The Journal of Finance

Imperfect Information and Cross‐Autocorrelation among Stock Prices

Published: 09/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04752.x

KALOK CHAN

I develop a model to explain why stock returns are positively cross‐autocorrelated. When market makers observe noisy signals about the value of their stocks but cannot instantaneously condition prices on the signals of other stocks, which contain marketwide information, the pricing error of one stock is correlated with the other signals. As market makers adjust prices after observing true values or previous price changes of other stocks, stock returns become positively cross‐autocorrelated. If the signal quality differs among stocks, the cross‐autocorrelation pattern is asymmetric. I show that both own‐ and cross‐autocorrelations are higher when market movements are larger.

Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount

Published: 01/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01313.x

KALOK CHAN, ALBERT J. MENKVELD, ZHISHU YANG

We examine the effect of information asymmetry on equity prices in the local A‐ and foreign B‐share market in China. We construct measures of information asymmetry based on market microstructure models, and find that they explain a significant portion of cross‐sectional variation in B‐share discounts, even after controlling for other factors. On a univariate basis, the price impact measure and the adverse selection component of the bid‐ask spread in the A‐ and B‐share markets explains 44% and 46% of the variation in B‐share discounts. On a multivariate basis, both measures are far more statistically significant than any of the control variables.

What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide

Published: 05/03/2005   |   DOI: 10.1111/j.1540-6261.2005.768_1.x

KALOK CHAN, VICENTIU COVRIG, LILIAN NG

We examine how mutual funds from 26 developed and developing countries allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide. We find robust evidence that these funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks. Results indicate that the stock market development and familiarity variables have significant, but asymmetric, effects on the domestic bias (domestic investors overweighting the local markets) and foreign bias (foreign investors under or overweighting the overseas markets), and that economic development, capital controls, and withholding tax variables have significant effects only on the foreign bias.

Depositary Receipts, Country Funds, and the Peso Crash: The Intraday Evidence

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00303

Warren Bailey, Kalok Chan, Y. Peter Chung

We study the intraday impact of exchange rate news on emerging market American Depositary Receipts (ADRs) and closed‐end country funds during the 1994 Mexican peso crisis. Peso exchange‐rate changes affect prices and trading volumes of Latin American equities, and some closed‐end fund behavior is consistent with “noise trader” theories of small investors. However, there is no evidence that peso depreciation triggers a significant sell‐off of non‐Mexican securities or that other non‐Mexican trading patterns change at times of high peso news flow. Thus, the “Tequila Effect” is largely confined to price changes.

What if Trading Location Is Different from Business Location? Evidence from the Jardine Group

Published: 05/06/2003   |   DOI: 10.1111/1540-6261.00564

Kalok Chan, Allaudeen Hameed, Sie Ting Lau

We examine the price behavior and market activity of the Jardine Group companies after they were delisted from Hong Kong in 1994. Although the trading activity of the Jardine Group moved to Singapore, the core businesses remained in Hong Kong and Mainland China. Evidence indicates the Jardine stocks are correlated less (more) with the Hong Kong (Singapore) market after the delisting. This result cannot be explained by various hypotheses, such as relocation of core business, time‐varying betas, migration of trading activity, and currency and tax distortions. We conclude that price fluctuations are affected by country‐specific investor sentiment.

Why Option Prices Lag Stock Prices: A Trading‐based Explanation

Published: 12/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb05136.x

KALOK CHAN, Y. PETER CHUNG, HERB JOHNSON

While many studies find that option prices lead stock prices, Stephan and Whaley (1990) find that stocks lead options. We find no evidence that options, even deep out‐of‐the‐money options, lead stocks. After confirming Stephan and Whaley's results, we show their results can be explained as spurious leads induced by infrequent trading of options. We show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, we find no evidence of arbitrage opportunities associated with the stock lead.

Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00345

Hee‐Joon Ahn, Kee‐Hong Bae, Kalok Chan

We investigate the role of limit orders in the liquidity provision in a pure order‐driven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask (bid) side, investors will submit more limit sell (buy) orders than market sell (buy) orders. This result is consistent with the existence of limit‐order traders who enter the market and place orders when liquidity is needed.