Speculative trading and stock returns: A stochastic dominance analysis of the Chinese A-share market

The pricing of A-shares in China has long puzzled financial economists. This paper applies recent tests of stochastic dominance (SD) to examine whether differences in the return distributions of A- and B-shares in China are consistent with market efficiency. As SD is nonparametric, market efficiency can be examined without the joint test problem arising from misspecifications in the asset pricing benchmark. Our results show A-shares have second-order dominated B-shares from 1996 to 2005. This dominance was most significant during the market segmentation period, but has continued, albeit to a lesser extent even after the B-share market was opened to local investors in 2001. Our results are robust to using residual returns from an international asset pricing model instead of raw returns. We conclude that the superior performance of A-shares cannot be attributed to risk. The results are more likely due to a return bias caused by intense speculation among retail individuals under limited arbitrage.     

Risky asset pricing based on safety first fund management

We study a portfolio selection model based on Kataoka's safety-first criterion (KSF model in short). We assume that the market is complete but without risk-free asset, and that the returns are jointly elliptically distributed. With these assumptions, we provide an explicit analytical optimal solution for the KSF model and obtain some geometrical properties of the efficient frontier in the plane of probability risk degree z _α and target return r _α. We further prove a two-fund separation and tangency portfolio theorem in the spirit of the traditional mean-variance analysis. We also establish a risky asset pricing model based on risky funds that is similar to Black's zero-beta capital asset pricing model (CAPM, for short). Moreover, we simplify our risky asset pricing model using a derivative risky fund as a reference for market evaluation.     

A simple asset pricing model with heterogeneous agents,uninsurable labor income and limited stock market participation

In this paper we study a simple two-period asset pricing model to understand the implications of uninsurable labor income risk and/or borrowing constraints, limited stock market participation, heterogeneous labor income volatilities, and heterogeneous preferences. We appraise the performance of each of these in matching moments of asset returns to the data and show that limited stock market participation generates a significantly large equity premium. We also show that the distribution of wealth between stock market participants and non-participants plays an important role in asset pricing, and that the effect of borrowing constraints on asset returns are similar to that of limited participation. Finally, we discuss the practical implications of our investigation, providing an appraisal of ongoing changes in asset returns.     

A perfect storm in the financial market

This study provides a model explaining how small changes in asset prices may disrupt an entire financial market. Based on the capital asset pricing model (CAPM), our model implies that during a market crash, asset price changes affect the relative distribution of the CAPM betas of individual assets and force all tradable assets to co-move. Using US stock market data, our empirical results are consistent with the model’s predictions. Overall, the study aids understanding of the price patterns of assets during substantial market downturns, such as financial crises.     

Does Post-Earnings-Announcement Drift in Stock Prices Reflect A Market Inefficiency? A Stochastic Dominance Approach

This paper uses a stochastic dominance approach to test for market efficiency following earnings announcements. We find that the stocks that recently announced good earnings news stochastically dominate those that recently announced bad news. The results cast serious doubt on any belief that asset pricing model misspecifications might explain post-earnings-announcement drift.     

Stock and Bond Liquidity and its Effect on Prices and Financial Policies

An asset is liquid if it can be traded at the prevailing market price quickly and at low cost. We show that in addition to risk, liquidity affects asset prices and returns. Theories of asset pricing suggest that the expected return of an asset is increasing in its risk, because risk-averse investors require compensation for bearing more risk. Because investors are also averse to the costs of illiquidity and want to be compensated for bearing them, asset returns are increasing in illiquidity. Thus, asset prices should depend on two asset characteristics: risk and liquidity. This paper surveys research on the effects of liquidity on asset prices and returns, showing that liquidity is an important factor in capital asset pricing.     

