THESIS
2013
iv leaves, v-x, 116 pages : illustrations ; 30 cm
Abstract
This thesis studies the interactions between market frictions and investor trading behavior,
as well as their implications on asset pricing.
Chapter 1 investigates the issue from the perspective of information production. The
chapter studies volume-return dynamics under a framework with endogenous information
production that is linked to a firm's investment activities. My framework generates time-varying
differences of opinion and trading volume, especially when a firm receives (unexpected)
positive or negative news. In addition, my framework predicts cross-sectional
variation regarding the ability of volume shocks to predict future returns (often referred
to as the high volume return premium). Using standard CRSP monthly data, I document
that the high volume return premium is...[
Read more ]
This thesis studies the interactions between market frictions and investor trading behavior,
as well as their implications on asset pricing.
Chapter 1 investigates the issue from the perspective of information production. The
chapter studies volume-return dynamics under a framework with endogenous information
production that is linked to a firm's investment activities. My framework generates time-varying
differences of opinion and trading volume, especially when a firm receives (unexpected)
positive or negative news. In addition, my framework predicts cross-sectional
variation regarding the ability of volume shocks to predict future returns (often referred
to as the high volume return premium). Using standard CRSP monthly data, I document
that the high volume return premium is economically and statistically stronger (increases
from 6% to 12% per annum) for firms that exhibit poor stock market or operating performance
prior to volume shocks; for firms that receive "positive news" when volume shocks
hit; and for firms that have high degrees of information asymmetry. I also examine volume
shocks around earnings announcements, and find additional supporting evidence for my
framework.
Chapter 2 focuses on two market frictions: short-sale constraint and limited risk bearing
capacity. The chapter studies Chinese dual-listed companies that are traded both in
China(Mainland) and Hong Kong. When China has a short-sale ban, Chinese stock prices
are l.8x as high as Hong Kong prices (on average). Stock pairs with higher fundamental
volatilities or more volatile order flows have higher price disparities (on average). The
average stock pair's return difference is volatile and has a standard deviation of 8.8% per
week. This paper shows that order flows can affect both a company's fundamental price
and/or its transitory prices. In Hong Kong, transitory variance accounts for 39% of a
stock's total variance. These results are surprising because the average market capitalization
is over USD 8 billion for the Hong Kong-listed shares and the turnover is over
2.5x per annum. We exploit a quasi-natural experiment in which the short-sale ban is
lifted for some Chinese stocks but not others. After the ban is lifted, the affected shares
trade at parity. We estimate that lifting the short-sale ban in China (mainland) reduces
weekly transitory volatility in Hong Kong by 49 bp per week because it enables a hedging
mechanism.
Post a Comment