The risk–return relations in the Singapore stock market

This paper examines the risk–return relations in the Singapore stock market for the period April 1986 to December 1998. Though beta is significantly related to realized returns, the explanatory power is low. Adding other stock characteristics such as skewness and kurtosis provides limited incremental benefits. However, when a conditional framework based on up and down markets is introduced, the explanatory power increases more than 100 times and there is a significant positive (negative) relation between beta and returns when the market excess returns are positive (negative). The same relation applies when unsystematic risk, total risk and kurtosis are added separately to the beta–return relation during up and down markets with increased explanatory power. Our results indicate that other stock characteristics in addition to beta are also important in pricing risky assets and investors do not hold diversified portfolios. Our results are also checked and compared with another conditional model with time-varying betas conditional on a set of economic variables.     

Does preventive regulation reduce stock price synchronicity? Evidence from Chinese annual report comment letters

Based on a sample of Chinese A-share listed firms from 2015 to 2018, this paper studies the impact of annual report comment letters (ARCLs) on firm stock price synchronicity. We find that after firms receive ARCLs, their stock price synchronicity decreases. Moreover, the longer the ARCLs and the more negative the ARCLs’ tone, the lower the resulting stock price synchronicity. The mechanism test shows that after firms receive ARCLs, the firms’ information disclosure increases in quantity and quality, external media attention increases, and the firms’ governance improves, reducing their stock price synchronicity. Further research shows that this negative association is more significant in firms with higher information asymmetry. This paper shows that the ARCL, an innovative application of the capital market supervision philosophy, is conducive to improving the quality of listed firms and to the healthy development of the capital market.     

Financial constraints and stock returns — Evidence from Australia

Using multiple discriminant analysis, we construct an index that measures firms' external financial constraints in an Australian setting. We form portfolios of firms based on our financial constraints index and find that financially constrained firms earn lower return than their unconstrained counterparts. Moreover, stock returns of financially constrained firms are found to move together, indicating the potential existence of a financial constraints factor. Neither the variation nor the mean return of the constraints factor are well explained by existing asset pricing models, suggesting an independent role for our financial constraints factor in affecting stock returns.     

Does institutional ownership increase stock return volatility? Evidence from Vietnam

The literature on institutional ownership and stock return volatility often ignores small emerging countries. However, this issue is more profound, due to the large size of institutional investors and small stock market size, in emerging equity markets. This paper examines the effects of the institutional ownership on the firm-level volatility of stock returns in Vietnam. Our data cover most of non-financial firms listed on the Ho Chi Minh City stock exchange for the period 2006–2012. Employing different analysis techniques for panel data and controlling for possible endogeneity problems, our empirical results suggest that institutional investors stabilize the stock return volatility. Moreover, we document that: i) the stabilizing effect of institutional investor ownership is higher in dividend paying firms, and ii) if firms are paying out more dividends, this stabilizing effect is greater. Our results outline the important role of institutional investors in maintaining the stability in emerging stock markets.     

The impact of derivatives hedging on the stock market: Evidence from Taiwan’s covered warrants market

We examine the impact of derivatives hedging on the spot market using accurate hedge ratios of covered warrants traded in the Taiwan Stock Exchange (TWSE). Results present significant positive abnormal returns and trading volumes before the announcement of a warrant’s issuance, and the effect is stronger when the hedging demand is larger. Moreover, a significantly positive relationship exists between stock return volatility and the price elasticity of hedging demand. Finally, we observe a significantly negative price effect upon the underlying stock after a call warrant has expired in-the-money due to the liquidation of hedging portfolios.     

Does stock market development always improve firm-level financing? Evidence from Tunisia

The question of whether or not increased stock market size allows for improved financing conditions for firms in emerging markets is an important one for policy-making. This paper seeks to investigate this issue by analyzing whether increases in market-level liquidity have indeed trickled down to individual firms over the last decade of stock market development in Tunisia, a fast-growing Mediterranean emerging market. We develop time varying liquidity scores for all firms listed in the Tunisian market over the 1997–2009 period and analyze the extent to which market development, firm-level characteristics and risk exposure affect the magnitude and the distribution of liquidity using a set of fixed effect panel regressions. Our results suggest that massive increases in value traded have created market congestion, thereby increasing the costs of trading, in a context of persistently low efficiency and increased international integration. The main implications of this process are (i) market-level development and international integration are not sufficient conditions to ease access to finance for local firms, (ii) further reforms in the Tunisian market should focus on diversifying corporate ownership and improving the disclosure of information, and (iii) international investors seeking diversification in Tunisia should be aware of a significant illiquidity risk.     

