Joseph W. Cheng

An Examination of Herd Behavior in Equity Markets: An International Perspective

We examine the investment behavior of market participants within diAerent international markets (i.e., US, Hong Kong, Japan, South Korea, and Taiwan), specifically with regard to their tendency to exhibit herd behavior. We find no evidence of herding on the part of market participants in the US and Hong Kong and partial evidence of herding in Japan. However, for South Korea and Taiwan, the two emerging markets in our sample, we document significant evidence of herding. The results are robust across various size-based portfolios and over time. Furthermore, macroeconomic information rather than firm-specific information tends to have a more significant impact on investor behavior in markets which exhibit herding. In all five markets, the rate of increase in security return dispersion as a function of the aggregate market return is higher in up market, relative to down market days. This is consistent with the directional asymmetry documented by McQueen et al. (1996) (McQueen, G., Pinegar, M.A., Thorley, S., 1996.

Does futures trading increase stock market volatility? The case of the Nikkei stock index futures markets

Abstract We propose new tests to examine whether stock index futures affect stock market volatility. These tests decompose spot portfolio volatility into the cross-sectional dispersion and the average volatility of returns on the portfolios constituent securities. Our tests show that for Nikkei stocks spot portfolio volatility increased and cross-sectional dispersion decreased compared with average volatility when Nikkei futures began trading on the Osaka Securities Exchange, but not on the Singapore International Monetary Exchange. For non-Nikkei stocks, no shift occurred when futures trading began on either exchange. These findings are consistent with the hypotheses that futures trading increases spot portfolio volatility but that there is no volatility “spillover” to stocks against which futures are not traded. However, the increase in volatility attributable to futures trading is small compared with volatility shifts induced by changes in broad economic factors.

Further evidence on the variability of inflation and relative price variability

Abstract Using a sample of monthly observations of both a 12-category group and a 203-category group of personal consumption expenditures, we furnish evidence that relative price variability is positively related to both the inflation rate and inflation variability. The relation is robust to oil-price shocks.

On the Performance of Naive, Analyst and Composite Earnings Forecasts: Evidence from Hong Kong

In this paper, we compare the information content and performance of naive, analyst and composite forecasts in Hong Kong. Empirical evidence shows that superior performance can be obtained by a composite measure combining both analyst and naive forecasts. In addition, analyst forecasts become more conditionally efficient over the naive model as the actual announcement approaches. The superiority and timing advantage of analyst forecasts suggest that more emphasis should be placed on the services of analysts for predicting future earnings figures, particularly when the announcement is approaching.