We talked very briefly today.  Prof. Rivkin thought the ideas behind Andrew Lo's Adaptive Markets Hypothesis were very interesting, but he was not convinced it was a better alternative over EMH.  For next week, I need to have the following sections of my thesis written:

• Framework
• Data Set (characteristics)
• Write up of Autocorrelation and Geary Runs tests

Continue reading "Meeting with Rivkin"

In our meeting today, we briefly talked about the thesis presentations last week.  I plan to e-mail Professor Ishii and respond to his concern about the long-term differenes between EMH and AMH (my response is basially that there aren't any, but the issue I am trying to address really is in the transition phase, in which the two views do differ).  Prof. Nicholson's concern about the significance of the filter trading rules is more of a direct problem that I need to address.

What I will accomplish over Interterm:

• Run all of the necessary autocorrelation tests
• Develop a criteria for significance of filter trading rules
• Look at points in history in which efficiency might be affected in the Hong Kong stock market

I made my thesis proposal presentation today in front of the Amherst College Economics department.  I was faced with a question about the long-term differences between Adaptive and Efficient Markets Hypothesis and how my findings would tie into my original thesis question.  Another question is what criteria I will use to qualify the inefficiencies of markets from using the filter trading rule.  I will have to examine these issues in closer detail.  Also, I will post up my presentation slides when I get a chance.

In our meeting today, we discussed autocorrelation testing.  I had started redoing the Stata project using another built-in ACF test.  Ironically, the autocorrelation test results were excessively conclusive about the evidence of autocorrelation in our data.  Since this looks too good to be true,  will spend this week figuring out exactly what I did wrong to get such impossibly good results.

Also, I was told that there's a prominent Amherst alum working at a well known asset management company that would be interested in talking to me about my thesis idea.  I take this opportunity to welcome anyone reading this to contact me even if it is nothing more than just letting  me know you are interested in reading about this topic.  Or that your heart skips a beat every time you see me publish a new post.  Feel free to leave comments or send me an e-mail.  I'm tired of seeing 4-5 new spambot trackbacks on my blog everyday and not much else.  There is nothing more valuable to me than hearing your opinions.  Thank you.

Here's the latest draft of my thesis proposal.  I will be presenting this to faculty in the coming week.

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I met with Prof. Woglom today and showed him the Excel file I worked on over this weekend. I will attach the file here when I get a chance.

Trading rules are as follows:

• If stock rises by x% or more, buy long position.
• If stock then falls by x% or more and price is still above the buy-in price, sell current position and furthermore sell short.
• If stock then rises by x% or more and price is still below the second sell-short price, cover short position and buy long position.
• If during a long position the stock falls by x% or more but price is below the buy-in price, then hold.
• If during a short position the stock rises by x% or more but price is above sell-short price, then hold.
• Likewise, if stock initially falls x%, then short position first.
• We apply this strategy to all historical data that we have.

Below is a list of stocks that are traded on three exchanges: the New York Stock Exchange (NYSE), the Hong Kong Stock Exchange (HKEX), and the Shanghai Stock Exchange (SSE). As you will notice, there is a premium ranging from 12% to 388% for stocks listed in Shanghai compared to those listed in the US for the same company. In a market where there are no restrictions on supply and demand and no easy arbitrage opportunities, there probably would still be a difference in the pricing of a stock that is listed on two different exchanges. It is an issue I'd be interested in looking into. According to this article, from the 45 Chinese companies dual-listed in both Hong Kong and the mainland, the H-shares are 34% cheaper.  Recently, there was a rumor from the China Securities Regulatory Commission (CSRC) that suggested the PRC was considering allowing swaps between the A-shares listed on the mainland and the H-shares listed in Hong Kong. Although these rumors were later dismissed, it certainly raises questions such as how efficient the SSE and HKEX currently are and also what the equilibrium prices would be if these swaps were allowed.

