Chuan-Yang Hwang

Transitory Price Changes and Price-Limit Rules: Evidence from the Tokyo Stock Exchange

We compare the volatility of 24-hour returns computed from the opening and closing prices of a diverse sample of Tokyo Stock Exchange (TSE) stocks. We find that volatility at the open is greater than volatility at the close only for the most actively traded TSE stocks. Daytime and overnight return covariances suggest that the volatility patterns are explained by the effect of implicit bid-ask spreads at the open and partial price adjustment at the close, both of which are related to the intensity of trading. Our results challenge the view that open-to-open returns are more volatile than close-to-close returns for stocks, in general, and are consistent with the hypothesis that TSE price limit rules have a significant impact on the dynamics of security prices.

The tax-loss selling hypothesis, market liquidity, and price pressure around the turn-of-the-year

Abstract In this paper, we use intra-day data for all stocks listed on the ISSM and provide new and direct evidence consistent with the tax-loss selling hypothesis. We find that (a) there is abnormal selling pressure prior to the year-end for stocks that have experienced large capital losses in the current and prior years (b) investors delay realizing capital gain by postponing the sale of capital gain stocks until after the new year (c) there is a significant decrease in the average trade size for stocks with large capital losses before the year-end and for stocks with capital gains in the new year, which suggests that individuals, rather than institutional investors, are the major sellers around the year-end (d) the tax-loss selling hypothesis, and not firm size or share price, is the fundamental explanation for abnormal January returns. Further, small or low share priced firms with capital gains do not experience abnormal returns in January. However, conditional on capital losses, small or low share priced firms magnify the turn-of-the-year effect (e) On average, the increase in selling activity adversely affects market liquidity by increasing bid-ask spreads and reducing depths. (f) The tax-loss selling pressure not only causes the price to be at the bid at the year-end, it also temporarily depresses the equilibrium price indicating the short run demand curve is not perfectly elastic (g) the year-end buying activity suggests that large investors buy capital loss stocks prior to the year-end to take advantage of the temporarily depressed price and capital gain stocks after the new year to reinvest the proceeds of the tax-loss selling.

The post-listing puzzle: evidence from Tokyo Stock Exchange listing

Abstract In this paper, we examine the post-listing return and trading volume behavior of 292 stocks that listed on the Tokyo Stock Exchange during the period 1975–1989. Though the abnormal returns for the full sample are significantly positive, these returns are primarily driven by the IPOs, which do not begin trading immediately. The post-listing returns pattern for the non-IPO firms that list in the first section is negative and similar to those reported for stocks that list on the NYSE. The post-listing abnormal returns for those stocks that list in the second section are negative but insignificant and differ from significant negative abnormal returns for stocks that list on the American Stock Exchange. We explore the role trading volume plays in explaining the post-listing return behavior. We find some support for the argument that a lack of trading interest provides a partial explanation as to why the negative post-listing returns persists for non-IPOs. The post-listing anomaly for non-IPOs seems to be an international phenomenon.

A microstructure examination of trading activity following stock splits

In a study of 1,131 stock splits spanning the period 1983–1989 we observe an increase in the number of trades as well as a reduction in the mean trade size following the split. Combined with earlier reported findings of an increase in the number of shareholders postsplit, we conclude that the number of liquidity traders increases after a split. We confirm the previously observed increase in the bid-ask spread following a split, and upon decomposition of the spread find an increase in its adverse selection component in the postsplit period. This is consistent with the finding by Brennan and Hughes (1991) of an increase in the number of analysts following a stock after a split. Further, observing a decrease in market depth following a split we determine that Kyle-type models incorporating diverse private information for informed traders most correctly describe the nature of security trading. Since this decrease in postsplit market depth is not related to the trading volume or the split factor, we reject price correction explanations for stock splits.

The ex-date impact of rights offerings. The evidence from firms listed on the Tokyo stock exchange

Abstract This paper examines the behavior of stock price and trading volume around the ex-dates of rights offerings by firms listed on the Tokyo Stock Exchange. Based on a sample of 248 rights offerings over the time period from 1975 to 1989, we document a significant abnormal stock return of 7.10 percent on the ex-date of an offering. We also find significant increases in trading activity on the ex-date, and the five days leading up to the ex-date, with these increases being related to the ex-date abnormal return. In addition, our investigation reveals an increase in stock volatility after the ex-date, with the median value of this increase being 18 percent. Our results also indicate that a part of this volatility increase can be explained by changes in bid-ask spreads around the ex-date.

