This paper introduces a markov‐switching heterogeneous autoregressive (MS‐HAR) model with time‐varying transition probabilities (TVTP) for the realised volatility of Shanghai securities composite index returns. Its various extensions have been obtained by including negative returns outside trading hours in addition to the leverage effects and trading volume. The findings show asymmetries in the impact of explanatory variables on the realised volatility. Moreover, the out‐of‐sample results show that the benchmark MS‐HAR with TVTP model and its extensions consistently outperform the simple HAR model, MS‐HAR model with constant transition probabilities (CTP) and their extensions. These results are robust to alternative realised measurements, and have economic implications.
{"title":"Forecasting Realised Volatility: A Markov Switching Approach with Time‐Varying Transition Probabilities","authors":"Xunxiao Wang, Keshab Shrestha, Qi Sun","doi":"10.1111/acfi.12503","DOIUrl":"https://doi.org/10.1111/acfi.12503","url":null,"abstract":"This paper introduces a markov‐switching heterogeneous autoregressive (MS‐HAR) model with time‐varying transition probabilities (TVTP) for the realised volatility of Shanghai securities composite index returns. Its various extensions have been obtained by including negative returns outside trading hours in addition to the leverage effects and trading volume. The findings show asymmetries in the impact of explanatory variables on the realised volatility. Moreover, the out‐of‐sample results show that the benchmark MS‐HAR with TVTP model and its extensions consistently outperform the simple HAR model, MS‐HAR model with constant transition probabilities (CTP) and their extensions. These results are robust to alternative realised measurements, and have economic implications.","PeriodicalId":108284,"journal":{"name":"Econometric Modeling: International Financial Markets - Emerging Markets eJournal","volume":"74 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124193778","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Over 50 years ago, two physicists Montroll and Weiss in the physical context of dispersive transport and diffusion introduced stochastic process, named Continuous-Time Random Walk (CTRW). The trajectory of such a process is created by elementary events ‘spatial’ jumps preceded by waiting time. Since introduction, CTRW found innumerable application in different fields including high-frequency finance, where jumps are considered as price increments and waiting times represent inter-trade times. In this manuscript we show that dependencies between inter-trade times are the key element to explain long-term memory in financial time-series, even when taking into account intraday seasonality (so-called "lunch effect�?). We introduce the new CTRW model with long-term memory in waiting times, able to successfully describe power-law decaying time autocorrelation of the absolute values of price changes. We test our model on the empirical data from Polish stock market.
{"title":"The Key Role of Inter-Event Times in Volatility Clustering","authors":"Jarosław Klamut, T. Gubiec","doi":"10.2139/ssrn.3402388","DOIUrl":"https://doi.org/10.2139/ssrn.3402388","url":null,"abstract":"Over 50 years ago, two physicists Montroll and Weiss in the physical context of dispersive transport and diffusion introduced stochastic process, named Continuous-Time Random Walk (CTRW). The trajectory of such a process is created by elementary events ‘spatial’ jumps preceded by waiting time. Since introduction, CTRW found innumerable application in different fields including high-frequency finance, where jumps are considered as price increments and waiting times represent inter-trade times. In this manuscript we show that dependencies between inter-trade times are the key element to explain long-term memory in financial time-series, even when taking into account intraday seasonality (so-called \"lunch effect�?). We introduce the new CTRW model with long-term memory in waiting times, able to successfully describe power-law decaying time autocorrelation of the absolute values of price changes. We test our model on the empirical data from Polish stock market.","PeriodicalId":108284,"journal":{"name":"Econometric Modeling: International Financial Markets - Emerging Markets eJournal","volume":"73 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-06-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122697402","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this work the performance of a number of correlation estimators are compared on uniform but asynchronously observed timeseries. Correlation estimates for a sample of main index equity indices: H225, HSI, BSE30, FTSE100, and SPX500, will be examined, contrasting the bias and efficiency of various approaches to dealing with the fact that the final end of day index levels are observed at different times during the day. Using a standard correlation estimator without correcting for asynchronicity is well known to result in downward biased estimated of correlation, and we demonstrate that while the use of longer horizon or overlapping observations reduces the bias, the resulting estimates are inefficient (i.e., they have a large standard error). It is shown that efficient estimates are produced by including lagged observations in the covariance estimate using 1-day returns, and unless the correlation is large (∼90%) these estimates are as efficient as maximum likelihood estimates. The use of lagged observations also allows one to estimate the degree of asynchronicity, and estimators for this quantity are also introduced. Estimates of the asynchronicity factor produced by maximum likelihood analysis are shown to be the most efficient out of the methods examined.
