Isabel K. Yan

The Determinants of International Portfolio Holdings and Home Bias

Despite the liberalization of foreign portfolio investment around the globe since the early 1980s, the home-bias phenomenon is still found to exist. Using a relatively new IMF survey dataset of cross-border equity holdings, this paper tests new structural equations from a consumption-based asset-pricing model on international portfolio holdings. Using of stock data allows us to provide new and clear-cut evidence on the determinants of international portfolio holdings. The empirical results show that an augmented gravity model performs remarkably well. The results indicate that market size, transaction cost, and information asymmetry are major determinants of cross-border portfolio choice. These findings shed light on alternative theories of international portfolio holdings, especially on the transaction and information cost-based explanations of home bias.

On the convergence of the Chinese and Hong Kong stock markets: a cointegration analysis of the A and H shares

This article explores the potential existence of comovements between the stock prices in Mainland China and Hong Kong. The cointegration test shows that the prices of a substantial number of A shares and H shares have started to cointegrate with each other after the launch of the Closer Economic Partnership Arrangement in recent years. This confirms the role of increased financial openness in accounting for the stock market comovements between Mainland China and Hong Kong.

Determinants of Real Exchange Rates: An Empirical Investigation

The large and persistent deviations of nominal exchange rates from their purchasing power parities comprise a key stylized fact in international economics. This paper sheds light on these persistent deviations by combining two disparate strands of empirical work. The first strand focuses on real economic shocks such as sectoral technology shocks suggested by the celebrated Balassa-Samuelson model, whereas the second strand emphasizes monetary shocks which create persistent effects on both the real interest rate and the real exchange rate. We also hypothesize a third factor which may affect real exchange rates - shocks to the global financial system, which we proxy by the real price of gold. Although each factor in isolation has limited explanatory power, we find that these three factors in conjunction can successfully explain the medium to long run movements in 14 bilateral U.S. dollar real exchange rates from 1970 to 2006. The three factors are sectoral total factor productivity differentials, real interest rate differentials, and the real price of gold, representing real shocks, monetary shocks, and shocks to the global financial system, respectively. We document evidence suggesting that bilateral U.S. dollar real ex-change rates are cointegrated with these three factors. Keywords: purchasing power parity, Balassa-Samuelson model, cointegration JEL codes: F31, F41

An Examination of the Underpricing of H-Share IPOs in Hong Kong

The main purpose of this paper is to study the empirical determinants of the underpricing of H-share initial public offerings (IPOs) during the 1993–2003 period. A special characteristic of H-shares is that they are shares of companies incorporated in China, but are also listed abroad. Our estimates indicate that the average IPO underpricing level of H-shares was about 16.8%. We find that the conventional explanations for the worldwide IPO underpricing are not adequate in explaining the underpricing level of H-shares. Some new factors that are important in explaining the underpricing phenomenon in H-shares are identified. We show that the degree of IPO underpricing is positively associated with market conditions prior to issuance. It is also negatively related to the range of the issuing prices as well as to the growth rate of historical profits. In addition, it is found that firms cross-listed in Hong Kong and America have higher underpricing levels.

Effects of Financial Liberalisation and Political Connection on Listed Chinese Firms’ Financing Constraints

This study examines the impact of recent financial liberalisation in China on the financing constraints of publicly listed Chinese firms with and without politically connected CEO/Chairman. Two continuous indices are used to measure the evolution and intensity of financial reforms: a financial liberalisation index and a capital control index. The results indicate that while firms without politically connected CEO/Chairman face significant financing constraints and politically connected firms do not, financial liberalisation has reduced the constraints for the former. Similarly, lower capital control in China’s equity market lessens credit constraints for non‐connected firms. No statistically significant impact of financial liberalisation is detected with regard to firms that have CEO/Chairman with powerful political background.

On China's Domestic Capital Mobility and the Role of the Government: Empirical Evidence Over 1970–2006

This article investigates capital mobility across 29 provinces in China for the period of 1970–2006 using the Feldstein–Horioka (FH) approach and Campbell and Mankiw’s consumption‐smoothing (CS) framework. It also examines the role of the governments in driving provincial capital mobility. If the provincial government investment is not properly separated out from the private investment, the FH framework applied to the overall saving and investment (private plus public) is found to underestimate the private saving–investment correlation and hence overstates the degree of private capital mobility compared with the CS framework that focuses on the private consumption and output. Both frameworks indicate strong correlation between private saving–investment and private consumption–output, implying strong barriers in the provincial private capital flows. However, there is ample evidence that capital mobility has been rising over time, particularly after the mid 1990s. It also appears that the government facilitates capital flows through inter‐governmental transfers during the sample period. The extent of provincial capital mobility sheds light on the ability of different provinces in diversifying idiosyncratic provincial risks. The earlier findings are robust to alternative measurements of variables and model specifications.

International Protection of Intellectual Property: An Empirical Investigation

In this paper, we test the empirical implications of Grossman and Lais (2004) game-theoretic model of international patent protection. The model yields clear predictions of the variation in degrees of patent protection across countries based on the market sizes and levels of innovative capability of the countries. To take into account the interdependence in the determination of strengths of patent protection between countries, we adopt the spatial econometrics approach. We find that the pattern of patent protection around the globe was broadly consistent with the predictions of the model before the implementation of the TRIPS agreement in 1995.

The Determinants of International Portfolio Holdings and Geographical Bias

This paper employs a unique cross-border equity position dataset from the IMF to investigate the determinants of international portfolio holdings in a wide range of countries. It is observed that, besides the home bias phenomenon, there is considerable geographical bias in the cross-border portfolio holdings - investors tend to hold more securities in countries closer to them in distance. We estimate that if the distance between two counties doubles the cross-border equity holdings are reduced by 68%. This paper first derives structural equations from a consumption-based asset pricing model and then applies them to analyze the effect of distance, information and transaction costs on international portfolio holdings. The results indicate that, by explicitly introducing information and transaction costs into the model, the heterogeneity of cross-border holdings and a great part of the home bias puzzle can be explained.

Intergovernmental Fiscal Arrangements and Provincial Consumption Risk Sharing in China

This paper utilizes a panel data set on two major fiscal reforms in China—the fiscal contract system (FCS) in 1980-93 and the tax-sharing system (TSS) after 1994—to examine how the various aspects of intergovernmental fiscal arrangement affect the ability of the fiscal system to facilitate risk sharing. The high revenue decentralization and the proliferation of extrabudgetary revenue items in the FCS generally weakened the central governments ability to support interprovincial risk sharing. This situation was reversed in the TSS period. In addition, the effect of central-to-local transfer (transfer-in) and local-to-central transfer (transfer-out) on risk sharing was asymmetric in the sense that transfer-out enhances risk sharing but transfer-in does not.

Sectoral Capital–Labor Ratios and Total Factor Productivity: Evidence from Asia

This paper examines the relationship between sectoral capita-labor ratios and total factor productivity (TFP) for six Asian economies in the context of the Balassa-Samuelson model. A strong prediction of the model is that the capital-labor ratios in both the traded- and nontraded-goods sectors depend on the TFP in the traded-goods sector. Both single-equation and panel cointegration tests support this implication of the model.