Ming-Hua Liu

Analysis of the long-term relationship between macro-economic variables and the Chinese stock market using heteroscedastic cointegration

Purpose - The purpose of this paper is to investigate the relationship between the Chinese stock market indices and a set of macro-economic variables, i.e. money supply, industrial production, inflation, exchange rate and interest rates. Design/methodology/approach - The aims of this paper are addressed using heteroscedastic cointegration analysis. Findings - Results show that the cointegrating relationship does exist between stock prices and the macro-economic variables in the highly speculative Chinese stock market. Detailed analysis shows stock market performance is positively related to that of macro-economy in the long term. Research limitations/implications - The results imply that in the long run, investors can benefit in terms of better returns and portfolio diversification as the Chinese economy is expected to continue to perform strongly. Originality/value - The main contributions of this paper are two-fold: first, this is the first paper to examine the long-term relationship between the stock market indices and macro-economic variables in China, one of largest economies in the world. Second, heteroscedastic cointegration analysis is used and hence this paper controls for time-varying volatility.

Monetary policy and interest rate rigidity in China

This study examines the conduct of monetary policy and the setting of deposit and lending rates in China. As China is still in the transitional stage from a centrally planned economy to a market economy, State-Owned Enterprises and banks are being restructured and financial markets are being developed. Our findings show that there is a long-term relationship between interest rates and inflation, but the relationship is weak. In the short run, the central bank adjusts deposit and lending rates downward faster than they adjust them upwards. The weak long-term relationship reflects the fact that the interest rate as a tool of monetary policy is rather ineffective in China and the asymmetric adjustment speed shows that interest rates are kept deliberately below their equilibrium levels for the state-sponsored objective of stimulating economic growth, creating jobs and maintaining financial stability.

Share Repurchases in New Zealand

In this paper, we investigate the New Zealand stock market reactions to both on-market and off-market share repurchase programmes for the period 1995–2004. Share repurchases have become more frequent in New Zealand in recent years, though the size and the number of repurchases are still small by international standards. The main reason appears to be the presence of the dividend imputation system which diminishes the tax consequences of cash dividends compared to capital gains. On the whole, we observe that the market reacts positively and significantly to the share repurchase announcements. The magnitude of average abnormal returns for the on- and the off-market repurchases on the announcement day are 3.25 and 3.12% respectively. We further observe the reasons companies undertake stock repurchase are consistent with the investment and free cash flows agency hypotheses.

Mean reversion of profitability: evidence from the European‐listed firms

Purpose - The purpose of this paper is to investigate the profitability of European Union (EU) firms with the aim of confirming the mean-reverting pattern documented by earlier research in the USA. In addition, the paper classifies firms by industry sectors across countries to investigate potential differences. Design/methodology/approach - The paper follows closely a model where the forecasting of profitability is done through year-by-year regressions. This approach allows the use of large samples and the year-by-year variation in the slopes. Both a linear and a nonlinear partial adjustment models are used for forecasting profitability. Findings - Findings show that the profitability does follow a mean-reverting process and that profitability forecasting can be improved substantially by exploiting the mean-reverting feature. Further analysis shows that mean reversion does not play an important role in EU countries as in the USA and there is no evidence of nonlinearity in mean reversion. It was also found that mean-reverting speed differ across industries, with utilities, financial and manufacturing among the lowest. Research limitations/implications - The sample companies are not originated from a single economy, but from 15 different countries with different macro-economic conditions that might influence their profitability. Originality/value - Studying the European market, where the institutional and financial structure of firms are different from the USA allows us to observe whether the US results are sample specific or can be generalized and applied elsewhere. The difference observed in these sample results is probably due to the fact that the US economy is more competitive than that of EU.

The Global Financial Crisis and Retail Interest Rate Pass-Through in Australia

In this paper, we examine the impact of the global financial crisis (GFC) on the interest rate pass-through for four types of loans in Australia: mortgages, residentially secured small business lending, nonsecured small business lending and personal loans. Australia is an interesting case study since its central bank lowered but also raised interest rates during the GFC. We find that after the onset of the crisis, there has been a shift in the way banks adjust their lending rates in response to changes in market interest rates; the markup has increased and there has been a drop in both short- and long-term pass-through from funding costs to lending rates. Closer analysis indicates that the drop in short-term pass-through is due to the slower response of banks to increases in funding costs. We also find asymmetries in the way banks adjust lending rates in relation to funding costs in the long-run for nonsecured small business lending and personal loans. The evidence shows that banks in Australia tightened lending standards and competed less aggressively for loans but more for deposits in response to heightened default risks following the global financial crisis. The wider margin allows banks to adjust their lending rates more slowly and asymmetrically.

Inflation Transmission in Greater China

This paper examines inflation dynamics in Greater China. Using an asymmetric error correction model, we investigate how inflation in Hong Kong and Macao are related to inflation in Chinese Mainland. Our results based on data from July 1997 to December 2012 reveal that a long-term equilibrium relation exists between inflation in Chinese Mainland and inflation in both Hong Kong and Macao, the two Special Administrative Regions of China. The degree of inflation pass-through is higher for Macao than for Hong Kong. Moreover, we find no evidence of asymmetries in either Hong Kong and Macaos adjustment speeds towards long-run equilibrium or in the short-run pass-through of accelerating or decelerating inflation in the Mainland. Collectively, our results show a close relationship among price dynamics of the three economies and call for a reconsideration of the exchange rate anchor in the Greater China Region.