Risk-sharing,market imperfections,asset prices: Evidence from China’s stock market liberalization

We examine the roles of risk-sharing and other factors in stock price revaluation during a recent liberalization episode in China. Consistent with the theoretical prediction that liberalizations reduce systematic risk, we find that risk-sharing explains approximately one-fourth of the price revaluation of investible stocks during the eight-month window between reform announcement and implementation. The firm-specific information generated by the reform is more efficiently priced into stocks that have a higher degree of market liquidity, information transparency, and informed trading.     

How does China's stock market react to supply chain disruptions from COVID-19?

As a once-in-a-century global pandemic, COVID-19 severely hit the global economy and disrupted the worldwide supply chain. Based on 505 Chinese firms, we use the event study method to explore the effect of COVID-19 on the financial performance of firms. The findings show that COVID-19 has an immediate impact on Chinese firms. Hubei firms experience stronger effects than non-Hubei firms. Supply chain disruptions effects from COVID-19 are observed. Transportation industry is hit more severely than retail industry. Insurance companies experience a strong adverse effect. On the other hand, both medical and competitor firms experience significantly positive spillover effects.     

Which industries benefited from Trump environmental policy news? Evidence from industrial stock market reactions

We investigate whether election of Donald Trump as the president of the United States of America (the US) and subsequent changes in environmental policies and regulations affected any of the 49 different industry sectors in the US. We analyze 19 different events during Trump’s tenure that were mainly rollbacks of previously created regulations and policies. To analyze stock market effects, an event study methodology is used to assess industry reactions. We assume that Trump loosened environmental regulations and policies to strengthen the US economy. Results show that the lax enforcement of environmental regulations and policies was not effective. Only the coal industry can be considered a beneficiary because it experienced repetitive significant positive abnormal returns, whereas other industries experienced mixed or negative reactions or discontinuous positive reactions. Our results contribute to the extant literature on the US environmental policy within the scope of industry.     

Another January effect—Evidence from stock split announcements

This paper examines whether there is a January effect in the propensity and abnormal returns of stock split announcements. It provides primary evidence in the investigation of using monthly effects to explain the patterns of stock splits. The results show that the January effect exists in the likelihood of the occurrence of share splits and in the associated short-term abnormal returns. We also find that another monthly effect—the Halloween effect—exists in stock split announcements. However, the January effect has a much larger and considerably more significant impact on the probability and returns of these announcements. The results of this paper shed light on why we observe patterns in the announcement of corporate events.     

The Jarrow/Turnbull default risk model—Evidence from the German market

Abstract

This article estimates default intensities within the continuous-time Jarrow and Turnbull model for German bank and corporate bond prices. It is shown that a joint implicit estimation of the default intensity and the recovery rate is numerically unstable. In addition to cross-sectional estimations, separate estimations (for each bond individually) are performed. Results strongly support separate estimation over the building of any cross-sections. In contrast to preceeding literature, the optimum volume of data required to provide reasonable estimates of the default intensity is also investigated. It is shown that calibration based on daily data as a rule does not minimize the ex ante mean squared pricing errors. Finally, it is shown that the constant default intensity assumption is not sound with the underlying data and the determinants of the default intensity are investigated. Regressions show that the lagged default intensity estimate, the level of the default-free term structure and liquidity proxies affect the estimated default intensity via joint parameters.     

Does stock market index adjustment affect environmental information disclosure? Evidence from China

This study empirically investigated the effect of adjustment of the China Securities Index 300 (CSI 300) on environmental information disclosure (EID) by index constituents, based on propensity score matching and difference-in-difference approaches. The results showed that the inclusion in the CSI 300 significantly improved the quality of EID by firms. Moreover, this positive impact was more pronounced among firms with lower agency costs and those located in regions with a stronger legal environment. Further testing of the mediating mechanism revealed that becoming an index constituent served to curb opportunistic behavior by managers arising from shortsightedness. Our results were valid after addressing the potential endogeneity between index adjustment and EID and remained unchanged in various other robustness tests. The findings provide support for the positive impact of stock market index adjustment on non-financial information disclosure and have practical implications for decision-making regarding EID in China and other emerging markets.     

Does government report readability matter? Evidence from market reactions to AAERs

We investigate whether market reactions to Accounting and Auditing Enforcement Releases (AAERs) of the U.S. Securities and Exchange Commission (SEC) vary with different levels of readability in the AAERs. After controlling for the complexity of an AAER report and the severity of the enforcement case, we find that when the AAER is more difficult to read, with readability measured based on the directives of the Plain Writing Act of 2010, markets react more negatively to the AAER announcement. Cross-sectional tests indicate that the effect of AAER readability is attenuated by investor sophistication and firm visibility, whereas the effect is more pronounced when AAER firms are exposed to greater uncertainty. Contrary to conventional wisdom that linguistically complex disclosures receive reduced market reactions, our results suggest that complex AAER announcements could trigger more negative stock price reactions, since investors under uncertainty and ambiguity tend to assume the worst and bid down the market value of AAER firms. Our study offers meaningful implications for regulators concerned with writing clarity in government documents.     

