Individual Stock Level Research Articles

Economic policy uncertainty and the predictability of stock returns: impact of China in Asia

PurposeMotivated by the significant role of uncertainty in affecting investment decisions and China's economic leadership in Asia, this paper investigates the predictive role of exposure to Chinese economic policy uncertainty at the individual stock level in large Asian markets.Design/methodology/approachWe estimate the monthly uncertainty exposure (beta) for each stock and then employ the portfolio-level sorting analysis to investigate the relationship between the China’s uncertainty exposure and the future returns of major Asian markets over multiple trading horizons. The raw returns of the high-minus-low portfolios are then adjusted using conventional asset pricing models to investigate whether the relationship is explained by common risk factors. Finally, we check the robustness of the portfolio-level results through firm-level Fama and MacBeth (1973) regressions.FindingsApplying portfolio-level sorting analysis, we reveal that exposure to Chinese uncertainty is negatively related to the future returns of large stocks over multiple trading horizons in Japan, Hong Kong and India. We discover this is unexplained by common risk factors, including market, size, value, profitability, investment and momentum, and is robust to the specification of stock-level Fama and MacBeth (1973) regressions.Research limitations/implicationsOur analysis demonstrates the spillover effects of Chinese economic policy uncertainty across the region, provides evidence of China's emerging economic leadership, and offers trading strategies for managing uncertainty risks.Originality/valueThe findings of the study significantly improve our understanding of stock return predictability in Asian markets. Unlike previous studies, our results challenge the leading role of the US by providing a new intra-regional return predictor, namely, China’s uncertainty exposure. These results also evidence the continuing integration of the Asian economy and financial markets. However, contrary findings for some Asian markets point toward certain market-specific features. Compared with market-level research, our analysis provides deeper insights into the performance of individual stocks and is of particular importance to investors and other market participants.

Internal control effectiveness and stock price crash

This study focuses on the problems of imperfect internal control effectiveness, insufficient information transparency, and plummeting stock prices. The study selects the data of non-financial main board listed companies in China’s Shanghai and Shenzhen A-shares from 2012 to 2021 as a sample, and adopts an empirical research methodology, which reveals that the effectiveness of internal control is negatively related to the trend of share price crash, and efficient internal control is positively related to the transparency of corporate information environment. The findings suggest the impact of internal control on the risk of stock price crash at the individual stock level and provide empirical support for listed companies to manage their risks. This study has practical value in guiding listed companies to strengthen internal control, improve information transparency, mitigate the risk of stock price crashes, and provide a decision-making basis for the healthy and stable development of the capital market.

Is macroeconomic tail risk contagious to stock idiosyncratic risk?

We explore whether macroeconomic tail risk (MTR) is contagious at the individual stock level. We find that macroeconomic tail risk exacerbates stock idiosyncratic volatility. An increase in macroeconomic tail risk by one standard deviation is associated with an average increase in idiosyncratic volatility by 5.10%. Further, divergence of opinion intensifies the macro to stock idiosyncratic risk contagion. Results show that the positive impact of macroeconomic tail risk on idiosyncratic volatility is only observed in assets with positive MTR beta, indicating that risk-averse hedging trading behavior of investors during macroeconomic downturns is the potential reason for the macro-individual risk contagion.

The 1929 crash of the New York stock exchange as a liquidity crisis

AbstractWhat caused the 1929 crash of the New York Stock Exchange? This paper quantitatively studies liquidity during the 1929 crash of the NYSE. I evidence that the crash represented a liquidity crisis due to the liquidation of brokers’ margin loans. Applying recent estimators of effective spreads and liquidity conditions from contemporary finance literature suggests a four‐fold increase in spreads during the crash at the aggregate level. At the individual stock level, quoted bid‐ask spreads suggest that liquidity explains one‐fifth of the variance in daily stock returns during the crash.

Counteracting large-scale asset purchase program: The Bank of Japan’s ETF purchases and securities lending

This study investigates the impact of the Bank of Japan’s (BOJ) exchange traded fund (ETF) purchasing program on the stock lending market. In particular, we focus on the fact that stocks held by ETF managers for the BOJ are lendable to other investors in order for them to make a short position in stock market. Using individual stock level data, we show that expansions of the ETF purchase program have substantially increased the supply of stocks in the lending market by changing the behavior of stock holders as the BOJ is expected to be a “buy-and-hold” type of investor. This result implies that such an active stock lending market would help to reduce the side-effects of the ETF program whereas the squeezing effect of the program on supply–demand balance in spot stock markets is mitigated.

