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 second-order stock market model

A first-order model for a stock market assigns to each stock a return parameter and a variance parameter that depend only on the rank of the stock. A second-order model assigns these parameters based on both the rank and the name of the stock. First- and second-order models exhibit stability properties that make them appropriate as a backdrop for the analysis of the idiosyncratic behavior of individual stocks. Methods for the estimation of the parameters of second-order models are developed in this paper.     

An equilibrium model with restricted stock market participation

This article solves the equilibrium problem in a pure-exchange,continuous-time economy in which some agents face informationcosts or other types of frictions effectively preventing themfrom investing in the stock market. Under the assumption thatthe restricted agents have logarithmic utilities, a completecharacterization of equilibrium prices and consumption/investmentpolicies is provided. A simple calibration shows that the modelcan help resolve some of the empirical asset pricing puzzles.     

Capital market equilibrium with externalities, production and heterogeneous agents

The paper studies general equilibrium in an economy with externalities, production and heterogeneous agents. The model developed builds on Brock [Brock, W.A., 1982. Asset prices in a production economy. In: McCall, J.J. (Ed.), The Economics of Information and Uncertainty. University of Chicago Press, Chicago, pp. 1–43] and Merton [Merton, R.C., 1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance 42, 483–510]; it involves both a stock market and a market for loans, together with negative externalities produced by a subset of firms. Importantly, the technological production structure of the firms is reflected in the properties of the shares traded in the stock market. Agents are heterogeneous in their financial choices, potentially discriminating against the firms producing a negative externality. The model sheds light on the utility costs of the discriminating behavior and on the impact on the price of the stock issued by the firm which is responsible for the externality. The model is used to study the factors which may magnify or reduce the impact of discrimination. A set of discriminated firms may be seriously affected only if the discriminating investors command a large portion of overall wealth and/or they do not represent important diversification instruments. The model can be applied to understanding the effects of socially responsible investment, whereby investors discriminate against companies belonging to some sectors which are perceived as socially dangerous or unethical.     

Multiple equilibria in a monopoly market with heterogeneous agents and externalities

We explore the effects of social influence in a simple market model in which a large number of agents face a binary choice: to buy/not to buy a single unit of a product at a price posted by a single seller (monopoly market). We consider the case of positive externalities: an agent is more willing to buy if other agents make the same decision. We consider two special cases of heterogeneity in the individuals' decision rules, corresponding in the literature to the Random Utility Models of Thurstone, and of McFadden and Manski. In the first one the heterogeneity fluctuates with time, leading to a standard model in Physics: the Ising model at finite temperature (known as annealed disorder) in a uniform external field. In the second approach the heterogeneity among agents is fixed; in Physics this is a particular case of the quenched disorder model known as a random field Ising model, at zero temperature. We study analytically the equilibrium properties of the market in the limiting case where each agent is influenced by all the others (the mean field limit), and we illustrate some dynamic properties of these models making use of numerical simulations in an Agent based Computational Economics approach. Considering the optimization of the profit by the seller within the case of fixed heterogeneity with global externality, we exhibit a new regime where, if the mean willingness to pay increases and/or the production costs decrease, the seller's optimal strategy jumps from a solution with a high price and a small number of buyers, to another one with a low price and a large number of buyers. This regime, usually modelled with ad hoc bimodal distributions of the idiosyncratic heterogeneity, arises here for general monomodal distributions if the social influence is strong enough.     

The cross-section of stock returns in an early stock market

Using a new dataset which contains monthly data on 1015 stocks traded on the London Stock Exchange between 1825 and 1870, we investigate the cross section of stock returns in this early capital market. Unique features of this market allow us to evaluate the veracity of several popular explanations of asset pricing behavior. Using portfolio analysis and Fama–MacBeth regressions, we find that stock characteristics such as beta, illiquidity, dividend yield, and past-year return performance are all positively correlated with stock returns. However, market capitalization and past-three-year return performance have no significant correlation with stock returns.     

