Yunbi An

International Diversification Benefits: An Investigation from the Perspective of Chinese Investors

This paper investigates the potential benefits of international diversification with short-selling constraints from the perspective of Chinese investors. Based on a stream of time-rolling realized portfolios, we show that Chinese investors can gain substantially in terms of portfolio risk reduction as they venture into global markets, regardless of the region into which they choose to diversify and whether in-sample or out-of-sample performance is evaluated. The risk reduction is particularly pronounced when investing in developed and Euro-American markets as compared with a well-diversified domestic portfolio. The in-sample test also demonstrates that international diversification can greatly enhance the expected portfolio returns as well as the risk-adjusted returns. However, Chinese investors cannot achieve higher out-of-sample expected returns and risk-adjusted returns unless they choose to only diversify into emerging markets. In addition, our analysis illustrates that optimal portfolio weights vary significantly over time due to fluctuations in the correlations among international markets, suggesting that international portfolios need to be rebalanced frequently in order to generate the greatest possible diversification benefits.

HEDGING VOLATILITY RISK: THE EFFECTIVENESS OF VOLATILITY OPTIONS

In this paper we focus on the performance of volatility options as hedging instruments for hedging volatility risk. We investigate (a) the relative hedging performance of volatility and European options, (b) the relative hedging performance of volatility index and straddle options, and (c) the impact of model misspecification on hedging effectiveness. Our focus is on exotic options as the options to be hedged, because they are more sensitive to volatility risk and model risk and practically more relevant when the effectiveness of different hedging strategies is examined. Using a Monte Carlo simulation, we find that volatility options are especially useful for hedging options with a severe exotic feature and there is no significant difference between the performances of volatility index and straddle options. Furthermore, our results indicate that model misspecification has an important impact on the hedging performance.

The impacts of accrual-based and real earnings management on executive compensation: evidence from Chinese public firms in the private sector

Abstract This paper investigates whether high CFO or CEO compensation follows earnings management practices in Chinese public firms in the private sector. We find that while accrual-based earnings management does not impact executive compensation, real earnings management leads to high executive compensation. In addition, the effect of real earnings management is particularly strong for CEO pay, consistent with the notion that CEO pressure is the key driver of earnings management. Moreover, we find that this association is more pronounced for firms with a powerful CEO as well as for firms with a large wedge between control and cash flow rights.