Understanding the Chinese stock market: international comparison and policy implications

The definitions of the bear, sidewalk and bull markets are ambiguous in the existing literature. This makes it difficult for practitioners to distinguish between different market conditions. In this paper, we propose statistical definitions of the bear, sidewalk and bull markets, which correspond to the three states in our hidden semi-Markov model. We apply this analysis to the daily returns of the Chinese stock market and seven developed markets. Using the Viterbi algorithm to globally decode the most likely sequence of the market conditions, we systematically find the precise timing of the bear, sidewalk and bull markets for all the eight markets. Through the comparison of the estimation and decoding results, many unique characteristics of the Chinese stock market are revealed, such as ‘crazy bull’, ‘frequent and quick bear’ and ‘no buffer zone’. In China, the bull market is more volatile than in developed markets, the bear market occurs more frequently than in developed markets, and the sidewalk market has not functioned as a buffer zone since 2005. Possible causes of these unique characteristics are also discussed and implications for policy-making are suggested

Decoding Chinese stock market returns: three-state hidden semi-Markov model

In this paper, we employ a three-state hidden semi-Markov model (HSMM) to explain the time-varying distribution of the Chinese stock market returns since 2005. Our results indicate that the time-varying distribution depends on the hidden states, which are represented by three market conditions, namely the bear, sidewalk, and bull markets. We find that the inflation, the PMI, and the exchange rate are significantly related to the market conditions in China. A simple trading strategy based on expanding window decoding shows profitability with a Sharpe ratio of 1.14

Four essays on modelling asset returns in the Chinese financial market

Firstly, we employ a three-state hidden semi-Markov model (HSMM) to explain the time-varying distribution of the Chinese stock market returns. Our results indicate that the time-varying distribution depends on the hidden states, represented by three market conditions, namely the bear, sidewalk, and bull markets. Secondly, we further employ the three-state HSMM to the daily returns of the Chinese stock market and seven developed markets. Through the comparison, three unique characteristics of the Chinese stock market are found, namely “Crazy Bull”, “Frequent and Quick Bear”, and “No Buffer Zone”. Thirdly, we propose a new diffusion process referred to as the ``camel process'' to model the cumulative return of a financial asset. Its steady state probability density function could be unimodal or bimodal, depending on the sign of the market condition parameter. The overreaction correction is realised through the non-linear drift term. Lastly, we take the tools in functional data analysis to understand the term structure of Chinese commodity futures and forecast their log returns at both short and long horizons. The FANOVA has been applied to examine the calendar effect of the term structure. An h-step functional autoregressive model is employed to forecast the log return of the term structure

The Cytoplasmic Tail of FPC Antagonizes the Full-Length Protein in the Regulation of mTOR Pathway

FPC (fibrocystin or polyductin) is a single transmembrane receptor-like protein, responsible for the human autosomal recessive polycystic kidney disease (ARPKD). It was recently proposed that FPC undergoes a Notch-like cleavage and subsequently the cleaved carboxy(C)-terminal fragment translocates to the nucleus. To study the functions of the isolated C-tail, we expressed the intracellular domain of human FPC (hICD) in renal epithelial cells. By 3-dimensional (3D) tubulogenesis assay, we found that in contrast to tubule-like structures formed from control cells, hICD-expressing cells exclusively formed cyst-like structures. By western blotting, we showed that the Akt/mTOR pathway, indicated by increased phosphorylation of Akt at serine 473 and S6 kinase 1 at threonine 389, was constitutively activated in hICD-expressing cells, similar to that in FPC knockdown cells and ARPKD kidneys. Moreover, application of mTOR inhibitor rapamycin reduced the size of the cyst-like structures formed by hICD-expressing cells. Application of either LY294002 or wortmannin inhibited the activation of both S6K1 and Akt. Expression of full-length FPC inhibited the activation of S6 and S6 kinase whereas co-expression of hICD with full-length FPC antagonized the inhibitory effect of full-length FPC on mTOR. Taken together, we propose that FPC modulates the PI3K/Akt/mTOR pathway and the cleaved C-tail regulates the function of the full-length protein

