Political uncertainty and a firm's credit risk: Evidence from the international CDS market

Using a large sample of firms with single-name credit default swap (CDS) contracts in 30 countries, we document the evidence that political uncertainty, proxied by national election dummy, is positively related to firm-level credit risk. Specifically, this positive relation is more pronounced for the firms that have no political connection or poor international diversification, and in the countries with higher political uncertainty and lower investor protections. Further, by using a difference-in-differences approach, we find evidence to support idiosyncratic volatility and debt rollover channels through which political uncertainty affects the credit risk of individual firm.     

Price discovery of subordinated credit spreads for Japanese mega-banks: Evidence from bond and credit default swap markets

This paper investigates the determinants and dynamics of subordinated credit spreads for Japanese mega-banks using the bond and credit default swap (CDS) spreads. The main findings are as follows. Subordinated bond and CDS spreads are cointegrated in most cases, and the CDS spread plays a more dominant role in price discovery than the bond spread. In addition, there are significant volatility spillovers from the CDS to bond spread. This information leadership for the CDS spread can largely be explained by stronger reactions of the CDS spread to some financial market variables and bank-specific accounting variables than the bond spread.     

Disruption and stock markets: Evidence from Hong Kong

We examine the impact of disruption on stock markets using the 2019 Hong Kong protests for identification. We find that greater protest intensity corresponds to higher bid–ask spreads, lower trading volume, and greater return volatility for dual-listed Chinese firms’ Hong Kong (H) shares but not their home (A) shares. We also document negative abnormal returns only for these firms’ H-shares around major protest events, which shortly after exhibit reversal. Next, we validate our main findings by documenting similar results using Hong Kong-listed firms only. Overall, we provide new evidence highlighting the impact of protest-induced disruption on financial markets.     

Liquidity and short-run predictability: Evidence from international stock markets

This study investigates the determinants of short-run predictability in international stock markets, where predictability is defined as the accuracy of the best-combined daily forecasts. Contrary to popular belief, illiquid markets, characterized by high transaction costs and large price impact, are not necessarily highly predictable. Instead, markets with larger trading volume are more predictable, especially after the global financial crisis and in emerging markets. Those with larger market capitalization, steeper upward trends, and positively skewed returns are less predictable. Company financial strength has limited influence. During the COVID-19 pandemic the markets have become more predictable, with stronger price trends. Emerging markets are less predictable when relatively over- or undervalued.     

Portfolio selection and skewness: Evidence from international stock markets

This paper finds that the returns of the world's 14 major stock markets are not normally distributed, and that the correlation matrix of these stock markets was stable during the January 1988–December 1993 time period. Polynomial goal programming, in which investor preferences for skewness can be incorporated, is utilized to determine the optimal portfolio consisting of the choices of 14 international stock indexes. The empirical findings suggest that the incorporation of skewness into an investor's portfolio decision causes a major change in the construction of the optimal portfolio. The evidence also indicate that investors trade expected return of the portfolio for skewness.     

Short-selling,margin-trading,and stock liquidity: Evidence from the Chinese stock markets

This paper examines the impacts of two forms of leveraged trading—margin trading and short selling—on the trading liquidity of individual stocks in China. We find that trading liquidity for relevant stocks generally improves after restrictions on leveraged trading are removed. However, margin trading and short selling have opposite impacts on liquidity. During ordinary periods, margin trading benefits liquidity, whereas short selling damages liquidity; however, during market downturns, their roles are reversed. We also provide evidence suggesting that short sellers are informed traders in China and that short selling reduces stock liquidity because of the increased risk of adverse selection faced by uninformed traders.     

Asset growth and stock returns: Evidence from Asian financial markets

This study examines the effect of corporate asset growth on stock returns using data on nine equity markets in Asia. For the period from 1981 to 2007, we find a pervasive negative relation between asset growth and subsequent stock returns. Such relation is weaker in markets where firms' asset growth rates are more homogeneous and persistent and in markets where firms rely more on bank financing for growth. On the other hand, corporate governance, investor protection, and legal origin do not influence the magnitude of the asset growth effect in Asian markets.     

