Department of Finance

1. A novel cluster HAR-type model for forecasting realized volatility

Author:Yao, XZ;Izzeldin, M;Li, ZX


Abstract:This paper proposes a cluster HAR-type model that adopts the hierarchical clustering technique to form the cascade of heterogeneous volatility components. In contrast to the conventional HAR-type models, the proposed cluster models are based on the relevant lagged volatilities selected by the cluster group Lasso. Our simulation evidence suggests that the cluster group Lasso dominates other alternatives in terms of variable screening and that the cluster HAR serves as the top performer in forecasting the future realized volatility. The forecasting superiority of the cluster models are also demonstrated in an empirical application where the highest forecasting accuracy tends to be achieved by separating the jumps from the continuous sample path volatility process. (C) 2019 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.
2. Corporate Hedging and the High Idiosyncratic Volatility Low Return Puzzle

Author:Chng, MT;Fang, V;Xiang, V;Zhang, HF


Abstract:The literature offers various explanations to either support or refute the Ang et al. (2009) high idiosyncratic volatility low return puzzle. Fu (2006) finds a significantly positive contemporaneous relation between return and exponential generalized autoregressive conditional heteroskedastic idiosyncratic volatility. We use corporate hedging to shed light on this puzzle. Conceptually, idiosyncratic volatility matters to investors who face limits to diversification. But limits to diversification become less relevant for firms that consistently hedge. We confirm the main finding in Fu (2009), but only for firms that do not consistently hedge. For firms that adopt a consistent hedging policy, idiosyncratic volatility, whether contemporaneous or lagged, is insignificant in Fama-MacBeth regressions, controlling for size, book-to-market, momentum, liquidity, and industry effects.
3. Return predictability of variance differences: A fractionally cointegrated approach

Author:Li, ZX;Izzeldin, M;Yao, XZ


Abstract:This paper examines the fractional cointegration between downside (upside) components of realized and implied variances. A positive association is found between the strength of their cofractional relation and the return predictability of their differences. That association is established via the common long-memory component of the variances that are fractionally cointegrated, which represents the volatility-of-volatility factor that determines the variance premium. Our results indicate that market fears play a critical role not only in driving the long-run equilibrium relationship between implied-realized variances but also in understanding the return predictability. A simulation study further verifies these claims.
4. Project-Level Disclosure and Investment Efficiency: Evidence From China

Author:Chen, JA;Cheng, XS;Gong, SX;Tan, YC


Abstract:Different from studies that use rough proxies for aggregate accounting information quality to investigate its impact on investment efficiency, we construct a project-level measure of disclosures pertaining specifically to firms' ongoing and future investments, using a large sample of Chinese listed firms. We first validate this measurement of project-level investment disclosure, finding that more detailed investment disclosures are associated with stronger market reactions, particularly among strong-governance firms. Furthermore, we find that project-level disclosure is associated with higher future investment efficiency for strong-governance firms, but not for weak-governance firms. Investigations into underlying channels reveal that well-governed firms with more investment disclosures face less financial constraints and are more likely to abandon poorly performing investments. Cross-sectional analyses suggest that project-level disclosure and governance play a more important role in settings where firms have stronger incentives for opportunistic disclosure. Overall, our evidence indicates that project-level disclosure interacts with corporate governance to impact investment efficiency. The results have implications for disclosure regulation and practice.
5. What moved share prices in the nineteenth-century London stock market?

Author:Campbell, G;Quinn, W;Turner, JD;Ye, Q


Abstract:Using a new weekly blue-chip index, this article investigates the causes of stock price movements on the London market between 1823 and 1870. We find that economic fundamentals explain about 15 per cent of weekly and 34 per cent of monthly variation in share prices. Contemporary press reporting from the London Stock Exchange is used to ascertain what market participants thought was causing the largest movements on the market. The vast majority of large movements were attributed by the press to geopolitical, monetary, railway-sector, and financial-crisis news. Investigating the stock price changes on an independent list of events reaffirms these findings, suggesting that the most important specific events that moved markets were wars involving European powers.
6. A two-stage Bayesian network model for corporate bankruptcy prediction

Author:Cao, Y;Liu, XQ;Zhai, J;Hua, S


Abstract:We develop a Bayesian network (LASSO-BN) model for firm bankruptcy prediction. We select financial ratios via the Least Absolute Shrinkage Selection Operator (LASSO), establish the BN topology, and estimate model parameters. Our empirical results, based on 32,344 US firms from 1961-2018, show that the LASSO-BN model outperforms most alternative methods except the deep neural network. Crucially, the model provides a clear interpretation of its internal functionality by describing the logic of how conditional default probabilities are obtained from selected variables. Thus our model represents a major step towards interpretable machine learning models with strong performance and is relevant to investors and policymakers.
7. Why Do Firms Pay Dividends?: Evidence from an Early and Unregulated Capital Market

Author:Turner, JD;Ye, Q;Zhan, WW

Source:REVIEW OF FINANCE,2013,Vol.17

Abstract:Why do firms pay dividends? To answer this question, we use a hand-collected data set of companies traded on the London stock market between 1825 and 1870. As tax rates were effectively zero, the capital market was unregulated, and there were no institutional stockholders, we can rule out these potential determinants ex ante. We find that, even though they were legal, share repurchases were not used by firms to return cash to shareholders. Instead, our evidence provides support for the information-communication explanation for dividends, while providing little support for agency, illiquidity, catering, or behavioral explanations.
8. Rookie independent directors and corporate fraud in China


Source:Finance Research Letters,2021,Vol.