上市公司综合盈利水平与股票收益

本文基于2000-2017年上市公司的财务及股票交易数据,研究了上市公司综合盈利水平与股票收益之间的关系。我们使用目前资产定价文献中较新的偏最小二乘法和组合预测法,从12个衡量公司盈利能力的指标中提取了一个测度上市公司综合盈利水平的指标。研究结果显示,上市公司综合盈利水平能够显著预测未来股票收益。使用单因子偏最小二乘法、取12个月斜率的平均值构造的综合盈利水平最有效,以其构建的多空对冲投资组合能产生15%的年平均收益,夏普比率达到0.75。与此对应,组合预测法提取的上市公司综合盈利水平的预测能力稍低,但依然显著。在控制了其他公司特征变量后,综合盈利水平对于股票收益的解释能力依然稳健。本文还从经济机制的角度出发,探讨了综合盈利水平对收益的预测来源。我们发现,上市公司综合盈利水平与股票预期回报的正向关系在投资摩擦更低的组中更高,而在错误定价程度更高的组通常更低。这些结果支持了基于投资摩擦的Q理论,而与行为金融的错误定价理论相悖。     

Are there common factors in individual commodity futures returns?

We explore whether there are common factors in the cross-section of individual commodity futures returns. We test various asset pricing models which have been employed for the equities market as well as models motivated by commodity pricing theories. The use of these families of models allows us also to test whether the commodities and equities market are integrated. In addition, we employ principal components factor models which do not require à priori specification of factors. We find that none of the models is successful. Our results imply that commodity markets are segmented from the equities market and they are considerably heterogeneous per se.     

World capital markets and Finnish stock returns

The paper explores issues related to time-varying global equity market integration from a Finnish perspective. Finland is an interesting market since profound economic changes and financial deregulation have taken place since the mid-1980s. Using Finnish firm size ranked portfolios and a conditional four-factor asset pricing model, several restrictions on asset behaviour are examined. It is found that a proxy for changing market integration — lagged foreign equity ownership — has a significant impact on the relative importance of local and global risk factors. Significant differences are found between the pricing of shares that were freely-available to all (unrestricted shares) and domestic investors only (restricted shares). Results also suggest that major capital market reforms profoundly affect the degree of market integration, but local risk factors do not become redundant.     

Asset liquidity,business risk,and beta

Extant literature posits that because of leverage, equity beta estimates from a single factor capital asset pricing model based on an equity-only market index are biased. We show analytically that this leverage bias is intimately related to the firm's asset structure per se, the firm's asset liquidity (i.e., cash holdings) and business risk. This is mainly because riskless cash holdings and risky real assets jointly determine the relevant risk for asset pricing. We empirically confirm that asset liquidity and business risk can marginally explain the leverage bias in the cross-section of stocks returns.     

Effects of market default risk on index option risk-neutral moments

We investigate the relative importance of market default risk in explaining the time variation of the S&P 500 Index option-implied risk-neutral moments. The results demonstrate that market default risk is positively (negatively) related to the index risk-neutral volatility and skewness (kurtosis). These relations are robust in the presence of other factors relevant to the dynamics and microstructure nature of the spot and option markets. Overall, this study sheds light on a set of economic determinants which help to understand the daily evolution of the S&P 500 Index option-implied risk-neutral distributions. Our findings offer explanations of why theoretical predictions of option pricing models are not consistent with what is observed in practice and provide support that market default risk is important to asset pricing.     

Trading Volume: Implications of an Intertemporal Capital Asset Pricing Model

We derive an intertemporal asset pricing model and explore its implications for trading volume and asset returns. We show that investors trade in only two portfolios: the market portfolio, and a hedging portfolio that is used to hedge the risk of changing market conditions. We empirically identify the hedging portfolio using weekly volume and returns data for U.S. stocks, and then test two of its properties implied by the theory: Its return should be an additional risk factor in explaining the cross section of asset returns, and should also be the best predictor of future market returns.     

系统性定价偏误:中国A股盈余公告后的价格漂移研究

行为金融学的研究表明,投资者情绪引起的定价偏误在各支股票之间具有相关性,从而构成市场上的系统性定价偏误。基于2003年6月至2009年6月中国A股月度交易数据,本文考察了系统性定价偏误与盈余公告后漂移(PEAD)之间的关系。研究结果显示,中国股票市场上的PEAD现象可能由系统性定价偏误引致,因此,将捕捉系统性定价偏误的偏误定价因子引入定价模型能够提升模型对于PEAD的解释力。经过对定价模型调整,季度盈余公告后6个月买人持有异常收益在经济及统计意义上不显著。这一方面表明中国股票市场上存在由投资者情绪造成的系统性定价偏误,另一方面也为盈余公告后漂移的产生原因提供了新的解释。     