A Global Version of Samuelson's Dictum

Samuelson’s Dictum refers to the conjecture that there is more informational inefficiency at the aggregate stock market level than at the individual stock level. Our paper recasts it in a global setup: there should be more informational inefficiency at the global level than at the country level. We find that sovereign CDS spreads can predict future stock market index returns, GDP, and PMI of their underlying countries. Consistent with the global version of Samuelson’s Dictum, the predictive power for both stock returns and macro variables is almost entirely from the global, rather than country-specific, information from the sovereign CDS market. (JEL G12, G14, G17)

Trading Behaviour of Foreign Institutional Investors: Evidence from Indian Stock Markets

The existence of behavioural bias such as positive feedback trading (PFT) and herding is well researched for advanced economies. This paper explores whether foreign institutional investors (FIIs), a prominent investor group, pursue these strategies in India. The contribution lies in the application of multiple measures of herding. Results indicate that FIIs exhibit PFT behaviour in equity and to some extent, in debt. At the individual stock level, FIIs herd during non-extreme market conditions, but market-level measures indicate absence of herding in extreme market conditions. In the bullish market, they behave more rationally compared to bearish or normal market conditions.

How Have ETFs Changed Market Macro Efficiency and Risk Structure?

In the late 1990s, Samuelson offered a dictum suggesting that the equity market, although micro efficient, is also macro inefficient. That is, at the aggregate level, the market does not accurately reflect the available information. We further explore this dictum in the context of a market that has evolved to provide larger options for trading across the whole spectrum of investors. We argue that the macro efficiency of the stock market has been increasing over the past 20 years. We show that the development and adoption of exchange-traded funds (ETFs) have played a major role in the transmission of information to the market, resulting in an increase in market macro efficiency. Our approach is based on the R-squared of the market model explaining US stock and sector returns. First, we propose these R-squared values as a proxy for market macro efficiency. Then, we use regression analyses at the individual stock and sector levels to observe the relationship between the rise in ETFs and market macro efficiency. Finally, we use extrafinancial data related to the awareness and adoption of ETFs to confirm their contribution.

An Empirical Risk and Return Analysis of Select Stocks in NASDAQ 100

Stock market indices are considered to be a powerful economic indicator. These indices can be classified based on the methodology of weight allocation for each stock and the rules governing the entry, retention and exit criteria of various stocks in the index. This paper presents a descriptive and an exploratory analysis carried out on the daily returns data of NASDAQ 100 (^NDX) index and shortlist of 20 stocks in the index. Random sampling was conducted at the sector level strata of all stocks that make up the index. This approach was followed to avoid selection bias and that stocks from the varied sectors are represented equally for this analysis. R-squared values and correlation coefficients were used to determine the explain-ability and relationship between the stock returns and the index returns respectively. The paper applied descriptive univariate analysis on daily returns at an individual stock level and at an aggregated sector level. Inter-relationship between stocks and the index returns was carried out by computing Pearson’s correlation coefficient across the different combinations of stocks and index return values. Linear regression was carried out identify the explain ability of the variance in the returns of from the index to the returns from the stocks. All analysis was carried out using the python and the stats-models library. As anticipated, the returns of randomly picked 20 stocks were able to explain ~85 % of the variance of the returns of index. One of the primary focus of the paper was to explore whether NASDAQ-100 index can explain the variability of the technology stocks relatively more than the stocks that belong to other sectors in its portfolio owing to the nature of most stocks that make up the index.

Erratum to “Opening Noise in the Indian Stock Market: Analysis at Individual Stock Level” [Theoretical Economics Letters 9(1) (2019) 21-32

The original online version of this article (Zargar, F. N., & Kumar, D. (2019). Opening noise in the Indian stock market: Analysis at individual stock level. Theoretical Economics Letters, 9(01), 21-32. doi:10.4236/tel.2019.91003) was published mistakenly without two relevant references. In this regard, we revise the References section by including two relevant citations.

