Prediction of stock price movement based on daily high prices

Prediction of stock close price movements has attracted a lot of research interest. Using machine learning techniques, especially statistical classifiers, for day ahead forecasting of the movement of daily close prices of a broad range of several hundreds of liquid stocks is generally not very successful. We suspect that one of the reasons for failure is the relatively high volatility of prices in the last minutes before the market closes. There have been some attempts to use less volatile daily high prices instead, but the studies concentrated only on a specific non-statistical machine learning approach on a small number of specific securities. We show that incorporating statistical classifiers for day ahead daily high price movement predictions in to some simple portfolio management techniques significantly increases their performance. Tests performed on S&P 500 stocks show that such a strategy is robust, i.e. the difference in reliability for different stocks does not vary significantly, and that such a strategy greatly outperforms the S&P 500 index and several other benchmarks while increasing the risk only by a small amount.     

Institutional cross-ownership and stock price crash risk

Using manually collected data of Chinese listed firms during the period 2007–2018, we provide strong and robust evidence that institutional cross-ownership is negatively associated with firm-specific stock price crash risk. Building on China’s institutional settings, we document that the negative relation is more pronounced for firms located in provinces with higher political uncertainty, or state-owned enterprises. This paper also conducts several mechanisms analyses and has confirmed three potential influencing mechanisms, such as information advantage, governance improvement and anticompetitive incentives, in explaining the effect of institutional cross-ownership on stock price crash risk. Overall, this paper develops a new perspective to investigate the ways to alleviate stock price crash risk in emerging markets.     

Large controlling shareholders and stock price synchronicity

This paper examines the effect of controlling shareholders on stock price synchronicity by focusing on two salient corporate governance features in a concentrated ownership setting, namely, ultimate cash flow rights and the separation of voting and cash flow rights (i.e., excess control). Using a unique dataset of 654 French listed firms spanning 1998–2007, this study provides evidence that stock price synchronicity increases with excess control, supporting the argument that controlling shareholders tend to disclose less firm-specific information to conceal opportunistic practices. Additionally, this study shows that firms with substantial excess control are more likely to experience stock price crashes, consistent with the conjecture that controlling shareholders are more likely to hoard bad information when their control rights exceed their cash flow rights. Another important finding is that firms’ stock prices are less synchronous and less likely to crash when controlling shareholders own a large fraction of cash flow rights. This is consistent with the argument that controlling shareholders have less incentive to adopt poor disclosure policies and to accumulate bad news, since high cash flow ownership aligns their interests with those of minority investors.     

Completion time structures of stock price movements

Summary This paper proposes to model movements in more than a century of daily US stock prices as the outcome of a multi-state marked point process and studies the time it takes for stock prices to complete an up or a down move of a certain size. We present a new econometric specification for a class of dynamic models that account for autoregressive conditional duration effects. We also present a method to account for the effect of time-varying state variables that may change within a duration.We find strong evidence of dynamic dependencies in the direction and speed of stock price movements. Past interest rates are also found to affect the speed and direction of completion times. Out-of-sample prediction results show that forecasts of the direction of moves in stock prices can be greatly improved by including covariates such as interest rates and allowing for dynamics in the econometric specification.We thank an anonymous referee, an associate editor, Rob Engle, Mark Machina and Ruth Williams for helpful conversations. We are grateful to INQUIRE UK for financial support for this research.     

Local speculative culture and stock price crash risk

Using unique city gambling conviction data in China as a proxy for a local speculative culture, we examine the impact of such a culture on stock price crash risk. We find that firms in regions with a stronger speculative culture are more likely to experience future stock price crash risk. The results are consistent after using 2SLS regression analysis (IV) and staggered difference-in-difference (DID) analysis to mitigate endogeneity concerns. Further analysis shows that overinvestment, excessive debt, accounting conservatism and charitable donations are the main channels through which local speculative culture affects stock price crash risk. We also find that the positive relationship between local speculative culture and stock price crash risk is more salient for small firms and firms with managers with a cultural backgrounds similar to the local culture. Our study implies that the local culture plays an important role in the practice of corporate governance.     

Regime shift,speculation, and stock price

We investigate the impacts of speculation on stock price and return volatility in a framework with regime shifting. We find that greater difference in beliefs about the probability of bad state leads to higher stock prices. The intuition is that in periods of higher dispersion of beliefs, the investors perceive greater speculative opportunities, leading to increased demands and valuations of the stock. When investors agree with each other on the state of dividend growth, they have a stronger incentive to invest in the riskless bond, when becoming more pessimistic about the dividend growth. As a result, the demand and the valuations of stock decrease. Moreover, higher level of heterogeneity in beliefs gives rise to higher volatility of the stock returns, even in the absence of dividend shocks. Furthermore, with homogeneous beliefs, return volatility with respect to investors’ beliefs follows an inverted-U shape.     

