Richard Chung

Are Hedge Fund Managers Better Able to Forecast Real Estate Security Returns than Others

Tests of whether hedge fund managers are better able to forecast real estate securities returns than others are reported in this article. Two main conclusions follow from the estimation results. First, it appears that real estate securities hedge fund managers may have some superior forecasting skills. Second, there is evidence that hedge fund managers prefer real estate securities that are larger, have a higher beta, and a higher residual standard deviation. The results reported are consistent with the hypothesized effects.

Chinese superstition in US commodity trading

We examine the potential effect of Chinese superstition on the prices of four commodities traded in the US commodity market using daily data from January 1994 to September 2012. We focus on market responses to days that Chinese traders superstitiously deem as either lucky or unlucky. Our results suggest that day 4 in the month (considered unlucky) is associated with significantly lower returns for three commodities (copper, cotton and soybean). The evidence controls for the possible effects of other anomalies and emerges despite the fact that China buys only about half of the US total exports of these commodities. These results seem in conflict with an efficient US commodity market as it opens the possibility for formulating profitable trading rules based on day 4 trading.

Accuracy of consensus expectations for top-down earnings per share forecasts for two S&P indexes

In this paper, we examine the top-down forecast accuracy and divergence of market strategists for quarterly Earnings Per Share (EPS) forecasts for the S&P400 and S&P500 Indexes using the I/B/E/S summary database. We find that such forecasts are, on average, optimistically biased, and that the bias increases with an increase in the number of reporting market strategists and the coefficient of variation of such forecasts. We find that our nondirectional measure of forecast accuracy indicates that accuracy deteriorates with increasing default and term premia (two priced APT factors). Our findings have implications for the asset allocation decisions and markettiming practices of professional fund managers.

Relative scarcity and convenience yield: evidence from non-ferrous metals

ABSTRACT We study the relationship between convenience yield and relative scarcity in the non-ferrous metal market for the period January 2000–March 2015. We identify various sets of economic relationships for six major base metals, namely, aluminium, copper, lead, nickel, tin and zinc. Our bivariate and multivariate VARs and associated Granger-causality test results generally support the existence of a positive relationship between convenience yields of base metals and our relative scarcity measure. Furthermore, the time-varying characteristics observed in the results, especially during contango and backwardation periods, provide useful information to market players in developing inventory strategies.

REIT Stock Market Volatility and Expected Returns

We study the relation between REIT stock volatility and future returns, focusing particularly on the financial crisis period of 2007-2009. There is ongoing debate about whether stock volatility can forecast future returns. Our findings suggest that REIT implied volatility is negatively related to contemporaneous stock returns; there is a significant positive relationship between REIT implied volatility and future stock volatility; and there is a significant negative relation between REIT implied volatility and future stock returns. Lastly, we develop trading rules based on REIT implied volatility to test whether these relationships are exploitable. The result suggests a potentially profitable trading strategy.

Big 4 Conservatism Around the World

Conservatism is a long-established underlying principle of accounting but its implementation has come under the spotlight in recent years following the spate of well-publicized corporate collapses in the U.S. and elsewhere. Previous studies have shown that the Big 4 audit firms are more conservative than the non-Big 4 in the U.S. The current study examines whether the U.S. findings extend to other countries. In doing so, we make use of a relatively new measure of conservatism, namely, the C-score developed by Khan and Watts. We find that the conclusion drawn from U.S. studies, namely that the Big 4 are more conservative, extends to the international setting but only under certain conditions. Specifically, the Big 4 are more conservative in those countries where litigation and reputation risks, broadly defined, are high. This increase in conservatism represents a rational response by the Big 4 auditors to their greater exposure, vis-a-vis the non-Big 4 auditors, to litigation and reputation loss in those countries.

Superstitions and stock trading: some new evidence

We examine the potential effect of superstitious beliefs on stock trading in four Asian-Pacific countries with deep Chinese cultural heritage (China, Hong Kong, Singapore, and Taiwan). We focus on market responses to days that are superstitiously deemed in the Chinese cultural as either lucky or unlucky. Our regression results from daily data over 2 January 1991 to 30 December 2011 suggest that unlucky days (particularly day 4 and Friday the 13th) generally exhibit higher stock returns. However, our results remain generally consistent with market efficiency since a trading rule based on this numbering pattern fails to produce any significant abnormal profits after taking into account transaction costs.

Robustness of selectivity and timing measures of performance based on quadratic and dummy variable regressions

Abstract We provide a useful demonstration that the ex post assessment of portfolio performance by selectivity and timing based on the quadratic and dummy variable regression methods commonly prescribed in standard textbooks in investments can lead to incorrect selectivity inferences. We show that an “insider” who has access to the actual portfolio weights and returns can make correct assessments. Our findings support Jensens (1972) concern about the appropriateness of the portfolio approach to the measurement of portfolio performance based solely on observed asset returns.

Reporting Incentive Conflicts and Audit Effectiveness Differentiation between Big Six and Non-Big Six Auditors

In this paper, we examine whether the effectiveness of external auditing for deterring opportunistic earnings management (i.e., audit effectiveness) differs between two distinct situations with income-increasing vs. income-decreasing incentives and how audit effectiveness differentiation between Big Six and non-Big Six auditors is differentially influenced by the direction of earnings management incentives. Our results show that only when managers have incentives for income-increasing accounting choices are Big Six auditors more effective than non-Big Six auditors in deterring/monitoring opportunistic earnings management. Contrary to conventional wisdom, we find no significant difference in audit effectiveness between Big Six and non-Big Six auditors when managers prefer conservative accounting choices. The above findings are robust to different proxies for opportunistic earnings management, different proxies for the direction of earnings management incentives, and different regression methods used.

Augmenting the intertemporal CAPM with inflation: Further evidence from alternative models

Studies consistently find that inflation is an important augmented factor for intertemporal capital asset pricing models (ICAPMs) when pricing the Fama–French 25 size and book-to-market portfolios. We extend this line of research by investigating two alternative ICAPM models (from Michel; Hahn and Lee) and the three-factor model from Hou et al. We find significant evidence that both ICAPMs and Hou et al.’s three-factor model perform better when augmented with inflation than the original models. The augmented models achieve a good model fit with the fewest factors, thus avoiding or alleviating the over-fitting problem.