Researchers have developed a number of theories to explain stock return continuation. Using stock data from 16 emerging markets (1990 to 2002), we conduct an out-of-sample test for the sources of momentum profitability. This paper examines the role of financial analyst in the exhibited stock return continuation among emerging markets. Consistent with the predictions of the gradual information diffusion theory (Hong and Stein, 1999), the evidence indicates that momentum strategies are most profitable in small firms, firms with low analyst coverage. More interestingly, we find that besides the level of analyst following, the change in analyst following, specifically, increasing analyst coverage, and the analyst forecasts with high dispersion can help explain stock return momentum.

China’s stock markets have grown rapidly since their inception and have become an increasingly important emerging market for international investors. However, there are few systematic studies on how asset prices are formed in Chinese domestic equity markets; popular financial media even depict the market as irrational. In this paper, we study the asset pricing mechanism in the nascent Chinese stock markets, with the objective of identifying variables that capture the cross-sectional variation in average stock returns. We focus on the effects of various market imperfections in China. We find that while the market risk (beta) is not priced, there is a significantly negative relationship between firm-specific risk and expected returns. Chinese investors are willing to pay a significant premium for more liquid stocks or for dividend-paying stocks. Furthermore, investors value local A-shares more if there are offshore counterparts (e.g., B- and H-shares) for foreigners, implying that a Chinese firm with a foreign shareholder base has a lower cost of capital, ceteris paribus. Lastly, as with U.S. and other mature markets, firm size and the book-to-market ratio are systematically related to stock returns. Given market imperfections, stocks are priced rather rationally in China, despite the widespread perception to the contrary.

The Chinese stock market has grown very rapidly, but is often distorted by government regulation, and this is especially true for the initial public offering market. The average underpricing of Chinese IPOs is 247 percent, the highest of any major world market. We model this extreme underpricing with a demand-supply analytical framework that captures critical institutional features of China’s primary market, and then empirically test this model using a sample of 1,397 IPOs listed on the Shanghai and Shenzhen Stock Exchanges between 1991 and 2004. The pricing of IPO shares is subject to a cap set by the government, and the supply of IPO shares allowed on the market is also set by the government through the Chinese quota system. The government regulator even controls the timing of flotation of shares onto the stock exchange--after the initial public offering is executed--and there is usually a long time lag between the IPO and the actual listing of shares for trading. A special feature of the Chinese IPO market is that the government is by far the largest issuer. In our sample, 66 percent of the IPOs in our sample are pure share issue privatizations (SIPs), in which the government sells part of its ownership in state-owned enterprises (SOEs) to the public; fully 88 percent would be considered privatizations under a more expansive definition that included state-connected owners. Insider theft of corporate assets is also a big concern of IPO subscribers in China, and IPO shares must also be discounted for significant tunneling risks. We find that insider shareholdings are a negative determinant of initial returns. We suggest that investment risks in China's primary markets are greater than in other new issues markets, and these risks partly explains the extreme levels of Chinese IPO underpricing. However, the principal cause of the this underpricing is government regulation. The supply restricting measures traditionally adopted by the Chinese regulatory authorities turn IPO shares into hot commodities, which are fiercely bid for, and this leads to corruption and a reallocation of wealth from firms and investors to politically connected individuals and groups.

This paper studies sequential portfolio choices by MPS-risk-averse investors in a continuous time jump-diffusion framework. It is shown that the optimal trading strategies for MPS risk averse investors, if they exist, must be located on a so-called `temporal efficient frontier' (t.e.f.). The t.e.f. is found not to coincide with the local instantaneous frontier --- the continuous time analogue of Markowitz's mean-variance frontier. This observation is potentially useful in understanding the existence of documented financial anormally in empirical finance --- MPS risk averse investors may not wish to invest along the local instantaneous Markowitz's mean-variance frontier, but instead hold portfolios on the t.e.f.. The optimal portfolio on the t.e.f. could well fall strictly within the instantaneous local Markowitz's efficient frontier. Our observations on mutual fund separation are also profound and interesting. In contrast to the classical two-fund separation along the line of Black (1972) and Tobin (1958), our study shows that MPS-risk-averse investors' optimal trading strategy is target rate specific. Precisely, investors with different target rates may end up investing into different managed mutual funds, each involving a specific set of separating portfolios. Our theoretic findings are, nevertheless, much in line with the real world phenomena on the existence of various types of mutual funds offered by different financial institutes, each aiming to attract demand from some specific groups of investors --- a picture that is in sharp contrast to the theoretical prediction made by Black (1972) and Tobin (1958). Finally, our study sheds light on the difference between expected utility and MPS-risk-averse investors concerning their trading behavior in sequential time frame. Even though these two groups of investors may end up holding a common risky portfolio in each spot market, the differences between their trading behaviors are most reflected through the portfolio weights assigned to each of the separating portfolios within the time frame and across states. Precisely, the portfolio weights corresponding to investors respectively from the two groups are associated with recognizable different time patterns. We showed that such difference in trading behavior would be also reflected from the time patterns of the instantaneous returns and the volatilities of the funds respectively managed by investors from these two groups.

