Stock and Bond Relationships in Asia

This paper analyzes the relationship between stocks and bonds in nine Asian countries. Using a bivariate stochastic volatility model, we show that there are significant volatility spillover effects between stock and bond markets in several of the countries. Furthermore, dynamic correlation patterns show that the relationship between stock and bond markets changes considerably over time in all countries. Stock-bond correlation increases during periods of turmoil in several countries, indicating that there is a cross-asset contagion effect. Therefore, if there is a flight to quality effect in Asian markets, it seems to occur across countries or regions rather than across domestic assets. The results have direct and important implications for regional policy makers as well as domestic and international investors that invest in multiple asset classes.Asia; stock markets; bond markets; stochastic volatility; Markov Chain Monte Carlo; spillover effects; dynamic correlation

Asian Sovereign Debt and Country Risk

This paper analyzes systematic risk of sovereign bonds in four East Asian countries: China, Malaysia, Philippines, and Thailand. A bivariate stochastic volatility model that allows for time-varying correlation is estimated with Markov Chain Monte Carlo simulation. The volatilities and correlation are then used to calculate the time-varying betas. The results show that country-specific systematic risk in Asian sovereign bonds varies over time. When adjusting for inherent exchange rate risk, the pattern of systematic risk is similar, even though the level is generally lower. The findings have important implications for international portfolio managers that invest in emerging sovereign bonds and those who need benchmark instruments to analyze risk in assets such as corporate bonds in the emerging Asian financial markets.Asia; sovereign bonds; systematic risk; stochastic volatility; Markov Chain Monte Carlo

CHINA'S FINANCIAL MARKET INTEGRATION WITH THE WORLD

It is commonly argued that China's financial markets are effectively insulated from the rest of the world. To see if this is true and to better understand China's financial development, we analyze China's integration with major financial markets. Using conditional copulas, we show that China has experienced an increasing level of integration with several major financial markets during the last decade, even though the country's financial markets are commonly seen as being insulated. Furthermore, the level of integration has increased with several major markets during the current financial crisis. The results and possible reasons for the increasing integration are analyzed and the implications for policymakers and market participants are discussed.China; financial market integration; codependence; copula

WHAT MOVES BOND YIELDS IN CHINA?

This paper analyzes the joint dynamic processes of macroeconomic and monetary variables and bond yields in China. We show that macroeconomic variables as well as monetary policy variables have a significant impact on two factors that capture the variation in yields. An increase in the inflation rate and economic growth result in a rise in the yield curve. Similarly, an increase in the money supply causes a rise in the yield curve, albeit with a delayed effect. Finally, when official rates are raised, the long yield shows signs of a delayed decline. Overall, the long yield is more sensitive to most changes in macroeconomic and monetary variables. These results differ from an earlier study on bond yields by Ang and Piazzesi (2003), who show that the U.S. short-term rate is more sensitive to changes in macroeconomic variables. Possible explanations for the difference include certain unique structural features in the domestic financial system and the way monetary policy is conducted in China.China; yield curve; macroeconomic factors; monetary policy

Spillover Effects among the Greater China Region Stock Markets

This paper explores the linkages between the different stock markets in the Greater China region. Cointegration tests indicate that the three markets are not cointegrated. A vector-autoregressive multivariate conditional volatility model that accounts for asymmetric volatility effects is used to model the mean and volatility processes of the different stock markets. The empirical findings indicate spillover effects in both mean and variance between the markets. Both China and Hong Kong are effected by mean spillover effects from Taiwan, while Hong Kong and Taiwan show signs of a feedback relationship in their volatility processes. The later markets also show clear signs of asymmetric volatility effects, while China's market seems to follow a symmetric volatility path. Overall, the Mainland China market is much less interdependent with the other two markets, whereas Taiwan and Hong Kong show clear bidirectional spillover effects. Furthermore, the volatility persistence is strong in all three markets, and especially so in the Mainland China stock market, where the half-life of innovations in the volatility process is close to 40 periods.Stock Markets, Greater China, Cointegration, Causality, Multivariate EGARCH

