Jing-Ming Kuo

The lunar moon festival and the dark side of the moon

We propose and adduce evidence for a new seasonal anomaly associated with the Lunar Moon Festival (LMF) in East Asian economies. While the LMF effect bears some resemblance to the festivity and vacation anomalies, it is mainly driven by nostalgia, historically negative associations, the full moon and uncertainty about future harvest prospects. This negative sentiment and associated increase in risk and loss aversion are responsible for reducing share turnover, return volatility and stock returns over a 2-week period. The LMF effect is the strongest for China, Taiwan and South Korea where it is not only celebrated as a public or cultural holiday but it also impacts on neighbouring stock markets where overseas Chinese investors possess significant resources. Robustness checks demonstrate that it has a distinctive and more pronounced impact than competing seasonal effects associated with lunar phases and the summer vacations.

A pricing kernel approach to valuing options on interest rate futures

This paper builds on existing asset pricing models in an intertemporal capital asset pricing model framework to investigate the pricing of options on interest rate futures. It addresses the issues of selecting the preferred pricing kernel model by employing the second Hansen–Jagannathan distance criterion. This criterion restricts the set of admissible models to those with a positive stochastic discount factor that ensures the model is arbitrage-free. The results indicate that the three-term polynomial pricing kernel with three non-wealth-related state variables, namely the real interest rate, maximum Sharpe ratio, and implied volatility, clearly dominates the other candidates. This pricing kernel is always strictly positive and everywhere monotonically decreasing in market returns in conformity with economic theory.

Regional institutions, financial analysts and stock price informativeness

ABSTRACT This paper investigates the impact of legal institutions on the external governance role of equity analysts in enhancing the corporate information environment. By analysing a sample of Chinese listed firms between 2003 and 2013, we find that analyst coverage is positively related to stock price informativeness. Firms located in provinces where legal institutions are stronger, as indicated by better development of market intermediaries and lower levies and charges on firms, are less likely to withhold value-relevant information. Financial analysts play a more effective role in improving stock informativeness in provinces with less developed legal institutions.

Governance, Efficiency and Risk Taking in Chinese Banking

We employ a hand-collected unique dataset on banks operating in China between 2003 and 2011 to investigate the impact of board governance features (size, composition and functioning) on bank efficiency and risk taking. Our evidence suggests that board characteristics tend to have a greater influence on banks’ profit and cost efficiency than on loan quality. We find that the proportion of female directors on the board appears not only to be linked to higher profit and cost efficiency but also to lower traditional banking risk. Similarly, board independence is associated with higher profit efficiency of banks; while the opposite is found for executive directors and in the presence of dual leadership of the CEO/chairperson. Among the control variables, we found that liquidity negatively affects profit and cost efficiency, while positively affecting risk. Interestingly, we find some evidence of an incremental effect of specific board characteristics on efficiency for banks with more concentrated ownership structures and state-owned institutions; while for banks with CEO performance-related pay schemes the effect on efficiency when significant is usually negative. Our results offer useful insights to policy makers in China charged with the task of improving the governance mechanisms in banking institutions.

Market Efficiency, Information Flows and Hedging Performance in Carbon Markets

In this study, we examine the market efficiency of both the European and the U.S. carbon markets. Athreshold vector error correction model (TVECM) is adopted, which makes our paper the first to allow for the threshold effect and asymmetric price adjustments in market efficiency analysis. The results indicate that the market efficiency is strongly violated in both the European and the U.S. carbon markets in the short term. This generates the interest to examine information flows between the European and the U.S. market, and the results from a bivariate AR-GARCH model indicate that there is evidence for volatility spillover between the two markets. Finally, we examine the performance of several hedging strategies in carbon markets. We find that the European carbon futures market cannot provide effective risk management function to carbon market participants due to its market inefficiency in the long run, while the U.S. carbon market provides much better hedging performance due to its long term market efficiency.