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Two essays on empirical asset pricing

Learning effect or fundamentals? high volatility risk for young firms

Co-movement and country attributes

Authors Zheng, Xiaohong
Issue Date 2007
Summary Essay I : Learning Effect or Fundamentals? High Volatility Risk for Young Firms I conjecture that the well-documented high volatility risk of a young firm can be attributed to two forces based on Pastor and Veronesi (2003) — high volatility in its fundamentals and high estimation risk of parameters as investors learn about them. The significance of the differentiation lies in that how uncertain investors are about the firms’ characteristics may or may not be due to firms’ fundamentals. Say, the short-listing history to trace for a “young firm” might result in high level of information asymmetry and add difficulty for investors to learn. Empirical evidence supports my prediction. Furthermore, linked with firm characteristics, it is small-sized and least profitable firms whose learning effect has greatest impact on volatility of stock returns; while fundamental uncertainty for those small-sized and medium/most profitable firms has greatest impact on volatility of stock returns; both effects are positively correlated, implying that high fundamental uncertainty can be a reason for high estimation risk. I find that before 1980s, it is mainly fundamental effect that causes the high volatility of young firms’ stock returns; however, after 1980s, the significance of learning effect increased substantially and it even dominates the effect of fundamentals in explaining young firm’s high volatile stock price. KEY WORDS: Volatility Risk; Young Firms; Learning about Profitability; Fundamentals JEL CLASSIFICATION CODES: G12, G14 Essay II : Co-movement and Country Attributes The study of equity markets co-movement has been largely focused on economic fundamentals, whereas, this work is focusing on the possible endogenous country-specific factors which might affect behavior of investors and thus have a long-term impact on co-movement. Using 36 country attributes data from 1995 to 2004, I investigate the factors like physical distance, cultural barrier, legal restrictions, political risk etc., which would affect the capital flow across border and therefore have an impact on co-movement. Specifically, I find that if two countries have proximities in geography and time zone, two equity markets tend to have greater co-movement; the impact of physical distance seems to be greater when it is less than 3,000km. I also document a positive relationship between Christianity and co-movement. Previous literature has found a negative relationship between religiosity and risk preference. Differences in other attributes like legal and institutional factors are examined. Not surprisingly, political risk change and corporate governance factors like accounting standards and expropriation risk seem to matter for co-movement. The explanatory power of the results implies that those factors listed above can hardly afford to be missed out. KEY WORDS: Co-movement; Country Attributes; Difference Factor JEL CLASSIFICATION: G15, G12
Note Thesis (Ph.D.)--Hong Kong University of Science and Technology, 2007
Language English
Format Thesis
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