Religious beliefs, gambling attitudes, and financial market outcomes

This study investigates whether geographic variation in religion-induced gambling norms affects aggregate market outcomes. We conjecture that gambling propensity would be stronger in regions with higher concentrations of Catholics relative to Protestants. Consistent with our conjecture, we show that in regions with higher Catholic–Protestant ratios, investors exhibit a stronger propensity to hold lottery-type stocks, broad-based employee stock option plans are more popular, the initial day return following an initial public offering is higher, and the magnitude of the negative lottery-stock premium is larger. Collectively, these results indicate that religion-induced gambling attitudes impact investors' portfolio choices, corporate decisions, and stock returns.     

Momentum and Foreign Investors: Evidence from the Korean Stock Market

Abstract:

We examine whether the price impact of foreign investors on the Korean stock market from December 2000 to February 2007 generated a momentum phenomenon. In our empirical results, foreigners seem to have exerted a significantly positive impact on prices in “up” markets (periods of positive stock returns), but have had little impact on prices in “down” markets (periods of negative returns). We document that the impact of foreigners’ trades is concentrated in large companies. Most importantly, when the market is in the up state, the returns of stocks of large companies that were positively affected by foreign investors in the previous six-month period continue to increase in the subsequent six-month period. As a result, the subsequent six-month return on a past “winner” stock portfolio is significantly higher than that on a past “loser” stock portfolio. This brings to mind a momentum phenomenon that has been reported not to exist in the Korean stock market.     

The empirical relationship between risk and return: evidence from the UK stock market

Previous studies reach no consensus on the relationship between risk and return using data from one market. We argue that the world market factor should not be ignored in assessing the risk-return relationship in a partially integrated market. Applying a bivariate generalized autoregressive conditional heteroscedasticity in mean (GARCH-M) model to the weekly stock index returns from the UK and the world market, we document a significant positive relationship between stock returns and the variance of returns in the UK stock market after controlling for the covariance of the UK and the world market return. In contrast, conventional univariate GARCH-M models typically fail to detect this relationship. Nonnested hypothesis tests supplemented with other commonly used model selection criteria unambiguously demonstrate that our bivariate GARCH-M model is more likely to be the true model for UK stock market returns than univariate GARCH-M models. Our results have implications for empirical assessments of the risk-return relationship, expected return estimation, and international diversification.     

Responsible investment in the Chinese stock market

This paper provides insights into the current development of responsible investment in the Chinese stock market. We find that responsible investment can bring portfolio benefits to investors, and institutional investors have a holding preference for stocks in responsible investment indexes. By using a national air pollution proxy, we find that investors’ pessimistic mood on days with heavy air pollution has a negative influence on the stock return of A-shares, while stocks in responsible investment indexes display improved performance over the same time period. We use aggregated trading data to study the trading preference of Chinese retail investors on days when they are influenced by air pollution, and find that their total trading ratio shows a negative influence for both A-shares and responsible investment indexes. Moreover, there is more seller-initiated trading of the whole sample but more buyer-initiated trading of stocks in responsible investment indexes on air pollution days. This finding is consistent with the different stock return performances of these two samples. Our finding extends the studies of responsible investment to emerging markets and presents new evidence about the influence of environmental factors on trading behavior and return performance.     

Impact of liquidity on stock returns: an empirical investigation of the Tunisian stock market

This paper investigates the return–liquidity relationship on one Middle East and North Africa frontier market, the Tunisian Stock Exchange (TSE). The findings provide evidence that there is a significant and positive premium for companies with high price impact and low trading frequency. However, Tunisian investors appreciate more low spread stocks. We show, also, a non-linear relation between potential delays of execution and stock returns. In addition, we find that Tunisian investors require a premium to compensate past cumulative illiquidity risk (high price impact, low turnover and high potential delay of execution) over the prior three to 12 months and to compensate past cumulative spread over 12 months. We point out also that these effects are seasonal.     

Stock market entry timing and retail investors' disposition effect

This paper explores the long-lasting impact of investors' first impression of participation in the stock market and the disposition effect. Using a unique dataset of account-level transaction records from a large brokerage firm in China, we find strong evidence for the existence of a disposition effect of Chinese retail investors. Our empirical results suggest that investors exhibit a stronger disposition effect if they initially participate in the stock market in periods of lower market returns, lower investor sentiment, higher market volatility, or higher economic policy uncertainty (EPU). The evidence enhances our understanding of the role of investors' early experience in stock market decisions and the determinants of behavioural biases in investment decisions.     