Abstract:This paper examines whether rookie independent directors (RIDs) have an effect on corporate fraud in Chinese public companies. In firm-level analysis, we find that the presence of RIDs increases the likelihood of corporate fraud. In director-level analysis, we reveal that rookie independent directors are less likely to dissent using the voting records collected from company announcements. And the cost of dissension for RIDs is the higher likelihood of losing current board seats, compared with seasoned independent directors. Our results are robust to alternative variables about the existence of RIDs, the IV approach and the conditional model.
9. Asymmetries, causality and correlation between FTSE100 spot and futures: A DCC-TGARCH-M analysis

Author:Tao, J;Green, CJ


Abstract:We use DCC-TGARCH-M to study asymmetries in the conditional variance in FTSE100 spot and futures returns before and after cost-reducing market microstructure changes on the London Stock Exchange and the London International Financial Futures Exchange. We find bidirectional causality-in-mean and that negative shocks have a larger impact on the conditional variances than positive shocks. There is little evidence of causality-invariance. The results support a risk premium explanation of asymmetric volatility before the microstructure changes; afterwards, there is evidence of a risk premium effect in futures but a momentum effect in spot. Following the microstructure changes, the speed at which the markets absorbed news increased, as did the asymmetric volatility effect of bad news. We also document regular temporary declines in the conditional correlations following contract expiration. This is consistent with the increased uncertainty following expiration, when investors' attention switches to the next near contract, and the no-arbitrage linkage between spot and futures is temporarily reduced. (C) 2012 Elsevier Inc. All rights reserved.
10. Modelling systems with a mixture of I(d) and I(0) variables using the fractionally co-integrated VAR model

Author:Yao, XZ;Izzeldin, M;Li, ZX

Source:ECONOMICS LETTERS,2019,Vol.181

Abstract:We propose a filtration technique for making inference in systems with I(0) and I(d) variables using the fractionally co-integrated vector autoregressive (FCVAR) model with long memory in the co-integrating residuals. Superior predictions for the I(0) variable are demonstrated using simulations. (C) 2019 Elsevier B.V. All rights reserved.
11. Watch out for bailout: TARP and bank earnings management

Author:Fan, YY;Huang, YC;Jiang, YX;Liu, FH


Abstract:We study the impact of the recent government bailout, called Trouble Asset Relief Program (TARP), on bank accounting quality. By adopting a difference-in-difference (DID) method, we find a significantly positive impact of TARP on earnings management of recipient banks, compared with their non-recipient peers. Further, we observe that TARP-recipient banks engage more in earnings-decreasing manipulation rather than earnings-increasing manipulation. This behavior is more obvious for those banks that voluntarily request for TARP funds. Also, participant banks change their accounting strategy to manipulate earnings upwards after TARP funds are paid back. Our findings confirm our hypothesis that TARP-recipient banks are motivated to manipulate downwards (or hide some earnings) to obtain further favorable treatment by the program administrators. (C) 2020 Elsevier B.V. All rights reserved.
12. Managerial multi-tasking, Team diversity, and mutual fund performance

Author:Chen, JJH;Xie, L;Zhou, S


Abstract:This study examines the impact of multi-tasking teams on fund performance. We find that while managerial multi-tasking has a negative impact on fund performance, teamwork can mitigate the adverse effect associated with managerial multi-tasking, which is indicative of superior performance of funds managed by multi-tasking teams. More importantly, it is the characteristics of the multitasking team that contribute to these superior results, which can be attributed to network cognitive diversity, suggesting that extended networks, facilitated by indirectly-connected managers via local teammates, can largely enhance the scale of cognitive diversity, thus generating significant gains through information pooling and integration. In assessing possible mechanisms for the observed superior performance, we find evidence of improved decision-making induced by network cognitive diversity through both transmission and sharing of value-relevant information, and speedy information diffusion.
13. Modelling temperatures in shanghai using fractional brownian motion


Source:Far East Journal of Mathematical Sciences,2012,Vol.70

Abstract:In this study, daily average temperatures in Shanghai over the last twenty years are modelled with a view towards application to weather derivatives. For this purpose, a mean-reverting Ornstein-Uhlenbeck (OU) process driven by Fractional Brownian Motion (FBM) is used. The estimated Hurst parameter shows that temperature dynamics deviate from the assumptions of Brownian motion and that option prices using FBM are significantly higher compared to the model with an OU process driven by Brownian motion. The motivation for using FBM is the long-range temporal dependence and the normality of temperature fluctuations observed for Shanghai temperatures. Standard call and put options on a temperature index (Heating/Cooling Degree Days [HDDs/CDDs]) for Shanghai are priced using a Monte Carlo simulation of the proposed model with fitted parameters. © 2012 Pushpa Publishing House.
14. Financial Transparency, Media Coverage, and Momentum in China

