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1 – 10 of 15Mao He, Juncheng Huang and Hongquan Zhu
The purpose of our study is to explore the “idiosyncratic volatility puzzle” in Chinese stock market from the perspective of investors' heterogeneous beliefs. To delve into the…
Abstract
Purpose
The purpose of our study is to explore the “idiosyncratic volatility puzzle” in Chinese stock market from the perspective of investors' heterogeneous beliefs. To delve into the relationship between idiosyncratic volatility and investors' heterogeneous beliefs, and uncover the ability of heterogeneous beliefs, as well as to explain the “idiosyncratic volatility puzzle”, we construct our study as follows.
Design/methodology/approach
Our study adopts the unexpected trading volume as proxies of heterogeneity, the residual of Fama–French three-factor model as proxies of idiosyncratic volatility. Portfolio strategies and Fama–MacBeth regression are used to investigate the relationship between the two proxies and stock returns in Chinese A-share market.
Findings
Investors' heterogeneous beliefs, as an intermediary variable, are positively correlated with idiosyncratic volatility. Meanwhile, it could better demonstrate the negative correlation between the idiosyncratic volatility and future stock returns. It is one of the economic mechanisms linking idiosyncratic volatility to subsequent stock returns, which can account for 11.28% of the puzzle.
Originality/value
The findings indicate that idiosyncratic volatility is significantly and positively correlated with heterogeneous beliefs and that heterogeneous beliefs are effective intervening variables to explain the “idiosyncratic volatility puzzle”.
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Danling Jiang, Liu Shuying, Feiyu Li and Hongquan Zhu
This paper intends to study how geographic heterogeneity in urban vibrancy, especially in human capital creation, helps explain persist firm valuation dispersion across cities in…
Abstract
Purpose
This paper intends to study how geographic heterogeneity in urban vibrancy, especially in human capital creation, helps explain persist firm valuation dispersion across cities in China.
Design/methodology/approach
This paper studies geographic differences in firm valuations of 1,023 listed companies headquartered in 35 major cities in China from 2001 to 2018. The authors estimate panel regressions of local firm Tobin's q on city fixed effects or city endowed attributes in human capital creation after controlling industry-year fixed effects as well as a set of firm and city time variant attributes.
Findings
The results show persistent, significant city-to-city differences in Tobin's q, especially among large, mature or high labor-intensive firms. To explain such geographic differences in firm valuations, the authors identify several factors of the endowed city competitive advantages in creating human capital that play important roles in explaining the persistent geographic firm valuation premia.
Originality/value
This paper provides the first systematic analysis of urban vibrancy in human capital supply in explaining persistent geographic firm valuation dispersion in China. The evidence suggests that city endowed comparative advantages in supplying human capital have created long-lasting, and growing, shareholder wealth by attracting and retaining talents and human resources in local firms.
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Tigist Abebe Desalegn, Hongquan Zhu and Dinkneh Gebre Borojo
This study aims to examine the impact of economic policy uncertainty and bank competition on the financial stability of the Chinese banking industry. This study answers two…
Abstract
Purpose
This study aims to examine the impact of economic policy uncertainty and bank competition on the financial stability of the Chinese banking industry. This study answers two fundamental questions. First, does economic policy uncertainty (EPU) affects the financial stability of banks in China? Second, does competition affect the financial stability of the Chinese banking sector?
Design/methodology/approach
The sample includes all commercial banks to provide a full picture of the Chinese banking sector. This study covers the time between 2011 and 2019. The sample period captures different EPU spikes and key policy changes. This study used different econometric methodologies such as the generalized method of moments and the fixed effect and ordinary least square estimation models. Furthermore, this study used the Instrumental Variable model to solve endogeneity, autocorrelation and unobserved heterogeneity concerns. Besides, alternative EPU and financial stability measures were used. Moreover, this study reestimates the model after dropping the big five state-owned banks.
Findings
This study found that both EPU and competition reduce financial stability. This implies that EPU has a negative impact on financial stability. This shows that uncertainty distorts resource allocation efficiency and creates confusion, leading to financial instability in the banking sector. Besides, this study found that competition negatively affects financial stability. This result implies that high competition pushes banks toward riskier activities that ultimately lead to increased financial instability.
Originality/value
This study is the first of its kind that examines the impact of EPU and competition on the financial stability of the Chinese banking sector. This study conducted several robustness tests such as the instrumental variable model, alternative measurement and sample construction methods. This study brings policy implications and lessons for the banking sector.
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Hongquan Zhu and Lingling Jiang
Merton’s model of capital market equilibrium under incomplete information predicts that contemporaneous stock returns are positively related to investor recognition and that…
Abstract
Purpose
Merton’s model of capital market equilibrium under incomplete information predicts that contemporaneous stock returns are positively related to investor recognition and that future stock returns are negatively related to investor recognition. The purpose of this paper is to empirically investigate whether Merton’s theory holds true for the Chinese stock market.
