Trading of foreign investors and stock returns in an emerging market - Evidence from Vietnam

This article investigates the impact of foreign investors' trading on stock returns in Vietnam, a key emerging market. We utilize a time series data set of foreign investors' trading volume and market returns of the Ho Chi Minh City stock exchange over an extended time frame before and after global financial crisis. The results indicate that foreign investors are positive feedback traders in Vietnam stock market. The findings also reveal the timing ability and trading strategy of foreign investors. The paper offers strong implications for market participants and portfolio investment.     

Momentum strategies and stock returns: Chinese evidence

This paper investigates the profitability of momentum investment strategies for equities listed in the Shanghai Stock Exchange. We also investigate the role of trading volume to examine whether there is any relationship between stock returns and past trading volume for Chinese equities. We find evidence of substantial momentum profits during the period 1995 to 2005 and that momentum is a pervasive feature of stock returns for the market investigated in this paper.Our findings suggest that investors can generate superior returns by investing in strategies unrelated to market movements. We also investigate the potential of past volume to explain momentum profits, and find no strong link between past volume and momentum profits. Our findings also show a strong momentum effect around earnings announcements but the magnitude of these returns is small in relation to the average monthly returns earned in the early months following portfolio formation.     

Portfolio Returns,Market Volatility,and Seasonality

This paper examines three important issues related to the relationship between stock returns and volatility. First, are Duffee's (1995) findings of the relationship between individual stock returns and volatility valid at the portfolio level? Second, is there a seasonality of the market return volatility? Lastly, do size portfolio returns react symmetrically to the market volatility during business cycles? We find that the market volatility exhibits strong autocorrelation and small size portfolio returns exhibit seasonality. However, this phenomenon is not present in large size portfolios. For the entire sample period of 1962–1995, the highest average monthly volatility occurred in October, followed by November, and then January. Examining the two sub-sample periods, we find that the average market volatility increases by 15.4% in the second sample period of 1980–1995 compared to the first sample period of 1962–1979. During the contraction period, the average market volatility is 60.9% higher than that during the expansion period. Using a binary regression model, we find that size portfolio returns react asymmetrically with the market volatility during business cycles. This paper documents a strongly negative contemporaneous relationship between the size portfolio returns and the market volatility that is consistent with the previous findings at the aggregate level, but is inconsistent with the findings at the individual firm level. In contrast with the previous findings, however, we find an ambiguous relationship between the percentage change in the market volatility and the contemporaneous stock portfolio returns. This ambiguity is attributed to strongly negative contemporaneous and one-month ahead relationships between the market volatility and portfolio returns.

     

Liquidity and asset pricing: Evidence from the Hong Kong stock market

This study investigates the role of liquidity in pricing stock returns in the Hong Kong stock market. Our results show that liquidity is an important factor for pricing returns in Hong Kong after taking well-documented asset pricing factors into consideration. The results are robust to adding portfolio residuals and higher moment factor in the factor models. The results are also robust to seasonality, and conditional-market tests. We also compare alternative factor models and find that the liquidity four-factor model (market excess return, size, book-to-market ratio, and liquidity) is the best model to explain stock returns in the Hong Kong stock market, while the momentum factor is not found to be priced.     

What moves international stock and bond markets?

We study the relation between international mutual fund flows and the different return components of aggregate equity and bond markets. First, we decompose international equity and bond market returns into changes in expectations of future real cash payments, interest rates, exchange rates, and discount rates. News about future cash flows, rather than discount rates, is the main driver of international stock returns. This evidence is in contrast with the typical results reported only for the US. Inflation news instead is the main driver of international bond returns. Next, we turn to the interaction between these return components and international portfolio flows. We find evidence consistent with price pressure, short-term trend chasing, and short-run overreaction in the equity market. We also find that international bond flows to emerging markets are more sensitive to interest rate shocks than equity flows.     

Does futures trading increase stock market volatility? The case of the Nikkei stock index futures markets

We propose new tests to examine whether stock index futures affect stock market volatility. These tests decompose spot portfolio volatility into the cross-sectional dispersion and the average volatility of returns on the portfolio's constituent securities. Our tests show that for Nikkei stocks spot portfolio volatility increased and cross-sectional dispersion decreased compared with average volatility when Nikkei futures began trading on the Osaka Securities Exchange, but not on the Singapore International Monetary Exchange. For non-Nikkei stocks, no shift occurred when futures trading began on either exchange. These findings are consistent with the hypotheses that futures trading increases spot portfolio volatility but that there is no volatility “spillover” to stocks against which futures are not traded. However, the increase in volatility attributable to futures trading is small compared with volatility shifts induced by changes in broad economic factors.     

