to control portfolio stability in real application of portfolio selection. The empirical results on both US and China stock markets show that PERC portfolio effectively controls turnover and consequently the transaction cost, and that is why it is so competing compared with other alternative methods. Research limitations/implications The findings suggest that the rebalancing turnover and the associated transaction cost that is usually ignored in theoretical analysis play a very important role in real investment. Practical implications For investors, especially institutional investors, the rebalancing turnover and corresponding transaction cost must be carefully addressed. The variance of the estimated portfolio weights is a good candidate to quantify portfolio instability. Originality/value This study addresses the important role of portfolio instability and proposes a novel expected risk criterion for portfolio selection after the quantitative definition of portfolio instability.
      Citation: China Finance Review International
      PubDate: 2019-01-25T11:03:22Z
      DOI: 10.1108/CFRI-12-2017-0226
       
  • Unveil the economic impact of policy reversals: the China experience
    • Abstract: China Finance Review International, Ahead of Print.
      Purpose The purpose of this paper is to reveal the economic impact of policy reversals related to market liberalization reforms in China. Design/methodology/approach To perform the analysis, the authors hand-collect 59 financial market liberalization policy reversals from 1999 to 2017. These reversals are related to the liberalization of the stock market, bond market, derivatives market, forex market, lending market, and real estate market etc. The authors employ a stylized equilibrium interest rate model from Li et al. (2013) to deduce the impact of policy reversals on economic growth and the associated volatility after the announcement of each policy reversal. Findings First, the authors discover that about half of reversals are related to some tradeoff between the economic growth and the volatility associated with growth. Second, the authors also find that about a quarter of the reversals are detrimental to both the growth and the stability. These reversals, if known to policymakers, should be entirely avoided or corrected. Third, using a simple diagnostic test, the authors can identify detrimental reversals at the intra-day frequency by computing the change of the term spread and the volatility before and after the reversals. Practical implications The findings are useful for identifying effective policymaking in developing countries where mature democratic and rigorous policymaking processes are often lacking and formulating economic policies is challenging. The findings suggest that policy reversals serve China well by improving the quality of the policy made without posing destructive consequences to the existing economic infrastructure. This empirical evidence is important for a better understanding of the benefits of policy reversals on economic growth. Social implications The empirical procedure provides a timely and objective evaluation of policy shifts, allowing for the general public to discern the rationale behind the policy decisions. Consequently, stakeholders’ trust and confidence in policymakers is enhanced so that the probability of the successful implementation of structural reforms may increase in these developing countries. Originality/value First, the results reveal some successful examples of Chinese policymaking in the path of liberalizing financial market. The authors find that the Chinese liberalization policy flip-flops have resulted in a more balanced growth on some occasions with reduced growth rate and volatility. Second, the proposed methodology provides an objective evaluation of policy shifts, allowing for the public to infer the general direction of the impact generated by policy shifts. Subsequently, stakeholders’ trust and confidence in policymakers can be enhanced and/or restored if the process of finding a successful path of structural reforms is unambiguous. Finally, the interest rate model also provides a timely method to evaluate the impact of policy shifts at an intra-day frequency, whereas most macroeconomic indicators are available at longer frequencies such as monthly or quarterly. The timeliness in understanding the economic consequences of policy reversals can be critical to prevent the destructive consequences of bad ones.
      Citation: China Finance Review International
      PubDate: 2019-01-08T01:09:06Z
      DOI: 10.1108/CFRI-04-2018-0033
       
  • Pay gap, inventor promotion and corporate technology innovation
    • Pages: 154 - 182
      Abstract: China Finance Review International, Volume 9, Issue 2, Page 154-182, May 2019.
      Purpose The purpose of this paper is to investigate how the pay gap between the management and ordinary employees influence corporate technology innovation. Design/methodology/approach This study built a tournament model based on inventor innovation and career promotion. In addition, the authors use IV-GMM estimation method to address the possible endogeneity issue in the regressions. Findings Based on the unbalanced panel data of patents and pay gap in 1,501 Chinese listed manufacturing firms during 2001-2015, this paper finds that the pay gap could lead inventor innovation and improve technology innovation. The pay gap could encourage corporate innovation significantly: 1 percent increase in pay gap may increase the number of patents by 2 percent in the next year. The pay gap between the management and ordinary employees facilitates corporate innovation via two possible channels. First, inventor innovation and career promotion. Inventors are selected into the management mainly based on their innovation output. The larger the pay gap, the more innovation incentives and patents would gain. Second, investment increase in technology innovation. The pay gap and more patents that inventors gain would increase the ratio of inventors promoted to the management, who tend to pour more resources into R&D activities and absorb more inventors to the management due to their sectionalism and R&D preference. The above two channels constitute a positive feedback mechanism among technology innovation, inventor promotion and increase in R&D investment. Research limitations/implications This paper highlights that pay gap between the management and ordinary employees is an important issue that could encourage corporate innovation. The conclusions imply that pay gap could encourage inventors to work hard and produce more patents, which could help them to enter into the management such as executives or directors. Originality/value This study contributes to the current literature by implying that pay gap could have positive effects on innovation through theoretical and empirical analysis. Also, this study finds that inventor promotion due to the pay gap is a critical channel to stimulate corporate technology innovation.
      Citation: China Finance Review International
      PubDate: 2018-04-23T12:39:08Z
      DOI: 10.1108/CFRI-06-2017-0073
       
