My dissertation attempts to understand the determinants of asset prices (returns) in the cross section. The thesis contains three chapters.

Chapter 1 studies a unique and large cross section of enterprise bonds traded simultaneously in two Chinese secondary bond markets, and shows that bond prices are significantly higher in the exchange than in the interbank market. Price differences can be explained by the demand and supply effects due to yield-chasing individual investors who can only trade in the exchange market. The price difference is significantly higher for bonds with higher coupon rate, lower total outstanding, higher demand exposure to individual investors, and lower supply of close substitutes. The supply and demand effects are stronger for bonds with higher duration...[ Read more ]

My dissertation attempts to understand the determinants of asset prices (returns) in the cross section. The thesis contains three chapters.

Chapter 1 studies a unique and large cross section of enterprise bonds traded simultaneously in two Chinese secondary bond markets, and shows that bond prices are significantly higher in the exchange than in the interbank market. Price differences can be explained by the demand and supply effects due to yield-chasing individual investors who can only trade in the exchange market. The price difference is significantly higher for bonds with higher coupon rate, lower total outstanding, higher demand exposure to individual investors, and lower supply of close substitutes. The supply and demand effects are stronger for bonds with higher duration risk, consistent with limited arbitrage.

Chapter 2 investigates the time-varying return predictability of net stock issues and profitability in the past four decades. While the return-profitability relation has weakened, the return-net stock issues relation has strengthened over time. A model of investment under uncertainty with convex external financing costs suggests that the decreasing level and decreasing persistence of firm profitability may explain the time-varying return predictability of net stock issues and profitability, respectively. The change in firm profitability can fully explain the time-varying return predictability of net stock issues, while investor sentiment cannot.

Chapter 3 dissects the profitability premium. Macroeconomic risks only partially capture the relation between profitability and future stock returns, while an investor sentiment factor explains a substantial amount of it. The profitability premium concentrates in firms whose market valuations are inconsistent with their profitability and therefore more subject to ex-ante expectation errors, and only exists during high sentiment periods. Firms with high profitability but low market valuation have significantly higher abnormal earnings announcement returns, analyst earnings forecast errors and forecast revisions than firms with low profitability but high market valuation.

My studies explore both the rational and behavioral hypotheses in explaining the cross section of asset prices (returns). My research suggests that both the efficient market hypothesis and behavioral biases could potentially play important roles in determining asset prices across markets.