The Cross-Section of Stock Returns on The Shanghai Stock Exchange

This study explores the cross-sectional stock return behavior on the A-share market of the Shanghai Stock Exchange (SSE), which is segmented from world's other equity markets. We estimate the effects of beta, firm size, book-to-market equity ratio and a variable unique to the Chinese stock markets, the proportion of firm's floating (tradable) equity over total equity on SSE stocks over the period 1993–2002. We find that smaller firms and value stocks perform better. Systematic risk is negatively significant in down markets. The proportion of floating equity has no direct effect on stock returns. JEL Classification: G14, G15     

Monetary Policy and the Cross-Section of Expected Stock Returns

Ample evidence shows that size and book-to-market equity explain significant cross-sectional variation in stock returns, whereas beta explains little or none of the variation. Recent studies also demonstrate that proxies for monetary stringency increase the explained variation in stock returns. We reexamine a three-factor model that includes beta, size, and book-to-market equity, while allowing monetary conditions to influence the relations between these risk factors and average stock returns. We find that ex-ante proxies for monetary stringency significantly influence the relations between stock returns and all three risk factors. Additionally, all three variables are found to contribute significantly to explaining cross-sectional returns in a three-factor model that includes the monetary sector.     

Constructing a Multifactor Model for the Shanghai Stock Exchange

ABSTRACT

We examine the validity of five factor models for explaining the time-series and cross-sectional variations in stock returns in the Shanghai Stock Exchange. The factor models include four models proposed by previous literature. Moreover, we propose a four-factor model (comprising market, size, book-to-market, and sales-to-price factors) to explain variations of stock returns in the Shanghai Stock Exchange. The results show that the Shanghai stock market exhibits size, book-to-market, and sales-to-price effects. Both the adjusted coefficient of determination and regression model intercepts indicate that the proposed four-factor model explains variations of stock returns in the Shanghai Stock Exchange more effectively in comparison with other multifactor models.     

THE EFFECT OF SIZE,BOOK-TO-MARKET EQUITY,PRIOR RETURNS,AND BETA ON STOCK RETURNS: JANUARY VERSUS THE REMAINDER OF THE YEAR

Size and book-to-market equity are shown to transcend beta in explaining stock returns. One possible explanation of the book-to-market equity effect is overreaction. We investigate the effect of size, book-to-market equity, prior returns, and beta on stock returns. We find significant reversals in January consistent with overreaction. We find a strong positive relation between returns and prior returns for February through December. Both patterns are distinct from either a size or book-to-market equity effect. Book-to-market equity is significantly related to returns, with some evidence of a stronger effect in January.     

Leverage and the Cross‐Section of Equity Returns

Building on theoretical asset pricing literature, we examine the role of market risk and the size, book‐to‐market (BTM), and volatility anomalies in the cross‐section of unlevered equity returns. Compared with levered (stock) returns, unlevered market beta plays a more important role in explaining the cross‐section of unlevered equity returns, even after controlling for size and BTM. The size effect is weakened, while the value premium and the volatility puzzle virtually disappear for unlevered returns. We show that leverage induces heteroskedasticity in returns. Unlevering returns removes this pattern, which is otherwise difficult to address by controlling for leverage in regressions.     

Security returns, beta, size, and book-to-market equity: evidence from the Shanghai A-share market

The main purpose of this paper is to explore the cross-sectional relationship between security returns and beta, size and book-to-market equity in the Shanghai A-share market. This study takes place during the period January 1997–December 2006. The methodology of Fama and French (J Finance 51:55–84, 1992) and Pettengill et al. (J Financial Quant Anal 30:101–116, 1995) is adopted. The Results show no evidence of an unconditional relationship between beta and returns. However, a conditional relationship is found when the data is split into up and down markets. The relationship holds even in the presence of size and book-to-market equity. Both size and book-to-market equity is found to be priced by the market and thereby regarded as significant determinants of security returns.     

Is unlevered firm volatility asymmetric?

Asymmetric volatility refers to the stylized fact that stock volatility is negatively correlated to stock returns. Traditionally, this phenomenon has been explained by the financial leverage effect. This explanation has recently been challenged in favor of a risk premium based explanation. We develop a new, unlevering approach to document how well financial leverage, rather than size, beta, book-to-market, or operating leverage, explains volatility asymmetry on a firm-by-firm basis. Our results reveal that, at the firm level, financial leverage explains much of the volatility asymmetry. This result is robust to different unlevering methodologies, samples, and measurement intervals. However, we find that financial leverage does not explain index-level volatility asymmetry. We show that this difference between index-level asymmetry and firm-level asymmetry is driven by the asymmetry of the unlevered covariance component of index volatility.     

