Y. Peter Chung

Exchange Rate Fluctuations, Political Risk, and Stock Returns: Some Evidence from an Emerging Market

We study the impact of exchange rate fluctuations and political risk on the risk premiums reflected in cross-sections of individual equity returns from Mexico, a country that has experienced significant monetary and political turbulence. Indicators from Mexicos currency and sovereign debt markets are employed as proxies for exchange rate and political risks. We find some evidence of equity market premiums for exposure to these risks. The results suggest common factors in emerging market equity, currency, and sovereign debt markets, and have several implications for corporate and portfolio management and for the use of emerging market data by researchers.

Foreign Ownership Restrictions and Equity Price Premiums: What Drives the Demand for Cross-Border Investments?

We study the impact of barriers to international capital flows with stock price data from 11 countries whose stock markets feature shares restricted to locals and otherwise identical shares available to foreigners. Large price premiums for unrestricted shares relative to matching restricted shares are typically observed. Although basic notions of international asset pricing offer a straightforward explanation for the price premiums, we find little evidence that the price premiums are explained by lower foreign required returns. Alternative concepts and theories centering on foreign investor demand and the supply of shares explain some of the time-series and cross-sectional variation of price premiums. More specifically, premiums for unrestricted shares are positively correlated with foreign investor demand in the form of international mutual fund flows, sentiment implicit in matching closed-end country fund premiums, market liquidity, and information reflected in press coverage, country credit rating, and firm size.

The Intraday Behavior of Bid-Ask Spreads for NYSE Stocks and CBOE Options

We study the intraday behavior of bid-ask spreads for actively traded CBOE options and for their NYSE-traded underlying stocks. We confirm previous findings that stocks have a U-shaped spread pattern; however, the options display a very different intraday pattern—one that declines sharply after the open, and then levels off. Our results suggest that both the degree of competition in market making and the extent of informed trading are important for understanding the intraday behavior of spreads.

Intraday relationships among index arbitrage, spot and futures price volatility, and spot market volume: A transactions data test

Abstract This paper examines intraday temporal relationships among arbitrage spreads, cash and futures price volatility, and cash trading volume, using transactions data for the Major Market Index futures contracts and the component stocks of the index. Results indicate that changes in the spread have a significant impact on cash and futures price volatility as well as on cash trading volume. The impact of the spread, however, is attenuated by the short-sale restriction in the cash market. Contrary to popular beliefs, a more volatile market leads to subsequent decreases in the spread, probably because of increases in the supply of arbitrage services or faster price adjustments.

Vector autoregression or simultaneous equations model? The intraday relationship between index arbitrage and market volatility

Abstract We conduct simulations to compare the vector autoregression (VAR) and simultaneous equations models (SEM) for examining temporal relationships among arbitrage spreads, spot price volatility, and futures price volatility. Contrary to Koch (1993) , we find that the VAR model can better reveal the underlying process, and that SEM can be misleading and may yield unreliable inferences.

INDEX-FUTURES ARBITRAGE IN JAPAN

We examine the impact of the unique Japanese stock market microstructure on the pricing of stock index futures contracts. We use intraday transactions data for the Nikkei 225 Futures contracts in Osaka and the corresponding Nikkei 225 Index in Tokyo. Incorporating more realistic transaction-cost estimates and various institutional impediments in Japan, we find that the time-varying liquidity of some component shares of the index in Tokyo represents the most critical impediment to intraday arbitrage and often causes futures prices in Osaka to deviate significantly and persistently from their no-arbitrage boundary, especially for longer-lived contracts.