Chun I. Lee

Trading rule profits in Latin American currency spot rates

Abstract The efficiency of foreign exchange markets has received extensive attention in the literature in recent years, especially with regard to technical trading. We extend the existing evidence on this topic by applying the moving average (MA) and channel (CH) trading rules to 13 Latin currencies to see if opportunities for profitable trading exist. Our results show that although not all of the Latin American currencies can be exploited through the use of trading rules that we use, there are some that appear amenable to our technical analysis. Specifically, the results suggest that MA trading rules are profitable for four currencies, namely the Brazilian real, the Mexican peso, the Peruvian new sol, and the Venezuelan bolivar. We further find that CH rules are profitable for the Brazilian real, the Mexican peso, and the Venezuelan bolivar. Our results suggest that due to differences in the statistical properties of exchange rates, some trading rules may be more suitable for certain types of currencies.

Dimensions of international expansions by US firms to China: Wealth effects, mode selection, and firm-specific factors

Abstract Chinas recent efforts to attract foreign investment have been viewed favorably by US firms, who have explored a variety of strategies for expanding to China. This paper provides evidence related to a comprehensive set of strategies used by US firms to expand to China. For the 302 announcements of expansion by US firms into the Chinese market, several firm-specific factors are found to affect both the choice of mode entry and the reaction of investors to the announcement of the expansion. The results suggest that firms with a high investment in proprietary assets prefer foreign direct investment (FDI) modes to non-FDI modes, as do firms with high levels of geographic diversification. Firms entering the Chinese market utilize non-FDI modes, while those who have established a presence in China prefer FDI modes. The reaction of the stock market to expansions to China is positive; average excess returns of 0.75% are observed for the two days surrounding the announcement. Both FDI and non-FDI categories of expansion have statistically significant excess returns. Analysis by mode of expansion shows that expansions through joint ventures (JVs) and contracts are the most desirable alternatives. Other modes of expansion do not result in significant excess returns. Finally, a firms prior financial performance has a significant influence on its ability to profitably expand to China.

Effect of Regulation FD on Asymmetric Information

On 23 October 2000, the U.S. SEC put Regulation Fair Disclosure into effect. It requires companies to disseminate releases of material information to all investors, not selectively. Proponents of Regulation FD argued that the flow of information would improve; critics of the regulation asserted that Regulation FD would increase volatility and reduce the quantity of information being released into the market, resulting in an increase in asymmetric information. We examined components of the bid–ask spread surrounding news releases and trading activity by retail versus institutional investors before and after the institution of Regulation FD. Our results indicate no significant increase in volatility after Regulation FD, and we found little or no increase in the adverse-selection component of bid–ask spreads. Overall, our results do not support critics of Regulation FD. On 23 October 2000, the U.S. SEC put Regulation Fair Disclosure into effect. It requires companies to disseminate releases of material company information to all investors rather than to select investors. The idea was to create a level playing field for all market participants. For example, prior to Regulation FD, companies could restrict who could be part of a conference call. The exclusion of retail investors, some institutional analysts and investors, and in particular, the media, was a significant catalyst in bringing about Regulation FD. Regulation FD requires that companies release material, market-moving information to all investors simultaneously through a press release or an 8-K filing with the SEC. If a company holds a press conference, it must provide adequate time for investors to learn of the conference before it is held, and the conference must be made available to the widest audience possible—by allowing anyone to dial into a conference call or by making a webcast available in real time over the Internet. Regulation FD also provides a mechanism for dealing with the unintentional disclosure of material nonpublic information. Proponents of Regulation FD argued that it would improve the flow of information. Critics asserted that the regulation would decrease information coming out of companies, which was expected to increase volatility and reduce the quantity of information being released into the market, resulting in an increase in asymmetric information. When asymmetric information increases, market makers widen their bid–ask spreads to compensate for the increased risk of trading against an informed investor. To analyze the effects of Regulation FD, we examined—before and after Regulation FD—volatility, trading activity by retail versus institutional investors, and bid–ask spreads (and the spread’s components) to determine whether the regulation has increased the cost of trading to investors. Among the components of the spread, we focused on adverse selection because it should be the most sensitive to the impact of changes in information flows from companies. If Regulation FD reduced the amount and quality of information put out by companies, the adverse-selection component should have increased. If Regulation FD has not affected the information flow, the adverse-selection component should not have changed. We analyzed 4,278 conference calls made prior to Regulation FD and 3,322 calls made after Regulation FD. The total period covered is 1 January 1999 through 27 February 2001. We broke down the full sample of calls by the subject of the call and focused analysis on the largest group, namely, calls to make earnings announcements. We also broke out from the sample calls that were closed before Regulation FD. We found for the post-FD period an increase in the number of conference calls per day and in the number of companies per day making calls. Tests on volatility in the pre- and post-FD periods indicate that volatility did not increase after implementation. Indeed, it is more likely that Regulation FD contributed to lower volatility. When we examined bid–ask spreads and their components before and after Regulation FD, we found that both absolute (in dollar terms) and relative (in percentage terms) mean and median spreads increased significantly after Regulation FD. The adverse-selection component of the bid–ask spread, however, has had no significant change since Regulation FD in either absolute or relative terms. These results are contrary to the expectations of critics of Regulation FD. Overall, our results indicate that Regulation FD has not been detrimental to investors.

The tick/volatility ratio as a determinant of the compass rose pattern

This study provides evidence that low frequency data masks certain returns phenomena in the foreign exchange (forex) market. It is shown that the compass rose pattern is entirely absent in daily returns in the spot and futures forex markets. In contrast, the intraday returns, especially those for holding periods of less than an hour, clearly exhibit the pattern. Monte Carlo investigation of the tick/volatility ratio provides convincing evidence that the pattern appears only if the tick/volatility ratio is above some threshold level. Since intraday returns have a ratio above the threshold value, they exhibit the pattern. On the other hand, the absence of the pattern in daily returns is due to the fact that the spot and futures currency returns examined have a ratio much smaller than the threshold value. Overall, the evidence is consistent with the hypothesis that the tick/volatility ratio is a determinant of the compass rose pattern. The economic implications of this pattern are discussed.

Sources of Intraday Noise

We use a sample of intraday extreme stock price movements and assess the noise trading component of those movements. We find that the first and last periods of the day are when large stock price movements are triggered without public information. The reversals to positive stock price movements are more pronounced when the initial stock price movement was caused by a relatively high degree of institutional trading, and when there is a relatively low degree of trading activity for that stock. The reversals are more pronounced for the relatively large positive and negative intraday stock price movements. This implies that market participants view large intraday stock price deviations as noise when they are not backed by public information, and they quickly correct for these discrepancies.