{"title":"Correlation Estimates from Asynchronously Observed Series","authors":"Michael A. Clayton","doi":"10.2139/ssrn.3270305","DOIUrl":"https://doi.org/10.2139/ssrn.3270305","url":null,"abstract":"In this work the performance of a number of correlation estimators are compared on uniform but asynchronously observed timeseries. Correlation estimates for a sample of main index equity indices: H225, HSI, BSE30, FTSE100, and SPX500, will be examined, contrasting the bias and efficiency of various approaches to dealing with the fact that the final end of day index levels are observed at different times during the day. Using a standard correlation estimator without correcting for asynchronicity is well known to result in downward biased estimated of correlation, and we demonstrate that while the use of longer horizon or overlapping observations reduces the bias, the resulting estimates are inefficient (i.e., they have a large standard error). It is shown that efficient estimates are produced by including lagged observations in the covariance estimate using 1-day returns, and unless the correlation is large (∼90%) these estimates are as efficient as maximum likelihood estimates. The use of lagged observations also allows one to estimate the degree of asynchronicity, and estimators for this quantity are also introduced. Estimates of the asynchronicity factor produced by maximum likelihood analysis are shown to be the most efficient out of the methods examined.","PeriodicalId":108284,"journal":{"name":"Econometric Modeling: International Financial Markets - Emerging Markets eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-10-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128920492","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
N. Mechri, Salah Ben Hamad, C. de Peretti, Sahar Charfi
This research aims to identify the impact of exchange rate volatility on the fluctuations of stock markets prices, considering two countries from MENA zone. Several gaps in the literature have been identified, indeed, previous works used very short periods of study, many important variables were neglected, and all results were contradictory. In this study, we integrate assorted determinants of stock market indices that have not been used simultaneously before, and we spread out our research period up to 15. The GARCH model is employed. The results show that exchange rate volatility have a significant effect on stock market fluctuations.
{"title":"The Impact of the Exchange Rate Volatilities on Stock Markets Dynamics: Evidence from Tunisia and Turkey","authors":"N. Mechri, Salah Ben Hamad, C. de Peretti, Sahar Charfi","doi":"10.2139/ssrn.3304040","DOIUrl":"https://doi.org/10.2139/ssrn.3304040","url":null,"abstract":"This research aims to identify the impact of exchange rate volatility on the fluctuations of stock markets prices, considering two countries from MENA zone. Several gaps in the literature have been identified, indeed, previous works used very short periods of study, many important variables were neglected, and all results were contradictory. In this study, we integrate assorted determinants of stock market indices that have not been used simultaneously before, and we spread out our research period up to 15. The GARCH model is employed. The results show that exchange rate volatility have a significant effect on stock market fluctuations.","PeriodicalId":108284,"journal":{"name":"Econometric Modeling: International Financial Markets - Emerging Markets eJournal","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-09-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125486266","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The study is an endeavor to investigate the empirical and significant association between working capital and the profitability of pharmaceutical companies operating in Bangladesh. To serve the analysis mostly secondary level data have been employed. The study has been used balanced panel data of 16 selected pharmaceutical companies listed in Dhaka Stock Exchange (DSE) and covering seven years annual data from 2011 to 2017. To diagnosis the ties between working capital management on profitability the study have been used return on assets and gross profit margin (proxy variable of profitability) as dependent variable and days sales outstanding, days payable outstanding, days inventory outstanding, cash conversion cycle, working capital turnover, current ratio, quick ratio, debt ratio and size as independent variable. Fisher Type Unit root test has been employed to check stationary properties of panel data and found that there are no unit roots in taken panels at the 1% statistical significance level. Breusch-Pagan/Cook-Weisberg test has been employed to investigate the degree of heteroscedasticity and the significant evidence suggests that the data of the study is out of heteroscedasticity problem. Cameron & Trivedi's decomposition of IM-test also suggests that the variance is homogenous. Variance inflation factor (VIF) has been investigated the degree of multicollinearity and revealed that all variable except quick ratio (QR) and current ratio (CR) has a lower degree of multicollinearity. To analyses balanced panel data, the study has been employed two multiple regression model and used fixed and random effect model for proper estimation. Hausman specification test has been used to detect the alternative panel analysis methods. Results indicate that out of 9 independent variables only day’s cash conversion cycle (CCO), current ratio (CR), quick ratio (QR) and working capital turnover (WCT) shows a significant relationship with return on assets of the taken sample of pharmaceutical companies. Results also indicate that out of 9 independent variable only days sales outstanding (DSO), quick ratio (QR) and debt ratio (DR) shows a significant relationship with gross profit margin of the taken sample.