Empirical investigation of changes in policy uncertainty on stock returns—Evidence from China’s market

This study finds evidence that a rise in economic policy uncertainty (EPU) leads to a decline in stock returns in Chinese market; however, a positive coefficient was observed in the lagged EPU as stock prices rebound. This phenomenon also holds true for a rise in uncertainty innovations in fiscal policy, monetary policy, trade policy and global policy. The evidence leads to conclude that policy uncertainty premiums should be priced into China’s stock prices. An escalation of U.S. policy uncertainty has a significantly harmful effect on Chinese stocks regardless of whether firms are stated own or listed on U.S. market.     

Sentiment and stock market connectedness: Evidence from the U.S. – China trade war

We assess the impact of monthly and daily investor sentiment on stock market return and volatility connectedness during the U.S.-China trade war period. Our analyses focus on the connectedness between the two economies and their major trading partners. We also investigate the asymmetric impact of sentiment on volatility connectedness by exploring the upside and downside markets separately. We consistently document a negative relationship between investor sentiment and stock market connectedness for both return and volatility. We further confirm that investor sentiment exerts a larger impact on volatility connectedness in the downside market compared to the upside market.     

Are IFRS value-relevant for separate financial statements? Evidence from the Italian stock market

Using a sample of Italian firms, this paper investigates whether separate financial statements are useful to capital market investors, and whether International Financial Reporting Standards (IFRS) are more value-relevant than domestic generally accepted accounting principles (GAAP). These issues are key in evaluating the decision made by some states in the European Union to extend the use of IFRS to separate financial statements. The study provides evidence that separate financial statements are value-relevant, regardless of the accounting standard set. However, contrary to expectations, separate financial statements under IFRS do not have incremental information content beyond domestic GAAP. There is even some evidence that domestic GAAP financial statements are more value-relevant than IFRS. Finally, this paper documents the important role of model specification in value-relevance studies.     

The determinants of stock–bond return correlations

I study the options-implied market risks that affect US stock–bond correlations from 2007 to 2021. I discover that US stock and bond market uncertainty, stock market tail risk, and global credit-default risk are dominant contributors to changing stock–bond correlations during the global financial crisis (GFC) period. However, these market risks collectively contribute much less to time-varying correlations in the post-GFC period. Furthermore, stock–bond correlations rise in times of rising US and global bond market risks. Rising stock market uncertainty raises stock–bond correlations in the GFC period but lowers them in the post-GFC period. My results disentangle the risks of stock and bond markets and show that equity tail risk, bond market risk, and stock market uncertainty are dominant factors in changing stock–bond diversification benefits in periods of market turmoil.     

Do extreme returns matter in emerging markets? Evidence from the Chinese stock market

Recent evidence in the U.S. and Europe indicates that stocks with high maximum daily returns in the previous month, perform poorly in the current month. We investigate the presence of a similar effect in the emerging Chinese stock markets with portfolio-level analysis and firm-level Fama–MacBeth cross-sectional regressions. We find evidence of a MAX effect similar to the U.S. and European markets. However, contrary to U.S. and European evidence, the MAX effect in China does not weaken much less reverse the anomalous idiosyncratic volatility (IV) effect. Both the MAX and IV effects appear to independently coexist in the Chinese stock markets. Interpreted together with the strong evidence of risk-seeking behaviour among Chinese investors, our results partially support the suggestion that the negative MAX effect is driven by investor preference for stocks with lottery-like features.     

How does electronic trading affect efficiency of stock market and conditional volatility? Evidence from Toronto Stock Exchange

The present paper investigates informational efficiency and changes in conditional volatility of the TSX before and after the implementation of an automated trading system on April 23, 1997. Using a battery of unit root, stationarity, as well as linear tests, we find that the introduction of electronic trading led to an increase in linearity dependence in TSX daily returns. In addition, when we examined the nonlinearity dependences using powerful econometric tests, we find that electronic trading has increased nonlinear dependencies in return series, which is the main cause of rejecting the Random Walk Hypothesis (RWH). Our results suggest that the automated trading system has negatively affected informational efficiency of the TSX. We also find evidence of long memory following automation which suggests that the introduction of electronic trading has increased the level of persistence of information and trading shocks.