Accruals quality,information risk,and institutional investors’ trading behavior: Evidence from the Korean stock market

This study analyzes the effect of firm-specific information risk, measured by accruals quality, on the cost of capital using institutional investors’ trading behavior. Institutional investors in firms with lower accruals quality increase their net selling in later years. Furthermore, these investors’ net selling is relevant to the innate and discretionary factors of accruals quality. This relationship is stronger for foreign institutions than for domestic institutions, and it is mostly observed under favorable macroeconomic conditions. We do not observe this relationship for large business groups connected by shares.     

What drives the liquidity premium in the Chinese stock market?

This paper examines the dynamics of the liquidity premium in the Chinese stock market by adopting a multivariate decomposition approach to measure the individual contributions of various driving forces of the premium (such as firm size, idiosyncratic volatility, and market liquidity betas). By employing a wide range of liquidity measures, we show that liquidity premium is generally significant in the Chinese stock market. Furthermore, this premium is increasing in recent years starting from 2011; this observation is different from the United States market, in which the premium has declined over the years. Moreover, the multivariate decomposition approach highlights several asset pricing factors as the main driving forces of the premium. Based on the Amihud liquidity measure, the decomposition approach indicates that the size factor contributes 45–65% to the liquidity premium. However, the measure based on turnover suggests that idiosyncratic volatility accounts for at least 60% of the liquidity premium. In contrast, the global market liquidity beta does not significantly contribute to the premium. However, there is some evidence that the local market liquidity beta has become more significant in its impact on the premium during the period from 2011 to 2015. Our results imply that the findings on the liquidity premium in the Chinese stock market could be sensitive to the liquidity measure used and period of analysis.     

The stock–bond comovements and cross-market trading

We propose an asset pricing model with heterogeneous agents allocating capital to the stock and bond markets to optimize their portfolios, utilizing the dynamic interaction between the two markets. While some agents focus on the stock market and have more expertise in it, the others specialize in the bond market. Based on their comparative advantages in a particular market, heterogeneous agents constantly revise their investment portfolios by taking into account the time-varying stock–bond return comovements and the changing market conditions. Agents׳ collective investment behavior shapes the stock–bond interlinkage, which feedbacks on their subsequent capital allocations. Using monthly US stock and bond data from January 1990 to June 2014, we estimate the vector autoregression model with threshold and Markov switching mechanisms. We find evidence in support of flight-to-quality and show that it is mainly driven by the technical traders who actively sell stocks and buy bonds during periods of high market uncertainty.     

Investor co-attention and stock return co-movement: Evidence from China’s A-share stock market

This study attempts to link investor co-attention to stock return co-movement in China's A-share stock market. On the one hand, stock price will co-move for stocks within the same industry and within the same market, which is labelled “return co-movement”. On the other hand, investor attention will also co-move as investors systematically search for relevant information for stocks of similar characteristics or as the stocks experience common information shocks, which is termed “investor co-attention”. The empirical evidence suggests that stock return co-movement can be explained by investor co-attention to a great extent, even after controlling for stock fundamentals and firm characteristics, and this effect is more salient for stocks with lower institutional ownership. Moreover, we employ large national lottery jackpots as exogenous shocks to investor attention. The empirical findings show that the co-movement of both investor attention and stock return increase on large lottery jackpot days, while investor co-attention contributes less to return co-movement on large lottery jackpot days. In summary, we offer an alternative explanation for return co-movement by observing the causal relationship between investor co-attention and stock return co-movement.     

Jump risk and cross section of stock returns: evidence from China’s stock market

Various studies have confirmed the existence of jumps in different financial markets. However, there is sparse theoretical or empirical effort to examine the dynamic relation between jump risk and cross-sectional expected stock returns. We follow a stylized SDF-based diffusion-jump model to examine its testable implications about the relation between cross-section expected excess returns and variations in jump intensities across stocks. The zero-cost portfolio, exploiting the return spreads between the top and bottom decile portfolios formed on jump intensity, could earn an annualized return as high as 24% with an annualized Sharpe ratio of 1.67. A Fama-MacBeth test shows that stock excess returns monotonically decrease in jump intensity even after controlling for other common risk factors.     

Economic policy uncertainty and industry risk on China’s stock market

We propose a dynamic mixture Copula with time-varying weight, which is endowed with generalized autoregressive score dynamics. Based on this model, we portray the lower-tail dependence between the return of WIND first-level industry and CSI-300 index as a proxy variable for the industry risk in China’s stock market, and use the VAR-GARCH-in-mean model based on BEKK-GARCH to deconstruct the different impact of the economic policy uncertainty (EPU) on industry risk of the first and second moments in terms of four policy categories, namely fiscal policy, monetary policy, trade policy, and foreign exchange rate and capital account policy. The results are followed. Firstly, the risk of Consumer Discretionary is averagely the highest, while the risk of Utilities remains the lowest. Secondly, category-specific EPU has no significant mean spillover to the risk of overall industries, while the variance spillover is significant for all the cases. Thirdly, except for Real Estate, the GARCH-in-mean effect is not significant of EPU on industry risks. Further more, all those three kinds of impact show industrial heterogeneities. To avoid systemic risks, we advise that the issue of economic policy should be forward-looking, consistent, and targeted, especially for sensitive industries.     

