Securities trading in multiple markets: the Chinese perspective

This thesis studies the trading of the Chinese American Depositories Receipts (ADRs) and their respective underlying H shares issued in Hong Kong. The primary intention of this work is to investigate the arbitrage opportunity between the Chinese ADRs and their underlying H shares. This intention is motivated by the market observation that hedge funds are often in the top 10 shareholders of these Chinese ADRs. We start our study from the origin place of the Chinese ADRs, China’s stock market. We pay particular attention to the ownership structure of the Chinese listed firms, because part of the Chinese ADRs also listed A shares (exclusively owned by the Chinese citizens) in Shanghai. We also pay attention to the market microstructures and trading costs of the three China-related stock exchanges. We then proceed to empirical study on the Chinese ADRs arbitrage possibility by comparing the return distribution of two securities; we find these two securities are different in their return distributions, and which is due to the inequality in the higher moments, such as skewness, and kurtosis. Based on the law of one price and the weak-form efficient markets, the prices of identical securities that are traded in different markets should be similar, as any deviation in their prices will be arbitraged away. Given the intrinsic property of the ADRs that a convenient transferable mechanism exists between the ADRs and their underlying shares which makes arbitrage easy; the different return distributions of the ADRs and the underlying shares address the question that if arbitrage is costly that the equilibrium price of the security achieved in each market is affected mainly by its local market where the Chinese ADRs/the underlying Hong Kong shares are traded, such as the demand for and the supply of the stock in each market, the different market microstructures and market mechanisms which produce different trading costs in each market, and different noise trading arose from asymmetric information across multi-markets. And because of these trading costs, noise trading risk, and liquidity risk, the arbitrage opportunity between the two markets would not be exploited promptly. This concern then leads to the second intention of this work that how noise trading and trading cost comes into playing the role of determining asset prices, which makes us to empirically investigate the comovement effect, as well as liquidity risk. With regards to these issues, we progress into two strands, firstly, we test the relationship between the price differentials of the Chinese ADRs and the market return of the US and Hong Kong market. This test is to examine the comovement effect which is caused by asynchronous noise trading. We find the US market impact dominant over Hong Kong market impact, though both markets display significant impact on the ADRs’ price differentials. Secondly, we analyze the liquidity effect on the Chinese ADRs and their underlying Hong Kong shares by using two proxies to measure illiquidity cost and liquidity risk. We find significant positive relation between return and trading volume which is used to capture liquidity risk. This finding leads to a deeper study on the relationship between trading volume and return volatility from market microstructure perspective. In order to verify a proper model to describe return volatility, we carry out test to examine the heteroscedasticity condition, and proceed to use two asymmetric GARCH models to capture leverage effect. We find the Chinese ADRs and their underlying Hong Kong shares have different patterns in the leverage effect as modeled by these two asymmetric GARCH models, and this finding from another angle explains why these two securities are unequal in the higher moments of their return distribution. We then test two opposite hypotheses about volume-volatility relation. The Mixture of Distributions Hypothesis suggests a positive relation between contemporaneous volume and volatility, while the Sequential Information Arrival Hypothesis indicates a causality relationship between lead-lag volume and volatility. We find supportive evidence for the Sequential Information Arrival Hypothesis but not for the Mixture of Distributions Hypothesis

Shipping Investor Sentiment and International Stock Return Predictability

Stock return predictability by investor sentiment has been subject to constant updating, but reaching a decisive conclusion seems rather challenging as academic research relies heavily on US data. We provide fresh evidence on stock return predictability in an international setting and show that shipping investor sentiment is a common leading indicator for financial markets. We establish out-of-sample predictability and demonstrate that investor sentiment is also economically significant in providing utility gains to a mean-variance investor. Finally, we find evidence that the predictive power of sentiment works best when negative forecasts are also taken into account

Does Investor Sentiment Affect Islamic Stock Prices? Evidence From Indonesia

The Islamic finance industry in Indonesia has grown rapidly in the last decade, one of which is marked by the number of sharia stocks. Sharia stocks, based on the underlying principle, prohibit the involvement of investor sentiment which is often used as a consideration in investment decisions because there are elements of tadlees in it. This study examines the influence of investor sentiment on islamic stock prices index. This study aims to analyze whether Islamic stock price indices are influenced by investor sentiment. The representation of Islamic stock price indices are Indonesia Sharia Stock Index (ISSI) and Jakarta Islamic Index (JII). This study utilizes ARCH/GARCH analysis to determine whether there is an influence of investor sentiment on Islamic stock prices. The statistical tool used is e-views 12.0 program. The research findings stated that investor sentiment influences Jakarta Islamic Index (JII) but doesnt influence Indonesia Sharia Stock Index (ISSI). The difference in the results between the two Islamic stock indices can be explained by the different constituents and criteria for selecting Islamic stock