Does the Stock Market Affect the Real Economy? An Empirical Analysis Based on China’s Stock Market Liquidity

This article investigates the causal effect between the stock market and the real economy. Based on the data of China’s A‐share market from 1998 to 2017, this article uses the fixed‐effect model and other methods to find the causal effect from the perspective of the impact of illiquidity at the individual stock level on enterprise investment decision‐making. Empirical results show that stock illiquidity significantly decreases enterprise investment. Information asymmetry is one of the important channels between the stock market and the real economy. The financial constraints and agency conflicts caused by information asymmetry significantly affect the causal effect. Macroeconomic policies to alleviate market information asymmetry can effectively act on the real economy through the stock market. From the microperspective of studying the causal effect, this study controls the time effect and individual effect and further explores the influence mechanism between the stock market and the real economy. Research shows that macroeconomic policies can effectively affect the real economy through the stock market and provides decision‐making references for future macropolicy formulation.

Understanding idiosyncratic momentum in the Chinese stock market

In this paper, we revisit the idiosyncratic momentum pattern in the Chinese stock market. We show that idiosyncratic momentum strategies constructed to hedge out the risk exposures to eight popular multifactor models remain profitable. Importantly, a PLS-based idiosyncratic momentum strategy that aggregates the information contained in various idiosyncratic momentum measures consistently produces substantial profits in the cross-sectional pricing at the portfolio and individual stock levels. Furthermore, the PLS-based idiosyncratic momentum factor is helpful in explaining the cross-section of expected returns and can be rationalized in the context of Merton’s (1973) intertemporal CAPM (ICAPM) theory.

Counteracting Large-Scale Asset Purchase Program: The Bank of Japan's ETF Purchases and Securities Lending

This study investigates the impact of the Bank of Japan’s (BOJ) exchange traded fund (ETF) purchasing program on the stock lending market. In particular, we focus on the fact that stocks held by ETF managers for the BOJ are lendable to other investors in order for them to make a short position in stock market. Using individual stock level data, we show that expansions of the ETF purchase program have substantially increased the supply of stocks in the lending market by changing the behavior of stock holders as the BOJ is expected to be a “buy-and-hold” type of investor. This result implies that such an active stock lending market would help to reduce the side-effects of the ETF program whereas the squeezing effect of the program on supply-demand balance in spot stock markets is mitigated.

Monetary policy and liquidity: Does investor sentiment matter?

We examine the relationship between monetary policy and liquidity effects at the macro (overall market) and micro (individual stocks) levels, using data from the Indian stock market. We also test the possible asymmetric effect of investor sentiment on the monetary policy – liquidity relationship. Results suggest strong predictability of monetary policy on liquidity at an aggregate market level and individual stock level. The effect of monetary policy on liquidity is stronger during low sentiment (pessimistic) periods as compared to high sentiment (optimistic) periods.

Higher moments anomaly: evidence from the Indian equity market

PurposeThe study investigates the impact of higher moments on cross-sectional returns in the Indian equity market.Design/methodology/approachUsing the daily data of 3,085 Bombay Stock Exchange-listed stocks spanning over 20 years from January 2000 to December 2019, the study evaluates the relationship between higher moments (skewness and kurtosis) and stock returns at individual stock and portfolio levels. The variations in the returns of the equal-weighted and the value-weighted portfolios are analysed, where the portfolios are constructed by sorting the stocks on skewness and kurtosis. The returns are adjusted for five common factors – market excess-returns, size, value, momentum and illiquidity, to controls other cross-sectional effects. Besides, the study employs Fama-MacBeth cross-sectional regression and time-series tests of higher moments as robustness measures.FindingsThe study presents higher moments anomaly in the Indian equity market. Contrary to what is expected based on a risk-averse rational agent model, a robust positive relationship is observed between the skewness and stock returns. The relationship between the kurtosis and stock returns is negative, albeit statistically weak. These results are robust for the Fama-MacBeth cross-sectional regression and time-series tests.Originality/valueIt is among the earlier attempts to investigate the pricing impact of higher moments at different levels of asset prices in an emerging market. Besides the standard portfolio methodology for explaining cross-sectional variations, the study also employs the time-series tests for higher moment factors, hence provides more robust results. Results have wider implications for asset pricing in emerging markets and highlight many issues for further research.

