Edward H. Chow

The Exchange-Rate Risk Exposure of Asset Returns

Real exchange-rate changes affect bonds differently from stocks. Bonds, having relatively fixed income streams, reflect only an interest-rate effect; stocks reflect a conjunction of interest-rate and cash-flow effects. If exchange rate changes contain information about future interest rates and cash flows over more than one period, then using short horizons may not fully capture exchange exposure, which may explain why prior empirical studies have failed to find an association between stock returns and exchange rates. Using long-horizon returns and long-horizon exchange-rate changes as the authors do provides a clearer picture of exchange exposure. Copyright 1997 by University of Chicago Press.

Trading Returns for the Weekend Effect Using Intraday Data

The existence of the weekend effect has been documented as early as 1885. This paper examines whether the serial dependence in returns around weekends and the magnitude of negative Friday returns can be used to produce superior trading returns. We find some success for this endeavor after accounting for transaction costs (including the bid/ask spread), especially when trading is confined to weekends for which there are large negative Friday returns and to positions opened on Friday afternoons. The effect of stocks trading ex-dividend on Mondays does not appear to bias our results. Copyright Blackwell Publishers Ltd 1997.

Trading mechanisms and trading preferences on a 24-hour futures market: A case study of the Floor/GLOBEX switch on MATIF

Abstract MATIF is the only major exchange offering a 24-hour non-interrupted trading cycle accommodating two distinct non-overlapping trading mechanisms. We find that trading volume on the floor is significantly higher than that on GLOBEX around the switch of trading mechanism. GLOBEX is mainly used by institutions to hedge their cash positions. The higher trading volume on the floor may be attributed to several factors: trade immediacy vs. transaction cost, liquidity trading by locals, inertia to trade under a new mechanism, and transparency vs. anonymity. In addition, the floors open is unique with large interday return volatility.

The Performance of Overconfident Fund Managers

Using data for 193 equity funds in Taiwan, we examine whether fund managers behave overconfidently. We show that the higher the fund performance, the more that trading occurs in the next period. In addition, such trading may hurt subsequent performance, although the evidence is marginal. Our findings suggest that managers of equity funds in Taiwan are overconfident.

Expiration Day Effects and Futures Trading Profits: Evidence from Taiwan

We set out in this study to analyze the expiration effects of index futures on the cash market in Taiwan, and find that both volatility and trading volume are higher on the final settlement days as compared to normal trading days. We also calculate the volume of open interest for final settlement relating to different classes of traders, as well as the profits from the open interest positions of these traders in index futures contracts. We find that proprietary traders exhibit superior performance whereas foreign investors achieve the worst returns. Our empirical results provide strong evidence in support of the view that the expiration effects in the Taiwan futures market are partially attributable to attempts at ‘marking the close’.

Capital Market Integration and Exchange Risk Exposure of the Asian Emerging Markets

This paper investigates the integration relationship between the Asian emerging capital markets (AEMs) and the rest of the world in the context of an international Sharpe-Lintner CAPM during the period 1985-1996. Overall, the results show that the world capital markets, with the inclusion of the AEMs, are not integrated. The rejection can be attributed to exchange risk exposures of the AEMs during the 80s. In addition, the results show that the AEMs become integrated with the world afier 1991, the results of which are further confirmed by the fact that no exchange risk exposure is found for the AEMs after the 1991. However, the correlations between the AEMs and the world markets are still low.

Trading Behavior and Asset Returns: Evidence from the Interday Serial Correlations of Intraday‐to‐Intraday Daily Returns of Taiwan

This paper sheds light on the importance of trading behavior in the determination of asset prices by examining the interday serial correlations of intraday-to-intraday daily returns of the Taiwan Stock Exchange (TSEC). The TSEC exhibits positive serial correlation in the beginning and the end of the week and negative serial correlation in the middle of the week. The interday serial correlation is not a result of non-synchronous trading, bid-ask bounce in transaction price, or price limits. The serial correlation is positively related to trading volume and similar to the pattern in the US. We suggest that trading behavior seems to be an important determinant of asset prices.

Investor Tax Heterogeneity, Ex-Dividend Prices, Volumes, and Trades: Evidence from an Emerging Market

We analyze 987 ex-dividend events in Taiwan stock market between January 1992 and December 2006, and find that differential taxes really matter for the share prices and investors behaviors around the ex-dividend day. Ex-day price drop ratio increases with the investors’ average preference for dividend relative to capital gains. The excess volume around the ex-dividend day is positively correlated with the degree of tax heterogeneity and the gains from dividend capturing activities, and is negatively associated with the risk and transaction cost. We also find that wealthy investors sell shares cum-dividend and reverse to buy on ex-day; whilst less-wealthy investors, proprietary traders, and corporation shareholders trade in the opposite direction. Overall, our results provide support for the dynamic dividend clientele hypothesis.