University of North Carolina at Chapel Hill Graduate School
Doi
Abstract
Fully aware of the importance of effective risk management, we develop the HYBRID-quantile model aimed at enhancing the accuracy of conditional quantile predictions. In the first essay, we validate that the model has a strong performance when applied to various GARCH-type processes. We use conditional asymmetry measures derived from the conditional quantile predictions to design portfolio allocation strategies. We identify two portfolios that could improve upon the risk-return trade-off of the benchmarks. In the second essay, we study the downside risk in the Chinese equity market. A wide range of investors, both domestic and foreign, have paid more attention to the Chinese stock market because of the growing significance of the Chinese economy. Downside risk has been a focal point, particularly considering the large price movements and the regulatory changes that took place over time. We use the 1% and 5% conditional quantiles of equity index returns to study the pattern of downside risk, and discover several break dates linked to major financial crises and trading reforms. Furthermore, our findings indicate that breaks in the B shares and the H shares downside risk tend to appear earlier than those corresponding to the A shares tails. Lastly, the revised Qualified Foreign Institutional Investor (QFII) program in 2006 and government share purchasing actions in 2015 have shown to be effective at alleviating downside risks in the Shanghai A shares. In the third essay, a joint work with Eric Ghysels and Steve Raymond, we examine granularity in the U.S. stock market. The U.S. equities market price process is largely driven by large institutional investors. We use quarterly 13-F holdings reported by institutional investors and focus on the Herfindahl-Hirschman Index (HHI) as the measure of granularity. We provide a comprehensive study of how granularity affects: (1) the cross-section of returns, (2) conditional variances across stocks and (3) downside risk. We find that constructing a low-HHI minus high-HHI portfolio produces an annualized return of 5.6%, and a 6.2% liquidity risk-adjusted return. We document the adverse impact that investor ownership concentration has on both conditional volatility, and critically, a robust set of downside risk measures at both the portfolio and the firm level.Doctor of Philosoph
