What is an Optimal Allocation in Hong Kong Stock, Real Estate, and Money Markets: An Individual Asset, Efficient Frontier Portfolios, or a Naïve Portfolio? Is This a New Financial Anomaly?

ABSTRACT

To test for arbitrage opportunities and market efficiency in the Hong Kong money, stock, and real estate markets, we find that the money market stochastically dominates both the stock and real estate markets. Furthermore, the real estate market dominates the stock market, the money market dominates nearly all the efficient frontier portfolios, none of the efficient portfolios dominates the money market, and the money market also dominates the equal-weighting portfolio. This infers that in some cases investors could achieve higher expected ex-ante utility by investing in an individual asset rather than a portfolio. Our conclusions drawn from the pre-COVID-19 period are the same as those drawn from the entire period and the conclusions drawn from the COVID-19 period are the same as those drawn from the entire period except that the money market only stochastically dominates some of the efficient frontier portfolios. Our findings question diversification benefits in the Hong Kong capital market during our sample period, including both the pre-COVID-19 and COVID-19 periods.

KEYWORDS:

• Stochastic dominance
• risk aversion
• fund portfolios
• efficient frontier

JEL CLASSIFICATION:

• C12
• G1
• G12
• G15

Acknowledgements

The authors thank the Editor in Chief, Professor Paresh Kumar Narayan, and two anonymous referees for their helpful comments, which help to improve our manuscript significantly. The first author was supported by Guangzhou Municipal Science and Technology Bureau (202201010246) and Guangdong Provincial Department of Education (2021KQNCX020). The fourth author would like to thank Robert B. Miller and Howard E. Thompson for their continuous guidance and encouragement. This research has been supported by Northeast Normal University, China, Asia University, China Medical University Hospital, The Hang Seng University of Hong Kong, Hong Kong Shue Yan University, Research Grants Council (RGC) of Hong Kong (project number 12500915), and Ministry of Science and Technology (MOST, Project Numbers 106-2410-H-468-002 and 107-2410-H-468-002-MY3), Taiwan.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Supplementary material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/1540496X.2022.2136941

Notes

1. For example, the Wealth Report 2019 by Knight Frank ranks Hong Kong as one of the top three most important cities in the world. As of September 2019, Hong Kong represents Asia’s third-largest stock market and the sixth largest in the world in terms of market capitalization. Considering initial public offerings (IPOs), Hong Kong is the third largest stock market in the world. In addition, European Public Real Estate Association shows that Hong Kong is one of the largest listed real estate and stock markets in Asia by market capitalization. Importantly, its real estate market has been highly securitized (60%). Readers may refer to https://prodapp.epra.com/media/EPRA_Total_Markets_Table_-_Q1-2022_1649681531420.pdf for more information. These characteristics make Hong Kong an excellent research subject and our findings draw meaningful implications on an important international financial center.

2. Readers may refer to Bai’s et al. (2015) for more information on the test statistic and the critical values and refer to Chan et al. (2020, 2022) for more information on the third-order SD test.

3. We would like to thank the anonymous referee for the helpful comments so that we include this section in our study.

Additional information

Funding

This work was supported by the Guangzhou Municipal Science and Technology Bureau (202201010246), Guangdong Provincial Department of Education (2021KQNCX020), Research Grants Council (RGC) of Hong Kong (project number 12500915), and Ministry of Science and Technology (MOST, Project Numbers 106-2410-H-468-002 and 107-2410-H-468-002-MY3).