{"title":"An Empirical Investigation of Linkage between Working Capital Management and Profitability: Panel Data Evidence from Bangladesh Pharmaceutical Industry","authors":"M. Wadud, Aornob Chakma","doi":"10.2139/ssrn.3251319","DOIUrl":"https://doi.org/10.2139/ssrn.3251319","url":null,"abstract":"The study is an endeavor to investigate the empirical and significant association between working capital and the profitability of pharmaceutical companies operating in Bangladesh. To serve the analysis mostly secondary level data have been employed. The study has been used balanced panel data of 16 selected pharmaceutical companies listed in Dhaka Stock Exchange (DSE) and covering seven years annual data from 2011 to 2017. To diagnosis the ties between working capital management on profitability the study have been used return on assets and gross profit margin (proxy variable of profitability) as dependent variable and days sales outstanding, days payable outstanding, days inventory outstanding, cash conversion cycle, working capital turnover, current ratio, quick ratio, debt ratio and size as independent variable. Fisher Type Unit root test has been employed to check stationary properties of panel data and found that there are no unit roots in taken panels at the 1% statistical significance level. Breusch-Pagan/Cook-Weisberg test has been employed to investigate the degree of heteroscedasticity and the significant evidence suggests that the data of the study is out of heteroscedasticity problem. Cameron & Trivedi's decomposition of IM-test also suggests that the variance is homogenous. Variance inflation factor (VIF) has been investigated the degree of multicollinearity and revealed that all variable except quick ratio (QR) and current ratio (CR) has a lower degree of multicollinearity. To analyses balanced panel data, the study has been employed two multiple regression model and used fixed and random effect model for proper estimation. Hausman specification test has been used to detect the alternative panel analysis methods. Results indicate that out of 9 independent variables only day’s cash conversion cycle (CCO), current ratio (CR), quick ratio (QR) and working capital turnover (WCT) shows a significant relationship with return on assets of the taken sample of pharmaceutical companies. Results also indicate that out of 9 independent variable only days sales outstanding (DSO), quick ratio (QR) and debt ratio (DR) shows a significant relationship with gross profit margin of the taken sample.","PeriodicalId":108284,"journal":{"name":"Econometric Modeling: International Financial Markets - Emerging Markets eJournal","volume":"65 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127100057","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates how risks spread across sectors of the stock market in China. Using graph theory and a recently developed time series technique, we are able to identify the most important sector in the market and the patterns of risk spillovers across sectors over time. Unlike the standard econometric modelling, the graph theory enables us to approach this question in a more reader-friendly way. Empirical results show that the industrial sector plays the most important role and should thus be considered a systemically important sector in the stock market of China. The spillover structure is found to be time-varying. While the industrial sector dominates the system for most of the time, other sectors, such as the consumer discretionary sector, also appear occasionally as the central sector. Our empirical results also indicate that the simple correlation based approach can produce equally useful information as the more advanced econometric models can.