Are stock markets really efficient? Evidence of the adaptive market hypothesis

This study examines the adaptive market hypothesis in the S&P500, FTSE100, NIKKEI225 and EURO STOXX 50 by testing for stock return predictability using daily data from January 1990 to May 2014. We apply three bootstrapped versions of the variance ratio test to the raw stock returns and also whiten the returns through an AR-GARCH process to study the nonlinear predictability after accounting for conditional heteroscedasticity through the BDS test. We evaluate the time-varying return predictability by applying these tests to fixed-length moving subsample windows and also examine whether there is a relationship between the level of predictability in stock returns and market conditions. The results show that there are periods of statistically significant return predictability, but also episodes of no statistically significant predictability in stock returns. We also find that certain market conditions are statistically significantly related to predictability in certain markets but each market interacts differently with the different market conditions. Therefore our findings suggest that return predictability in stock markets does vary over time in a manner consistent with the adaptive market hypothesis and that each market adapts differently to certain market conditions. Consequently our findings suggest that investors should view each market independently since different markets experience contrasting levels of predictability, which are related to market conditions.     

Stock market volatility and equity returns: Evidence from a two-state Markov-switching model with regressors

This paper proposes a two-state Markov-switching model for stock market returns in which the state-dependent expected returns, their variance and associated regime-switching dynamics are allowed to respond to market information. More specifically, we apply this model to examine the explanatory and predictive power of price range and trading volume for return volatility. Our findings indicate that a negative relation between equity market returns and volatility prevails even after having controlled for the time-varying determinants of conditional volatility within each regime. We also find an asymmetry in the effect of price range on intra- and inter-regime return volatility. While price range has a stronger effect in the high volatility state, it appears to significantly affect only the transition probabilities when the stock market is in the low volatility state but not in the high volatility state. Finally, we provide evidence consistent with the ‘rebound’ model of asset returns proposed by Samuelson (1991), suggesting that long-horizon investors are expected to invest more in risky assets than short-horizon investors.     

我国股票市场“聪明投资者”投资绩效归因研究

不同于寻找具有超额收益“证券”的股票市场主流投资方法,根据历史投资绩效来“选人”,即寻找“聪明投资者”可为构建有效的投资策略提供新思路。本文利用我国投资者全账户交易信息,根据历史投资绩效界定“聪明投资者”,并探索其获得超额收益的原因。结果显示,我国股票市场存在“聪明投资者”,在牛熊市中均可获得显著的超额收益;相比其他投资者,“聪明投资者”风险偏好较低但能获得超额收益,即不是因为他们高杠杆融资和配置更多风险资产承担风险而获得风险溢价,而是因为这类投资者具有更好的仓位管理能力、市场风格适应能力及显著的选股能力。本研究拓展了对我国这一部分特殊群体投资者行为的探索,结论可以用于构建具有实践意义的投资策略。     

Nonlinear tail dependence in cryptocurrency-stock market returns: The role of Bitcoin futures

We investigate the median and tail dependence between cryptocurrency and stock market returns of BRICS and Developed countries using a newly developed nonparametric cumulative measure of dependence over the period January 4, 2016 – December 31, 2019 as well as before and after the introduction of Bitcoin futures on December 17, 2017. The new measure is model-free and permits measuring tail risk. The results highlight the leading role of S&P500, Nasdaq and DAX 30 in predicting BRICS and developed countries’ stock market returns. Among BRICS countries, BVSP shows a starring role in predicting stock market returns. BSE 30 is the most predictor of cryptocurrencies, which have a little predictability on stock market returns. Ethereum has the leading role in predicting cryptocurrencies and stock market returns followed by Bitcoin. Tail dependence shows substantial role of S&P500, Nasdaq and BVSP in predicting stock market returns. Subsample analysis show the role of Bitcoin futures in reshaping the mean and tail dependence between cryptocurrency and stock market returns. Our results have important policy implications for portfolio managers, hedge funds and investors.     

Risk,return, and liquidity during Ramadan: Evidence from Indonesian and Malaysian stock markets

Indonesia and Malaysia are common in religion; however, the two countries have different developments in their equity markets. This study investigates the risk, return, and liquidity during Ramadan for the Indonesia and Malaysia stock markets. We find that the volatility is higher around Ramadan for the Indonesia stock market, while displays dynamic patterns in different phases around the month of Ramadan for Malaysia. Despite the changing risk during Ramadan, the risk-adjusted return remains unchanged. Furthermore, this study finds that the liquidity in most stock index markets of the two countries is higher around Ramadan. These findings support the notion that Ramadan affects investors’ risk-taking attitude and facilitates the trade in stocks.     

The Other January Effect: international evidence

This paper investigates the predictive power of stock market returns in January for the subsequent 11 months’ returns across 19 countries, thereby contributing to the literature on stock market seasonalities. Only 2 out of 19 countries’ stock markets exhibit a robust Other January Effect. In the light of this evidence, we conclude that the Other January Effect is not an international phenomenon.     