Evaluation of the adaptive market hypothesis as an evolutionary perspective on market efficiency: Evidence from the Tehran stock exchange

This study evaluates the existence of the adaptive market hypothesis (AMH) as an evolutionary alternative to the efficient market hypothesis (EMH) by applying daily returns on the TEPIX index in the Tehran stock exchange (TSE) in Iran. The data span of daily returns is from 1999 to 2013. In this paper four different tests in the form of two distinguished classes (linear and nonlinear) have been used to study adaptive behavior of returns. The results that were obtained from linear (automatic variance ratio and automatic portmanteau) and nonlinear (generalized spectral and McLeod–Li) tests represent the oscillatory manner of returns about dependency and independency which corresponds with the adaptive market hypothesis.     

Location-specific stock market indices: an exploration

This article develops an alternative location-specific stock market index driven by investors’ ‘attachment’ towards investment at a specific location. We evaluate the performance of hypothetical stock market indices that track companies based on their state of registration, taking the US stock market as our case. Using annual data since 1980 we present raw, risk-adjusted and value-weighted state portfolios’ returns to study the extent to which stock market performance varies by state-level demographics and economic factors. A dynamic panel data estimation – with and without spatial spillover effects – is employed to establish a strong association between stock price performance and the state-level (or geography-weighted) factors. We find that spatial effects are strong and that the ‘spatial attachment’ of companies in interaction with the various location-specific variables imparts an overarching influence on stock-price performance. Comparison of model performances further supports our claims.     

Momentum in stock returns: evidence from an emerging stock market

This study examines the presence and sources of momentum profits in the Dhaka stock exchange (DSE). Although the short-term reversal and intermediate-term momentum are found to be evident, short-term reversal is not as consistent and significant as intermediate-term momentum. Further examination shows that momentum profits in the DSE cannot be explained by the rational source like market factor but can be explained by the size factor. We argue that presence of large number of small stocks and lack of arbitrage opportunity could be the possible causes of momentum effect in the DSE.     

Herd mentality in the stock market: On the role of idiosyncratic participants with heterogeneous information

This paper examines herd behaviour using aggregate market data for stocks, with a focus on the role of idiosyncratic participants with heterogeneous information. We look at herding asymmetry between up and down markets, taking into consideration the daily price limits and the impact of the recent financial crisis. We also improve upon existing tests for fundamental and non-fundamental herding, as well as proposing a method for investigating herd behaviour of different groups of investors. Empirical evidence based on the Ho Chi Minh Stock Exchange in Vietnam reveals a greater level of herding on up compared to down market days, and a significant reduction in the magnitude of herding following the crisis. We document robust intentional herding even when unintentional (fundamental) herding is factored out. Our empirical results also uncover potential within-group herding and between-group interactions among arbitrageurs and noise traders in the market.     

以退为进从H股到A股跨市场增值模式

近年来,内地企业为了将私有化后的H股公司注入旗下的A股公司,大股东们往往会进行一系列的资产剥离和资产置换等运作,提升A股上市公司的规模和盈利能力,最终使原来的H股公司能够以远高于私有化时的估值水平注入A股公司.     

A latent factor model for the Chinese stock market

We propose a new latent factor model for the Chinese stock market based on an instrumented principal component analysis (IPCA). Compared with other common asset pricing models, the new latent factor model explains a larger proportion of individual and portfolio return variation and shows significant out-of-sample predictability. The long-short investment strategy formed by the IPCA factor also presents the highest average return and Sharpe ratio. Subsample and different horizon results are robust. Market beta, profitability and momentum emerge as the most important characteristics in driving the latent factors. We also provide evidence on the economic grounds of the new latent factor model.     

