Market liquidity risk factor and financial market anomalies: Evidence from the Chinese stock market

The Chinese stock market is an order-driven market and hence its characteristics are structurally different from quote-driven markets. There are no studies that consider the role of the market liquidity risk factor in determining cross-sectional stock returns in a model including financial market anomalies for order-driven markets. Our aim is to test whether financial market anomalies such as firm size, the book-to-market ratio, the turnover rate, and momentum both with and without the inclusion of the market liquidity risk factor in the case of the Chinese stock market can explain cross-sectional stock returns. The empirical framework is based on the model proposed by Avramov and Chordia (AC, 2006). Our main finding is that the AC model can capture financial market anomalies except momentum when we include the market liquidity risk factor on the Chinese stock market.     

Liquidity risk and stock performance during the financial crisis

We investigate whether and how ex-ante liquidity risk affects realized stock returns during the global financial crisis of 2008–2009 in international equity markets. We find that stocks with higher pre-crisis return exposure to global market liquidity shocks experience larger price reductions during the crisis period. Our findings provide further insight into the comprehensive picture of the effect of liquidity risk on asset prices, especially in an international context and under different market conditions.     

On the relationship between exchange rates and equity returns: A new approach

This paper employs a new approach in order to investigate the underlying relationship between stock markets and exchange rates. Current approaches suggest that the relative equity market performance of two countries is linked to their exchange rate. In contrast, this study proposes an alternative approach where one global variable – global equity market returns – is believed to have an effect on exchange rates, with the relative interest rate level of a currency determining the sign of the relationship. Our empirical findings suggest that exchange rates and global stock market returns are strongly linked. The value of currencies with higher interest rates is positively related with global equity returns, whereas the value of currencies with lower interest rates is negatively related with global equity returns.     

Liquidity and stock returns: Evidence from a pure order-driven market using a new liquidity proxy

Liquidity has been found to be a determinant of stock returns in large hybrid quote-driven markets. Liquidity proxies have ranged from trade-based measures such as turnover rate to order-based measures such as the bid-ask spread. The relationship between return and liquidity in small pure order-driven markets is less clear, with different liquidity proxies yielding conflicting results. This study adds to the existing literature by considering the return-liquidity relationship on the Australian Stock Exchange, a small pure order-driven market, using a new liquidity measure, Weighted Order Value (WOV). Liquidity is found to be an important determinant of returns.     

Money and liquidity in financial markets

We argue that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the market for liquidity leads banks to engage in what we term “liquidity pull-back,” which involves selling financial assets either by banks directly or by levered investors. Empirical tests on the stock market are supportive. Tighter interbank markets are associated with relatively more volume in more liquid stocks; selling pressure, especially in more liquid stocks; and transitory negative returns. We control for market-wide uncertainty and in the process also contribute to the literature on portfolio rebalancing. Our general point is that money matters in financial markets.     

Short-selling bans and institutional investors' herding behaviour: Evidence from the global financial crisis

The literature on short-selling restrictions focusses mainly on a ban's impact on market efficiency, liquidity and overpricing. Surprisingly, little is known about the effects of short-sale constraints on herd behaviour. Since institutional investors have come to dominate mature stock markets and rely extensively on short sales, constraining these traders may influence the asset pricing process. We investigate six stock markets that faced bans during the recent global financial crisis. Our empirical evidence shows that short-selling restrictions exhibit either no influence on herding formation or induce adverse herding. This implies a higher dispersion of returns around the market compared to rational asset pricing, which can be interpreted as an increase in uncertainty among stock market investors.     

The implications of liquidity and order flows for neoclassical finance

While liquidity and order flows are microstructure constructs, we show that they have profound implications for all of finance. In particular, liquidity is intimately connected with the fundamental building blocks of finance, namely, the pricing of risk, the powerful no-arbitrage theorems, and market efficiency. Large-sample studies of liquidity show that both liquidity and liquidity risk are priced in the cross-section of stock returns, the law of one price is more likely to hold in more liquid markets, and liquidity enhances market efficiency. Hence policies to enhance liquidity encourage efficiency and reduce costs of raising capital. Furthermore, order flows are powerful predictors of returns as well as the real economy.     

