Explaining Idiosyncratic Volatility Puzzle and Lottery-Like Stock with Extreme Returns: Evidence from Emerging Stock Market

This paper explores the possibility that idiosyncratic volatility may cause unexpectedly high levels of volatility in the Pakistani stock market. This study further analyzes the Pakistani stock market as there has been much discussion about the existence of a pervasive idiosyncratic volatility puzzle since the market as a whole low volatility stock has significantly grown. The study implemented the Fama-French six-factor model to the data of common stocks traded on the Pakistan Stock Exchange between the time period of 2003 to 2020 in order to quantify idiosyncratic volatility. The expected return is then investigated as a possible explanation for the anomalous volatility. The authors discover that individual stock price swings are strongly linked to predicted returns. As the company-level factors have a strong explanatory power when it comes to explaining idiosyncratic volatility for equity returns, based on the findings of this study, we can conclude that the expected returns for firms with strong idiosyncratic volatility are extraordinarily high, and this problem disappears once firm-level factors are taken into account. Additionally, it is found that stocks with high skewness and high idiosyncratic volatility have underperformed the market over almost two decades.  Overall, our results imply that the mystery emerges because highly volatile equities are overvalued and then undergo a subsequent correction because of their high max effect/lottery properties. Investment lottery preferences and market frictions have been cited in the literature as possible causes of idiosyncratic volatility. An expected return measure for stocks as a proxy for the over-valuation of stock returns and discover the relevance of idiosyncratic volatility in solving the idiosyncratic volatility puzzle

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

Executive Compensation, Firm Performance and Liquidity Under Imperfect Corporate Governance

This dissertation examines the relationship between executive compensation, firm performance and liquidity under imperfect corporate governance institution by using a novel Chinese dataset over 2001-2010. The first essay examines the determinants of Chinese executive compensation from the agency-based theoretical framework. I find that there is a positive relationship between Chinese executive compensation and firm performance. The weak corporate governance in China exhibits strong liquidity and control effects after the split-share structure reform. It seems that CEO duality, the establishment of compensation committee, and the involvement of state ownership in Chinese public firms may lead executive compensation to a relation-based rather than a market-based contract. The second essay explores the probability of expropriation of minority shareholders by controlling shareholders in terms of CEO compensation in an imperfect governance institution. The results reveal that firms with more tunneling activities typically have larger controlling ownership, stronger involvement of state control, less balance of power among other large shareholders as well as weak board characteristics. The positive relationship between controlling shareholders’ tunneling and executive compensation implies that the controlling shareholder might divert personal benefits from the public firms at the expense of minority shareholders in terms of executive compensation. The third essay examines the determinants of cross-listing for Chinese public firms by focusing on the A-shares that concurrently issue B-shares or H-shares based on agency theory, and the signaling and bonding hypothesis. I find that cross-listing issuers are motivated to list overseas by the legal and accounting standards of the foreign markets, management remuneration, as well as the demands for external capital. The results suggest that the level of Chinese executive compensation is associated with the decision of cross-listings, implying that cross-listings could be employed by executives as a way of asset appropriation. Moreover, a Chinese firm is more likely to cross-list if it experiences value deteriorations, or a lack of growth opportunity in the domestic market

Jump Diffusion Phenomenon, Realized Jumps, and Stock Returns: Panel Quantile Regression Analysis of Aggregate Market and Sectors

Past financial crisis and uncertain dynamics of stock market direct the highly volatile trend of stock prices and returns. These volatility conditions may affect investors and financial managers severely. Therefore, it is necessary to find comprehensive framework to understand the dynamics of stock return volatility. This study is aimed at examination of dynamics of jump diffusion phenomenon of stock return volatility. Comparative insight of aggregate stock market and sectoral stock returns in response with diffusive risk, jump risk, return asymmetry and total volatility measures of jump diffusion are provided in this research. This study is based on the sample of 251 non-financial firms with 8 sectors listed in PSX formerly in KSE during the period of 2006 to 2018. This research uses panel data quantile regression model with fixed effect estimates for statistical results. The results indicate that non-linear events with proxy results of realized jumps have significant negative impact on aggregate stock market return. But sectoral stock returns show mixed of positive and negative linkages with realized jumps. Jump diffusion components of volatility results confirmed non-linear positive and negative impact on sectoral stock returns. This research will provide diversified perspectives of managing investment decisions. Key Words: Jump Diffusion Processes, Realized Jumps, Volatility, Non-Linear Events, Financial risk JEL Codes: C32, G12, G14, G3