Risk,Mispricing, and Value Investing

We evaluate the stock return performance of a modified version of the book-to-market strategy and its implications for market efficiency. If the previously documented superior stock return of the book-to-market strategy represents mispricing, its performance should be improved by excluding fairly valued firms with extreme book-to-market ratios. To attain this, we classify stocks as value or glamour on book-to-market ratios and accounting accruals jointly. This joint classification is likely to exclude stocks with extreme book-to-market ratios due to mismeasured accounting book values reflecting limitations underlying the accounting system. Using both 12-month buy-and-hold returns and earnings announcement returns, our results show that this joint classification generates substantially higher portfolio returns in the post-portfolio-formation year than the book-to-market classification alone with no evidence of increased risk. In addition, this superior stock return performance is more pronounced among firms held primarily by small (unsophisticated) investors and followed less closely by market participants (stock price <$10). Finally, and most importantly, financial analysts are overly optimistic (pessimistic) about earnings of glamour (value) stock, and for a subset of firms identified as overvalued by our strategy, the earnings announcement raw return, as well as abnormal return, is negative. These last results are particularly important because it is hard to envision a model consistent with rational investors holding risky stocks with predictable negative raw returns for a long period of time rather than holding fT-bills and with financial analysts systematically overestimating the earnings of these stocks while underestimating earnings of stocks that outperform the stock market.     

The January effect for individual corporate bonds

We examine the presence, magnitude and determinants of a January effect for individual corporate bonds. Our results provide empirical evidence of positive and statistically (but not economically) significant abnormal returns in January across different event windows and models. Our results suggest that, in the addition to the term and default factors, the excess stock returns, size and book-to-market factors are priced for individual bond returns. We investigate a number of determinants of the January abnormal returns for individual bonds. Our findings suggest that the reversal and tax-loss selling effects are important determinants of the abnormal returns on individual bonds.     

The relationship between size,book-to-market equity ratio,earnings–price ratio,and return for the Hong Kong stock market

In this paper, we investigate the relation between stock returns and β, size (ME), leverage, book-to-market equity ratio, and earnings–price ratio (E/P) in Hong Kong stock market using the Fama and French (FF) [J. Finance 47 (1992) 427] approach. FF find that two variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with β, size, leverage, book-to-market equity, and E/P ratios. In this paper, similar to previous studies in Hong Kong and US stock markets, we find that β is unable to explain the average monthly returns on stocks continuously listed in Hong Kong Stock Exchange for the period July 1984–June 1997. But three of the variables, size, book-to-market equity, and E/P ratios, seem able to capture the cross-sectional variation in average monthly returns over the period. The other two variables, book leverage and market, are also able to capture the cross-sectional variation in average monthly returns. But their effects seem to be dominated by size, book-to-market equity, and E/P ratios, and considered to be redundant in explaining average returns when size, book-to-market equity, and E/P ratios are also considered. The results are consistent across subperiods, across months, and across size groups. These suggest that the results are not driven by extreme observations or abnormal return behavior in some of the months or by size groups.     

Implied Equity Duration: A New Measure of Equity Risk

Duration is an important and well-established risk characteristic for fixed income securities. We use recent developments in financial statement analysis research to construct a measure of duration for equity securities. We find that the standard empirical predictions and results for fixed income securities extend to equity securities. We show that stock price volatility and stock beta are both positively correlated with equity duration. Moreover, estimates of common shocks to expected equity returns extracted using our measure of equity duration capture a strong common factor in stock returns. Additional analysis shows that the book-to-market ratio provides a crude measure of equity duration and that our more refined measure of equity duration subsumes the Fama and French (1993) book-to-market factor in stock returns. Our research shows how structured financial statement analysis can be used to construct superior measures of equity security risk.     

The cross-sectional relationship between stock returns and domestic and global factors in the Chinese A-share market

By using an extension of the Fama and MacBeth cross-sectional regression model, this analysis examines the relationship between stock returns and (i) a local beta, (ii) two global betas, and (iii) some firm-specific characteristics in the Chinese A-share market. The results of the analysis suggest that neither the conditional local beta nor the global betas has a significant relationship with stock returns in A-shares. Our findings indicate that firm factors, such as the book-to-market ratio and firm size, are important in explaining stock returns. However, the size effect is sensitive to the specification of the model. Finally, the results of sub-period tests indicate that the A-share market did not become increasingly integrated with either the world stock markets or the Hong Kong stock market over the period 1995–2002.