Design/methodology/approach
This paper proposes the degree of shareholder base growth (SBG) as a proxy for investor recognition and examines the relationship between investor recognition and stock returns through a univariate analysis and Fama-Macbeth cross-sectional regressions based on A-Share listed firms.
Findings
The results show that investor recognition is nonlinearly and positively related to contemporaneous stock returns and is negatively related to future stock returns in contrast to the conclusions of Merton’s theory. A long-short trading strategy that involves buying stocks with the lowest SBG rate and that sells stocks with the highest SBG rate will earn an average monthly return of 3.615 percent.
Research limitations/implications
Though Merton’s theory is not fully reflected in the Chinese stock market, investor recognition is considered an important risk factor in the Chinese stock market.
Originality/value
No works have yet investigated the validity of Merton’s “investor cognition hypothesis” in relation to the Chinese stock market. This paper strives to fill this gap.
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Lu Qin and Hongquan Zhu
– The purpose of this paper is to identify the effective measures for heterogeneity and to uncover the relationship between investor heterogeneity and stock returns.
Abstract
Purpose
The purpose of this paper is to identify the effective measures for heterogeneity and to uncover the relationship between investor heterogeneity and stock returns.
Design/methodology/approach
The paper employs dispersion in analysts’ earnings forecasts and unexpected trading volume as proxies of heterogeneity. Portfolio strategies and Fama-Macbeth regression are used to uncover the relationship between the two proxies and stock returns in the Chinese A-share market.
Findings
The result indicates that stock returns are significantly related to unexpected trading volume, i.e., higher unexpected trading volume implies higher stock returns now but lower future stock returns. In contrast, there is no statistically significant relationship between analysts’ forecast dispersion and stock returns.
Originality/value
The findings suggest that unexplained trading volume is an effective measure for investor heterogeneity in the Chinese A-share market.
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Lin Chen, Junbo Wang, Chunchi Wu and Hongquan Zhu
Although stock price co-movement has been examined extensively, its causes are not well understood. Using a decomposition method, we extract three information components from the…
Abstract
Although stock price co-movement has been examined extensively, its causes are not well understood. Using a decomposition method, we extract three information components from the turnover rate: market information, firm-specific information, and investors' opinion divergence. We find that market information strengthens stock price co-movement, whereas firm-specific information weakens it. Moreover, our analysis shows that divergence of investors' opinion increases stock price variations but weakens price co-movement.
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The purpose of this paper is to investigate how block trading and asymmetric information contribute to the firm-specific information measured by the stock return synchronicity…
Abstract
Purpose
The purpose of this paper is to investigate how block trading and asymmetric information contribute to the firm-specific information measured by the stock return synchronicity. Based on China stock market which is dominated by individual investors, this study focus on whether traders of block trading, which are usually institutional investors, are “information trader.”
Design/methodology/approach
Based on the high frequency data, the paper constructs two measures of information asymmetry, intraday measure and inter-day measure. Then the paper constructs a multiple regression model and examine how block trading and information asymmetry contribute to the firm-specific information measured by the stock return synchronicity.
Findings
The results show that: on the one hand, block trading transmits more firm-specific information, and can reduce the synchronicity; on the other hand, when the degree of information asymmetry is higher, block trading contains more firm-specific information and has a stronger effect on synchronicity. The effect of information asymmetry specifically displays as: block trading during the first half-hour of the trading day has a stronger effect on synchronicity; and block trading occurred in the days with publicly announced trading information has greater impact on synchronicity.
Practical implications
The conclusions have important practical implications: for market regulators, monitoring for block trading can improve the recognition and prevention of insider trading; for individual investors, especially the risk aversion investors, recognition of intraday and inter-day information asymmetry is beneficial for them to avoid the risk of asymmetric information.
Originality/value
First, the domestic and foreign research mostly concentrated impact of block trading on stock prices. However, reasons of stock price changes include the information effect and non-information effect, this paper selects stock return synchronicity as firm-specific information measure, and mainly focus on the information effect of block trading. Second, based on the high frequency data, the paper constructs two measures of information asymmetry, intraday measure and inter-day measure. Compared with general measure of information asymmetry, such as firm size, earnings quality, the two measures based on high frequency data are more precisely.
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Yan He, Ruixiang Jiang, Yanchu Wang and Hongquan Zhu
We form portfolios based on return and liquidity and examine the effects of liquidity and other risk factors on asset pricing in the Chinese stock market. Our results show that…
Abstract
We form portfolios based on return and liquidity and examine the effects of liquidity and other risk factors on asset pricing in the Chinese stock market. Our results show that the past loser-and-illiquid stock portfolios tend to outperform the past winner-and-liquid stock portfolios in the 1–12 months holding period. The excess return is significantly associated with the market-wide liquidity factor even when we control the three Fama-French and momentum factors. Cross-sectionally, the liquidity beta significantly affects the excess return even with control of other risk betas and other traditional liquidity proxies.
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