  • Investment-internal capital sensitivity, investment-cash flow sensitivity
           and dividend payment
    • Pages: 183 - 207
      Abstract: China Finance Review International, Volume 9, Issue 2, Page 183-207, May 2019.
      Purpose On the basis of principal-agent and financing constraints theories, the purpose of this paper is to construct a unified research framework via mathematical models and to provide a logical and consistent explanation of the contradictory discovery of the relationship between dividend payment and I-CFO in the previous literature. Design/methodology/approach Establishing the economic mathematical models, this paper uses the comparative static analysis to figure out the equilibrium results, to further testify the conclusions, the authors initiate the empirical tests to make the discussion more realistic. Findings The authors observe that overinvestment caused by agency problems is the primary reason for I-C sensitivity when the investment expenditure is less than the internal capital; dividend payout suppresses the overinvestment caused by the agency problem, thus alleviating the investment’s dependence on the internal capital. However, underinvestment caused by the financing constraints is the primary cause of I-C sensitivity when the investment expenditure is greater than the internal capital. The payment of cash dividends increases the investment shortage caused by the financing constraints, thus increasing the sensitivity. Further, the authors explore the impact of dividend payments on I-CFO sensitivity. They argue that dividend payment is not an appropriate measure of financing constraints. Both I-CFO sensitivity and I-C sensitivity are functions of agency cost and information cost. Research limitations/implications This study provides a logical and consistent explanation of the contradictory discovery of the relationship between dividend payment and I-CFO in the previous literature and provides a clear framework and reference for future studies on the impact of financial constraints, agency cost on the investment’s dependence on the internal capital. Practical implications The theoretical model of this paper supports this differentiated mandatory dividend policy and provides reference and evidence for China's financing policies and dividend distribution policies. Originality/value This study theoretically and empirically analyzes and verifies the roles of agency cost and financial constraints on the determinants of I-C sensitivity for the first time. First, different from earlier literature, this paper puts forward I-C sensitivity as a new measure of investment’s dependence on internal capital, making the measurement more accurate. In the case of a firm with positive liquidity reserves, using the I-CFO sensitivity as a measure of external financing constraints could overestimate the firm’s financial constraints. Second, by constructing an economic static analysis framework, this study analyzes how I-C and I-CFO sensitivities change with the agency cost, the financing constraints and the dividend payment ratio. The research provides a basic framework and explanation on the contradictions of the earlier literature. The results are supposed to serve as a foundation for estimations of investment’s dependence on internal capital and should be embedded in general empirical tests in future research.
      Citation: China Finance Review International
      PubDate: 2018-05-10T01:19:49Z
      DOI: 10.1108/CFRI-06-2017-0103
       
  • Empirical analysis of the effect of financial restraint policy on Chinese
           residents’ consumption
    • Pages: 208 - 234
      Abstract: China Finance Review International, Volume 9, Issue 2, Page 208-234, May 2019.
      Purpose The purpose of this paper is to test whether the policies of China’s financial restraint have an inhibitory effect on the consumption of residents. Design/methodology/approach This study used the principal component analysis for constructing a financial restraint index and also used empirical methodology. Findings The authors found that financial restraint policies create rent opportunities for banking sector and production sector, which further creates the rent opportunities for the household sector. Such transfer of rent and redistribution will have an inhibitory effect on residents’ consumption. The financial restraint policies directly and indirectly inhibit the growth of residents’ income; and in theory, the purpose of financial restraint policy is to promote economic growth, thus promoting residents’ consumption. Thus, the financial restraint policies impacting the residents’ consumption are non-linear and test the threshold effect of financial restraints on the residents’ consumption of China. Research limitations/implications This paper’s theoretical contribution includes: increasing the connotation of financial restraint in the policies of stock market and foreign exchange controls, and further developing the financial restraint theory; and exploring the inhibitory effect on the consumption of residents from the perspective of financial restraints to enrich the connotation of the consumption theory. Originality/value The findings in this study can help the financial authorities to gradually relax the financial restraint policies to encourage residents’ consumption.
      Citation: China Finance Review International
      PubDate: 2018-01-22T11:29:56Z
      DOI: 10.1108/CFRI-06-2017-0123
       