Government finances and bank bailouts: Evidence from European stock markets

Using a sample of European banks and a series of events affecting governments' finances, we conduct an event study to examine whether there is a relationship between governments' fiscal difficulties and banks' stock returns. We find a significant reaction of banks' stocks to news concerning governments' finances. Banks' stock returns fall in response to a deterioration of governments' financial situation. We find little difference in the reaction between large and small banks. The evidence points towards all banks being equally likely to be bailed out. Our data are consistent with a policy during the Eurozone sovereign-debt crisis in which “no bank is too small to save”.     

The value of stock analysts' recommendations: Evidence from emerging markets

This is the first study to empirically examine post-recommendation buy and hold abnormal returns in emerging markets. By analyzing a sample of 13 emerging countries over the decade from 1996 to 2005, we find that stock prices react strongly to stock analyst recommendations and revisions. We also find that there is a stronger positive bias in analyst recommendations and revisions in emerging markets compared with that in developed markets. In our cross-sectional analysis, we find that the Market-to-Book ratio is the primary indicator for Buy and Strong Buy recommendation regressions. This indicates that stock analysts in emerging markets prefer high growth stocks with attractive characteristics.     

Seeking causality between liquidity risk and credit risk: TED-OIS spreads and CDS indexes

Since the Global Financial Crisis, credit risk and its management have become one of the most appealing topics in finance literature. In this study, we investigate the interaction of credit risk and liquidity risk through the TED and the OIS spreads and various credit default swap indexes from the CDX and the iTraxx family (CDXIG, CDXHY, ITEEU, and ITEXO). The empirical analysis is conducted through the Kapetanios unit root test, the EGARCH model, the Bootstrap Toda-Yamamoto modified Wald test and the asymmetric causality analysis. The results of symmetric and asymmetric causality methods reveal that liquidity risk appears to play an important role in credit risk, and in most cases, the TED and the OIS spreads dominate the CDS indexes. It can, thus, be concluded that the TED and the OIS spreads are superior to the CDS indexes as an early warning indicator in the credit market.     

Returns,volatility and investor sentiment: Evidence from European stock markets

In this study, we show that patterns in returns behave as if investors, influenced by their level of optimism, selected stocks according to their volatility. Our goal is to confirm the contribution of behavioral finance while showing that investor sentiment can be profitably used by practitioners. We incorporate volatility in the relationship between investor sentiment and future returns, this is the main originality of our approach. Our methodology consists in comparing returns, volatility and higher-order moments of portfolios managed with investor sentiment against those obtained either with passive (buy and hold) portfolio management or with a minimum variance portfolio. Portfolios managed with investor sentiment have better returns and involve less risk under certain conditions.     

Spillovers among sovereign CDS,stock and commodity markets: A correlation network perspective

In the wake of the globalization of financial markets, studying spillovers among different asset markets, especially spillovers that include sovereign CDS markets, is of vital importance. This paper attempts to build a spillover network to investigate the complex interactions within the system of sovereign CDS, stock and commodity markets by adopting the spillover index based on forecast error variance (FEV) decomposition. The results reveal that emerging countries have larger average spillovers than developed countries with regard to sovereign CDS-to-stock returns spillovers, while the developed countries contribute more average spillovers than the emerging countries in the opposite direction. Moreover, the sovereign CDS market and the commodity market still demonstrate a relatively important role during certain periods although stock markets always occupy the dominant position during every phase. Our findings provide new insights into spillovers among the major global asset markets using a network perspective, which is valuable for regulation of financial markets, asset allocation and portfolio risk management.     

Corporate governance and the information environment: Evidence from Chinese stock markets

This article explores the relationship between corporate governance and the information environment in Chinese stock markets. We construct a parsimonious governance measure for public firms using a 2003 through 2011 sample period. We use four indicators to proxy for the information environment: analyst following, analyst forecast accuracy, analyst forecast dispersion, and price timeliness. We find that better governed firms tend to be associated with larger analyst followings and more informative forecasts. We also find that better governed firms tend to improve on the timeliness of bad news relative to good news.     

Price discovery and persistent arbitrage violations in credit markets

This paper investigates price violations in credit markets using a data sample spanning from 2002 to 2016. We find that price violations are highly persistent during the crisis period, particularly for speculative-grade bonds. There is evidence that price distortions and market disintegration are linked to market-wide and firm-level impediments to arbitrage and limited capital provision. Higher firm-level impediments to arbitrage lead to less market integration, and more severe and persistent pricing discrepancies. Moreover, we find that the negative CDS basis persists in the postcrisis period, which is attributable to dealers’ lower capital commitment and deterioration in market-making quality.     