Which past returns affect trading volume?

Anecdotal evidence suggests and recent theoretical models argue that past stock returns affect subsequent stock trading volume. We study 3,000 individual investors over a 51 month period to test this apparent link between past returns and volume using several different panel regression models (linear panel regressions, negative binomial panel regressions, Tobit panel regressions). We find that both past market returns as well as past portfolio returns affect trading activity of individual investors (as measured by stock portfolio turnover, the number of stock transactions, and the propensity to trade stocks in a given month). After high portfolio returns, investors buy high risk stocks and reduce the number of stocks in their portfolio. High past market returns do not lead to higher risk taking or underdiversification. We argue that the only explanations for our findings are overconfidence theories based on biased self-attribution and differences of opinion explanations for high levels of trading activity.     

Volume and skewness in international equity markets

We examine the relation between trading volume and skewness in 11 international stock markets using daily and monthly data from January 1980 to August 2004. We construct single equation and VAR models of the relation between the first three moments of market returns and trading volumes. Our results show hitherto unrecognised channels of influence, and support the investor heterogeneity approach to explaining return asymmetries.     

The efficiency of international information flow: Evidence from the ETF and CEF prices

While similar in their trading and organization, closed-end funds (CEFs) and exchange-traded funds (ETFs) differ in their liquidity and ease of arbitrage. We compare their price transmission dynamics using a sample of funds that invest in foreign securities and are most likely to show the deficiencies in the manner in which they process information. Our analysis shows that ETF returns are more closely related to their portfolio returns than are CEF returns. However, both fund types underreact to portfolio returns but overreact to domestic stock market returns. A simple trading strategy using these results is profitable with roundtrip trading costs less than 1.38% for CEFs and 0.71% for ETFs.     

Exchange rates,interventions, and the predictability of stock returns in Japan

Using monthly Japanese data for the period 1991–2005, we examined the link between exchange rate movements and stock returns. We found that exchange rate movements per se do not help to explain stock returns. There is, however, evidence of in-sample predictability if one accounts for the interventions of the Japanese monetary authorities in the foreign exchange market. This evidence does not indicate a violation of market efficiency insofar as investors cannot use information on interventions to systematically improve the performance of simple trading rules based on out-of-sample forecasts of stock returns.     

High Stock Returns before Holidays: Existence and Evidence on Possible Causes

On the trading day prior to holidays, stocks advance with disproportionate frequency and show high mean returns averaging nine to fourteen times the mean return for the remaining days of the year. Over one third of the total return accruing to the market portfolio over the 1963–1982 period was earned on the eight trading days which each year fall before holiday market closings. Examination of hourly pre-holiday stock returns reveals high returns throughout the day. Pre-holiday stock returns in the post-test 1983–1986 period are also examined.     

市场摩擦对特质风险溢价的影响效应——基于A股主板市场的实证分析

与国外发达市场相比,我国A股主板市场的市场摩擦因素对市场微观结构和资产定价的影响更大。在防范和化解系统性风险的过程中,进一步分析市场摩擦如何作用于特质风险定价效应的问题具有重要的理论和现实意义。本文通过采用多维市场摩擦指标来代理信息不对称、交易成本、买卖限制、卖空限制、风险对冲和外部冲击,检验中国股市特质风险和预期收益率的关系,并判断出市场摩擦因素间的差异性影响机制。回归发现,市场摩擦和特质风险因子(特质波动率和特质偏度)都具有定价效应。各维度市场摩擦因素降低了股票流动性,进而增强了特质波动率的负向定价效应,部分解释了“特质波动率之谜”,但市场摩擦对特质偏度因子溢价的影响较为微弱。同时,基于特质波动率和特质偏度因子的投资策略能够产生超越CAPM、三因子和五因子模型的绝对收益,并印证了市场摩擦对特质风险因子绝对收益的影响作用。     

Cross-section of option returns and volatility

We study the cross-section of stock option returns by sorting stocks on the difference between historical realized volatility and at-the-money implied volatility. We find that a zero-cost trading strategy that is long (short) in the portfolio with a large positive (negative) difference between these two volatility measures produces an economically and statistically significant average monthly return. The results are robust to different market conditions, to stock risks-characteristics, to various industry groupings, to option liquidity characteristics, and are not explained by usual risk factor models.     

