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(2021) Wang, HangThesisThis thesis examines the role of public information on equity prices. In the first study, we add new evidence that news increases investor disagreement. First, we find that stock prices are convex in relation to news, confirming that prices on news days reflect the risk compensation of opinion divergence. Second, using unexplained trading volume as a proxy for investor disagreement, we find that investor disagreement is positively priced in the cross-section, confirming that news increases investor disagreement. Finally, we distinguish empirically between two competing channels regarding how trading volume gets incorporated into asset prices when trading volume is a proxy for disagreement. We find that news-day unexplained trading volume is associated with high liquidity and low average bias, which reduces the effect of optimistic views. In the second study, motivated by the existing evidence that investors misreaction to news generates skewness and creates mispricing, we draw novel evidence that investors inability to interpret news correctly contributes to the pricing of skewness. Specifically, we find that only the skewness extracted from observed corporate news-day returns is negatively priced. This effect is particularly pronounced for stocks with greater asymmetric responses to good and bad news, and investors lottery preferences do not explain these results. Collectively, our findings suggest that accounting for endogeneity in skewness rather than treating skewness as an exogenous characteristic (lottery feature) of the return distribution is critical for understanding the negative relationship between skewness and future returns. In the final study, we examine the effect of Mercury Retrograde on stock market returns. Focusing on market indexes in 48 countries, we find that the average market returns in Mercury Retrograde periods are about 3.22% annually lower than those in other periods. This effect comes from a belief channel: investors who hold an astrological belief that Mercury Retrograde can destroy their decision-making will stay away from the market. This belief results in a higher risk premium required by remaining investors in sharing more risk. We further confirm that this belief channel concerns belief in ancient Greek culture, highlighting the importance of ancient culture in equity prices. Collectively, our findings suggest that investors may deem some ancient cultures important and behave accordingly.
(2021) Bay, JoshuaThesisThis paper explores extensive asset allocation possibilities and asset pricing tests shedding light into the cross-sectional and time-varying nature of combining multi-asset alternative risk premia. Existing literature in the multi-asset risk premia space is limited in terms of allocation studies as most research on combining factor exposures are only in the single-stock equity space. The literary gap is further exacerbated over the last decade with the explosion of new factors discovered. To address this, key asset allocation techniques commonly used in allocating across long-only traditional asset classes and equity factors are applied to multi-asset risk premia. The results seem to suggest the key assumptions of expected returns, followed by expected risks, higher moments and then lastly correlations in this order of importance are associated with building portfolios with higher risk-reward. To the best of my knowledge, this is one of the first papers that provide a comprehensive and practical study of a wide array of portfolio implementation approaches to multi-asset risk premia. This paper serves as an annex for investors to better understand the interaction and concentration of multi-asset risk premia exposures to meet their desired investment profiles.
(2021) Li, XunThesisThe aim of this thesis is to utilise transnational regulatory network (TRN) theory to examine the effectiveness of the regulatory framework promulgated by the International Organisation of Securities Commissions (IOSCO) — to address the activities of transnational hedge funds. Scholarship employing TRN theory has not previously accounted for the distinctive role that IOSCO — a body well-described as a TRN — has played in developing hedge fund regulation to prevent, identify and mitigate systemic risk related to transnational hedge funds. It is a gap that this thesis attempts to fill. This thesis asks whether and in what ways the IOSCO framework contributes to systemic risk mitigation in relation to transnational hedge funds operating at the global level. It does so to help academics and policymakers to better understand and appreciate the value, and overcome the limitations of IOSCO in this respect. Using the case studies of the failure of Long-Term Capital Management at the end of the 20th century and the demise of Bear Stearns’ hedge funds during the global financial crisis, it argues that it is the systemic hazards posed by hedge funds that make them merit extra regulation at both national and transnational levels. Deploying the findings of the TRN theory, it further demonstrates that the IOSCO framework for transnational hedge fund regulation holds not only advantages to be maintained but also shortcomings to be overcome in addressing these systemic hazards. The significance of this study lies in its contribution to advancing comprehension of the global regulatory framework for transnational hedge funds. It makes the advance by introducing a focus on systemic risk mitigation, hitherto lacking, and developing a critical, doctrinal understanding of the relatively understudied rules and standards under IOSCO.
(2021) Cai, LinThesisThis thesis consists of three chapters that investigate the linkage between uncertainty and corporate investment decisions on an international basis. In first chapter, I investigate the extent of U.S. policy-related spillovers into 22 other real economies. I find that, after accounting for factors previously used to explain corporate investment, US Economic Policy Uncertainty (US EPU, hereafter) fluctuations affect foreign corporate investments through two channels. First, the single effect of US EPU on international corporate investment shows an unequivocal negative relation (the direct channel). Second, an increase in US EPU also attenuates the negative sensitivity of corporate investment towards the cost of capital (the indirect channel). Further, I find that while the direct channel of US EPU on corporate investment persists across several subsamples, its indirect channel relates to a high degree of dependence on the U.S. economy and opacity exhibited by local economies. The second chapter reconciles the contrary views on the foreign investors using local disaster shocks from 46 countries over the period 1998-2018. I find that local disaster shocks cause significant disruptions to corporate investments, but foreign institutional investors attenuate the costs of disaster risks. The benefits associated with foreign institutional investors are not uniformly held across all economies, where the role of foreign institutional investors is particularly measurable in countries with well-developed institutional environment. The third chapter focuses on the uncertainty at domestic level using national elections across 23 different countries. I find that the corporate investment cycle corresponds with the timing of national elections, but there is a cross-sectional difference in the firm-level investment sensitivity to elections. During election periods, while firms temporarily reduce investment expenditures relative to nonelection years, the decline is mainly sourced from firms with greater political exposures. Further, I find that the investment cycles are more volatile when the election outcomes are uncertain, and the institutional environments are weaker.