Review of the ecosystem approach in Cumberland Sound, Nunavut, Canada

Historically, fisheries have been monitored at the individual stock level, without consideration to connectivity to other species or activities in the ecosystem. The ecosystem approach requires that the stock and fishery be seen in the context of predators, competitors, prey, by-catch impacts, other fisheries, and abiotic environmental variables so that management is holistic. In this study, we describe the components of the ecosystem approach applied in the scientific investigation of fisheries in Cumberland Sound, Nunavut. Relative to other Canadian Arctic locales with commercial fisheries operations, the Cumberland Sound area has a greater biodiversity and abundance of fishes and marine mammal species. These components support active fisheries for Arctic Charr, Greenland Halibut, and Beluga Whale, as well as Ringed, Bearded, and Harp Seals. The species and their fisheries are variable in character, their ecosystem effects, and their response to the environment. We describe the species dynamics and their fisheries within an ecosystem context. We briefly note the challenges to developing an overarching model of the system such as the integration of the different life histories of the species, as well as the incorporation of future non-fisheries-related disturbances.

A Global Version of Samuelson’s Dictum

Samuelson’s Dictum refers to the conjecture that there is more informational inefficiency at the aggregate stock market level than at the individual stock level. Our paper recasts it in a global setup: there should be more informational inefficiency at the global level than at the country level. We find that sovereign CDS spreads can predict future stock market index returns, GDP, and PMI of their underlying countries. Consistent with the global version of Samuelson’s Dictum, the predictive power for both stock returns and macro variables is almost entirely from the global, rather than country-specific, information from the sovereign CDS market.

Does investor sentiment affect stock pricing? Evidence from seasoned equity offerings in China

<abstract> Seasoned equity offerings attract a great deal of attention from investors in China's stock market, and they provide natural experimental environment for examining relationship between investor sentiment and asset pricing. We measure the investor sentiment on the individual stock level and examine its impact on stock pricing by using seasoned equity offerings (SEO) samples in the China's stock market from 2006 to 2019. The study shows that investor sentiment gradually rises during the Pre-SEO window and stays at a relatively high level after the new equity issuance. Meanwhile, investor sentiment is a significant pricing factor during the SEO window. However, the role of investor sentiment is different during different stages of SEO events, with a negative and positive impact on the Pre-SEO window and Post-SEO window respectively. Overall, this study identifies the pricing mechanism of investor sentiment in Chinese SEO market and provides some policy implications for portfolio management and market regulation. </abstract>

Predicting long-term returns of individual stocks with online reviews

Predicting long-term returns is essential for getting a full view of market efficiency. It is, additionally, more challenging for both human and algorithms, especially at the level of individual stocks, and competent solutions are still missing in previous effort. Considering the profound connections between stock prices and consumer opinions, asking experienced buyers can be a promising direction. In this paper, which is based exclusively on online reviews, a framework for predicting long-term returns of individual stocks is established. Specifically, 6,246 features of 13 categories inferred from more than 18 million product reviews are elaborated to build the prediction model. A satisfactory increase in accuracy, 13.94%, was achieved compared to the cutting-edge solution with 10 technical indicators being features. Additionally, we conduct a trading simulation on real-world stocks and our model obtains the highest return 13.12% among all baselines in half year. The robustness of the model is further evaluated and testified. Our approaches, in both feature inference and prediction model, will offer insightful advices to investors in long-term investments on individual stocks.

Order imbalance beta and stock returns

ABSTRACT This paper studies the impact of order imbalance beta on cross-sectional stock returns in the Chinese stock market. We measure the daily order imbalance beta, which is defined as the sensitivity of stock returns to changes in stock order imbalance, and show at the individual stock level that stocks with higher order imbalance betas contemporaneously have higher average returns. Furthermore, we find that higher order imbalance beta stocks tend to be smaller, and have lower trading volumes, lower prices and lower turnover rates. Moreover, we find that the long-horizon (1-, 3-, 6- and 12-month) effect of order imbalance beta on stock returns is consistent with the previous daily effect. Finally, we prove that the positive relationship between order imbalance beta and stock returns is robust in different stock markets in China and when using different minimum day limits (30, 45 and 60 days) to estimate order imbalance beta.