Measuring systemic risk in the Southeast Asian banking system: A CoVaR approach

The recent financial crisis has proven how integrated are the economies and the financial markets, and therefore how important is to understand the spillover effects, as well as to measure and manage systemic risk. The Southeast Asian market is no exception, even though little research has been done on systemic risk and contagion in this region. Thus, this dissertation analyzes the cross-sectional dimension of systemic risk in the Southeast Asian banking system, applying Adrian’s and Brunnermeier’s CoVaR methodology to the six major Southeast Asian banks. The results of this dissertation evidence that, over the period between 4th of November 2015 and 1st of November 2019, the banking institutions indeed contribute to the systemic risk of the Southeast Asian financial market; all the banks are sensitive to a systemic crisis; and in fact there are interconnections across them.A recente crise financeira veio evidenciar o quão integrados estão as economias e os mercados financeiros, e consequentemente o quão importante é entender os efeitos colaterais, assim como medir e gerir o risco sistémico. O mercado financeiro do Sudeste Asiático não é exceção à integração, no entanto existem poucos estudos acerca do risco sistémico e de contágio nesta região. Assim sendo, esta dissertação pretende analisar a dimensão transversal do risco sistémico no mercado bancário do Sudeste Asiático, aplicando a metodologia de Adrian e Brunnermeier, intitulada de CoVaR, aos seis maiores bancos do Sudeste Asiático. Para o período entre 4 de novembro de 2015 e 1 de novembro de 2019, os resultados apontam que de facto os bancos selecionados contribuem para o risco sistémico da região; que todos os bancos seriam afetados por uma crise financeira no Sudeste Asiático; e que existem interligações entre os bancos

Innovation, Firm Life Cycle and the Dividend Payout Scale Effects on ETF Performance

This dissertation consists of two essays. In the first essay, I introduce a new measure of the firm life cycle and compare its efficacy with the three existing life cycle proxies: ‘cashflow patterns’, ‘earned contributed capital mix’, and the firm’s public ‘age’. More specifically, I show that two groups of firms, similar in all respects except in their innovations efficiencies, will adopt different dividend policies regardless of their calendar age, earned income, or the cash flow patterns. I employ a large sample of US manufacturing firms spanning from 1973 to 2017. I find that more innovative firms pay lower dividends than the less innovative firms, irrespective of how we describe the life cycle stages. Besides, I perform a comprehensive cross-sectional look at the interrelations among various factors, including innovation output, growth, firm life cycle, and the dividend payout. I conclude that the intensity of innovation outputs has a direct relation with the firm\u27s growth rate, and that, in turn, affects the firm’s life cycle, and thereby its dividend policy. In the second essay, I evaluate the returns to scale, tracking error, and the role of fund characteristics on the ETFs risk-return performance. I investigate the impact of asset base size growth on the risk-adjusted performance and on the tracking ability of ETFs to their benchmark indices. I use the quantile regression approach with survivorship biased free non-leveraged, non-active, equity-only ETFs sample for ten years. I find that the ‘universe of equity ETFs’ do not provide increasing returns to scale. The results show that the size has a more substantial negative impact on the highest performing quantiles of the ETF cluster. I also observe that the ‘illiquidity,’ ‘expense ratio,’ the ‘equal-weighted index composition’ among others are the main key drivers that exacerbate the inverse relationship between the size and the performance. However, the core blend style and the capitalization-weighted index composition have a positive effect. Finally, I conclude a negative relationship between the size and the tracking error. I document that the ‘illiquidity,’ ‘expense ratio,’ and ‘volatility’ have a positive relationship with the tracking error

Testing the influence of herding behaviour on the Johannesburg Securities Exchange

Magister Commercii - MComSince the discovery of herding behaviour in financial markets in the 1990s, it has become an area of interest for many investors, practitioners and scholars. Herding behaviour occurs when investors and market participants trade in the same direction during the same time period, as a result of the influence of other investors. Studies on herding behaviour have been undertaken in both the developed and developing economies and majority of these studies have confirmed the existence of herding behaviour in the stock markets. Despite its tremendous growth, the South African financial markets are not immune to such market anomaly. Herding behaviour on the JSE was first investigated in 2002 focusing in the unit trust industry on the South African stock market. Motivated by this, this study assessed the presence of herding behaviour using the Johannesburg Securities Exchange tradable sector indices. Four indices were employed, namely Financials, Industrials and Resources and were benchmarked against the JSE All Share Index for the period from January 2007 to December 2017. The industrials index ((FINI15) constitutes of 25 largest industrial stocks by market capitalization, the financials index (FINI15) comprises of 15 largest financial stocks by market capitalization, the resources index (RESI10) which represents 10 largest resources stocks by market capitalization and lastly the FTSE/JSE All Share Index defined as a market capitalization-weighted index which is made up of 150 JSE listed companies and is the largest index in terms of size and overall value JSE. The FTSE/JSE All Share Index was used as a benchmark for investors to check how volatile an investment is. The South African economy experienced the effects of the 2008 global financial crisis from 01 July 2007 to 31 August 2009. This study split the examination period into three categories namely before the global financial crises which was the period starting from 1 January 2007 to 30 June 2007, then the period during the global financial crisis which was from 1 July 2007 to 31 August 2009 and lastly the period after the global financial crises which was from 1 September 2009 to 31 December 2017. Apart from the diversity of the indices, the length of the examination period also had a significant influence towards the magnitude of herding behaviour on the JSE