Decoding the Australian electricity market: new evidence from three-regime hidden semi-Markov model

The hidden semi-Markov model (HSMM) is more flexible than the hidden Markov model (HMM). As an extension of the HMM, the sojourn time distribution in the HSMM can be explicitly specified by any distribution, either nonparametric or parametric, facilitating the modelling for the stylised features of electricity prices, such as the short-lived spike and the time-varying mean. By using a three-regime HSMM, this paper investigates the hidden regimes in five Australian States (Queensland, New South Wales, Victoria, South Australia, and Tasmania), spanning the period from June 8, 2008 to July 3, 2016. Based on the estimation results, we find evidence that the three hidden regimes correspond to a low-price regime, a high-price regime, and a spike regime. Running the decoding algorithm, the analysis systemically finds the timing of the three regimes, and thus, we link the empirical results to the policy changes in the Australian National Electricity Market. We further discuss the contributing factors for the different characteristics of the Australian electricity markets at the state-level

Nonlinear contagion between stock and real estate markets: international evidence from a local Gaussian correlation approach

In this paper, we analyze contagion over the daily period of January 1, 1998 to September 13, 2018 between Real Estate Investments Trusts (REITs) and the equity markets of nineteen countries, which are at their different stages of development in terms of the REITs market. For our purpose, we use the local Gaussian correlation approach during the dot-com, global financial, European sovereign debt crises, and the more recent period involving the Brexit in the UK. The employed method not only avoids the bias of the conditional correlation, but also describes any nonlinear structure in dependence and the deviation from global normality. In general, we find strong evidence of nonlinear contagion between equities and REITs of not only matured and established markets, but also in economies with an emerging REITs sector, especially during the global financial and sovereign debt crises. Further, when we considered contagion across REITs of the US and the other countries, and between US REITs and equities of the remaining eighteen countries, a similar pattern emerges. Our results have important implications for investors and policymakers alike

Monitoring for a change point in a sequence of distributions

We propose a method for the detection of a change point in a sequence $\{F_i\}$ of distributions, which are available through a large number of observations at each $i \geq 1$. Under the null hypothesis, the distributions $F_i$ are equal. Under the alternative hypothesis, there is a change point $i^* > 1$, such that $F_i = G$ for $i \geq i^*$ and some unknown distribution $G$, which is not equal to $F_1$. The change point, if it exists, is unknown, and the distributions before and after the potential change point are unknown. The decision about the existence of a change point is made sequentially, as new data arrive. At each time $i$, the count of observations, $N$, can increase to infinity. The detection procedure is based on a weighted version of the Wasserstein distance. Its asymptotic and finite sample validity is established. Its performance is illustrated by an application to returns on stocks in the S&P 500 index

Testing normality of data on a multivariate grid

We propose a significance test to determine if data on a regular d-dimensional grid can be assumed to be a realization of Gaussian process. By accounting for the spatial dependence of the observations, we derive statistics analogous to sample skewness and kurtosis. We show that the sum of squares of these two statistics converges to a chi-square distribution with two degrees of freedom. This leads to a readily applicable test. We examine two variants of the test, which are specified by two ways the spatial dependence is estimated. We provide a careful theoretical analysis, which justifies the validity of the test for a broad class of stationary random fields. A simulation study compares several implementations. While some implementations perform slightly better than others, all of them exhibit very good size control and high power, even in relatively small samples. An application to a comprehensive data set of sea surface temperatures further illustrates the usefulness of the test

Reliability analysis for automobile engines: conditional inference trees

The reliability model with covariates for machinery parts has been extensively studied by the proportional hazards model (PHM) and its variants. However, it is not straightforward to provide business recommendations based on the results of the PHM. We use a novel method, namely the Conditional Inference Tree, to conduct the reliability analysis for the automobile engines data, provided by a UK fleet company. We find that the reliability of automobile engines is significantly related to the vehicle age, early failure, and repair history. Our tree-structured model can be easily interpreted, and tangible business recommendations are provided for the fleet management and maintenance