This study investigates the impact of the COVID-19 pandemic on the stock market crash risk in China. For this purpose, we first estimated the conditional skewness of the return distribution from a GARCH with skewness (GARCH-S) model as the proxy for the equity market crash risk of the Shanghai Stock Exchange. We then constructed a fear index for COVID-19 using data from the Baidu Index. Based on the findings, conditional skewness reacts negatively to daily growth in total confirmed cases, indicating that the pandemic increases stock market crash risk. Moreover, the fear sentiment exacerbates such risk, especially with regard to the impact of COVID-19. In other words, when the fear sentiment is high, the stock market crash risk is more strongly affected by the pandemic. Our evidence is robust for the number of daily deaths and global cases.
Using the carefully selected industry classification standard, we divide 102 industry securities indices in China's stock market into four demand-oriented sector groups and identify demand-oriented industry-specific volatility spillover networks. The "deman-oriented" is a new idea of reconstructing the structure of the networks considering the relationship between industry sectors and the economic demand their outputs meeting. Networks with the new structure help us improve the understanding of the economic demand change, especially when the macroeconomic is dramatically influenced by exogenou…
We present an interacting-agent model of speculative activity explaining bubbles and crashes in stock markets. We describe stock markets through an infinite-range Ising model to formulate the tendency of traders getting influenced by the investment attitude of other traders. Bubbles and crashes are understood and described qualitatively and quantitatively in terms of the classical phase transitions. The results of estimation the parameters of the model using the actual financial data (the bubble and the subsequent crash in the Japanese stock market in 1987-1992) show that the good quality of t…
This paper investigates the impact of economic policy uncertainty (EPU) on the crash risk of US stock market during the COVID-19 pandemic. To this end, we use the GARCH-S (GARCH with skewness) model to estimate daily skewness as a proxy for the stock market crash risk. The empirical results show the significantly negative correlation between EPU and stock market crash risk, indicating the aggravation of EPU increase the crash risk. Moreover, the negative correlation gets stronger after the global COVID-19 outbreak, which shows the crash risk of the US stock market will be more affected by EPU …
The informational context is regularly questioned in a transitional economic regime like the one implemented in China or Vietnam. This article investigates this issue and the predictive power of fundamental analysis in such context and more precisely in a Chinese context with an analysis of 3 different industries (media, power, and steel). Through 3 different kinds of correlation, we examine 25 financial determinants for 60 Chinese listed companies between 2011 and 2015. Our results show that fundamental analysis can effectively be used as an investment tool in transitional economic context. C…
We analyze how investor expectations about economic growth and stock returns changed during the February-March 2020 stock market crash induced by the COVID-19 pandemic, as well as during the subsequent partial stock market recovery. We surveyed retail investors who are clients of Vanguard at three points in time: (i) on February 11-12, around the all-time stock market high, (ii) on March 11-12, after the stock market had collapsed by over 20\%, and (iii) on April 16-17, after the market had rallied 25\% from its lowest point. Following the crash, the average investor turned more pessimistic ab…
Starting on February 20, 2020, the global stock markets began to suffer the worst decline since the Great Recession in 2008, and the COVID-19 has been widely blamed on the stock market crashes. In this study, we applied the log-periodic power law singularity (LPPLS) methodology based on multilevel time series to unravel the underlying mechanisms of the 2020 global stock market crash by analyzing the trajectories of 10 major stock market indexes from both developed and emergent stock markets, including the S&P 500, DJIA, NASDAQ, FTSE, DAX, NIKKEI, CSI 300, HSI, BSESN, and BOVESPA. In order to e…
Recent works have shown that social media platforms are able to influence the trends of stock price movements. However, existing works have majorly focused on the U.S. stock market and lacked attention to certain emerging countries such as China, where retail investors dominate the market. In this regard, as retail investors are prone to be influenced by news or other social media, psychological and behavioral features extracted from social media platforms are thought to well predict stock price movements in the China's market. Recent advances in the investor social network in China enables th…
In complex systems like financial market, risk tolerance of individuals is crucial for system resilience.The single-security price limit, designed as risk tolerance to protect investors by avoiding sharp price fluctuation, is blamed for feeding market panic in times of crash.The relationship between the critical market confidence which stabilizes the whole system and the price limit is therefore an important aspect of system resilience. Using a simplified dynamic model on networks of investors and stocks, an unexpected linear association between price limit and critical market confidence is th…
