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Title: Two essays on empirical asset pricing
Authors: Zhang, Liang
Issue Date: 2008
Abstract: I: This essay examines what causes the significant negative relation between idiosyncratic risk and subsequent stock returns, as shown by Ang et al. (2006a, 2006b). Our analyses demonstrate that this negative relation is driven by monthly return reversals as documented in the previous literature (e.g. Jegadeesh (1990)). The abnormal positive returns from taking a long (short) position in the low (high) idiosyncratic risk portfolio are fully explained by an additional control variable, the "winners minus losers" portfolio returns, introduced to the conventional three- or four-factor time-series regression model. The cross-sectional regressions confirm that no significant relation exists between idiosyncratic risk and expected returns once we control for return reversals.
II: There are two approaches to explain the short-term return reversals. Liquidity hypothesis argues that non-informational trades generate return reversals and informational trades cause return continuations. While overreaction hypothesis suggests that return reversals are caused by informational trades, and stocks with more firm-specific information exhibit stronger return reversals since investors overreact to. firm-specific information. Using idiosyncratic volatility to. proxy the amount of firm-specific information contained in prevailing stock trading activities, this study distinguishes the above two explanations by examining the relation between short-term return reversals and idiosyncratic volatility. I find that stocks with more firm-specific information hence higher idiosyncratic volatility display greater return reversals, and this relation is robust after trading volume and illiquidity are controlled. Our study supports overreact inn hypothesis and indicates information content playa very important role in explaining short-term return reversals.
Description: Thesis (Ph.D.)--University of Hawaii at Manoa, 2008.
Dissertation Essay I. This essay examines what causes the significant negative relation between idiosyncratic risk and subsequent stock returns, as shown by Ang et al. (2006a, 2006b). Our analyses demonstrate that this negative relation is driven by monthly return reversals as documented in the previous literature (e.g. Jegadeesh (1990)). The abnormal positive returns from taking a long (short) position in the low (high) idiosyncratic risk portfolio are fully explained by an additional control variable, the "winners minus losers" portfolio returns, introduced to the conventional three- or four-factor time-series regression model. The cross-sectional regressions confirm that no significant relation exists between idiosyncratic risk and expected returns once we control for return reversals.
Dissertation Essay II. There are two approaches to explain the short-term return reversals. Liquidity hypothesis argues that non-informational trades generate return reversals and informational trades cause return continuations. While overreaction hypothesis suggests that return reversals are caused by informational trades, and stocks with more firm-specific information exhibit stronger return reversals since investors overreact to firm-specific information. Using idiosyncratic volatility to proxy the amount of firm-specific information contained in prevailing stock trading activities, this study distinguishes the above two explanations by examining the relation between short-term return reversals and idiosyncratic volatility. I find that stocks with more firm-specific information hence higher idiosyncratic volatility display greater return reversals, and this relation is robust after trading volume and illiquidity are controlled. Our study supports overreaction hypothesis and indicates information content play a very important role in explaining short-term return reversals.
Includes bibliographical references (leaves xxx-xxx).
Also available by subscription via World Wide Web
103 leaves, bound 29 cm
URI: http://hdl.handle.net/10125/20645
ISBN: 9780549787877
Rights: All UHM dissertations and theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission from the copyright owner.
Appears in Collections:Ph.D. - International Management



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