As first noted by Borch (1960), it seems natural to consider allocations of premium among reciprocal reinsurers as a problem in cooperative game theory. In the present paper, we address this problem by defining and studying the characteristic function associated with the reinsurers’ payoffs from concluding a reciprocal treaty. First, we use the characteristic function to describe the core and bargaining set previously identified by Baton and Lemaire (1981a, 1981b). Given that the core and bargaining set may consist of more than one point, it is necessary to develop a framework for selecting a unique premium allocation. However, this effort is greatly complicated by the large number of potentially desirable mathematical properties associated with various premium-allocation methods. To address this difficulty, we consider two specific contexts for reciprocal reinsurance – within-corporate-group and between-corporate-group transactions – and provide a detailed analysis of the mathematical properties most desirable for each context. Using these properties, we are able to compare competing allocation methods to determine which is the most suitable. Our analysis shows that the Shapley value provides the most attractive allocation method for the within-group problems, whereas the nucleolus provides the most compelling outcome for the between-group case.

We study the problem of structuring excess-of-loss catastrophe-reinsurance contracts to minimize the total reinsurance premium paid by primary insurers. Specifically, for a fixed retention level and upper coverage limit, we seek the optimal layering of coverage, both in terms of the number of layers and their respective widths.

One argument for floating the Chinese renminbi (RMB) is to insulate China's monetary policy from the US effect. However, we note that both theoretical considerations and empirical results do not offer a definite answer on the link between exchange rate arrangement and policy dependence. We examine the empirical relevance of the argument by analyzing the interactions between the Chinese and US interest rates. Our empirical results, which appear robust to various assumptions of data persistence, suggest that the US effect on the Chinese interest rate is quite weak. Apparently, even with its de facto peg to the US dollar, China has alternative measures to retain its policy independence and de-link its interest rates from the US rate. In other words, the argument for a flexible RMB to insulate China's monetary policy from the US effect is not substantiated by the observed interest rate interactions.

This paper examines the currency exposure and exchange rate risk management at Chinese textile and apparel exporters. Chinese exporting firms have large net exposure to the US dollar. On average a 10 percent increase in the value of the renminbi against the dollar would reduce net revenues by 5.4 percent if the firms left prices unchanged. This large exposure is driven heavily by the choice of export pricing currency by the firms. The regional distribution of sales is more balanced across the major export markets of the US, EU, and Japan. However many firms are unaware of their indirect currency risk to currencies other than the dollar and most firms undertake little or no activities to hedge their foreign currency exposure, direct or indirect. The large dollar exposure of Chinese exporters may help explain the reluctance of the People's Bank of China to allow the RMB to undergo a rapid appreciation against the dollar.

The US dollar has been volatile and falling again and again in recent decades as well as recent years, and for many observers, it is going to be broken sooner or later. The central importance of the dollar is due to the fact that it is not just a currency for the US. Over half of all dollar bills in circulation are held outside of the US borders, and almost half of the US Treasury bonds are held as reserves by foreign central banks. The US dollar is supposed to be the anchor that stabilizes the global currency market. Instead, today it is a major source of instability. In the back ground, the US fiscal deficits have been running high again under Bush administration, once up to almost 3% of US GDP. And current account deficit is set to about 7% in 2005 and more volatility is widely expected. The situation is very challenging for the central banks of Japan, China, Korea, Taiwan and Singapore which collectively hold about US$2.8 trillion worth of US Treasury bonds as part of their reserves. The moment that they reduce their purchases, the value of the dollar slips. Yet, the more they buy, the more they are exposed to a potential free fall of the US dollar. China has been blamed, not only by US congressmen who are understandably not very familiar with either the complicated currency issues or the domestic politics in any other country, but also many economists or business strategists. It was said that it was all because RMB did not reevaluate, as the source of this "global imbalance" and currency instability. How much revaluation of RMB would remove the US deficits of $700 billions, or at least the US-China trade deficits $200 billions (including Hong Kong)? 500% or 1000%? Of cause no body asked for that kind of magnitude now. Normally smart people say 30-50%, with the unsaid intention to blame-then-suggest again another 30-50% after some initial moves, then the third, the fourth. This seems not really new phenomena at all. It has been all so familiar before and since the Nixon shock in early 70s', and in 80s' when there was the Plaza Accord. The convenient targets to blame were the gold standard, the Dutch Mark, the Japanese Yen. Now it is turn for Chinese reminbi. So the question is what are the real causes of the global imbalance and currency instability? In this short paper, we first take a look at what is really going on with the Chinese economy and trade balance, and then try to identify sources of the current imbalance , and then, as a concluding remark, think again the possibilities to reform the global currency system.

This paper proposes a path-dependent approach for estimating maximum appreciations of the renminbi expected by the market based on first-passage-time distributions. Using market data of the renminbi spot exchange rates, non-deliverable forward rates and currency option prices from 21 July 2005 (the reform of the exchange rate regime) to 28 February 2008 for model parameters, the maximum appreciations of the renminbi estimated under the proposed approach show that the market expected another large movement of the exchange rate during the 14 months after the reform. Subsequently, the few occasions of appreciations beyond the expected maximums coincided with the trade-related issues and speculations of greater momentum of appreciation allowed by the authorities. The PBoC's measures were however largely incorporated into the derivatives' prices. The proposed approach can be used to gauge the range of appreciations of the renminbi anticipated in the market and to identify any exchange rate movements beyond market expectations.