Investors’ Biases & Stock Return Volatility: A Systematic Literature Review

Purpose: Literature is scarce on the possible relationship between investors’ biases, risk tolerance attitude, and stock return volatility. The researcher investigated what are the investor biases, and how they contribute to the risk-averse and risk-seeking attitudes and developed a taxonomy model of investors’ biases in the form of a causal framework that impacts stock return volatility. Methodology: The study employs a systematic literature review approach. The analysis of literature includes 65 articles from impact factor journals including three seminal papers in the fields of traditional and behavioral finance. The time frame ranges from 2008 to 2022. Findings: The findings suggest that investors encounter certain biases such as cognitive, emotional, cultural, religious, financial, macroeconomic, demographic, etc. Literature has identified positive, negative, and mixed impacts of investors' biases on stock return volatility. The systematic analysis of literature helps in identifying recently evolving biases such as individualism, uncertainty avoidance, a religious adherence, investor mood, weather bias, fear sentiments, sports sentiments, power distance, masculinity, social media sentiments so on and so forth. Conclusion: The study has proposed an integrated taxonomy model comprised of possible investors’ biases as independent variables along with mediating, controlling, and moderating variables that impact stock return volatility. Moreover, investors’ risk tolerance profile is also constructed which indicates the role of behavioral biases in shaping investors’ attitudes as risk seekers and risk-averse

Is investor sentiment contagious? International sentiment and UK equity returns

This paper contributes to a growing body of literature studying investor sentiment. Separate sentiment measures for UK investors and UK institutional investors are constructed from commonly cited sentiment indicators using the first principle component method. We then examine if the sentiment measures can help predict UK equity returns, distinguishing between “turbulent” and “tranquil” periods in the financial markets. We find that sentiment tends to be a more important determinant of returns in the run-up to a crisis than at other times. We also examine if US investor sentiment can help predict UK equity returns, and find that US investor sentiment is highly significant in explaining the UK equity returns

Securities trading in multiple markets : the Chinese perspective

This thesis studies the trading of the Chinese American Depositories Receipts (ADRs) and their respective underlying H shares issued in Hong Kong. The primary intention of this work is to investigate the arbitrage opportunity between the Chinese ADRs and their underlying H shares. This intention is motivated by the market observation that hedge funds are often in the top 10 shareholders of these Chinese ADRs. We start our study from the origin place of the Chinese ADRs, China’s stock market. We pay particular attention to the ownership structure of the Chinese listed firms, because part of the Chinese ADRs also listed A shares (exclusively owned by the Chinese citizens) in Shanghai. We also pay attention to the market microstructures and trading costs of the three China-related stock exchanges. We then proceed to empirical study on the Chinese ADRs arbitrage possibility by comparing the return distribution of two securities; we find these two securities are different in their return distributions, and which is due to the inequality in the higher moments, such as skewness, and kurtosis. Based on the law of one price and the weak-form efficient markets, the prices of identical securities that are traded in different markets should be similar, as any deviation in their prices will be arbitraged away. Given the intrinsic property of the ADRs that a convenient transferable mechanism exists between the ADRs and their underlying shares which makes arbitrage easy; the different return distributions of the ADRs and the underlying shares address the question that if arbitrage is costly that the equilibrium price of the security achieved in each market is affected mainly by its local market where the Chinese ADRs/the underlying Hong Kong shares are traded, such as the demand for and the supply of the stock in each market, the different market microstructures and market mechanisms which produce different trading costs in each market, and different noise trading arose from asymmetric information across multi-markets. And because of these trading costs, noise trading risk, and liquidity risk, the arbitrage opportunity between the two markets would not be exploited promptly. This concern then leads to the second intention of this work that how noise trading and trading cost comes into playing the role of determining asset prices, which makes us to empirically investigate the comovement effect, as well as liquidity risk. With regards to these issues, we progress into two strands, firstly, we test the relationship between the price differentials of the Chinese ADRs and the market return of the US and Hong Kong market. This test is to examine the comovement effect which is caused by asynchronous noise trading. We find the US market impact dominant over Hong Kong market impact, though both markets display significant impact on the ADRs’ price differentials. Secondly, we analyze the liquidity effect on the Chinese ADRs and their underlying Hong Kong shares by using two proxies to measure illiquidity cost and liquidity risk. We find significant positive relation between return and trading volume which is used to capture liquidity risk. This finding leads to a deeper study on the relationship between trading volume and return volatility from market microstructure perspective. In order to verify a proper model to describe return volatility, we carry out test to examine the heteroscedasticity condition, and proceed to use two asymmetric GARCH models to capture leverage effect. We find the Chinese ADRs and their underlying Hong Kong shares have different patterns in the leverage effect as modeled by these two asymmetric GARCH models, and this finding from another angle explains why these two securities are unequal in the higher moments of their return distribution. We then test two opposite hypotheses about volume-volatility relation. The Mixture of Distributions Hypothesis suggests a positive relation between contemporaneous volume and volatility, while the Sequential Information Arrival Hypothesis indicates a causality relationship between lead-lag volume and volatility. We find supportive evidence for the Sequential Information Arrival Hypothesis but not for the Mixture of Distributions Hypothesis.EThOS - Electronic Theses Online ServiceGBUnited Kingdo