The performance of model based option trading strategies

This paper analyzes returns to trading strategies in options markets that exploit information given by a theoretical asset pricing model. We examine trading strategies in which a positive portfolio weight is assigned to assets which market prices exceed the price of a theoretical asset pricing model. We investigate portfolio rules which mimic standard mean-variance analysis is used to construct optimal model based portfolio weights. In essence, these portfolio rules allow estimation risk, as well as price risk to be approximately hedged. An empirical exercise shows that the portfolio rules give out-of-sample Sharpe ratios exceeding unity for S&P 500 options. Portfolio returns have no discernible correlation with systematic risk factors, which is troubling for traditional risk based asset pricing explanations.     

Interest rates and risk premia in the stock market and in the foreign exchange market

This paper documents common empirical regularities in the foreign exchange market and in the US stock market. We find that increases in interest rates are associated with predictable increases in the volatility of returns in both markets, and that expected returns both in the stock market and in the foreign exchange market are negatively correlated with nominal interest rates.We show that not taking into account the time variation of second moments may seriously affect tests of asset pricing models. Using a numerical example based on the static capital asset pricing model, we are able to produce fluctuations in risk premia similar to those observed empirically. Finally we show that the overidentifying restrictions of the latent variable capital asset pricing model are not rejected when beats are assumed to be correlated with nominal interest rates.     

Aggregate investor preferences and beliefs in stock market: A stochastic dominance analysis

This paper analyzes whether the market portfolio is efficiently related to benchmark portfolios formed on size, value, momentum and reversal with various utility theories by using stochastic dominance criteria. The results support the prospect theory including assumption of loss aversion at monthly and yearly horizons, which indicates the market utility is S-shaped, and steeper for losses than for gains. And, the findings do not provide convincing evidence for positive skewness preference. Therefore, it should probe into asset pricing model and financial puzzles by prospect theory preferences. It may thus be difficult for the market to benefit from the asset through its features on skewness or other higher order central moment. We also develop several bootstrap procedures with favorable properties in statistical size and power for testing stochastic dominance efficiency.     

The fair value of a token: How do markets price cryptocurrencies?

With the rise of cryptocurrency tokens as a new asset class, the question of the fair evaluation of a cryptocurrency token has become a question of increasing importance. We estimate the pricing kernel with which users price factors affecting their token holdings. We investigate how traditional risk factors such as market risk are evaluated, as well as how blockchain specific risk factors are priced in. In order to do so, we introduce an asset pricing model and modify its properties to make it applicable to cryptocurrency markets. We group the risk factors into market related and Bitcoin- and Ethereum blockchain specific risk factors. We find that blockchain specific risk factors are priced in. There is evidence that risk factors have moved from Bitcoin to Ethereum specific risk factors with an increasing importance of market factors, providing evidence for a decoupling of on-chain and off-chain trading activity.     

Local risk factors in emerging markets: Are they separately priced?

We provide new evidence on the pricing of local risk factors in emerging stock markets. We investigate whether there is a significant local currency premium together with a domestic market risk premium in equity returns within a partial integration asset pricing model. Given previous evidence on currency risk, we conduct empirical tests in a conditional setting with time-varying prices of risk. Our main results support the hypothesis of a significant exchange risk premium related to the local currency risk. Exchange rate and domestic market risks are priced separately for our sample of seven emerging markets. The empirical evidence also suggests that although statistically significant, local currency risk is on average smaller than domestic market risk but it increases substantially during crises periods, when it can be almost as large as market risk. Disentangling these two factors is thus important in tests of international asset pricing for emerging markets.     

Tax liens: a novel application of asset pricing theory

Although relatively obscure, the market for distressed real estate tax liens exists in over 30 U.S. states, with a market size estimated to be around 20 billion dollars. While this niche asset class is relatively unknown to academics, internet advertising hypes tax liens to the populace as providing extraordinary returns. Not yet scientifically studied, this market provides a fertile and untouched arena for the application of asset pricing theory. Using insights from several areas of asset pricing, we formulate and test a pricing model for tax liens. The empirical evidence supports the pricing model, the (increasing) competitiveness of the tax lien market, and an unfair tax auction bidding mechanism for property owners that may provide extraordinary returns to investors, lending some credibility to the industry claims. We suggest avenues for extensions and further research.