Internet search intensity,liquidity and returns in emerging markets

Using a sample of listed companies in the Vietnam stock market from 2013 to 2018, this paper investigates the linkage between Internet search intenseness and stock returns and trading volume. The empirical results confirm the “price pressure hypothesis” that search intensity is positively associated with subsequent stock returns and trading volume. It also finds that the positive effects on stock returns are not temporary but remain for the long term although some reversals occur. The results show that the effects of search intensity on stock returns are higher for large stocks than for small stocks. The findings also reveal that stocks that attract more attention from the public are exposed to higher market risk. These findings have not been documented in the literature so they enrich the information on the relationship between Internet search intenseness and stock market returns, especially for emerging markets where Internet user numbers are sharply increasing.     

UNLISTED TRADING PRIVILEGES,LIQUIDITY, AND STOCK RETURNS

In this study we examine the effect of dual trading through unlisted trading privileges (UTPs) on liquidity and stock returns. Stocks with UTPs trade in a different market structure than stocks listed and traded only on the AMEX and NYSE. Differences in market structure may affect stock returns through liquidity services provided by the competing markets. The sample comprises 852 AMEX and NYSE firms that began unlisted trading on the Philadelphia, Pacific, Midwest, or Cincinnati exchanges between 1984 and 1988. The results show significantly positive abnormal returns around the SEC's announcement of a regional exchange's filing for UTPs. The results also suggest that increased competition improves trading liquidity. Only stocks with low liquidity before UTPs announcements experience significantly improved liquidity and positive stock returns.     

The cross-section of stock returns in frontier emerging markets

We are the first to investigate the cross-section of stock returns in the new emerging equity markets, the so-called frontier emerging markets. Our unique survivorship-bias free data set consists of more than 1400 stocks over the period 1997 to 2008 and covers 24 of the most liquid frontier emerging markets. The major benefit of using individual stock characteristics is that it allows us to investigate whether return factors that have been documented in developed countries also exist in these markets. We document the presence of economically and statistically significant value and momentum effects, and a local size effect. Our results indicate that the value and momentum effects still exist when incorporating conservative assumptions of transaction costs. Additionally, we show that value, momentum, and local size returns in frontier markets cannot be explained by global risk factors.     

Size,value, and momentum in developed country equity returns: Macroeconomic and liquidity exposures

The paper investigates value and momentum factors in 23 developed international stock markets. We find that typically value and momentum premia are smaller and more negatively correlated for large market capitalization stocks relative to small. Momentum factors are more highly correlated internationally relative to value. We provide international evidence on three sets of risk exposures of value and momentum returns: macroeconomic risk, funding liquidity risk, and stock market liquidity risk. We find that value returns are typically lower prior to a recession while momentum returns often exhibit little sensitivity. Value returns are typically lower in times of poor funding liquidity, whereas, with notable exceptions, momentum returns are typically unaffected. Lastly, for almost all countries, value returns are high in poor stock market liquidity conditions.     

Uncovering the time-varying relationship between commonality in liquidity and volatility

This study examines the dynamic linkages between commonality in liquidity in international stock markets and market volatility. Using a recently proposed liquidity measure as input in a variance decomposition exercise, we show that innovations to liquidity in most markets are induced predominately by inter-market innovations. We also find that commonality in liquidity peaks immediately after large market downturns, coinciding with periods of crisis. The results from a dynamic Granger causality test indicate that the relationship between commonality in liquidity and market volatility is bi-directional and time-varying. We show that while volatility Granger-causes commonality in liquidity throughout the entire sample period, market volatility is enhanced by commonality in liquidity only in sub-periods. Our results are helpful for practitioners and policy makers.     

Intraday volatility in the stock index and stock index futures markets

We examine the intraday relationship between returns and returnsvolatility in the stock index and stock index futures markets.Our results indicate a strong intermarket dependence in thevolatility of the case and futures returns. Price innovationsthat originate in either the stock or futures markets can predictthe future volatility in the other market. We show that thisrelationship persists even during periods in which the dependencein the returns themselves appears to weaken. The findings arerobust to controlling for potential market frictions such asasynchronous trading in the stock index. Our results have implicationsfor understanding the pattern of information flows between thetwo markets.     