{"title":"Systemic Risks and Spillovers in the Stock Market of China: A Sectoral Analysis","authors":"Fei Wu, Dayong Zhang, Zhiwei Zhang","doi":"10.2139/ssrn.3248975","DOIUrl":"https://doi.org/10.2139/ssrn.3248975","url":null,"abstract":"This paper investigates how risks spread across sectors of the stock market in China. Using graph theory and a recently developed time series technique, we are able to identify the most important sector in the market and the patterns of risk spillovers across sectors over time. Unlike the standard econometric modelling, the graph theory enables us to approach this question in a more reader-friendly way. Empirical results show that the industrial sector plays the most important role and should thus be considered a systemically important sector in the stock market of China. The spillover structure is found to be time-varying. While the industrial sector dominates the system for most of the time, other sectors, such as the consumer discretionary sector, also appear occasionally as the central sector. Our empirical results also indicate that the simple correlation based approach can produce equally useful information as the more advanced econometric models can.","PeriodicalId":108284,"journal":{"name":"Econometric Modeling: International Financial Markets - Emerging Markets eJournal","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-09-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121319336","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper aims to study the suspension features of the China A-shares market and the results will be useful for market participants who carry out China A-shares investment and portfolio management. A comprehensive review is first carried out to study the properties of different types of suspension events with a focus on their occurrence frequency and duration. The empirical findings illustrate that the suspension length has been increasing in general and prolonged suspension is still an issue in the China A-shares market. Next we investigate how suspension occurrence is related to stock fundamental attributes and the results are useful for estimating the suspension probability of individual stocks. It is demonstrated that stocks with smaller size, less attractive valuation, higher volatility and past history of more frequent suspensions are more likely to experience future suspension. Another focus of this research is to evaluate the effectiveness of the stock trading suspension system in the China A-shares market by studying the volatility, return and trading pattern around the suspension window. The empirical results suggest that the stock suspension system is a semi-effective process.
{"title":"The Suspension World of the China A-Shares Market","authors":"E. Pong","doi":"10.2139/ssrn.3193954","DOIUrl":"https://doi.org/10.2139/ssrn.3193954","url":null,"abstract":"This paper aims to study the suspension features of the China A-shares market and the results will be useful for market participants who carry out China A-shares investment and portfolio management. A comprehensive review is first carried out to study the properties of different types of suspension events with a focus on their occurrence frequency and duration. The empirical findings illustrate that the suspension length has been increasing in general and prolonged suspension is still an issue in the China A-shares market. Next we investigate how suspension occurrence is related to stock fundamental attributes and the results are useful for estimating the suspension probability of individual stocks. It is demonstrated that stocks with smaller size, less attractive valuation, higher volatility and past history of more frequent suspensions are more likely to experience future suspension. Another focus of this research is to evaluate the effectiveness of the stock trading suspension system in the China A-shares market by studying the volatility, return and trading pattern around the suspension window. The empirical results suggest that the stock suspension system is a semi-effective process.","PeriodicalId":108284,"journal":{"name":"Econometric Modeling: International Financial Markets - Emerging Markets eJournal","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-05-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127251922","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper develops a theory of market crashes resulting from an unanticipated deleveraging shock. We consider two groups of representative investors in a market holding different opinions about the public available information. The unexpected deleveraging shock forces the high confidence investors to liquidate their risky assets to pay back their margin loans. This creates a liquidity shortage in which asset prices have to fall substantially to restore trades when short sales are restricted ex ante. The deleveraging process also generates further price decline as low confidence investors absorb the liquidated assets. On top of these, the presence of multiple risky assets introduces substantial spillover effects, precipitating the crash. By comparing with the return data from the Chinese stock market during its recent crash, our models can fit quite well qualitatively its cross-sectional features. Insofar as it is difficult to regulate leverage, we argue that the ex ante relaxation of short sale constraints can moderate both the excessive rise and fall of asset prices.
{"title":"Heterogeneous Beliefs, Short Sale Constraints, Deleveraging, and Stock Market Crashes","authors":"Liang Wu, Lei Zhang, Zhiming Fu","doi":"10.2139/ssrn.2690995","DOIUrl":"https://doi.org/10.2139/ssrn.2690995","url":null,"abstract":"This paper develops a theory of market crashes resulting from an unanticipated deleveraging shock. We consider two groups of representative investors in a market holding different opinions about the public available information. The unexpected deleveraging shock forces the high confidence investors to liquidate their risky assets to pay back their margin loans. This creates a liquidity shortage in which asset prices have to fall substantially to restore trades when short sales are restricted ex ante. The deleveraging process also generates further price decline as low confidence investors absorb the liquidated assets. On top of these, the presence of multiple risky assets introduces substantial spillover effects, precipitating the crash. By comparing with the return data from the Chinese stock market during its recent crash, our models can fit quite well qualitatively its cross-sectional features. Insofar as it is difficult to regulate leverage, we argue that the ex ante relaxation of short sale constraints can moderate both the excessive rise and fall of asset prices.","PeriodicalId":108284,"journal":{"name":"Econometric Modeling: International Financial Markets - Emerging Markets eJournal","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-03-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122340480","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Cryptocurrency has become an issue that have attracted the attention of individuals, investors and government taking into play that the rate at which it is been patronized online and the media hype its getting. This paper tends to examine cryptocurrency as an investment tool and its missing link. However, the paper identifies the major types of cryptocurrencies, how is it exchanged and measured. It further revealed the benefits of the digital currency as it is secured; transfers are made easier, less processing charges, removing the bottle necks when using banks and other financial institution as intermediary, etc. Despite these benefits, there tend to be a missing links which could affect its operations. Amongst which are lack of government support, transparency issues, subject to loss, theft and fraud, lack of central repository and investors protection clause, etc. The paper concludes that cryptocurrency as an economic innovation is disruptive the way it’s currently managed and if this vacuum is not adequately addressed, it will not survive in the future. The study further recommends that there is need to create a legal & regulatory framework guiding its operations, ensure full disclosure on its transactions, need to be centralized in nature and investors protection clause should be incorporated, etc.
