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Hsien-wen Liao PhD. Candidate National Chengchi University Yuanchen Chang Department of Finance

News Effects on the Valuation of Closed-end Country Funds: Evidence around the Asian Financial Crisis Period. Hsien-wen Liao PhD. Candidate National Chengchi University Yuanchen Chang Department of Finance National Chengchi University. Content. Introduction Related literatures

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Hsien-wen Liao PhD. Candidate National Chengchi University Yuanchen Chang Department of Finance

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  1. News Effects on the Valuation of Closed-end Country Funds:Evidence around the Asian Financial Crisis Period Hsien-wen Liao PhD. Candidate National Chengchi University Yuanchen Chang Department of Finance National Chengchi University

  2. Content • Introduction • Related literatures • Data and methodology • Empirical results • Concluding remark NCCU

  3. Introduction • To resolve how news reports affect investors’ sentiment around the Asian financial crisis. • Concerning categorized news reports, to reveal how investors react to those news reports. • To resolve whether news effects have boundaries around financial crisis. NTTU

  4. Related literatures • The effects of news arrivals on the valuation of asset prices Mitchell and Mulherin (1994), Berry and Howe (1994): Significant relationship is found between information arrivals and trading volumes. Chan and Wei (1996): Political issues on the handover of Hong Kong show positive impact on return. Chan, Chui and Kwok (2001): Economic news have distinctive impacts on trading when comparing with political news. (Investors’ perceptual biases) NTTU

  5. Related literature (cont.) • Closed-end fund and investors’ reactions to news arrivals Lee, Shleifer and Thaler (1990), Dimson and Minio-Kozerski (1999): Shares of closed-end funds trade at an average discount. (market friction) Lee et al. (1991): Discounts are a proxy for changes of individual investors’ sentiment. Burch, Emery and Fuerst (2003): Country fund discounts worsened dramatically following the 9-11 attack and then recovered gradually alongside the broader market. (Investors’ sentiment) NTTU

  6. Data and methodology • Funds: Six Asian country funds listed on NYSE: Indonesia Fund, Korea Fund, Malaysia Fund, First Philippine Fund, Taiwan Fund, Thailand Fund. • Data source: Bloomberg NTTU

  7. Data and methodology (cont.) • Sample period: Jan. 1995 to Dec. 2002(Except for Indonesia Fund, its sample period is from Jan. 1995 to Nov. 2001.) Sub-periods: Before-and-During Crisis: Jan. 1995 – Dec. 1998 Post Crisis: Jan. 1999 – Dec. 2002 (Except for Indonesia Fund) NTTU

  8. Data and methodology (cont.) • News events: Data source:LexisNexis Academic Culling rule: (Klibanoff et al., 1998) 1. Country names appear on the headline of the front page of The New York Times. 2. News reports contain more than 500 words. Culling results: 64 salient news, about 3% of all relative news. NTTU

  9. Data and methodology (cont.) • Categorized news: 1. Political news, economic news and general news. 2. Positive-tone news, neutral-tone news and negative- tone news. Illustrations: “Indonesia agrees to IMF’s tough medicine” “Chinese, In a move to alarm Taiwan, fires test missiles” NTTU

  10. Data and methodology (cont.) • Research methodology 1. OLS for individual funds. 2. Panel data (random effect) with weekly dummy variables. • Before-and-During Crisis: 203 weekly dummy variables. • Post Crisis: 149 weekly dummy variables. NTTU

  11. Empirical results 1. Three funds show at average premium and the others show at average discount. 2. Average magnitude of fund premium in the sample with news reports > that of fund premium in the full sample. Table 1 NTTU

  12. Empirical results- summary statistics Table 2 In news weeks, FSPs react more. NTTU

  13. Empirical results-FSP’s reaction on the changes of NAV 1. Panel data: ◆ FSP underreacts to NAV. ◆ The incremental effect is small in the lagged NAV. ◆ Discount can predict FSP. 2. Individual fund: Korea Fund, Taiwan Fun and Philippine Fund show less underreact. Table 3 NTTU

  14. Empirical results-News effects on the underreaction of FSP Table 4 (panel data) 1. Panel data: ◆ Significant news effect to FSPs. ◆ Positive coefficients for News×Rtnav indicate that the underreaction is alleviated. NTTU

  15. Empirical results-News effects on the underreaction of FSP (cont.) Table 4 (individual funds) 2. Individual fund: ◆ Indonesia Fund and Korea Fund show significant news effects. ◆ Negative coefficients of News×Rtnav indicate FSPsreact less to the changes of NAVs in news weeks. NTTU

  16. Empirical results- news effects around the Asian financial crisis Table 5 (panel data) <Before-and-During Crisis period> ◆Significant news effects. ◆Negative coefficients of News×Rtnav indicateFSPs more underreact to NAVs in the news weeks. <Post Crisis period> ◆Insignificant news effects. ◆Significantly and positively incremental news effects. ◆The above two results indicate that in weeks with salient news reports the underreaction of FSP to NAV is significantly alleviated. NTTU

  17. Empirical results- news effects around the Asian financial crisis(cont.) Table 5 (individual funds) <Before-and-During Crisis period> ◆Significant news effects are shown on Indonesia Fund and Korea Fund. ◆Particularly, Korea Fund shows significantly and negatively incremental news effect. <Post Crisis period> ◆ All funds show insignificant news effects. ◆ Korea Fund shows significantly and negatively incremental news effect. NTTU

  18. Empirical results-Categorized news effects for full sample period Table 6 To details NTTU

  19. Empirical results-categorized news effects around the Asian financial crisis Table 7 To detail NTTU

  20. Empirical results- implications Implications: • During the crisis period, positive news is enhanced and perceived as news better than the news itself. • During the crisis period, the crisis itself is the lower bound for negative news. NTTU

  21. Concluding remark • Consistent with Klibanoff (1998), FSPs underreact to the changes of NAVs in regular weeks. • In weeks with salient news, the results are consistent with the hypothesis that news events lead individual investors to react more quickly. • Economic news affect individual investors’ reaction more than other categories of news in our sample period. NTTU

  22. Concluding remark (cont.) • Salient news do play a role in the magnitude of investors’ reaction to changes in fundamental value. • Financial crisis itself is the lower bound for negative news. NTTU

  23. The end NTTU

  24. Empirical results-Categorized news effects for full sample period Table 6 ◆Economic news is significant for both with and without weekly dummy variables. ◆Positive tone news is significant for both with and without weekly dummy variables. ◆Negative tone news is significant at 10% level for without weekly dummy variables. ◆Economic news with positive tone is significant for both with and without weekly dummy variables. ◆Economic news with negative tone is significant for without weekly dummy variables. Back NTTU

  25. Empirical results-categorized news effects around the Asian financial crisis Table 7 <Before-and-During Crisis period> ◆Significant effect for economic news. ◆Significant effect for positive tone news. ◆Significant effect for political news with positive tone at 10% level. ◆Significant effect for economic news with positive tone. <Post Crisis period> ◆Significant effect for economic news. ◆Significant effect for negative tone news at 10% level. ◆Significant effect for economic news with negative tone at 10% level. Back NTTU

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