On the long-term or short-term dependence in stock prices: Evidence from international stock markets

This study examines the short- and long-term dependence in the United States and 21 international equity market indexes. Two heteroscedastic-robust testing methods, the modified rescaled range analysis and the rescaled variance ratio test, are employed to test for the existence of dependence. The evidence consistently reveals the absence of long-term dependence in these 22 stock returns indexes. The random walk hypothesis for most, but not all, stock returns indexes is not rejected. When the random walk hypothesis is rejected, the evidence supporting the rejection is weak and the stochastic dependence occurs mainly in short-horizon, rather then long-horizon holding period returns.     

The determinants of price discovery: Evidence from US-Canadian cross-listed shares

We examine the determinants of price discovery for Canadian firms cross-listed on the main US stock exchanges over the period 1996–2011. Sampling at a one-minute frequency, we compute Gonzalo and Granger Component Shares (CS) and employ a system GMM approach to control for persistence in price discovery and endogeneity between CS and its determinants. We find that price discovery is highly persistent and that there is strong evidence of simultaneity between CS and its determinants. We conclude that lower relative spreads and higher relative trading activity increase an exchange’s contribution to price discovery. We also document that it is small trades that drive price discovery, particularly since the introduction of decimalization.     

Risk spillovers from China's and the US stock markets during high-volatility periods: Evidence from East Asianstock markets

This paper studies cross-country risk spillovers through C-vine copula quantile regression. We find Both China's and the US markets can result in large risk spillovers to East Asian markets. Furthermore, their significant conditional spillovers indicate they can emit risk through an intermediary market. However, their distinctive dependency structures with East Asian markets reflect their differences in spillovers to the markets in magnitude. The risk spillovers from US are stronger than China in magnitude. Moreover, the risk spillover from China's stock market during its high-volatility period is weaker than the whole period, which is contrary to the US market. It may imply Chinese financial influences gradually increase with Chinese financial liberalization and regional integration. Our results have implications for macroprudential regulators adopt the effective supervision and regulation to deal with the cross-border risk spillovers, and for international investors in risk hedging, derivative valuation and investment.     

Revealed stock preferences of individual investors: Evidence from Chinese equity markets

We examine the stock preferences of Chinese individual investors as revealed by their executed trades. Results show that their stock preferences vary with wealth levels. Wealthier individuals prefer stocks with high liquidity and volatility, greater state-ownership, high growth potential, and strong past performance. Less wealthy individuals, however, prefer stocks with high beta, high liquidity, poor past performance, low price, and small capitalization. Overall, the investment choices of Chinese individual investors do not necessarily suggest only behavioral biases as existing studies might have implied, but instead, they reveal to some extent the rational investing behavior of Chinese individual investors.     

Banking deregulation and credit risk: Evidence from the EU

This paper studies the effect of banking deregulation on credit risk. Its theoretical model shows that a bank is willing to invest more resources in screening borrowers when there is an entry threat, even though loan rates are driven lower. Thus, deregulation may result in improved loan quality and lower credit risk. This result is tested using bank-level balance sheet data and macroeconomic data for the European Union. The data reveal that competition intensified after the completion of the Second Banking Directive, while loan quality improved in most markets. Evidence is found that the loan quality improvement is associated with lower interest margin.     

Measuring changes in credit risk: The case of CDS event studies

This paper examines the size and power of test statistics designed to detect abnormal changes in credit risk as measured by credit default swap (CDS) spreads. We follow a simulation approach to examine the statistical properties of normal and abnormal CDS spread changes and assess the performance of normal return models and test statistics. Using daily CDS data, we find parametric test statistics to be generally inferior to non-parametric tests, with the rank test performing best. A CDS factor model based on factors identified in the empirical literature is generally well specified and more powerful in detecting abnormal performance than some of the classical normal return models. Finally, we examine abnormal CDS announcement spread changes around issuer's rating downgrades to demonstrate the effect of different CDS spread change measures and normal return models on event study results.