  • Monetary model of exchange rate determination under floating and
           non-floating regimes
    • Pages: 254 - 283
      Abstract: China Finance Review International, Volume 9, Issue 2, Page 254-283, May 2019.
      Purpose The purpose of this paper is to empirically analyse how different exchange rate regimes affect the links between monetary fundamentals and exchange rates in Sub-Saharan Africa. Design/methodology/approach Using the Pedroni method for panel cointegration, mean group and pooled mean group and the panel vector autoregressive technique, this study empirically investigates whether monetary fundamentals impact exchange rates similarly in both regimes. Thus, the author acquires needed and credible empirical data. Findings The result suggests that the impact is dissimilar. In the floating regime, an increase in relative money supply and relative real output depreciates and appreciates the nominal exchange rate in the long run whereas in the non-floating regime, the evidence is mixed. Thus, exchange rates bear a theoretically consistent relationship with monetary fundamentals across SSA countries with floating regimes but fails under non-floating regimes. This provides evidence that regime choice is important if the relationship between monetary fundamentals and exchange rates in SSA are to be theoretically consistent. Originality/value This study empirically incorporates the dissimilarities in exchange rate regimes in a panel framework and study the links between exchange rates and monetary fundamentals. The focus on how exchange rate regimes might alter the equilibrium relationships between exchange rates and monetary fundamentals in SSA is a pioneering experiment.
      Citation: China Finance Review International
      PubDate: 2018-07-31T07:25:17Z
      DOI: 10.1108/CFRI-10-2017-0204
       
  • Stock return predictability when growth and accrual measures are
           negatively correlated
    • Abstract: China Finance Review International, Ahead of Print.
      Purpose For most companies, growth measures such as asset growth are positively correlated with accrual measures. Just like investment in fixed assets, current accrual represents one form of investment and is an integral part of a firm’s business growth. This makes it difficult to distinguish between the growth-based and earnings quality-based interpretations of the accrual effects, because high accruals can represent both high growth and inflated earnings. The purpose of this paper is to add to the literature by examining an issue that has not received much attention: the correlation between asset growth and accruals and its implication on stock return predictability. The authors address the issue using Fama and Macbeth’s (1973) cross-sectional regressions that are conditional on the correlations between the two variables. Design/methodology/approach The authors partition firms based on whether the correlation between current accrual and asset growth in the past five years is positive (ρ+) or negative (ρ−). The authors refer to these two types of firms such as “positive correlation” and “negative correlation” groups. For both groups, the authors examine whether firms with higher asset growth and higher accruals are associated with lower future stock returns. The authors implement Fama and MacBeth’s cross-sectional regressions incorporating the effect of correlations between growth and accrual measures. In addition, the authors regress hedge portfolio returns on Fama and French (1993) three-factor and Fama and French (2015) five-factor models to see if the intercepts (a’s) from these regressions are significantly different from 0. Findings For each year, the authors partition firms based on whether the correlation between asset growth and current accrual is positive or negative. For both the “positive correlation” and “negative correlation” firms, the authors examine the association between accruals and future stock returns. The authors find that accruals remain strong in predicting future stock returns for both groups. The accrual effects from the “negative correlation” group cannot be attributed to the growth-based hypothesis because for these firms, when accruals are high, growth measures tend to be relatively low and vice versa. The effects are most likely driven by the alternative hypothesis that investors overvalue the accrual part of earnings. Research limitations/implications There exist a few issues when investors actually implement these strategies. These include liquidity costs, institutional holdings and short sale constraints. Lesmond (2008) concludes that the bulk of the trading profits is derived from the short side of the trade, but that this position suffers from high liquidity costs that reduces institutional holdings with consequent short sale constraints. The net gains after taking into account these issues remain an open question be addressed in the future. Practical implications The empirical results indicate that investors can do an implementable portfolio strategy of going long for a year on an initially equally weighted lowest asset growth (accrual) decile portfolio and going short for a year on an initially equally weighted highest asset growth (accrual) decile portfolio, which produces significant abnormal returns. The results further show that these abnormal returns can be improved if investors classify stocks into “the positive correlation” and “negative correlation” groups and implement trading similar trading strategies. Originality/value The empirical evidence finds that firm-year observations that exhibit a negative correlation between growth and accrual measures represents a significant 30 percent of the total firm-year observations during the sample period from July 1974 to June 2017. This highlights the necessity to undertake a detailed analysis on the issue. The authors continue to find accrual effects among these groups of firms. Therefore, the accrual effect cannot be attributed to the diminishing marginal return hypothesis. This is the main contribution of the paper.
      Citation: China Finance Review International
      PubDate: 2018-12-28T09:01:40Z
      DOI: 10.1108/CFRI-04-2018-0032
       
  • Long memory or structural break' Empirical evidences from index
           volatility in stock market
    • Abstract: China Finance Review International, Ahead of Print.
      Purpose The purpose of this paper is to explore whether stock index volatility series exhibit real long memory. Design/methodology/approach The authors employ sequential procedure to test structural break in volatility series, and use DFA and 2ELW to estimate long memory parameter for the whole samples and subsamples, and further apply adaptive FIGARCH (AFIGARCH) to describe long memory and structural break. Findings The empirical results show that stock index volatility series are characterized by long memory and structural break, and therefore it is appropriate to use AFIGARCH to model stock index volatility process. Originality/value This study empirically investigates the properties of long memory and structural break in stock index volatility series. The conclusion has a certain reference value for understanding the properties of long memory and structural break in volatility series for academic researchers, market participants and policy makers, and for modeling and forecasting future volatility, testing market efficiency, pricing financial assets, constructing quantitative investment strategy and measuring market risk.
      Citation: China Finance Review International
      PubDate: 2018-12-07T09:38:47Z
      DOI: 10.1108/CFRI-11-2017-0222
       
 
 
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