CHINA'S OFFICIAL RATES AND BOND YIELDS

Recent research shows that bond yields are influenced by monetary policy decisions. To learn how this works in an interest rate market that differs significantly from that of the U.S. and Europe, we model Chinese bond yields using the one-year deposit rate as a state variable. We also add the difference between the one-year interest rate and the one-year deposit rate as a factor. The model is developed in an affine framework and closed-form solutions are obtained. It is tested empirically and the results show that the new model characterizes the changing shape of the yield curve well. Incorporating the benchmark rate into the model thus helps us to match Chinese bond yields.China; deposit rate; bond yields; jump process; affine model

Escaping Political Extraction: Political Participation, Institutions, and Cash Holdings in China

We study the effects of political participation on holdings of liquid assets in a transition economy. Previous research has shown that the risk of political extraction by politicians and bureaucrats in countries with weak institutions has an adverse effect on holdings of liquid assets. We propose that political participation by private entrepreneurs can function as a means to alleviate some of that risk. Our empirical results indicate that political participation is positively related to cash holdings in China, especially in regions with weak institutions proxied by lower GDP per capita, lower marketization levels, and weaker property protection. Cash holdings have a negative effect on firm value as measured by the market-to-book ratio. However, political participation, the combined effect of cash holdings and political participation, as well as the combined effect of cash holdings, political participation, and institutions are all positively associated with firm value. Political participation thus results in an improved ability for firms that function in an environment fraught with the risk of political extraction to increase their holdings of liquid assets as well as a related positive effect on firm value.Political participation; Private entrepreneurs; Cash holdings; Political extraction; China

Political Participation and Entrepreneurial Initial Public Offerings in China

This paper examines the value of political participation by private entrepreneurs in China. Using a unique sample of all initial public offerings by entrepreneurial firms during 1994-2007 and political participation by the controlling entrepreneurs, we test the hypothesis that firms with entrepreneurs who participate in politics are able to exploit rent-seeking opportunities that normal firms do not have access to. We document that the long-run stock performance after the IPO of firms controlled by entrepreneurs who participate in politics is superior to that of common entrepreneurial firms. Our results also show that political participation has a significant positive effect on change in operating performance and a negative effect on first-day returns. Moreover, we find that economic development and local institutions are important for this value effect. The difference in performance is even larger in regions characterized by more abundant rent-seeking opportunities, indicating that the value effect of political participation likely originates from rent seeking. This finding is consistent with the hypothesis that political participation facilitates entrepreneurs’ rent seeking.Political participation; Entrepreneurial firms; Corporate governance; Initial public offerings; China

Reputational assets and social media marketing activeness: empirical insights from China

We explore the linkages between social media marketing activeness and reputational assets on digital platforms with a unique sample of over 8,000 customer-to-customer (C2C) sellers registered on both Taobao, China’s largest C2C online shopping platform, and Sina Weibo, China’s largest microblogging platform. A unique collaborative effort between the two platforms enables us to examine whether C2C sellers are motivated to engage in marketing activities on a separate social media platform. Applying machine learning methods, we first classify whether C2C sellers conduct social media marketing on their microblogs or not, which allows the measurement of social media marketing activeness. We then use logistic regression models and find that earned reputational assets such as the rating scores and the number of followers are significantly associated with social media marketing activeness on both platforms. However, we identify a conflict of owned reputational assets such as the shop age and the paid membership between the two platforms, which provides a potential explanation for the limited success of the cross-platform collaboration

Gravity vs radiation model: on the importance of scale and heterogeneity in commuting flows

We test the recently introduced radiation model against the gravity model for the system composed of England and Wales, both for commuting patterns and for public transportation flows. The analysis is performed both at macroscopic scales, i.e. at the national scale, and at microscopic scales, i.e. at the city level. It is shown that the thermodynamic limit assumption for the original radiation model significantly underestimates the commuting flows for large cities. We then generalize the radiation model, introducing the correct normalisation factor for finite systems. We show that even if the gravity model has a better overall performance the parameter-free radiation model gives competitive results, especially for large scales.Comment: in press Phys. Rev. E, 201