Investor sentiment and return predictability of disagreement

This study examines the influence of investor sentiment on the relationship between disagreement among investors and future stock market returns. We find that the relationship between disagreement and future stock market returns time-varies with the degree of investor sentiment. Higher disagreement among investors’ opinions predicts significantly lower future stock market returns during high-sentiment periods, but it has no significant effect on future stock market returns during low-sentiment periods. Our findings imply that investor sentiment is related to several causes of short-sale impediments suggested in the previous literature on investor sentiment, and that the stock return predictability of disagreement is driven by investor sentiment. We demonstrate that investor sentiment has a significant impact on the stock market return predictability of disagreement through in-sample and out-of-sample analyses. In addition, the profitability of our suggested trading strategy exploiting disagreement and investor sentiment level confirms the economic significance of incorporating investor sentiment into the relationship between disagreement among investors and future stock market returns.     

Employee stock option plans and stock market reaction: evidence from Finland

This paper examines whether the adoption of stock option plans results in changes in shareholders’ wealth, and whether the stock market reactions to ESOP announcements could be explained by the target group of ESOP and the dilution effect. Short-horizon test methods are applied for this purpose. The sample consists of ESOP announcements of Finnish publicly quoted companies on the Helsinki Stock Exchange during the time period 1988–1998. The event study results show a slightly positive market reaction to announcements of ESOPs targeted to management and a negative market reaction in the case of ESOPs targeted to all employees. The results of regression analysis show that the ESOPs with limited dilution convey positive information to the stock market and the dilution effect has a negative impact on stock returns, especially in the case of ESOPs targeted to all employees.     

Microstructure and reverse stock splits

In this paper we show that, similar to NYSE/AMEX stocks, NASDAQ stocks exhibit significant ex date returns for reverse stock splits. Although the 10-day cumulative return after the ex date is close to –10%, this does not violate market efficiency, because the average bid-ask spread for the reverse split stock is at least double this return. We also document that these large negative returns are mostly due to a drop in the ask price while bid prices barely change at all. Furthermore, the ex date returns are negatively related to trading volume.These results suggest that there is abnormal selling and a significant buildup of market makers' inventories near the ex date. To reduce the inventory buildup, market makers lower ask prices to induce buying by investors, resulting in the observed negative returns. Lowering bid prices, an alternative strategy for reducing inventories, is not attractive to market makers due to competitive factors and the reduction of commissions associated with a smaller number of transactions. Notably, selling investors have no incentives to sell their stocks early to avoid the observed negative ex date return, since this return is largely an ask price phenomenon and does not represent realized returns to sellers.     

The informativeness of domestic and foreign investors’ stock trades: Evidence from the perfectly segmented Chinese market

This paper uses the perfect market segmentation setting in China's stock market to compare the information content of the stock trades of domestic and foreign investors. We study 76 firms that issue both A-shares (for domestic investors) and B-shares (for foreign investors) and compare the price discovery role of the two segmented markets in China. Before Feb 19, 2001, the A-share market led the B-share market in price discovery, as the signed volume and quote revision of the A-share market had strong predictive ability for B-share quote returns, but not vice versa. After Feb 19, 2001, because some domestic investors were allowed to invest in the B-share market, we find evidence for a reverse causality from the B-share to the A-share market. Nevertheless, the [Hasbrouck (1995). One security, many markets: determining the contributions to price discovery, Journal of Finance 50, 1175–1199.] information share analysis reveals that A-shares continue to dominate the price discovery process.     

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.     

Firms' profit instability and the cross-section of stock returns: Evidence from China

This study utilizes samples from the Chinese A-share market to examine the relation between firms’ profit instability and cross-sectional stock returns. The empirical evidence indicates that firms with high profit instability have substantially lower future stock returns than those with low profit instability. The predictive information contained in profit instability is not subsumed by the level of profitability or the volatility of cash flow and is robust after controlling for well-known firm characteristics and risks. In addition, the long-term predictive performance of the firm’s profit instability is permanent over at least five years. Moreover, the profit instability effect is stronger among firms with better recent past performance, more lottery-like payoffs, and higher arbitrage risk. This finding suggests that the immaturity of investors and high constraints on arbitrage are the main sources of the profit instability effect in the Chinese market, which is consistent with the implications of behavioral mispricing explanations. Our investigation enriches the studies on profitability anomalies by uncovering profit instability as an incremental signal in predicting stock returns. Furthermore, this study provides a novel view to better understand the mechanisms of the anomalies related with firms' profitability in undeveloped stock markets of emerging economies, thereby benefiting investors from all over the world to seek more efficient investment strategies.     

ESG in credit ratings and the impact on financial markets

This study examines environment, social, governance (ESG) consideration in rating reports published by credit rating agencies. 3,719 Moody's credit rating reports between 2004 and 2015 are examined and the ESG consideration is analyzed using a latent dirichlet allocation (LDA) approach. We further analyze the stock returns and credit default swap (CDS) spread changes to check whether ESG consideration has an effect on the capital market reactions. We find a small but present consideration of ESG in rating decisions. Within ESG, corporate governance plays the most important role. Moreover, the results reveal that ESG consideration is a significant determinant in the stock return and CDS spread around the rating announcement. We find that all ESG criteria are important for equity and debt investors.