Board diversity and stock price crash risk

We show how board diversity influences stock price crash risk. By classifying board diversity into relation-oriented diversity (gender and age) and task-oriented diversity (tenure and education), we find that greater diversity on board can lower the risk of future stock crash. Additional analyses show that the effect of board diversity on future crash risk is stronger for firms with high information opacity and low institutional ownership. Overall, our findings provide new insights and suggest for more diverse boards to improve corporate governance practices.     

A hedonic price model for private properties in Hong Kong

A hedonic model is used to explore the effects of locational, structural, and neighborhood attributes on the price structure of private condominiums in Hong Kong. The regression results and the elasticities of housing attributes obtained from the Box-Cox analysis indicate that the valuation of a property is sensitive to changes in housing traits. Home buyers are rational and are willing (unwilling) to pay for desirable (undesirable) housing attributes and that the valuation of a property is market-driven in Hong Kong.     

Operating cash flow opacity and stock price crash risk

We examine the relation between operating cash flow (OCF) opacity and stock price crash risk. We find that OCF opacity is positively associated with future stock price crash risk after controlling for accruals opacity and other determinants known to influence crash risk. This finding suggests that OCF opacity facilitates bad news hoarding and enables managerial resource diversion, which in turn increases crash risk. We also find that the positive relation between OCF opacity and crash risk is more pronounced when external monitoring is weak, information asymmetry is high, OCF importance is low, and cost of accruals management is high. Overall, our evidence highlights the severe consequence of OCF opacity in that it boosts crash risk; our study should alert the researchers, investors, and regulators to pay more attention to OCF management.     

Press freedom,externally-generated transparency,and stock price informativeness: International evidence

This paper examines the impact of press freedom on stock price informativeness in a sample of firms from 50 countries. We find a significant relation between more press freedom and lower stock price synchronicity. Our results suggest that the freedom of the press can enhance the information environment of stock markets.     

Aggressive reporting,investor protection and stock price informativeness: Evidence from Chinese firms

This paper investigates the impact of aggressive reporting on the ability of stock prices to inform in Chinese firms. Using both stock price synchronicity and the probability of informed trading as proxies for stock price informativeness, we find that aggressive reporting damages the ability of stock prices to inform in Chinese firms. Our findings are robust to potential endogeneity and the use of alternative aggressive-reporting measures. Finally, we find that the impact of aggressive reporting in reducing stock price informativeness is stronger in firms located in regions of weaker institutional development and in private sectors firms.     

Long-run equilibrium, short-term adjustment, and spillover effects across Chinese segmented stock markets and the Hong Kong stock market

This paper adopts a novel FIVECM-BEKK GARCH approach to examine the bilateral relationships among the A-share and B-share stock markets in China and the Hong Kong stock market. The evidence shows that these stock markets are fractionally cointegrated. Analyses of the spillover effects across these markets indicate that the A-share markets are most influential. The relaxation of government restrictions on the purchase of B shares by domestic residents accelerates the market integration process of A-share markets with the B-share and Hong Kong markets. The effects of the Asian crisis on the stock-return dynamic correlations vary across these markets.     

Oil price shocks and the US stock market: A nonlinear approach

We study the response of US stock market returns to oil price shocks and to what extent it behaves asymmetrically over the different phases of the business cycle. For this purpose, we decompose the oil price changes into supply and demand shocks in the oil market and assess the state-dependent dynamics of structural shocks on US stock returns using a smooth transition vector autoregression model. When nonlinearity is considered, quantitatively very different asymmetric dynamics are observed. Our findings show that the responses of US stock returns to disaggregated shocks are asymmetric over the business cycle and that the impact of demand-driven shocks on US stock returns is stronger and more persistent, especially when economic activity is depressed. Furthermore, the contribution of shocks to expectation-driven precautionary demand in recessions accounts for a larger share of the variability of US stock market returns than that predicted by standard linear vector autoregressions.     

Managerial ability,investment efficiency and stock price crash risk

We examine empirically the effect of managerial ability on firm-level investment efficiency and how this affects future stock price crash risk. Using a managerial ability measure developed by Demerjian et al. (2012), the paper documents consistent evidence that the more able managers over-invest compared to their not-so-able counterparts, even after controlling for the effects of financial reporting quality and other firm specific determinants of investment efficiency. This evidence is robust to alternative proxies for investment efficiency. The empirical evidence also suggests that crash risk increases for firms with more able managers, primarily through the investment inefficiency channel. Overall, the study contributes to a better understanding of the influence of managerial ability on investment decisions in the context of diverging opinions regarding manager-specific effects on organizational outcomes.     

Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model

In this paper, we investigate existence of long-run equilibrium relationships among the aggregate stock price, industrial production, real exchange rate, interest rate, and inflation in the United States. Applying Johansen's cointegration analysis to monthly data for the 1974:01-1998:12 period, we find that the S&P 500 stock price is positively related to the industrial production but negatively to the real exchange rate, interest rate, and inflation. Analysis of error correction mechanism reveals that the stock price, industrial production, and inflation adjust to correct disequilibrium among the five variables, while variance decompositions indicate that the stock price is driven to a considerable extent by innovations in the interest rate. Structural stability tests show that the parameters of the cointegrating system and the error correction term are stationary.     

Overreaction in the Hong Kong stock market

Overreaction reported in the equity markets of the United States, Spain, and Brazil is also observed in the Hong Kong stock market. The “loser” portfolios of the 33 stocks in the Hang Seng Index (HSI), on average, outperform the “winner” portfolios by 9.9% 1 year after the formation periods. Besides its emphasis on the importance of the Hong Kong market in international investment, this paper is unique in some special features related to the overreaction study. Hong Kong has markets for index futures and stock futures. Only three stocks are used in the portfolios. All the stocks in the HSI have large market capitalization and liquidity and can be shorted with no up-tick rule. Unlike other studies in international stock markets, the “arbitrage” portfolio of buying the loser portfolio and shorting the winner portfolio can actually be formed with minimum cost and easy execution, which makes the overreaction phenomena in this study very powerful.     

COVID-19, a blessing in disguise for the Tech sector: Evidence from stock price crash risk

In this paper we document that although COVID-19 has brought uncertainties to the overall economy, the Technology (tech) sector is the systematic beneficiary of the pandemic. Using a quasi-natural setup, we find a significant notion that the Stock Price Crash Risk (SPCR) of firms within the Tech sector decreases during the COVID-19 pandemic compared to the recent past and firms belonging to other sectors. Our analyses further reveal that firms in the Tech sector with stronger external monitoring and better information environment receive an even greater advantage from the pandemic. Overall, our study suggests that the higher systemic dependency on the Tech sector during the COVID-19 outbreak results in an economic benefit for this sector.     

Patent pledge policy and stock price crash risk: Evidence from China

This study examines the influence of China’s patent pledge policy on the stability of stock prices for Chinese listed businesses. We find that when businesses use patent rights as collateral for loans, the probability of stock price crash increases. Additionally, this unfavorable effect is more pronounced in businesses with strong financial standing, excessive managerial confidence, and serious agency problems than in businesses with weak financial standing, non-excessive managerial confidence, and non-serious agency problems. Indeed, a mechanism analysis reveals that the patent pledge policy aggravates management’s excessive investment and contributes to stock price instability. Furthermore, the pledge financing process and corporate financing goals are not sufficiently transparent and lack internal and external supervision, due to the challenges associated with determining the value of patent rights, the lack of awareness of risk control in the pledge process, and the imperfections in pertinent policies and systems.     

Accounting regulations,enforcement, and stock price crash risk: Global evidence in the banking industry

This study uses the banking industry as a unique testing setting to examine the impact of accounting and enforcement regulations on stock price crash risk. We find that stocks are less likely to crash in countries with stricter accounting regulations and enforcement standards. More importantly, we provide evidence that the impact of accounting regulations is more significant in countries with stricter enforcement standards, suggesting that enforcement mechanisms and accounting regulations are complementary. We find that the main channels for accounting regulations and enforcement standards to affect stock price crash risk are regulations that strengthen information disclosure and improve the effects of direct supervision and external auditors. Our findings are robust after we include more control variables, employ regional regulatory developments as instrumental variables, conduct change regressions, use alternative measures of enforcement, and estimate in various subsamples. Our study has policy implications for how to design accounting regulations and enforcement mechanisms in a more effective manner.     

Systematic risk, and oil price and exchange rate sensitivities in Asia-Pacific stock markets

This paper examines the relationship between beta risk and realized stock index return in the presence of oil and exchange rate sensitivities for 15 countries in the Asia-Pacific region using the international factor model. Thirteen of the 15 countries have the expected beta signs and show significant sensitivity to domestic risk when the world stock market is in both up and down modes. In terms of oil sensitivity, only the Philippines and South Korea are oil-sensitive to changes in the oil price in the short run, when the price is expressed in local currency only. Basically no country shows sensitivity to oil price measured in US dollar regardless whether the oil market is up or down. Nine countries are affected by changes in the exchange rate. In terms of relative factor sensitivity distribution, one is willing to conclude that these stock markets are more conditionally sensitive to local currency oil price changes than to beta risk wherever the relationships are significant.