William Cheung

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.

Intertemporal profitability and the stability of technical analysis: evidences from the Hong Kong stock exchange

This study investigates the impact of market integration on the profitability of two simple and popular technical trading rules, the Simple Moving Average (SMA) and the Trading Range Break (TRB) in Hong Kong. Using data from 1972 to 2006, we find that the SMA (1, 50) consistently outperforms the market before the integration of stock exchanges in 1986. Under the (1, 50) rule, a variable length moving average performs better than the fixed length moving average rule by 2.5 to 5% (annual) before transaction costs because it includes the information of the first 9 days into investors’ decision. The results are robust to the out of sample tests for the validity of the profitability of the trading rules. The returns of the trading range break rules are insignificant over the 35-year span. Our results support the conjecture that stock market integration may lead to better information efficiency. The findings of significant pre-1986 profits and insignificant post-1986 profits, contradict previous findings that returns are predictable in Hong Kong, suggesting that the Hong Kong stock market may be weak-form efficient after 1986. Overall, our results suggest that technical analysis matters for asset pricing.

A Comparison of China's Main Board and Growth Enterprise Market Board — Market Microstructure Approach

We compare the market quality of the newly established, second board of the China stock market, the Growth Enterprise Market (GEM) with the Main Board, and examine its impact on the Main Board from the market microstructure perspective. Using the newly available transaction level data, several findings emerge. First, trading activities of the Main Board stocks increase after the introduction of GEM Board, suggesting that the establishment of GEM is not at the expense of the Main Board but instead enhance the overall trading activities in China. Pricing error variances are not different in the two Boards, while GEM stocks have larger adverse selection cost component of bid-ask spread and higher probability of information-based trading which indicate a larger information asymmetry among traders, on average in GEM stocks than those in the Main Board. Interestingly, we find that the 15 min returns of Main Board stocks strongly lead that of GEM stocks but the GEM board only weakly leads Main Board, evidencing information transmission from the Main Board to the GEM. Overall, our findings suggest that the market quality of the GEM is sufficiently good to provide an important, alternative listing venue for high potential firms in China.

Liquidity risk spillover: Evidence from cross-country analysis

We investigate the spillover of market liquidity risk across 50 countries using daily data from 1995 to 2010. By employing market liquidity risk measures from Pastor and Stambaugh (2003) and Acharya and Pedersen (2005), we estimate market liquidity risk associations among global stock markets. Empirical results show that the market liquidity risks across countries are correlated. Our study is important for governments, securities exchanges officials, institutional and individual investors.

Fuel Consumption Costs of Routing Uncertainty

We solve a car driver’s routing decision problem under uncertainty in terms of fuel consumption costs. Suppose a car driver can estimate his fuel consumption for a given route between A and B. We study the optimal decision regarding which route to take, given the possibility of travelling between A and B using different routes, where each route is characterized by stochastic uncertain fuel consumption due to unknown traffic at the time of decision. We show that the cost of fuel consumption decreases significantly when taking routes with uncertain knowledge about prevailing traffic.

Empirical anaylsis of liquidity provision of an order driven market

This paper studies how liquidity evolves in a limit order market. By considering the determinants and consequences of the limit and market orders submission, we find that the tradeoff between limit orders and market orders depends on liquidity supply, proxy by the limit order size and the bid-ask spread. We find that increase in limit orders attract market orders, which increase the liquidity demand. Spread only has a significant negative effect on the market orders. Order size only has significant negative effect on the limit orders.

Order aggressiveness of option market: Evidence from the 2008 credit crisis

This paper analyzes the order aggressiveness and order submission strategies in the Chicago Board Option Exchange (CBOE) during the 2008 credit crisis. Using an ordered probit analysis with a sample of 300 million observations, we find that the investors are aggressive when (i) longer the order processing time, and (ii) the narrower the spread.