Why Do Firms with High Idiosyncratic Volatility and High Trading Volume Volatility Have Low Returns

Ang, Hodrick, Xing and Zhang (2006) document a negative relation between returns and idiosyncratic volatility (hereafter the AHXZ result). We show their result is significant and robust to various measures of idiosyncratic volatility and various return horizons after deleting penny stocks and controlling for January. Moreover, their result is not attributable to small firms. We examine whether the market misprices high idiosyncratic volatility stocks in a manner consistent with the effects of limits of arbitrage and information uncertainty. The results are supportive of this hypothesis. The AHXZ result exists only among stocks with low analyst coverage, and is strongest among low-coverage stocks with high returns over the prior three years. Earnings announcement returns are negative and significant for high idiosyncratic volatility stocks with low analyst coverage, but not those outside the low-coverage group. Outside of low-coverage stocks, the relation between returns and idiosyncratic volatility is insignificant or positive. Distinct patterns in earnings indicate that the AHXZ result arises because the market overestimates the persistence of earnings growth for low-coverage stocks with high idiosyncratic return volatility. We document a similar collection of results for stocks sorted on the volatility of share turnover, suggesting that the negative relation between returns and turnover volatility documented by Chordia, Subrahmanyam and Anshuman (2001) also reflects mispricing consistent with information uncertainty and limits of arbitrage.

Local and Global Sentiment Effects, and the Role of Legal, Trading and Information Environments

Using domestic consumer confidence indicators to proxy investor sentiment and data from 23 different equity markets, we document a pervasive overall sentiment effect. We further document a significant effect of global sentiment across these markets. More accessible markets have stronger global sentiment effects, suggesting that capital flows help the spread of sentiment across borders. For locally sourced sentiment, the core finding is of a stronger sentiment effect in a poorer environment. On the other hand, for globally sourced sentiment the opposite result is strongly evidenced, namely, that a stronger sentiment effect tends to be linked to a stronger environment. Broadly speaking, a better domestic legal and information environment is associated with weaker local and stronger global sentiment effects. Our findings suggest that, the effect of a good environment on facilitating arbitrage activity is stronger than its effect on attracting local behavioral investors but weaker than its effect in attracting foreign behavioral investors. Our results also suggest that a good legal environment rather than low transaction costs is the primary concern when behavioral investors seek foreign investment opportunities.

Testing seasonality in the liquidity-return relation : Japanese evidence

We study liquidity (share turnover) effects of stock returns and their seasonality using Japanese data. We find a significant and negative turnover/return relation. Moreover, we find that the liquidity effect is not impacted by either January or June seasonality. There is weak evidence that stocks with higher liquidity risk have on average higher rates of return for non-June months.

Local and Global Sentiment Effects, and the Role of Legal, Information and Trading Environments

Using domestic consumer confidence indicators to proxy investor sentiment and data from 23 different equity markets, we document a pervasive overall sentiment effect. We further document a significant effect of global sentiment across these markets. More accessible markets have stronger global sentiment effects, suggesting that capital flows help the spread of sentiment across borders. For locally sourced sentiment, the core finding is of a stronger sentiment effect in a poorer environment. On the other hand, for globally sourced sentiment the opposite result is strongly evidenced, namely, that a stronger sentiment effect tends to be linked to a stronger environment. Broadly speaking, a better domestic legal and information environment is associated with weaker local and stronger global sentiment effects. Our findings suggest that, the effect of a good environment on facilitating arbitrage activity is stronger than its effect on attracting local behavioral investors but weaker than its effect in attracting foreign behavioral investors. Our results also suggest that a good legal environment rather than low transaction costs is the primary concern when behavioral investors seek foreign investment opportunities.

The 52-Week High, q Theory and the Cross-Section of Stock Returns

Hou, Xue and Zhang’s (2015) q-factor model outperforms other factor models in capturing the PTH (the ratio of current price to 52-week high price) anomaly: High-PTH stocks earn high future returns. PTH’s relations with future profitability and future investment growth are both significantly positive, and they mirror PTH’s relation with future returns in the cross-section and by time horizons. Incorporating the information about future investment growth contained in price level variables (e.g., PTH) helps the q factors to capture better those anomalies rooted in future investment growth. Together, these results suggest that the PTH anomaly is consistent with the investment CAPM.