Charles Chang

To Hedge or Not to Hedge: Revenue Management and Exchange Rate Risk

This article studies whether foreign exchange risk can be reduced by operational controls. Specifically, revenue management practices for five international markets are analyzed over a period of more than six years. Results show that ADR (average daily rate), RevPAR (revenue per available room), and occupancy improve in weak currency environments to make up for losses resulting from currency translation. The reverse is also true. That is, occupancy declines in strong currency environments to make up for gains in exchange. In other words, when a weak local currency threatens dollar-denominated earnings, managers can make up for it by increasing ADR without reducing occupancy, thereby increasing RevPAR. The result is significantly less exposure to foreign exchange risk than implied by traditional hedging arguments.

Impact of terrorism on hospitality stocks and the role of investor sentiment.

This study examines a comprehensive data set of all terrorist activities that directly affected Americans between 1973 and 2003, exploring the reaction of hospitality stocks to these events. Hospitality stocks’ returns following terrorist events are well in excess of those experienced by the rest of the stock market, beating the market by 10 to 15 percent per annum. These results persist despite controls for the type of event, number of casualties, location of the event, changes in market risk, and resulting impacts on room demand and average daily rates. The most severe one hundred events, after an initial negative reaction, are followed by returns nearly four times larger than those of the average event. Findings are consistent with sentiment playing a substantial role in hospitality stock returns.

On the Determinants of Basis Spread for Taiwan Index Futures and the Role of Speculators

This paper investigates basis spreads on index futures listed on the Taiwan Futures Exchange. We analyze the role of speculators and of informed trading in Taiwans futures market using intraday data during the five-day pre-expiration period. We demonstrate that liquidity, volatility, and informed trading are each significantly positively related to spread magnitude, indicating that speculators may dominate arbitrageurs. While spreads have narrowed as the market has matured, liquidity and informed trading continue to widen spreads despite the fact that a naive arbitrage strategy outperforms the market.

Do Investors Learn About Analyst Accuracy

We study the impact of analyst forecasts on prices to determine whether investors learn about analyst accuracy. Our test market is the crude oil futures market. Prices rise when analysts forecast a decrease (increase) in crude supplies. In the 15 minutes following supply realizations, prices rise (fall) when forecasts have been too high (low). In both the initial price action relative to forecasts and in the subsequent reaction relative to realized forecast errors, the price response is stronger for more accurate analysts. These price reactions imply that investors learn about analyst accuracy and trade accordingly.

ESO Compensation: The Roles of Default Risk and Over-Confidence

We derive a pricing model for employee stock options (ESO) that expands on Ingersoll (2006) by including default risk and that additionally considers the effects of employee over-confidence. We find that illiquidity reduces subjective value and alters incentive effects and value sensitivities. The ESO discount is increasing in risk-aversion and decreasing in tradability, but may be offset by employee over-confidence. Under normal calibrations, subjective value is approximately 40% less than market value, but employees who over-estimate firm returns by more than 5% value ESOs higher than the market. Our results potentially impact ESO accounting regulations as well as compensation decisions.