{"title":"Crypto Currency as an Emerging Investment Instrument: The Missing Link…….","authors":"M. Ibrahim","doi":"10.2139/ssrn.3144187","DOIUrl":"https://doi.org/10.2139/ssrn.3144187","url":null,"abstract":"Cryptocurrency has become an issue that have attracted the attention of individuals, investors and government taking into play that the rate at which it is been patronized online and the media hype its getting. This paper tends to examine cryptocurrency as an investment tool and its missing link. However, the paper identifies the major types of cryptocurrencies, how is it exchanged and measured. It further revealed the benefits of the digital currency as it is secured; transfers are made easier, less processing charges, removing the bottle necks when using banks and other financial institution as intermediary, etc. Despite these benefits, there tend to be a missing links which could affect its operations. Amongst which are lack of government support, transparency issues, subject to loss, theft and fraud, lack of central repository and investors protection clause, etc. The paper concludes that cryptocurrency as an economic innovation is disruptive the way it’s currently managed and if this vacuum is not adequately addressed, it will not survive in the future. The study further recommends that there is need to create a legal & regulatory framework guiding its operations, ensure full disclosure on its transactions, need to be centralized in nature and investors protection clause should be incorporated, etc.","PeriodicalId":108284,"journal":{"name":"Econometric Modeling: International Financial Markets - Emerging Markets eJournal","volume":"362 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-03-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125654359","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We propose a different way of constructing an idiosyncratic momentum factor using the Barra Global Multi-factor Risk Model. Also, we examine the properties as well as the performance of this new factor by applying it to the China's stock market. Out analysis shows that the idiosyncratic momentum factor constructed here carries the resemblance of the conventional price momentum factor, but with much lower variance and exposure to the common market factors, such as value, size, and volatility. In the long-short portfolio test for both China's A-Share IMI and CSI 500 Indies, we observe the significant improvement of this factor's return over the conventional momentum. In particular, this factor delivers consistent high returns with a moderate IC increase but a significant IR improvement. The performance results strongly suggest that, compared with the traditional momentum factor, the idiosyncratic momentum factor is more reliable and possesses high predictive power for future stock returns. This factor is a good candidate to replace the traditional momentum factor when constructing an effective momentum strategy for investing in China's stock market.
{"title":"Barra Risk Model Based Idiosyncratic Momentum for Chinese Equity Market","authors":"Sean Lu, Cindy Lu","doi":"10.2139/ssrn.3140113","DOIUrl":"https://doi.org/10.2139/ssrn.3140113","url":null,"abstract":"We propose a different way of constructing an idiosyncratic momentum factor using the Barra Global Multi-factor Risk Model. Also, we examine the properties as well as the performance of this new factor by applying it to the China's stock market. Out analysis shows that the idiosyncratic momentum factor constructed here carries the resemblance of the conventional price momentum factor, but with much lower variance and exposure to the common market factors, such as value, size, and volatility. In the long-short portfolio test for both China's A-Share IMI and CSI 500 Indies, we observe the significant improvement of this factor's return over the conventional momentum. In particular, this factor delivers consistent high returns with a moderate IC increase but a significant IR improvement. \u0000The performance results strongly suggest that, compared with the traditional momentum factor, the idiosyncratic momentum factor is more reliable and possesses high predictive power for future stock returns. This factor is a good candidate to replace the traditional momentum factor when constructing an effective momentum strategy for investing in China's stock market.","PeriodicalId":108284,"journal":{"name":"Econometric Modeling: International Financial Markets - Emerging Markets eJournal","volume":"57 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-03-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121041403","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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