THESIS
2014
xi, 129 pages : illustrations ; 30 cm
Abstract
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...[
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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.
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