Risk Characteristics of Real Estate Related Securities--An Extension of Liu and Mei (1992)

This study extends from Liu and Mei (1992) by further investigation of assets, real estate related securities, which includes both equity and mortgage real estate investment trusts (REITs), the stocks of builder- and owner-companies, and mortgage-backed securities (MBSs). There are five major findings. First, expected excess returns of real estate related securities are more predictable than the expected excess returns of value-weighted stocks and bonds. Second, right market timing is important to investors since evidence shows that the risk premiums of real estate related securities vary substantially over time. Third, real estate market conditions significantly influence bonds and MBSs. Fourth, MBSs are more similar to bonds than mortgage REITs. In addition, returns on mortgage REITs resemble both stocks and bonds. Finally, real estate stocks have a very high sensitivity toward stock market portfolio. This suggests that real estate stocks are not good instruments to help diversify stock risk.

Idiosyncratic Risk and the Creative Destruction in Japan

The dramatic rise and fall of the Japanese equity market provides a unique opportunity to examine market-and firm-specific risks over different market conditions. The price behavior of Japanese equities in the 1990s is found to resemble that of U.S. equities during the Great Depression. Both show increasing market volatility and a prolonged large co-movement in equity prices. What is unique about the Japanese case is the surprising fall in firm-level volatility and turnover in Japanese stocks after its market crash in 1990. This large decrease in firm-level volatility may have impeded Japan's capital formation process as it has become more difficult over the past decade for both investors and managers to separate high quality from low quality firms. Using data on firm performance fundamentals and corporate bankruptcies, we show that the fall in firm-level volatility and turnover in Japanese stocks could be attributed to the sharp increase in earnings homogeneity among Japanese firms and the lack of corporate restructuring.

Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia

The market dynamics of technology stocks in the late nineties has stimulated a growing body of theories that analyze the joint effects of short-sales constraints and heterogeneous beliefs on stock prices and trading volume. This paper examines implications of these theories using a unique data sample from China, a market with stringent short-sales constraints and perfectly segmented dual-class shares. The identical rights of the dual-class shares allow us to control for stock fundamentals. We find that trading caused by investors' speculative motive can help explain a significant fraction of the price difference between the dual-class shares.

Institutional Factors and Real Estate Returns - A Cross Country Study

This study provides an empirical study on the relationship between institutional factors and real estate returns. Using data from both developed and emerging market countries, our empirical results show that institutional factors do influence real estate returns and these factors may not be fully priced. We find that when controlling return volatility and level of economic growth, a higher property return is expected in countries where the economy is more efficient and has more economic freedom. Our results support the view that the combination of "lumpiness" of real estate investment and the volatile nature of international capital flows may expose property investors to extra investment risk, which needs to be compensated. Our results also indicate that an improvement in a country's economic efficiency and economic freedom may reduce property variance risk thus enhancing property returns.Economic Freedom index, Institutional Investors' Country Credit Ratings

Political Risk, Financial Crisis, and Market Volatility

This paper examines the impact of political uncertainty on the recent financial crises in emerging markets. By examining political election cycles, we find that eight out of nine of the recent financial crises happened during periods of political election and transition. Using a combination of probit and switching regression analysis, we find that there is a significant relationship between political election and financial crisis after controlling for differences in economic and financial conditions. We observe increased market volatility during political election and transition periods. Moreover, we have some evidence that political risk is more important in explaining financial crisis than market contagion. Our results suggest that political uncertainty could be a major contributing factor to financial crisis. Thus, politics does matter in emerging markets. Since the odds of financial crisis tend to be much larger during the political election periods, institutional investors should take that into account when making emerging market investment during those time periods

Political Risk, Financial Crisis, and Market Volatility

This paper examines the impact of political uncertainty on the recent financial crises in emerging markets. By examining political election cycles, we find that eight out of nine of the recent financial crises happened during periods of political election and transition. Using a combination of probit and switching regression analysis, we find that there is a significant relationship between political election and financial crisis after controlling for differences in economic and financial conditions. We observe increased market volatility during political election and transition periods. Moreover, we have some evidence that political risk is more important in explaining financial crisis than market contagion. Our results suggest that political uncertainty could be a major contributing factor to financial crisis. Thus, politics does matter in emerging markets. Since the odds of financial crisis tend to be much larger during the political election periods, institutional investors should take that into account when making emerging market investment during those time periods

Speculative Trading and Stock Prices: Evidence from Chinese A-B Share Premia

The market dynamics of technology stocks in the late 1990s have stimulated a growing body of theory that analyzes the joint effects of short-sales constraints and heterogeneous beliefs on stock prices and trading volume. This paper examines several implications of these theories using a unique data sample from a market with stringent short-sales constraints and perfectly segmented dual-class shares. The identical rights of the dual-class shares allow us to control for stock fundamentals. We find that trading caused by investors¡¯ speculative motives can help explain a significant fraction of the price difference between the dual-class shares.Speculative bubble, Trading volume

Investment Strategies to Exploit Economic Growth in China

Since the beginning of the economic reforms two decades ago, the economy in China has enjoyed a real growth rate of 9.6 percent per year. We believe that China is only in the early stages of its rapid-growth period. China is likely to enjoy rapid growth for decades to come at rates well above those of any other large country in the world.

Behavior Based Manipulation

If investors are not fully rational, what can smart money do? This paper provides an example in which smart money can strategically take advantage of investors’ behavioral biases and manipulate the price process to make profit. The paper considers three types of traders, behavior-driven investors who have two behavioral biases (momentum trading and dispositional effect), arbitrageurs, and a manipulator who can influence asset prices. We show that, due to the investors’ behavioral biases and the limit of arbitrage, the manipulator can profit from a "pump and dump" trading strategy by accumulating the speculative asset while pushing the asset price up, and then selling the asset at high prices. Since nobody has private information, manipulation investigated here is completely trade-based. The paper also endogenously derives several asset pricing anomalies, including the high volatility of asset prices, momentum and reversal