Daily momentum profits with firm characteristics and investors’ optimism in the Taiwan market

In this paper, we examine two different investing attitudes, being conservative sentiment which mitigates the momentum effect and, alternatively, the optimistic sentiment which strengthens such an effect. Where the stock market index levels close near a previous peak level, the impact of the index on momentum profits can assist in identifying such sentiments. In this study, we investigate the price and price-size momentum strategies in Taiwan of short formation periods of less than a month. The results indicate that investors adopt optimistic attitudes towards the 5-day and 20-day highs in the market index, whereas a conservative attitude is adopted at the 52-week high. Using the quantile regression model, the results indicate that the momentum effect is mitigated when the stock index price is relatively high for higher momentum profits. On the other hand, the momentum effect is strengthened when the stock index price is relatively high for lower momentum profits. However, the high point of the stock index is not found to have any impact on the price-B/M momentum effect.     

Foreign equity flows: Boon or bane to the liquidity of Malaysian stock market?

This paper examines the impact of gross foreign equity inflows on aggregate liquidity of the Malaysian stock market using newly assembled foreign trading data and the best performing bid-ask spread proxy. Employing vector autoregression, we discover a one-way causality from gross inflows to aggregate liquidity, and foreign investors erode liquidity of the Malaysian stock market. Additional analyses reveal that uncertainties in the U.S. markets negatively affect aggregate liquidity through the flows of foreign institutions, whose positive feedback trading destabilizes the local bourse. Despite the shocks, there is sufficient liquidity provision from local state-backed institutional funds and local proprietary day traders.     

News and noise: do investors react to stock split announcements differently during periods of high and low market volatility?

In this paper, we find evidence that stock split announcements have a greater wealth effect when market volatility, as measured by the VIX index, is low. This effect is driven primarily by small firms. These results support the hypothesis that when market volatility is high, signals sent by small firms are more likely to be obscured by noise than when market volatility is low.     

Connectedness and risk spillovers in China’s stock market: A sectoral analysis

This paper shows how sectors in the Chinese stock market are connected and investigates risk spillovers across these sectors. Using graph theory and a recently developed time series technique, we are able to identify the systemically important sector in the market and the patterns of risk spillovers across sectors over time. Unlike standard econometric modeling, graph theory enables us to approach this question in a more reader-friendly way. The empirical results show that Industrial sector plays a central role and should thus be considered the systemically most important sector in the Chinese stock market. The spillover structure is found to be time-varying. While Industrial sector dominates the system for most of the time, other sectors such as Consumer Discretionary sector also occasionally appear as the central sector. Our empirical results also indicate that the simple correlation-based approach can produce equally useful information as more advanced econometric models.     

Does algorithmic trading harm liquidity? Evidence from Brazil

This paper provides the first evidence of algorithmic trading (AT) reducing liquidity in the Brazilian equities market. Our results are contrary to the majority of work which finds a positive relationship between AT and liquidity. Using the adoption of a new data center for the B3 exchange as an exogenous shock, we report evidence that AT increased realized spreads in both firm fixed-effects and vector autoregression estimates for 26 stocks between 2017 and 2018 using high-frequency data. We also provide evidence that AT increases commonality in liquidity, evidencing correlated transactions between automated traders.     

Unconventional monetary policy and the stock market’s reaction to Federal Reserve policy actions

We examine the change in the effect of Federal Reserve’s policy actions on stock returns after the Fed started to use unconventional policy actions. We find that the response of stock returns to monetary policy actions are almost seven times higher after the federal funds rate hit the zero lower bound. We conduct additional analysis to examine the underlying causes of the increase in the impact of monetary policy actions of stock returns. We show that investors rebalance their portfolios towards equity after selling Treasury securities to the Federal Reserve during large scale asset purchases.     

Brokers’ financial network and stock return

Brokerage firms are usually not only known for trading stocks for their retail clients in return for commission fee but also known for being information distributors of their clients’ investment recommenders. However, only a few studies have examined investors’ trading behaviors within a brokerage firm. This study proposes a financial network model in modeling the information diffusion process of investors within brokerage firms and investigates the potential effect of interconnectedness among brokerage firms on stock returns. We find that the centrality of brokerage firms has strong explanatory power to stock returns even if we control for the Fama–French pricing factors and other characteristics of stock.     

