Adrian Cheung

Do Stock Investors Value Corporate Sustainability? Evidence from an Event Study

This paper analyzes the impacts of index inclusions and exclusions on corporate sustainable firms by studying a sample of US stocks that are added to or deleted from the Dow Jones Sustainability World Index over the period 2002–2008. The impacts are measured in terms of stock return, risk and liquidity. We cannot find any strong evidence that announcement per se has any significant impact on stock return and risk. However, on the day of change, index inclusion (exclusion) stocks experience a significant but temporary increase (decrease) in stock return. Liquidity deteriorates after the announcement day and bounces back significantly near the day of change. Systematic risk shows little change after announce- ments. But, idiosyncratic risk is higher after announcements. The overall results support Harris and Eitan’s (The Journal of Finance41(4), 815–829, 1986) price pressure hypothesis, which posits that event announcement does not carry information and any shift in demand (and hence the corresponding price change and liquidity change) is temporary.

Crypto-currency bubbles: an application of the Phillips–Shi–Yu (2013) methodology on Mt. Gox bitcoin prices

The creation of bitcoin heralded the arrival of digital or crypto-currency and has been regarded as a phenomenon. Since its introduction, it has experienced a meteoric rise in price and rapid growth accompanied by huge volatility swings, and also attracted plenty of controversies which even involved law enforcement agencies. Hence, claims abound that bitcoin has been characterized by bubbles ready to burst any time (e.g. the recent collapse of bitcoin’s biggest exchange, Mt Gox). This has earned plenty of coverage in the media but surprisingly not in the academic literature. We therefore fill this knowledge gap. We conduct an econometric investigation of the existence of bubbles in the bitcoin market based on a recently developed technique that is robust in detecting bubbles – that of Phillips et al. (2013a). Over the period 2010–2014, we detected a number of short-lived bubbles; most importantly, we found three huge bubbles in the latter part of the period 2011–2013 lasting from 66 to 106 days, with the last and biggest one being the one that ‘broke the camel’s back’ – the demise of the Mt Gox exchange.

Corporate social responsibility and dividend policy

This study outlines and tests two corporate social responsibility (CSR) views of dividends. The first view argues that firms are likely to pay fewer dividends because CSR activities lower the cost of equity, encouraging firms to invest or hoard cash rather than to pay dividends. The second view suggests that CSR activities are positive NPV projects that increases earnings and hence dividend payouts. The first (second) view predicts that firms with a stronger involvement in CSR activities should be associated with a lower (higher) dividend payouts. The finding supports the second view and is robust.

Sprinkle Your Investment Portfolio with Water

We investigate the profitability of water–related investments and their diversification benefits in a portfolio context. Motivated by the need to understand whether or not water indices and water funds are desirable vehicles for investment, we analyse the performance of a major water index independently as well as within portfolios. Our results indicate that the water asset class outperforms traditional asset classes, and has the capacity to produce diversification effects in portfolios primarily comprised of listed equity and bond assets. In addition, our study suggests that the diversification benefits of the water asset class are likely to be a result of its superior performance over the stock benchmark, rather than its low correlation with traditional asset classes. Our study provides a valuable contribution to the small, yet growing body of literature on water investments.

Yes, Indeed, Idiosyncratic Risk Matters to Socially Responsible Investments!

We provide empirical evidence regarding the effect of stock market regimes on Social Responsible Investment (SRI). Using the Markov Switching Model, we identify three market regimes for the study period between June 2001 and December 2009 in the US. These regimes are the low, medium, and high volatility states. We find a positive relationship between the idiosyncratic risk (i.e. unsystematic risk) and return during low and medium volatility states. However, this positive relationship tends to disappear during high volatility states. In addition, our analysis suggests that idiosyncratic risk has no forecasting power over SRI future returns. Overall, our findings imply that SRI investors are rewarded for bearing the additional SRI specific risk (idiosyncratic risk) when the market is less volatile. This reward, however, becomes uncertain during periods of high market volatility.

Investigating linear multi-factor models in asset pricing: considerable supplemental evidence

Abstract The literature has offered an interesting debate about whether the performance of Fama-French’s three-factor benchmark model is inadequate because it fails to pass some model specification tests and its R2 is not convincingly high in cross-sectional estimations. Previous studies have been quite limited, since they only focused on the time-series procedure with many models. We extend their work by providing a more robust investigation of the performance of several well-regarded pricing models in pooled portfolios and other portfolios sorted by new and important anomalies, using cross-sectional GMM tests for robustness. Finally, we find that, in addition to Fama and French’s five-factor model proposed in 1993, Fama-French’s three-factor model augmented by other factors usually outperforms Fama-French’s three-factor model across a significant proportion of different portfolios. In particular, Frazzini, Kabiller, and Pedersen’s model shows the best overall performance and consistency across different portfolios.

Augmenting the intertemporal CAPM with inflation: Further evidence from alternative models

Studies consistently find that inflation is an important augmented factor for intertemporal capital asset pricing models (ICAPMs) when pricing the Fama–French 25 size and book-to-market portfolios. We extend this line of research by investigating two alternative ICAPM models (from Michel; Hahn and Lee) and the three-factor model from Hou et al. We find significant evidence that both ICAPMs and Hou et al.’s three-factor model perform better when augmented with inflation than the original models. The augmented models achieve a good model fit with the fewest factors, thus avoiding or alleviating the over-fitting problem.

Quantile serial dependence in crude oil markets: evidence from improved quantilogram analysis with quantile wild bootstrapping

ABSTRACT We examine the quantile serial dependence in crude oil prices based on the Linton and Whang’s quantile-based portmanteau test which we improved by means of quantile wild bootstrapping (QWB). Through Monte Carlo simulation, we find that the quantile wild bootstrap-based portmanteau test performs better than the bound testing procedure suggested by Linton and Whang. We apply the improved test to examine the efficiency of two crude oil markets – WTI and Brent. We also examine if the dependence is stable via rolling sample tests. Our results show that both WTI and Brent are serially dependent in all, except the median quantiles. These findings suggest that it may be misleading to examine the efficiency of crude oil markets in terms of mean (or median) returns only. These crude oil markets are relatively more serially dependent in non-median ranges.

Information disclosure quality: correlation versus precision

We investigate how a multidimensional disclosure quality (i.e., correlation and precision) determines an optimal information disclosure strategy. We find that, for an infinitely lived, unlevered firm with market perfection, a truth-telling disclosure is optimal at increasing the expected firm value. However, for a finitely lived, levered firm in the presence of market imperfections (e.g., bankruptcy cost), the optimal disclosure quality depends negatively on the level of imperfections. Once we consider the agency problem, such dependence can become positive, thereby highlighting the importance of a proper managerial-incentive scheme to align the information disclosure interests of managers and shareholders.

Disclosure Quality, the Cost of Capital and Strategic Correlation

We investigate the strategic role of correlation between disclosure error and payoff shock in affecting a firm’s cost of capital or share price. We show that the correlation affects the relationship between disclosure quality and the cost of capital or share price. The standard result where disclosure quality unambiguously lowers the firm’s cost of capital or share price can be observed only in the case where the correlation is zero. In the extreme case where the correlation is perfect, disclosure quality does not affect the cost of capital or share price. When compared to other non-perfect correlation cases, the extreme case where the correlation is perfect results in, on average, a higher share price. This implies that the firm can achieve a higher share price by influencing the correlation (i.e., making it nonzero) and suggests a new way as to how the effectiveness of a disclosure should be evaluated.