Essays in empirical asset pricing

Abstract

The thesis encompasses three essays in empirical asset pricing and mainly concentrates on Chinese stock and futures markets. Traditional asset pricing models assume the arrival of information is immediately processed and incorporated into asset prices. In reality, there are numerous constraints that may distort the assumption, for instance the cross-border transmission and the cognitive limitation of humans. The three essays specifically explore the impact of these issues on asset prices. The first essay examines the instantaneous response of eight Chinese commodity futures to 19 different types of scheduled US macroeconomic news announcements after the introduction of night trading in China. Using intraday data from 2013 to 2016, we provide robust evidence that the surprise components of a number of news announcements exhibit a significant effect on returns, trading volume, and volatility of a majority of Chinese futures contracts, with gold and silver futures being the most sensitive. Moreover, we observe an asymmetric effect between positive and negative surprise components. A further examination of the responses to the US macroeconomic news announcements using US gold and silver futures over the same sample period provides qualitatively similar results with larger magnitudes. This evidence suggests a possible channel through which the impact of macroeconomic news announcements transmits from the US to the Chinese commodity futures market. The second essay develops a simple measure of investor attention by aggregating the days that a stock hits the upper price limit on a monthly basis. This attention proxy describes investor trading behavior and predicts the cross section of stock returns. Using data from the Chinese equity market from 2002 to 2017, we provide extensive evidence that the investor attention captured by the measure negatively predicts cross-sectional stock returns in the following months, and the long-short strategy based on this attention measure produces significant economic value. We argue that attention-motivated trading by individual investors is the main cause behind the return reversal. The third essay constructs novel market-level attention proxies using the abnormal limit-hits on a monthly basis in Chinese stock market, and examines their explanatory power on market excess return from 2005 to 2019. The abnormal limit-hits are calculated as the change in equal-weighted number of limit-hits that are aggregated from firm-specific ones. Notably, we find the attention proxies, constructed using upper limit-hits, have substantially negative predictability in subsequent two months for both in-sample and out-of-sample analyses. The forecasting power is also comparable to economic variables and perform better than other attention and sentiment variables. Additionally, the mean-variance investors can gain sizable economic gains in asset allocation based on the forecast of our predictors. Finally, we document the attention-motivated trading increases the price pressure temporarily but revert to fundamental subsequently and further lead to lower market returns.

Date of Award	8 Jul 2021
Original language	English
Awarding Institution	Univerisity of Nottingham
Supervisor	Ying Jiang (Supervisor) & Xiaoquan Liu (Supervisor)