Capital market equilibrium with heterogeneous investors

As a two-parameter model that satisfies stochastic dominance, the mean-extended Gini model is used to build efficient portfolios. The model quantifies risk aversion heterogeneity in capital markets. In a simple Edgeworth box framework, we show how capital market equilibrium is achieved for risky assets. This approach provides a richer basis for analysing the pricing of risky assets under heterogeneous preferences. Our main results are: (1) identical investors, who use the same statistic to represent risk, hold identical portfolios of risky assets equal to the market portfolio; and (2) heterogeneous investors as expressed by the variance or the extended Gini hold different risky assets in portfolios, and therefore no one holds the market portfolio.     

Predicting the long-term stock market volatility: A GARCH-MIDAS model with variable selection

We consider a GARCH-MIDAS model with short-term and long-term volatility components, in which the long-term volatility component depends on many macroeconomic and financial variables. We select the variables that exhibit the strongest effects on the long-term stock market volatility via maximizing the penalized log-likelihood function with an Adaptive-Lasso penalty. The GARCH-MIDAS model with variable selection enables us to incorporate many variables in a single model without estimating a large number of parameters. In the empirical analysis, three variables (namely, housing starts, default spread and realized volatility) are selected from a large set of macroeconomic and financial variables. The recursive out-of-sample forecasting evaluation shows that variable selection significantly improves the predictive ability of the GARCH-MIDAS model for the long-term stock market volatility.     

Forecasting global stock market volatilities in an uncertain world

We investigate the predictive relationship between uncertainty and global stock market volatilities from a high-frequency perspective. We show that uncertainty contains information beyond fundamentals (volatility) and strongly affects stock market volatility. Using several crucial uncertainty measures (i.e., uncertainty and implied volatility indices), we prove that the CBOE volatility index (VIX) performs best in point (density) forecasting; the financial stress index (FSI) in directional forecasting. Furthermore, VIX's predictive power improved dramatically after the COVID-19 outbreak, and the VIX-based portfolio strategy enables mean-variance investors to achieve higher returns. There are two empirical properties of VIX: (i) it helps reduce significantly forecast variance rather than bias; and (ii) its forecasts encompass other uncertainty forecasts well. Overall, we highlight the importance of considering uncertainty when exploring the expected stock market volatility.     

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.     

Unchecked intermediaries: Price manipulation in an emerging stock market

How costly is the poor governance of market intermediaries? Using unique trade level data from the stock market in Pakistan, we find that when brokers trade on their own behalf, they earn annual rates of return that are 50-90 percentage points higher than those earned by outside investors. Neither market timing nor liquidity provision by brokers can explain this profitability differential. Instead we find compelling evidence for a specific trade-based “pump and dump” price manipulation scheme: When prices are low, colluding brokers trade amongst themselves to artificially raise prices and attract positive-feedback traders. Once prices have risen, the former exit leaving the latter to suffer the ensuing price fall. Conservative estimates suggest these manipulation rents can account for almost a half of total broker earnings. These large rents may explain why market reforms are hard to implement and emerging equity markets often remain marginal with few outsiders investing and little capital raised.     

Afraid of the stock market

Review of Quantitative Finance and Accounting - This study demonstrates the way investors psychological traits influence their financial behaviors in the stock market. Results from the Health and...     

Irrational investor response to stock splits in an emerging market

Using the creation and collapse of the Cyprus stock market bubble as a backdrop, we document substantial positive abnormal returns around the announcement and execution of stock splits in Cyprus. Split-induced returns cannot be explained by variables proxying for conventional liquidity and signalling hypotheses for stock-split activity. Positive split-induced returns are largely reversed in the post-split months. Post-split stock underperformance is inversely related to, and thus appears to be a correction for, the significant market overreaction at split execution. We suggest an investor irrationality explanation for these results, arguing that stock splits were associated with the creation of the bubble due to the inability of investors to understand splits correctly. We conclude that educating investors in emerging markets to process information correctly will improve the efficiency of such markets.     

Financial liberalization and stock market efficiency: an empirical examination of nine emerging market countries

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from nine different countries, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient prior to the actual liberalization.