Essays on empirical asset pricing

• Main Author: WANG, Luying
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: Asset Pricing; Climate Change; News Media; Trading Volume; Mispricing; Behavioral Finance; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/etd_coll/567; https://ink.library.smu.edu.sg/context/etd_coll/article/1565/viewcontent/GPBS_AY2019_PhD_Luying_WANG.pdf
• Institution: Singapore Management University

The dissertation consists of three chapters on empirical asset pricing. The first chapter examinesthe market return predictability of media coverage on climate change. Specifically, we introduce acomprehensive media climate change concern (ΔCMCCC) index, derived from unexpected climatechange coverage across diverse media channels, including print (newspapers), voice (radio), andvideo (television). We show that this index negatively predicts aggregate stock market returns, bothin-sample and out-of-sample, offering potential gains for investors. Our findings emphasize themedia’s influence on market returns through climate change discussions, mainly via the cash-flowchannel. This reveals possible shifts in product demand, while demand for green or brown stocksmay not be altered as expected, possibly due to institutional investors engaging in “greenwashing”by overstating their environmental commitments. Existing studies such as Tetlock (2007) assessthe market predictability effect from news sentiment, and a recent work by Bybee, Kelly, Manela,and Xiu (2023) investigate the topic-specific sentiment. Despite the heightened prominence ofclimate change in recent media coverage, there exists a gap in research investigating whetherdiscussions on climate change can affect the aggregate stock market. Thus, this paper addressesthe gap by presenting market-level evidence regarding the impact of media coverage on climatechange. The second chapter delves into a comprehensive analysis of how trading volume can eithermitigate or amplify stock mispricing. Existing studies have presented varying perspectives, withsome interpreting trading volume as a measure of disagreement, potentially amplifying mispricing(MISP). Conversely, others argue that trading volume, as an indicator of attention, can mitigatecertain forms of mispricing, such as earnings momentum. Our research findings highlight that theimpact of trading volume on mispricing is contingent upon the predominant source of mispricing,whether it stems from limited attention or investor biases and the volume state (high or low). Toelaborate, trading volume exhibits a close correlation with attention among low-volume stocks,then mitigating mispricing driven by limited attention, such as Post-Earnings AnnouncementDrift (PEAD). Conversely, among high-volume stocks, trading volume is closely associated withdisagreement, which may amplify mispricing due to investors’ biases, such as Financing Factor(FIN). This research reconciles previous conflicting results and advances our understanding ofthese multifaceted dynamics inherent in trading volume. The third chapter investigates the cross-sectional heterogeneity in the risk-return trade-off.Traditional asset pricing theory suggests that higher risk should be rewarded with higher expectedreturns. However, the empirical studies have yet to reach a consensus regarding the existenceof such a positive risk-return trade-off. Thus, in the paper, we propose a novel psychologicalexplanation that anchoring on the psychological barrier of 52-week extreme price leads to theobserved heterogeneity in the risk-return trade-off. Specifically, we find negative risk-returnrelation among stocks with prices far from their 52-week high prices, and positive risk-returnrelation among stocks with prices near their 52-week high prices. It indicates investors considerthe 52-week extreme prices as a psychological barrier when evaluating risk: they are more likelyto push down (up) the prices of the risky stocks (lower) when the stock prices are close (far) tothe 52-week high, resulting in a positive (negative) risk-return trade-off among stocks at 52-weekhigh (low). We further rule out the alternative explanations including investors’ underreaction tobad news, disposition effect, liquidity effect and investors’ lottery preference.