Joseph K. W. Fung

Mispricing of index futures contracts and short sales constraints

This article examines if changes in short sales constraints affect the extent to which index futures contracts are mispriced. In particular, the study analyzes the mispricing of the Hong Kong Hang Seng Index futures contracts. Tests are conducted over three distinct regulatory regimes relating to the short selling of stocks in Hong Kong. This permits a study of how changes in short selling regulations affect the mispricing of futures contracts. The study indicates that relaxing the constraints on short selling reduces the extent of futures mispricing. Multiple regression analysis is used to test the relationship between the magnitude of mispricing and various economic factors including cash market volatility, time‐to‐maturity of the contract, trading cost, and dividend payout rates. The study also finds that lifting of the short selling restrictions speeds up market adjustment, especially when a long‐hedge (long futures, short stock) signal is detected.

The Information Content of Option Implied Volatility Surrounding the 1997 Hong Kong Stock Market Crash

This study examines the information conveyed by options, and examines their implied volatility at the time of the 1997 Hong Kong stock market crash. The paper determines the efficiency of implied volatility as a predictor of future volatility by comparing it to other candidate leading indicators. These include volume and open interest of index options and futures, as well as the arbitrage basis of index futures. Using monthly, non-overlapping data, the study reveals that implied volatility is superior to those variables in forecasting future realized volatility. The paper also demonstrates that a simple signal extraction model could have produced useful warning signals prior to periods of extreme volatility.

Pricing dynamics of index options and index futures in Hong Kong before and during the Asian financial crisis

This article studies the impact of the Asian financial crisis on index options and index futures markets in Hong Kong. We employed a time‐stamped transaction data set of the Hang Seng Index options and futures contracts that were traded on the Hong Kong Futures Exchange. The results show that during the crisis period, the arbitrage profits, and the standard deviations of these profits increased in both ex‐post and ex‐ante analyses. In a market turbulent time, market volatility brings a higher arbitrage profit level. However, despite the increased market volatility, the profitability of the arbitrage trades declined substantially with longer execution time lags in the ex‐ante analysis. This suggests that the HSI futures and options markets are mature and resilient. A multiple regression analysis on the ex‐post arbitrage profit also suggests that there were structural changes during the Asian financial crisis and the Hong Kong government intervention periods.

An examination of the determinants of stock price effects of US–Chinese joint venture announcements

This paper examines the announcement effects of US-Chinese joint ventures and explores several firm-specific factors which may affect the size of the abnormal returns. A sample of 103 joint ventures during the 1973-1993 period and eight variables, including current ratio, debt ratio, total asset turnover ratio, return on equity, industry classification, prior experience in China, location of headquarters and the date of the joint venture announcement, are used in the study. A significant 3-day cumulative abnormal return of 1.02% is found in the total sample. However, sub-sample and regression analyses show that none of the factors influence the size of the abnormal gains.

Restrictions on Short-Selling and Spot-Futures Dynamics

Recent lifting of short-sales constraints in Hong Kong provides an important opportunity to examine whether such restrictions affect the dynamic relationship between index futures and its underlying spot. The results show that the two prices have become more closely integrated without the restrictions. Adjustments to long-run equilibrium are accomplished more through index futures; however, the spot index has played an increasingly more important role in the lead-lag relationship after the deregulation. Market conditions, spot trading volumes, relative futures trading volumes and institutional participation also affect the dynamic relationship. Copyright Blackwell Publishers Ltd 1999.

Order Imbalance and the Pricing of Index Futures

This study examines whether the direction and magnitude of the aggregate order-imbalance of the index stocks can explain the arbitrage spread between index futures and the underlying cash index. The data are for the Asian financial crisis period and hence entail wide variations in order imbalance and the index-futures basis. The analysis controls for realistic trading costs and actual dividend payments. The results indicate that the arbitrage spread is positively related to the aggregate order imbalance in the underlying index stocks; negative order-imbalance has a stronger impact than positive order imbalance. Violations of the upper no-arbitrage bound are related to positive order imbalance and violations of the lower no-arbitrage bound are related to negative order imbalance. Asymmetric response times to negative and positive spreads can be attributed to the difficulty, cost, and risk of short stock arbitrage when the futures is below its no-arbitrage value. The significant relationship between order imbalance and arbitrage spread confirm that index arbitrageurs are important providers of liquidity in the futures market when the stock market is in disequilibrium.

Mispricing of Index Futures Contracts: A Study of Index Futures Versus Index Options

The ej3ciency o f derivatives markets is important not only to investors for speculation, hedging, and investment purposes, but also to regulators and society as a whole. Research has shown that there is mispricing in futures contracts relative to the cash market in dgerent countries. In this article, we examine the parity relationship between futures and options contracts written on the Hang Seng Index (HSI). Both contracts are traded on the Hong Kong Futures Exchange (HKFE). These contracts eliminate a number o f obstacles to index futures-index options arbitrage that have been proposed as reasons for mispricing in other markets, including uncertainty in future dividend payments, tracking error, and

Ownership Restrictions and Stock-Price Behavior in China

This study examines the stock-price behavior of Chinese stock markets in the Shanghai and Shenzhen Stock Exchanges. There are strict stock-ownership restrictions in China. Foreign investors can only trade B shares, while domestic investors can only trade A shares. Under this two-tier trading system (A and B shares), we find that the stock-price behavior is very different between the two tiers and in most of the firms. A- and B-share prices do not have the same price dynamics. Essentially, A- and B-share prices tend to be driven by their own economic forces. The results are qualitatively the same by using firm-level data with or without exchange-rate adjustment. The result of cointegrated/noncointegrated A- and B-share prices of individual firms can be explained by the ownership distribution, liquidity, and financial characteristics of the firms.

Initial Day Return and Underpricing Cost in Advance Payment Initial Public Offerings

Hong Kong represents the second largest of the initial public offering (IPO) markets that adopt an advance payment subscription procedure. The lengthy process creates substantial financing costs to investors but interest earnings to issuers. Data from a sample of 386 IPOs listed between 2000 and 2007 reveals that interest cost can reduce the return to public subscribers by 44%; while the HIBOR-based interest earnings to issuers are estimated at 0.59% of funds raised, and at 6.27% of forecast earnings. Consistent with Agarwal, Liu, and Rhee (2008), the realized subscription rate strongly influences returns but the link weakens at higher interest rates. Interest earnings and underpricing are highly correlated, a finding in support of Chowdhry and Shermani¦s (1996) proposition. However, the proposition is deemed irrefutable as both underpricing and interest earnings are highly related to the subscription rate. Moreover, regression results show that the relationship between the subscription rate and offer price of H-shares and red-chips are indistinguishable from other issues. These results cast doubt on the common conjecture that the management of China-related enterprises are more likely to underprice their offerings than the managers of other enterprises. The higher returns to H-shares and red-chips can be attributable to the higher public demand for large issues.

Early unwinding of options-futures arbitrage with bid/ask quotations and transaction prices

Abstract By early unwinding of initial arbitrage positions simulated from bid/ask quotes and transaction prices, options-futures arbitrageurs can capture extra profits. Profits peak when arbitrageurs apply the dynamic early-unwinding strategy to the bid/ask quotes. Profits are at their lowest when arbitrageurs use the static hold-to-expiration strategy based on transaction prices. However, due to stale quotes, executing trades at prevailing bid/ask quotes can overstate both the size and frequency of arbitrage profits compared to transaction data for either the early-unwinding or the hold-to-expiration strategy.