A risk-return explanation of the momentum-reversal “anomaly”

This study investigates the nature of the momentum-reversal phenomenon exhibited by U.S. stock returns from 1962 to 2013. We use cumulative future returns of long–short portfolios, which are formed using prior returns as benchmarks, after portfolio formation to analyze the well-documented momentum-reversal pattern. Contrary to many previous studies our results demonstrate that there is no momentum-reversal anomaly. We show that size (market capitalization), which is often considered a proxy for risk, eventually dominates momentum's initial effect, causing stock prices and, hence, returns to move in the opposite direction. We demonstrate that this latter price movement is likely to be related to institutional trading.     

The impact of portfolio diversification on mean reverting components of stock indices

Positive autocorrelations are introduced into stock index portfolios when they are formed from individual stock indices while negative autocorrelations are induced in returns by increasing the investment horizon. Using monthly data of six international stock indices, this paper examines the diversification effect with different investment horizons on autocorrelations of stock index portfolios. The results show that portfolio diversification does not alter the impact of the investment horizon on autocorrelations. Different investment horizons, however, have great impact on the diversification effect on autocorrelations. With short (long) horizons, the average autocorrelation coefficient increases (decreases) with an increase in the portfolio size, suggesting that mean-reverting component dominates the delayed adjustment effect in long horizons and vice versa in short horizons. Our results are robust across two 10-year sub-periods.The author would like to thank an anonymous referee of this Journal for the comments on an earlier version of this paper and the Research Committee of Hong Kong Baptist University for the financial support in this research.     

Can (unusual) weather conditions in New York predict South African stock returns?

This paper investigates the explanatory power of certain weather variables, measured as deviations from their monthly averages, in a leading international financial trading centre, i.e., New York, for South African stock returns, over the daily period January 2nd, 1973 to December, 31, 2015. The empirical results highlight that these unusual deviations of weather variables have a statistically significant negative effect on the stock returns in South Africa, indicating that unusual weather conditions in New York can be used to predict South African stock returns, which otherwise seems to be highly unpredictable. In fact, a forecasting exercise recommends that a trading rule that considers those weather variables through a GARCH modelling approach seems to outperform the random walk model and thus beat the market.     

The Timing of Opening Trades and Pricing Errors

After demonstrating that a zero investment trading strategy that buys stocks with overnight returns below the market average and sells stocks with overnight returns above the market average earns more than 1% monthly profit, I demonstrate that this profit is greater for stocks that start trading more quickly than for other stocks. These results control for trading costs. The resulting pricing errors are a material portion of stock price volatility and suggest that a quick response to overnight information adds non‐information‐based stock volatility to stock prices.     

Seasonality in stock returns and volatility: The Ramadan effect

Calendar anomalies in stock returns are well documented. Less obvious is the existence of seasonality in return volatility associated with moving calendar events such as the Muslim holy month of Ramadan. Using a GARCH specification and data for the Saudi Arabian stock market – now the largest stock market in the Muslim world – this paper documents a systematic pattern of decline in volatility during Ramadan, implying a predictable variation in the market price of risk. An examination of trading data shows that this anomaly appears to be consistent with a decline in trading activity during Ramadan. Evidence of systematic decline in volatility during Ramadan has significant implications for pricing of securities especially option-like products and asset allocation decisions by investors in the Islamic countries.     

Predicting bear and bull stock markets with dynamic binary time series models

Despite the voluminous empirical research on the potential predictability of stock returns, much less attention has been paid to the predictability of bear and bull stock markets. In this study, the aim is to predict U.S. bear and bull stock markets with dynamic binary time series models. Based on the analysis of the monthly U.S. data set, bear and bull markets are predictable in and out of sample. In particular, substantial additional predictive power can be obtained by allowing for a dynamic structure in the binary response model. Probability forecasts of the state of the stock market can also be utilized to obtain optimal asset allocation decisions between stocks and bonds. It turns out that the dynamic probit models yield much higher portfolio returns than the buy-and-hold trading strategy in a small-scale market timing experiment.     

Trading volume and short-horizon contrarian profits: Evidence from the Malaysian market

We provide evidence on short-term predictability of stock returns on the Malaysian stock market. We examine the relation between return predictability and the level of trading activity. This is particularly relevant in emerging stock markets, where thin trading is more pervasive. We find that the returns from a contrarian portfolio strategy are positively related to the level of trading activity in the securities. Specifically, the contrarian profits on actively and frequently traded securities are significantly higher than that generated from the low trading activity securities. We find that the differential behavior of high- and low-volume securities is not subsumed by the size effect, although for the small firms, the volume–predictability relation is most pronounced. We also suggest that the price patterns may be related to the institutional arrangement in the Malaysian stock market.