Two essays on financial market behavior: evidence from international markets

Dazhi Zheng

doi:10.17918/etd-3427

This dissertation studies two issues in empirical analysis of financial markets: The herd behavior in global markets and illiquidity as a risk factor to predict excess stock returns in international markets. These issues are structured into two essays. Essay #1 examines investors' herding behavior in an international setting. By applying daily data for 18 markets for the period May 25, 1988, through April 24, 2009, we obtain supportive evidence of herding in each advanced stock market (except the U.S.) and in Asian markets. No evidence of herding is found in Latin American markets in tranquil periods. We also find some evidence that return dispersion is correlated with excess trading volume, although its information is far less significant as compared with the estimated herding coefficients. By extending the testing to global markets, this study finds that stock return dispersions in the U.S. play a significant role in explaining the non-U.S. market's herding activity. With the exceptions of the U.S. and Latin American markets, herding is present in both up and down markets. Examining herding behavior in the crisis period, it is evident that herding formation is more apparent in the crisis period. There is supportive evidence that herding is present in the U.S. and Latin American markets when those markets are in crisis. Essay #2 tests the relation between expected (and contemporaneous) excess stock returns and liquidity in an international context. By applying panel regressions on monthly data from 17 markets spanning from January 1990 through March 2009, this essay finds evidence that expected excess stock returns are positively correlated with illiquidity. However, excess stock returns are negatively associated with contemporaneous illiquidity. The supporting evidence holds true for all of the advanced markets and most of emerging markets. This study also shows that risk factors from the U.S. stock and bond markets contribute to explain local excess stock returns. The findings in this essay are consistent with the U.S. evidence in the liquidity literature. This study supports the notion that illiquidity can be viewed as a general risk factor in global stock markets. Robust tests are implemented by using trading volume turnover as the proxy for illiquidity and the results still hold. While applying the model to the portfolio data, this study shows that illiquidity risk appears to be stronger for small firm stocks.

Two essays on financial market behavior: evidence from international markets

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Two essays on financial market behavior: evidence from international markets

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