Scott Fung

Global capital market interdependence and spillover effect of credit risk: evidence from the 2007–2009 global financial crisis

This article examines the impact of the 2007–2009 Global Financial Crisis on the interrelationships among global stock markets and the informational role of the TED spread as perceived credit risk. The current crisis originated from the dominant US market has a prompt and pervasive spillover effect into other global markets. Using the Vector Autoregressive (VAR) model, Granger causality test, cointegrating Vector Error Correction Model (VECM), we document enhanced leadership of the US market with respect to UK, Hong Kong, Japan, Australia, Russia and China markets during the crisis. Consistent with the contagion theory, the interdependence among international stock markets becomes stronger in the crisis. The TED spread serves as a leading ‘fear’ indicator and adjusts to new information rapidly during the crisis. While the impact of orthogonalized shocks from the US market on other global markets increases by at least two times during the crisis, the impact of orthogonalized shocks from the TED spread on global market indices increase by at least five times. Overall, these findings shed light on the dynamics of international stock market linkage and the spillover effect of credit risk.

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.

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.

Stock market-driven investment: new evidence on information, financing and agency effects

This study provides a theoretical model and empirical analysis to jointly examine the information, financing and agency effects, the three channels through which the stock market can actively influence corporate investment decisions and firm performance. First, stock market affects corporate investments, and such impact varies with different market valuation measures, types of investments and firm characteristics. Second, stock market valuation affects investments through the channel of corporate financing, supporting the financing hypothesis. Third, stock market-driven investments have differential impacts on the future operating performance of firms. Investments driven by market valuation of firm-specific information have a positive effect on future performance. In contrast, investments driven by market-wide sentiment have a negative effect on future performance. Fourth, consistent with the information hypothesis, market-driven investments are value-enhancing for firms with better external monitoring by analysts and institutional investors. Lastly, consistent with the agency hypothesis, market-driven investments are value-destroying when firms lack external monitoring, proper managerial incentives and independent board of directors.