Triple-Listed Stocks
Company	Stock Symbols / Prices (On Oct 5th)						Shares/ADS	Premiums
	NYSE		Hong Kong		Shanghai			Hong Kong to US	Shanghai to US	Shanghai to Hong Kong
Yanzhou Coal Mining	YZC	$101.70	1171.hk	HK$15.32	600188	￥22.92	50	16.75%	69.21%	54.44%
China Petroleum & Chemical Corp.	SNP	$126.81	0386.hk	HK$9.77	600028	￥18.94	100	-40.29%	12.14%	100.12%
Huaneng Power International	HNP	$52.48	0902.hk	HK$9.90	600011	￥17.42	40	46.21%	149.22%	81.64%
Guangshen Railway	GSH	$42.30	0525.hk	HK$6.40	601333	￥9.93	50	17.26%	76.25%	60.17%
China Life Insurance	LFC	$95.97	2628.hk	HK$48.35	601628	￥62.41	15	290.47%	388.25%	33.25%
Aluminum Corp. of China	ACH	$76.85	2600.hk	HK$23.10	601600	￥47.75	25	132.97%	366.50%	113.38%
Exchange Rates (On Oct 19th)
HK$ / $	0.129026
Yuan / $	0.133191
HK$ / Yuan	1.03229

I found the following few papers to be of interest:

• International Stock Market Efficiency and Integration: A Study of Eighteen Nations by Chan, Gup, and Pan
• Testing Efficiency of the Latvian Stock Market: An Evolutionary Perspective by Timur Mihailov
• An Empirical Test of German Stock Market Efficiency by Lindsay Gillette
• Testing Informational Market Efficiency on Kuala Lumpur Stock Exchange by Ozer Balkiz
• Testing for Market Efficiency in Emerging Markets: Evidence from the Athens Stock Exchange by George Filis
• Testing Stock Market Efficiency Using Neural Networks: Case of Lithuania by Marius Januskevicius

Also, I read this interesting article regarding the "Shanghai Premium", a disturbing fact that stocks listed on both the Chinese stock market and either the Hong Kong or US stock market (or all three) exhibit a heavy premium (in the neighborhood of 50-100%) for the Chinese stocks, even though the fundamental value of these stocks are the same. It's really more of a supply/demand issue since Chinese investors aren't yet allowed to participate in foreign stock exchanges or sell short Chinese stocks.

Click below to read the second draft of my thesis proposal.  There's not many significant changes; I just expanded some of the sections to reflect the recent work (see Lit Review) that I have done.

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Today, Woglom gave me some feedback on how to improve upon my Lit Review.  One of the key points I plan to add to my paper is Malkiel's finding that mutual funds didn't beat market returns (i.e. index funds), and taking into account load fees and commissions, they actually tended to perform worse.  This week I will doing more background research to make sure my thesis hasn't already been done by someone else.  Also, later this week another draft of the Thesis Proposal will be due.

The first draft for my thesis Literature Review is done. It's 6 pages long double-spaced and cites 34 references =).

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I will take a look at some historical stock market data of the Hang Seng Index and the iShares Hong Kong ETF which I pulled off of Yahoo Finance and Google Finance, respectively.  Hopefully I will remember enough econometrics from a few years ago to study their returns. 

Note: To view these files, right click on the links and save them to your computer.  You can open .csv files with Excel.

Note 2: My previous suggestion on saving and viewing this file actually doesn't seem to work. I will get it fixed as soon as I can.

Note 3: After you right click and choose to save, if you change the file extension from .htm to .csv, that should do it.

HSI (since 12/31/1986)

EWH (since 4/12/1996)

Due to Fall break, our usual Monday meeting was pushed back to today (Wednesday).  Some topics we discussed include: 1) outlining what points need to be covered in the Literature Review, 2) looking further into the trading rules discussed in Foreign Exchange AMH case study paper, and 3) reading more about the Hong Kong stock exchange and potential changes that may have caused significant fluctuations in the efficiency of the market.  This is going to be a very busy 3-day week for me, because there are tons of assignments coming due.

This is my response to the group reading, "Land Reform, the Market for Protection and the Origins of the Sicilian Mafia: Theory and Evidence" and "Does Public Insurance Crowd Out Private Insurance".

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Read the following:

Equity Markets of Hong Kong

The Asian Financial Crisis and the Ordeal of Hong Kong