Author:Chen, SH;Cao, XP;Lin, KB;Huang, JB;Zhang, YB;Lin, HW


Abstract:This paper digests the influences of financial transparency and media coverage in the Chinese stock market. In China, media performs under a regulatory system and media information is regarded as the direction of news. In addition, the Chinese market is dominated by retail investors and financial information is always manipulated, so the reliability of financial information is quite intriguing. The effect of ostensible financial information on the stock market through the media hype is a crucial issue. We employ media and transparency to analyze over 3,000 stocks in China. First of all, the Chinese stock market is characterized by significantly negative momentum profit and thus exhibits price reversal. However, when high media coverage and high transparency jointly come into play, the significantly negative momentum profit turns to be significantly positive. This dramatic change alters the price reversal to be price momentum. By contrast, low media coverage and low transparency still result in price reversal.
15. Cross-ownership and collateral in lending

Author:Qian, XS;Ding, ZF;Cao, XP;Qi, SS


Abstract:Information asymmetry is a major obstacle in both formal and informal loan markets. However, when a bor-rower and a lender are connected via cross-ownership, this obstacle can be significantly reduced. Cross -ownership enables lenders to collect more concrete and precise information about borrowers, and this lowered information asymmetry reduces the likelihood that the lender will require the borrower to provide collateral. Using a data set of 1091 intercorporate loans from China, we find strong support for the prediction that cross ownership between lenders and borrowers lowers the collateral requirements by more than 50%%. This relation is more pronounced for informationally opaque borrowers and for lending firms with a controlling stake in the borrowing firms.
16. From watchdog to watchman: Do independent directors monitor a CEO of their own age?

Author:Fan, YY;Jiang, YX;John, K;Liu, FH


Abstract:We examine the impact of age similarity between independent directors and the CEO on earnings management. Using changes in independent director composition due to same-aged director deaths and retirements for identification, we find that firms with the presence of independent directors who have the same age with the CEO are more likely to manage earnings. We further find that age similarity between these two parties increases earnings management through lowering the effectiveness of board monitoring. Additionally, this positive impact decreases as the age gap widens, but intensifies if independent directors share other characteristics with the CEO, if independent directors sit on audit or nomination committees, if firms with lower information asymmetry and if CEOs are older. Our results are robust to alternative proxies of earnings management.
17. The impact of an insider and short-selling on bubble formation in experimental financial market

Author:Chmura, T;Bai, Y;Bauder, D


Abstract:This study extends the institutional design of the existing literature focusing solely on short selling by introducing an insider who is informed of the dividend distribution and experienced outsiders who gain information via trading experience. Our findings show that introducing short selling and an insider does reduce the bubble duration and size. At the same time, volatility is significantly reduced. Furthermore, the presence of the single insider reduces the large undervaluation and overall turnover in pure short selling treatment and generates small positive bubbles. Once the outsiders gain information via trading experience, there are small positive bubbles with reduced volatility. (C) 2019 Elsevier B.V. All rights reserved.
18. Country and industry factors in tests of Capital Asset Pricing Models for partially integrated emerging markets

Author:Bai, Y;Green, CJ


Abstract:Existing literature has produced broadly inconclusive evidence about the asset pricing model which best fits partially integrated markets. This paper examines whether industry and country factors are independent factors helping to determine returns in emerging stock markets, or are derived from the stocks' risk-return characteristics. We link the country-industry decomposition framework to the local and the Global CAPM in a new and more direct way. The results show that country factors are additional independent sources of cross-sectional variation in stock returns before 1996 particularly under the Global CAPM. After 1996, the results suggest partial integration: industry and country factors are both additional independent determinants of cross-sectional variations in stock returns.
19. Premiums of the Pension Benefit Guarantee Corporation and risk taking by pension plans

Author:Romaniuk, K


Abstract:This paper focuses on defining Pension Benefit Guarantee Corporation (PBGC) premiums. We propose an analytical framework to analyze the effect of premium form on risk-taking by sponsoring firms in their pension plans. We show that risk-taking increases (decreases) when a firm's probability of bank ruptcy is superior (inferior) to the sum of the under funding proportion considered in the premium and of the minimum funding requirement parameters, this sum being divided by the level of the guarantee. (c) 2019 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.
20. Institutional preferences, demand shocks and the distress anomaly

Author:Ye, Q;Wu, YL;Liu, J


Abstract:Our paper examines the distress anomaly on the Chinese stock markets. We show that the anomaly disappears after controlling for institutional ownership. We propose two hypotheses. The growing scale of institutional investors and changes in institutional preferences can generate greater demand shocks for stocks with low distress risk than those with high distress risk, causing the former to outperform the latter. Consistent with our hypotheses, the growth of institutions explains the anomaly when the institutional market share increases rapidly. We also show that institutional preferences for stocks with low distress risk have significantly increased over time and changes in preferences also explain the anomaly. Finally, momentum trading and gradual incorporation of distress information cannot account for the anomaly.
Total 43 results found
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