Bidirectional relationship between investor sentiment and excessreturns : new evidence from the wavelet perspective

This paper sheds new light on the mutual relationship between investor sentiment and excess returns corresponding to the bubble component of stock prices. We propose to use the wavelet concept of the phase angle to determine the leadlag relation between these variables. The wavelet phase angle allows for decoupling short and longrun relations and is additionally capable of identifying timevarying comovement patterns. By applying this concept to excess returns of the monthly S&P500 index and two alternative monthly US sentiment indicators we find that in the short run (until 3 months) sentiment is leading returns whereas for periods above 3 months the opposite can be observed

Media Impacts on Mergers and Acquisitions: Evidence from UK Market

This thesis examines the impact of financial media on UK merger and acquisition (M&A) deals from several perspectives. The Chapter 2 examines the impact of financial media on M&A performance using UK M&A data from 1981 to 2010. The results show that, both in the short run and long run, deals with media coverage outperform deals without media coverage. Moreover, the results indicate a significantly negative correlation between media pessimism and post-merger performance both in the short run and long run. These findings suggest that pre-merger news released by influential financial media has a large impact on market reactions to M&A announcements, consistent with the investor recognition hypothesis. Furthermore, the negative correlation between media pessimism and acquirer returns suggests that high media pessimism about M&As leads to downward pressure on market prices. Chapter 3 examines how media coverage and media pessimism influence takeover outcomes, based on the same database as in the first chapter. It is generally believed that financial newspapers directly impact investor sentiment concerning both individual stocks and the market as a whole (Antweiler and Frank, 2004; Joe et al., 2009; Ferguson et al., 2012; Jegadeesh and Wu, 2012; Chen et al., 2013; Garcia, 2013). Moreover, M&As often occur due to either takeovers or tender offers and usually require bidders to buy the target stock for more than its current market value (Jensen and Ruback, 1983). However, Branch et al. (2008) state that about 10% of announced takeover attempts fail, including those withdrawn by the acquirer or rebuffed by the target firm. Failure usually consists of withdrawn or pending takeovers. Successful takeovers are contractual agreements in which both acquirers and targets have enough interest to agree on an offer. Chapter 4 tests the different impacts of media pessimism in hot and cold markets. This paper is primarily motivated by the growing importance of media sentiment among merger waves. The principle result suggests that acquirers are subject to less media pessimism when the deal is announced during a hot market valuation period. Moreover, the results also show that acquirers obtain significantly higher short-run announcement returns for deals announced during hot markets with low media pessimism and significantly lower long-run returns for deals announced during cold markets with low media pessimism. The finding is in line with early investigations by Petmezas (2009), who states that managers undertaking takeovers during hot markets can earn positive returns in the short run and earn insignificant returns during cold markets

Modeling of Jakarta Islamic Index Stock Volatility Return Pattern with Garch Model

Along with the large number of investors transacting on Islamic stocks, the movement of stock prices becomes more volatile. The purpose of this research is to examine the behavior of volatility patterns in shares incorporated in the Jakarta Islamic Index using the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model. This study uses daily data from six stocks contained in the Jakarta Islamic Index during the period January 1, 2009, to December 31, 2019. Data volatility is seen using the GARCH model. Estimation results for daily data show that the volatility of ASII, SMGR, TLKM, UNTR, and UNVR shares is influenced by the error and return volatility of the previous day. This is indicated by the GARCH effect on each regression result. The results of the study are beneficial for an investor, and if you want to invest with a low level of risk, you can choose TLKM shares. But if you're going to get a high level of return, you can invest in UNTR shares. For securities analysis, you can use the GARCH model that has been tested to predict volatility in the Jakarta Islamic Index

Investor Sentiment and Asset Pricing: A Review

This paper reviews literature on asset pricing and investor sentiment. It provides a fair accumulation of evidence with an objective of showing how productive has been the effort of modelling market sentiment in pricing assets. Research efforts in modelling non-standard investor behaviour have been successful in explaining aggregate predictability. However, despite the financial innovations and discussions on investor sentiment that happened in US markets, empirical work in emerging markets is still preliminary. The paper inquires the extent that the existing asset pricing models price the assets in the economy.KeywordsInvestor, Pricing, Returns, Sentimen