(2021) Balogh, AttilaThesisThis dissertation consists of three essays on shareholder activism and corporate governance. The first essay develops and validates a method to identify shareholder activism campaigns using a data-driven approach based on investor characteristics. The proposed identification can replace or complement the current method used in finance research that identifies shareholder activism campaigns based on a subjective evaluation of regulatory filings. It overcomes the ambiguity associated with the current approach and allows for a more accurate and consistent examination of activism that is also replicable. I show that professional investment manager status, investment portfolio size, and track record of proxy solicitations are important determinants of board turnover, which is the most common channel for influencing control by activist investors. The second essay provides evidence that activist investors improve the operation of the director labor market and profit from its imperfections through their superior ability to match directors to firms based on the director's specific expertise. I show that long-term returns are higher when a director is appointed to the target, especially when their prior experience makes them a good fit. Understanding that complex turnaround campaigns are only launched when a matched director is available provides insights into the collective action problem of disengaged investors, which is inherent in the regular director nomination process. I also highlight that takeovers are a similar reallocation of human capital because the firm is matched to new managers and directors. This is an overlooked point in activism research that frames takeovers as an efficient reallocation of financial capital only. The third essay examines insider trading activity by blockholders and compares their performance to executives and directors. Blockholders are expected to be important monitors, yet the findings reveal that they are less informed because their trades earn significantly lower abnormal returns compared to other insiders that purchase their company's stock. Using insider trading data extracted directly from regulatory disclosure allows for a classification of investor types and the examination of heterogeneity in trading patterns for different blockholder groups. I show that active blockholder trades are significantly more informative compared to other financial blockholders, indicating that they are considered active monitors by the market.
(2022) Dienemann, FabianThesisThis dissertation consists of three essays on asset pricing and market microstructure topics within the U.S. corporate bond market. The first essay investigates asymmetry in price pressure between customer buy and sell orders and demonstrates that it is a valuable measure of downside liquidity for corporate bonds. While evidence of a characteristic premium for illiquidity in the cross-section of corporate bonds is mixed, aggregate liquidity asymmetry has high explanatory power for the time series of market returns. Its statistical and economic significance justify it as a credible asset pricing factor. Average market-wide liquidity asymmetry comoves with interest rate and credit spread changes, investor sentiment, funding liquidity, dealer inventory, exchange-traded fund flows, and post-crisis regulatory change. The second essay documents the properties of market-wide corporate bond liquidity and demonstrates that liquidity risk is an important determinant of returns. In market downturns, transaction costs rise for sellers and fall for buyers. The negative relation between buyer and seller liquidity motivates a new across-measure liquidity factor that incorporates an asymmetric liquidity component. Shocks to market-wide liquidity explain a large portion of bond return variation in the time series. Primarily driven by the asymmetric component, the liquidity factor attracts a cross-sectional risk premium that is robust to controls for credit, equity, and interest rate factors, as well as the illiquidity level. The third essay provides new evidence of retail investors’ ability to predict returns based on transactions in U.S. corporate bonds with equity-like risk. Retail order flow is persistent and contrarian, and it predicts future returns in the cross-section. The profits of an equal-weighted, long-short strategy that buys (sells) bonds that experience high (low) net retail buying are economically meaningful. The alpha based on decile portfolios is significant at the 10% level when controlling for common equity and bond risk factors. However, due to high transaction costs and because retail purchase volume is concentrated in underperforming bonds, retail traders lose money in aggregate.
(2021) Besley, MichaelThesisBoth industry and academic research document the sustained outperformance of Australian small capitalisation (cap) managers with regard to market benchmarks and standard academic models. In contrast to both their large company peers and overseas fund manager returns, the high relative returns generated by these small company managers have continued despite increased competition from new managers. This paper confirms the persistence of these anomalous returns and explores the sources of alpha generation by Australian small cap managers. The commonly used Carhart factor model does not explain the persistence of this alpha. Carhart alpha averages 0.3% per month for the group, with 22 out of 46 funds having statistically significant alphas. By adding a combination of factors to the standard Carhart model approximately two thirds of this alpha can be explained. These factors include betting against beta, avoidance of stocks with lottery characteristics, a preference for stocks with strong profitability and strong balance sheets while avoiding ‘junk’ stocks. After controlling for all these factors, average alpha declines to 0.08% per month with only four funds still having statistically significant alpha. While most managers avoid high beta and lottery stocks, the better performing funds demonstrate higher loadings away from lottery and distressed stocks and towards profitability factors than their poorer performing peers.