The crowd panic and its contagion play non-negligible roles at the time of the stock crash, especially for China where inexperienced investors dominate the market. However, existing models rarely consider investors in networking stocks and accordingly miss the exact knowledge of how panic contagion leads to abrupt crash. In this paper, by networking stocks of sharing common mutual funds, a new methodology of investigating the market crash is presented. It is surprisingly revealed that the herding, which origins in the mimic of seeking for high diversity across investment strategies to lower in…
The effect of investor-driven information diffusion on excess comovement: Evidence from retail and institutional investors in China and the United States
School of Business, East China University of Science and Technology（华东理工大学商学院）；School of Economics, Anhui University（安徽大学经济学院）；Research Center of Finance, Shanghai Business School（上海商学院金融研究中心）
This paper investigates the solar term effect in China stock market as a supplementary to the existing literature of calender effect. Based on a regression framework, this paper verifies the existence of solar term effect in Shanghai Index in multiple dimensions: inter-solar-term analysis, full sample analysis at mean level and risk level as well as the turn of solar term effect. Several solar terms have been found to cause significant positive and negative value to the return such as solar term 1,3 and 4. and bring high volatility such as solar term 8, 11 and 14. The result is reliable and ro…
We revisit the dynamic relationship between domestic economic policy uncertainty and stock markets using the symmetric thermal optimal path (TOPS) method. We observe different interaction patterns in emerging and developed markets. Economic policy uncertainty drives the stock market in China, while stock markets play a leading role in the UK and the US. Meanwhile, the lead-lag relationship of the three countries reacts significantly to extreme events. Our findings have important implications for investors and policy makers.
The aim of this study is to investigate quantitatively whether share prices deviated from company fundamentals in the stock market crash of 2008. For this purpose, we use a large database containing the balance sheets and share prices of 7,796 worldwide companies for the period 2004 through 2013. We develop a panel regression model using three financial indicators--dividends per share, cash flow per share, and book value per share--as explanatory variables for share price. We then estimate individual company fundamentals for each year by removing the time fixed effects from the two-way fixed e…
This study empirically re-examines fat tails in stock return distributions by applying statistical methods to an extensive dataset taken from the Korean stock market. The tails of the return distributions are shown to be much fatter in recent periods than in past periods and much fatter for small-capitalization stocks than for large-capitalization stocks. After controlling for the 1997 Korean foreign currency crisis and using the GARCH filter models to control for volatility clustering in the returns, the fat tails in the distribution of residuals are found to persist. We show that market cras…
From the stock markets of six countries with high GDP, we study the stock indices, S&P 500 (NYSE, USA), SSE Composite (SSE, China), Nikkei (TSE, Japan), DAX (FSE, Germany), FTSE 100 (LSE, Britain) and NIFTY (NSE, India). The daily mean growth of the stock values is exponential. The daily price fluctuations about the mean growth are Gaussian, but with a non-zero asymptotic convergence. The growth of the monthly average of stock values is statistically self-similar to their daily growth. The monthly fluctuations of the price follow a Wiener process, with a decline of the volatility. The mean gro…
Wang Shi, a business mogul who created his empire of wealth from scratch, relished in his fame and basked in the glory of his affluent business. Nothing lasts forever! After mastering the turbulent business of real estate development in his country and therefore enjoying a rising and robust stock price, China Vanke Co. Ltd ("Vanke") founder and Chairman of the Board of Directors, Wang Shi was suddenly presented with a scathing notice from the Hong Kong Stock Exchange: rival Baoneng Group ("Baoneng") filed the regulatory documentation indicating that it had nicodemously acquired 5% of his compa…
In allusion to some contradicting results in existing research, this paper selects China's latest stock data from 2005 to 2020 for empirical analysis. By choosing this periods' data, we avoid the periods of China's significant stock market reforms to reduce the impact of the government's policy on the factor effect. In this paper, the redundant factors (HML, CMA) are orthogonalized, and the regression analysis of 5*5 portfolio of Size-B/M and Size-Inv is carried out with these two orthogonalized factors. It found that the HML and the CMA are still significant in many portfolios, indicating tha…