Investor sentiment and stock returns: Global evidence

We assess the impact of investor sentiment on future stock returns in 50 global stock markets. Using the consumer confidence index (CCI) as the sentiment proxy, we document a negative relationship between investor sentiment and future stock returns at the global level. While the separation between developed and emerging markets does not disrupt the negative pattern, investor sentiment has a more instant impact in emerging markets, but a more enduring impact in developed markets. Individual stock markets reveal heterogeneity in the sentiment-return relationship. This heterogeneity can be explained by cross-market differences in culture and institutions, along with intelligence and education, to varying degrees influenced by the extent of individual investor market participation.     

Does monetary policy determine stock market liquidity? New evidence from the euro zone

The recent financial crisis has been characterized by unprecedented monetary policy interventions of central banks with the intention to stabilize financial markets and the real economy. This paper sheds light on the actual impact of monetary policy on stock liquidity and thereby addresses its role as a determinant of commonality in liquidity. Our results suggest that an expansionary monetary policy of the European Central Bank leads to an increase of aggregate stock market liquidity in the German, French and Italian markets. Furthermore, the effect of monetary policy is significantly stronger for smaller stocks, suggesting a non-linear impact of monetary policy on stock liquidity.     

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。     

Stock returns and economic forces—An empirical investigation of Chinese markets

This study finds evidence that a better macroeconomic climate and an improvement in liquidity help to explain Chinese stock returns. There is no evidence to support the hypothesis that growth in dividend yields can predict stock returns. The sectoral stock returns in China's markets are correlated with stock returns in the US markets as evidenced by: (i) a positive correlation with US stock returns; (ii) a significant negative error correcting term; (iii) a negative response of Chinese stocks to financial stress in the US market; and (iv) a positive correlation with a depreciation in the China/US exchange rate.     

Linkages between Indian and US financial markets: impact of global financial crisis and Eurozone debt crisis

This paper examines inter-linkages between Indian and US equity, foreign exchange and money markets using the vector autoregressive-multivariate GARCH-BEKK framework. We investigate the impact of global financial crisis (GFC) and Eurozone debt crisis (EZDC) on the conditional volatility and conditional correlation estimates derived from the multivariate GARCH model for Indian and US financial markets. Our results indicate that there is significant bidirectional causality-in-mean between the Indian stock market returns and the Rs./USD market returns, and significant unidirectional causality-in-mean from the US stock market returns to the Indian stock market returns. As regards volatility spillovers, we find that volatility in the Indian stock market rises in response to domestic as well as US financial market shocks but Indian financial market shocks do not impact the US markets. Further, impact of the recent crisis episodes on the covariance matrix is found to be significant. We find that volatility in the Indian and US financial markets significantly amplified during GFC. The conditional correlations across asset markets were significantly accentuated in the wake of the two crisis episodes. The impact of GFC on cross-market conditional correlations is higher for majority of the asset market pairs in comparison to the EZDC.     

基于Copula函数的国际原油价格与股票市场收益的相关性研究

针对国际原油价格与金砖五国股票市场收益之间的相关性问题,使用 AR(p)-GARCH(1,1)-Copula 模型进行检验。运用广义误差分布(GED)获取收益残差序列,对 WTI 原油价格和金砖五国股市收益之间的相关性进行实证分析。研究结果表明,国际原油价格与中国股市收益呈现微弱的相关关系,而与其他四国股市收益的相关关系较为明显。用时变 SJC Copula 模型刻画国际原油价格与金砖五国股票市场收益的相关性最为合适。     

COVID-19, government policy responses,and stock market liquidity around the world: A note

Unprecedented non-pharmaceutical interventions targeted to curb the spread of COVID-19 exerted a dramatic impact on the global economy and financial markets. This study is the first attempt to investigate the influence of these government policy responses on global stock market liquidity. To this end, we examine daily data from 49 countries for the period January-April 2020. We demonstrate that the impact of the interventions is limited in scale and scope. Workplace and school closures deteriorate liquidity in emerging markets, while information campaigns on the novel coronavirus facilitate trading activity.