Terence Tai Leung Chong

STRUCTURAL CHANGE IN AR(1) MODELS

This paper investigates the consistency of the least squares estimators and derives their limiting distributions in an AR(1) model with a single structural break of unknown timing. Let I²1 and I²2 be the preshift and postshift AR parameter, respectively. Three cases are considered: (i) |I²1|

Technical analysis and the London stock exchange: testing the MACD and RSI rules using the FT30

This article examines two oscillators – the Moving Average Convergence–Divergence (MACD) and the Relative Strength Index (RSI) – to see if these rules are profitable. Using 60-year data of the London Stock Exchange FT30 Index, it is found that the RSI as well as the MACD rules can generate returns higher than the buy-and-hold strategy in most cases.

Partial parameter consistency in a misspecified structural change model

This paper discusses the consequences of underspecifying the number of change points in a simple structural change model. It is shown that the change-point estimator converges to one of the true change points, instead of a weighted average of them.

An empirical comparison of moving average envelopes and Bollinger Bands

This paper endeavors to compare the profitability of Moving Average Envelopes and Bollinger Bands. Despite the fact that Bollinger Bands can capture sudden price fluctuations which Moving Average Envelopes cannot, our study reveals that Bollinger Bands do not outperform the Moving Average Envelopes.

The value of superstitions

Abstract This paper estimates the value of superstitions by studying the auctions of vehicle license plates. We show that the value of superstitions is economically significant, which justifies their persistence in human civilization. We also document the changes of the value of superstitions across different types of plates, across different policy regimes, and across different macroeconomic environments. Interestingly, some of the changes are rather consistent with economic intuition.

Generic Consistency of the Break-Point Estimators Under Specification Errors in a Multiple-Break Model

This paper considers the estimation of multiple-structural-break models under specification errors. A common example in economics is that the true model is measured in level, but a linear-log model is estimated. We show that, under specification errors, if there are more than one break points and if a single-break model is estimated, the estimated break point is consistent for one of the true break points. This consistency result applies to models with multiple regressors where some or all of the regressors are misspecified. Another important contribution of this paper is that we have constructed a Sup-Wald test whose limiting distribution is not affected by model misspecification. Using this robust test, we show that the break points can be estimated sequentially one at a time. Simulation evidence and an empirical application are provided. Copyright

A principal-component approach to measuring investor sentiment

The usefulness of the investor sentiment measure in the stock market has received increasing attention in recent years. Various measures of investor sentiment have been proposed over the last two decades. Early studies, such as Lee et al. (1991), Swaminathan (1996) and Neal and Wheatley (1998), use closed-end fund discounts as a proxy for market sentiment. Since both closed-end funds and small stocks are mainly owned by individual investors, the sentiment affects the returns of small stocks in the same way as it influences closed-end funds. Otoo (1999) studies the survey-based Michigan consumer confidence index and finds a strong positive relationship between consumer sentiment and stock prices. Kumar and Lee (2002) construct a measure of individual investor sentiment based on the buy–sell imbalance and show that it has incremental explanatory power for small stocks, value stocks and stocks with low institutional ownership. Fan and Yao (2003) propose a composite index which contains the information of various market indicators.x Brown and Cliff (2004) use a vector autoregressive framework to explain the mutual influence between the sentiment measure, market returns and volatility. It is shown that investor sentiment measures have little explanatory power for short-term stock returns. Baker and Wurgler (2006) construct a measure of stock market sentiment based on the common variation of the closed-end fund discount, NYSE share turnover, the number of IPOs, the average first-day returns on IPOs, equity share in new issues and dividend premium. They show that stocks with highly subjective valuations and

Generic consistency of the break-point estimator under specification errors

This paper considers the asymptotic behavior of the break-point estimator when some or all of the variables in a structural-break model are misspecified. An obvious example is misspecifying a linear model as a log--log model. The results given here cover a large number of data transformations, including transformation of the independent variables, dependent variable and transformation of both variables at the same time. The true data generating process can be stationary or non-stationary. I establish a useful result that, under some relatively weak assumptions, the break point can always be consistently estimated regardless of how a structural-break model is misspecified. The asymptotic behavior of the SupWald test under model misspecification is studied. Simulations and empirical evidence are also provided. Copyright Royal Economic Society, 2003

On the convergence of the Chinese and Hong Kong stock markets: a cointegration analysis of the A and H shares

This article explores the potential existence of comovements between the stock prices in Mainland China and Hong Kong. The cointegration test shows that the prices of a substantial number of A shares and H shares have started to cointegrate with each other after the launch of the Closer Economic Partnership Arrangement in recent years. This confirms the role of increased financial openness in accounting for the stock market comovements between Mainland China and Hong Kong.

On the Comovement of A and H Shares

Using intraday high-frequency data, this article investigates the comovement between the A shares and H shares of twenty-one cross-listed Chinese companies. It is found that only a small portion of the cross-listed Chinese companies have a comovement in their A- and H-share prices. The results suggest that the stock markets of China and Hong Kong are segmented. For the comoving stocks, the China stock market plays a major role in the price discovery contribution. We also find that companies that have a relatively liquid H-share market tend to have a comovement in their A- and H-share prices, and that the A-share price seems to play a more important role in finding the implicit efficient price for cross-listed stocks.