Cross-sectional analysis of Swedish stock returns with time-varying beta: the Swedish stock market 1983–96

This paper analyses the ability of beta and other factors, like firm size and book-to-market, to explain cross‐sectional variation in average stock returns on the Swedish stock market for the period 1983–96. We use a bivariate GARCH(1,1) process to estimate time-varying betas for asset returns. The estimated variances of these betas, derived from a Taylor series approximation, are used for correcting errors in variables. An extreme bound analysis is utilized for testing the sensitivity of the estimated coefficients to changes in the set of included explanatory variables.
Our results show that the estimated conditional beta is a more accurate measure of the true market beta than the beta estimated by OLS. The coefficient for beta is not significantly different from zero, while the variables book-to-market and leverage have significant coefficients, and the latter coefficients are also robust to model specification. Excluding the down turn 1990–92 from the sample shows that the significance of the risk premium for leverage might be considered as an industry effect during this extreme period. Finally, we find a close dependence between the risk premium for beta and that for size and book-to-market. The omission of each of these variables may cause statistical bias in the estimated coefficient for beta.     

The stocks at stake: Return and risk in socially responsible investment

We relate US portfolio returns, book-to-market values and excess stock returns to different dimensions of socially responsible performance. We find that socially responsible investing (SRI) impacts on stock returns by lowering the book-to-market ratio and not by generating positive alphas. Our result is consistent with the theoretical work suggesting that SRI is reflected in demand differences between SRI and non-SRI stock. It also explains why so few studies are able to establish a link between alpha’s and SRI.     

Asset Growth and the Cross-Section of Stock Returns

We test for firm-level asset investment effects in returns by examining the cross-sectional relation between firm asset growth and subsequent stock returns. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks. When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm's annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of U.S. stock returns.     

Stock returns and beta,firms size,E/P,CF/P,book-to-market,and sales growth: evidence from Singapore and Malaysia

Using data from Singapore and Malaysia for the period 1988–1996, this paper examines the relationship between stock returns and beta, size, the earnings-to-price ratio, the cash flow-to-price ratio, the book-to-market equity ratio, and sales growth (SG). We find the presence of anomalies in these emerging markets. There is a conditional relationship between beta and stock returns for both countries. During months with positive market excess returns, there is a significant positive relationship. We also find a negative relationship between beta and stock returns during months with negative market excess returns. We document the existence of a negative relationship between stock returns and size for both countries. For Singapore, we also document a negative relationship between returns and SG. For Malaysia, we find a positive relationship between returns and the E/P ratio. These relationships are only significant in non-January months.     

Size,value and momentum in stock returns: evidence from India

This paper examines the effects of size, value and momentum on the cross-sectional relation between expected returns and risk in the Indian stock market. We find that the conditional Carhart four-factor model empirically describes the variation of cross-section of return better than the unconditional model. When size, book-to-market and momentum effects are controlled in the conditional model, the positive relation of market beta, book-to-market and momentum with expected returns remains economically and statistically significant. However, this evidence is found to be subject to characteristics of test portfolios. The expected returns are sensitive to changes in predictive macroeconomic variables.     

Stock return forecasting: Some new evidence

This paper makes three contributions to the literature on forecasting stock returns. First, unlike the extant literature on oil price and stock returns, we focus on out-of-sample forecasting of returns. We show that the ability of the oil price to forecast stock returns depends not only on the data frequency used but also on the estimator. Second, out-of-sample forecasting of returns is sector-dependent, suggesting that oil price is relatively more important for some sectors than others. Third, we examine the determinants of out-of-sample predictability for each sector using industry characteristics and find strong evidence that return predictability has links to certain industry characteristics, such as book-to-market ratio, dividend yield, size, price earnings ratio, and trading volume.     

Penetrating the Book-to-Market Black Box: The R&D Effect

The book-to-market (BM) phenomenon – the positive association between BM and subsequent returns – looms large among capital market enigmas. Economic theory postulates that the difference between market and book values of companies reflects their future abnormal profits. We capture these abnormal profits for a large sample of science-based companies by estimating the value of the off-balance sheet investment generating those profits – the value of R&D capital – and show empirically: (i) Firms' R&D capital is associated with their subsequent stock returns. (ii) For R&D intensive firms, this 'R&D effect' subsumes the 'book-to-market effect.' (iii) The association between R&D and subsequent returns appears to result from an extra-market risk factor inherent in R&D, rather than from stock mispricing. We thus provide an explanation for the book-to-market phenomenon of R&D companies.     

An investigation into the role of liquidity in asset pricing: Australian evidence

Employing a cross-sectional regression framework, we explore whether liquidity (as proxied by share turnover) is priced in an Australian setting, using monthly data over the period 1990 to 1999. We find that turnover is negatively related to stock returns and its importance persists even after controlling for book-to-market, size, stock beta and momentum. This finding is robust to seasonality effects and to potential nonlinearities.