There certainly is little or no doubt that politicians, sometimes consciously and sometimes not, exert a significant impact on stock markets. The evolving volatility over the Republican Donald Trump's surprise victory in the US presidential election is a perfect example when politicians, through announced policies, send signals to financial markets. The present paper seeks to address whether BRICS (Brazil, Russia, India, China and South Africa) stock markets equally vulnerable to Trump's plans. For this purpose, two methods were adopted. The first presents an event-study methodology based on r…
We investigate the behavior of stocks in daily price-limited stock markets by purposing a quantum spatial-periodic harmonic model. The stock price is presumed to oscillate and damp in a quantum spatial-periodic harmonic oscillator potential well. Complicated non-linear relations including inter-band positive correlation and intra-band negative correlation between the volatility and the trading volume of stocks are derived by considering the energy band structure of the model. The validity of price limitation is then examined and abnormal phenomena of a price-limited stock market (Shanghai Stoc…
This paper contributes to the literature on international stock market comovements and contagion. The novelty of our approach lies in application of wavelet tools to high-frequency financial market data, which allows us to understand the relationship between stock markets in a time-frequency domain. While major part of economic time series analysis is done in time or frequency domain separately, wavelet analysis combines these two fundamental approaches. Wavelet techniques uncover interesting dynamics of correlations between the Central and Eastern European (CEE) stock markets and the German D…
It is believed by the majority today that the efficient market hypothesis is imperfect because of market irrationality. Using the physical concepts and mathematical structures of quantum mechanics, we construct an econophysics framework for the stock market, based on which we analogously map massive numbers of single stocks into a reservoir consisting of many quantum harmonic oscillators and their stock index into a typical quantum open system--a quantum Brownian particle. In particular, the irrationality of stock transactions is quantitatively considered as the Planck constant within Heisenbe…
Changes in the capital structure before and after the global financial crisis for SMEs are studied, emphasizing their financing problems, distinguishing between internal financing and external financing determinants. The empirical research bears upon 158 small and medium-sized firms listed on Shenzhen and Shanghai Stock Exchanges in China over the period of 2004-2014. A regression analysis, along the lines of the Trade-Off Theory, shows that the leverage decreases with profitability, non-debt tax shields and the liquidity, and increases with firm size and tangibility. A positive relationship i…
A TGARCH modeling is argued to be the optimal basis for investigating the impact of index futures trading on spot price variability. We discuss the CSI-300 index (China-Shanghai-Shenzhen-300-Stock Index) as a test case. The results prove that the introduction of CSI-300 index futures (CSI-300-IF) trading significantly reduces the volatility in the corresponding spot market. It is also found that there is a stationary equilibrium relationship between the CSI-300 spot and CCSI-300-IF markets. A bidirectional Granger causality is also detected. ''Finally'', it is deduced that spot prices are pred…
This note investigates the causes of the quality anomaly, which is one of the strongest and most scalable anomalies in equity markets. We explore two potential explanations. The "risk view", whereby investing in high quality firms is somehow riskier, so that the higher returns of a quality portfolio are a compensation for risk exposure. This view is consistent with the Efficient Market Hypothesis. The other view is the "behavioral view", which states that some investors persistently underestimate the true value of high quality firms. We find no evidence in favor of the "risk view": The returns…
We argue that the present crisis and stalling economy continuing since 2007 are rooted in the delusionary belief in policies based on a "perpetual money machine" type of thinking. We document strong evidence that, since the early 1980s, consumption has been increasingly funded by smaller savings, booming financial profits, wealth extracted from house price appreciation and explosive debt. This is in stark contrast with the productivity-fueled growth that was seen in the 1950s and 1960s. This transition, starting in the early 1980s, was further supported by a climate of deregulation and a massi…
We give a microscopic representation of the stock-market in which the microscopic agents are the individual traders and their capital. Their basic dynamics consists in the auto-catalysis of the individual capital and in the global competition/cooperation between the agents mediated by the total wealth invested in the stock (which we identify with the stock-index). We show that such systems lead generically to (truncated) Pareto power-law distribution of the individual wealth. This, in turn, leads to intermittent market (short time) returns parametrized by a (truncated) Levy distribution. We re…