Time-varying lead–lag structure between investor sentiment and stock market

This paper uses the thermal path method to study the lead–lag structure of sentiment and the stock market. First, based on principal component analysis, four indicators are selected to construct the sentiment index. Furthermore, the effectiveness of the thermal path method is verified by numerical simulation. Finally, the lead-lag characteristics of the Shanghai Stock Index and the sentiment index are studied via the symmetric thermal optimal path method. The analysis results show that in the short term, investor sentiment has a leading position in the stock market, which may be related to the herd effect and buying the winners behavior. However, over a longer period of time, investor sentiment is affected mainly by fluctuation in the market, which may be related to the existence of cyclical fluctuations in the market and futures arbitrage. In addition, the stock market's leading effect appears mainly from January 2006 to January 2012, with an average lead time of one month.     

Swiss National Bank communication and investors’ uncertainty

This paper analyzes the effects of Swiss National Bank communication on stock investors’ uncertainty. Monetary policy news is identified via changes in short- and medium-term futures prices as well as by applying methods from computational linguistics and dictionary approaches to policy statements. Surprises in policy rate changes and regarding the future path of the policy rate exhibit an asymmetric effect on stock investors’ uncertainty. Moreover, by taking into account various topics addressed in the statements, I show that investors’ uncertainty decreases due to an optimistic tone in communications about economic growth. Increased uncertainty expressed in policy statements translate into increasing stock investors’ uncertainty. The results explain how news contained in monetary policy statements reduce noise in financial markets and therefore contribute to financial stability.     

Rationalizing investors’ choices

Assuming that agents’ preferences satisfy first-order stochastic dominance, we show how the Expected Utility paradigm can rationalize all optimal investment choices: the optimal investment strategy in any behavioral law-invariant (state-independent) setting corresponds to the optimum for an expected utility maximizer with an explicitly derived concave non-decreasing utility function. This result enables us to infer the utility and risk aversion of agents from their investment choice in a non-parametric way. We relate the property of decreasing absolute risk aversion (DARA) to distributional properties of the terminal wealth and of the financial market. Specifically, we show that DARA is equivalent to a demand for a terminal wealth that has more spread than the opposite of the log pricing kernel at the investment horizon.     

President’s Tweets,US-China economic conflict and stock market Volatility: Evidence from China and G5 countries

This study provides empirical evidence that the tweets from US President Donald J. Trump influence the trading decisions of investors worldwide. We examine the effects of Trump’s tweets related to China on stock market volatility in China and the G5 countries. Our results show that Trump’s original tweets related to the US-China economic conflict expand volatility in stock markets worldwide, and the US-China trade friction intensifies this effect. Furthermore, Trump’s tweets with different sentiments have different impacts on the returns of global stock markets. Our findings confirm that international investors may make their investment decisions based on information conveyed in these tweets.     

Interactions between investors’ fear and greed sentiment and Bitcoin prices

This paper examines the relationship between investor fear in the cryptocurrency market and Bitcoin prices by considering the potential effects of the ongoing COVID-19 pandemic during the period of May 5, 2018 and December 10, 2020. The existence of structural changes in the time series for the full sample reveals a non-constant causality between fear sentiment and Bitcoin prices, which leads us to apply a bootstrap rolling window Granger causality test. Our results show that both negative and positive interactions between fear sentiment and Bitcoin prices occur during several subperiods. The nature of these interactions changes significantly before and during the pandemic. Thus, we contribute to the fast-growing literature on the financial effects of the COVID-19 global pandemic, as well as to the debate on whether to classify Bitcoin as a new asset, speculative investment, currency, or safe haven asset.     

Dynamic interaction of risk–return trade-offs between oil market and China’s stock market: An analysis from the risk preferences perspective

The risk–return trade-off refers to the compensation required by investors for bearing risks, which can be viewed as the risk preference of investors in a market. The current study investigates the dynamic interdependence of risk–return trade-offs between China’s stock market and the crude oil market from the perspective of risk preference of investors, which is designed to explore the transmission process of investors’ risk preference in both markets. Specifically, this study applies the time-varying parameter GARCH-M model, namely TVP-GARCH-M model, to characterize the time-dependent risk–return trade-offs (investors’ risk preferences) in the crude oil and China’s stock markets, then examines their relationship through Granger causality tests. Results show that a variation in risk preferences of the oil market investors can dramatically cause a variation in risk preferences of the Chinese stock market investors, while the risk preference of investors in the Chinese stock market does not lead to that in the crude oil market, which is in accordance with expectations. The dynamic effect of investors’ risk appetite in the crude oil market is further examined by the TVP-VAR model. The findings of this work suggest that there generally exists a positive impact of investors’ risk preference in the oil market and that the effect is time-varying to a greater degree during the short and medium term. Moreover, responses of the Chinese stock market investors’ risk preference were more significant during the 2008 financial crisis. Additionally, the empirical results remain robust when applying alternative crude oil prices and China’s stock prices.     

Predator–prey model for stock market fluctuations

Journal of Economic Interaction and Coordination - We present a dynamical model for the price evolution of financial assets. The model is based on a two-level approach: In the first stage, one...