Three essays in intraday momentum, market efficiency and market liquidity

Khan, Ali Shakil (2020) Three essays in intraday momentum, market efficiency and market liquidity. PhD thesis, University of Nottingham.

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This thesis is composed of three essays which aim to provide a better understanding of intraday market momentum, market efficiency and market liquidity in international markets. These aspects are under researched in international stock markets, particularly in the Chinese stock markets. These issues have become significant as the International markets continue to expand in size and some of them such as China differ considerably in terms of ownership structure, have various share classes and are subject to various trading regulations.

In the first chapter, we employ an empirical analysis to examine the existence of a well documented Heston, Korajczyk, and Sadka (2010) intraday momentum pattern (which has also been verified and modelled by Bogousslavsky (2016)) in the cross section of US stock returns for Chinese stock returns. While the stocks in UK and Brazil exhibit the presence of the intraday momentum pattern, we don’t find evidence of this pattern in the Chinese A-shares market. The pattern exhibits itself in the Chinese B-shares much more profoundly than the dual listed A-share counterparts. Since the only significant difference between the Chinese dual listed A-shares and B-shares is investor composition; we conclude that investor composition is important in explaining the Heston, Korajczyk, and Sadka (2010) intraday momentum pattern. Further examination of dual listed A-shares in China and H-shares in Hong Kong suggests that limits of arbitrage such as price limits have an adverse impact on the proliferation of the pattern as these inhibit the ability of investors to exploit the Heston, Korajczyk, and Sadka (2010) intraday momentum strategy. Our results also show that domestic Chinese investors are contrarians and engage in contrarian strategies on an intraday basis and short-term return reversals last for 60 to 90 minutes in Chinese markets.

In chapter two, I consider the entire sample of Chinese stocks and empirically test the intraday market efficiency by employing two widely used measures - the intraday return predictability measure and the variance ratio measure. We find that limits of arbitrage play a major role in facilitating market efficiency. We also document a time of the day effect in market efficiency. The first half hour of trading exhibits the highest bid-ask spreads and the highest level of inefficiency in terms of the deviation from unity in the variance ratio tests conducted for two alternative specifications to ensure robustness. This information is vital for investors as they would be able to time their trades better with this information. We use two exogenous shocks to limits of arbitrage- the advent of Shenzen connect (which increases trade volume) and lowers limits of arbitrage and the inclusion of A-shares in the MSCI emerging markets index (which also increases trade volume and investments in Chinese A-shares) to study their impacts on market efficiency. Our results indicate that both these events improve market efficiency in terms of both our measures. Therefore, we conclude that policy makers in China are acting in the right direction to elevate China’s status in world markets by adapting policies that are inherently making China more attractive to global investors by enhancing market efficiency.

The third chapter is an investigation in to the relationship between economic, political and trade policy uncertainties and stock liquidity. I employ a panel regression and event study regression methodology to examine the role of economic and trade policy uncertainty in driving stock liquidity by taking the monthly average of two widely used liquidity measures- transaction costs and price impact measure. The time period spans from 1996 to 2018 and our results show that the higher the level of economic and trade policy uncertainty, the higher the level of illiquidity or the lower the level of liquidity. We further exploit the Bo political scandal in China to study the impact of political uncertainty and the break out of the trade war between the US and China to employ an event study methodology to study the impact of these two events on liquidity. We see that both the event studies indicate that both political and trade uncertainty inhibit stock liquidity, particularly for the more policy or trade sensitive industries. We also use high frequency data and two market efficiency measures- the the return predictability measure and the variance ratio tests to determine the impact of trade policy uncertainty on market efficiency. Our findings further indicate that trade policy uncertainty has a detrimental impact on market efficiency.

Item Type: Thesis (University of Nottingham only) (PhD)
Supervisors: Song, Lina
Chen, Jian
Chen, Minjia
Keywords: Intraday market efficiency, Market liquidity, Intraday momentum
Subjects: H Social sciences > HG Finance
Faculties/Schools: UK Campuses > Faculty of Social Sciences, Law and Education > Nottingham University Business School
Item ID: 59754
Depositing User: -, Ali
Date Deposited: 16 Jul 2021 13:16
Last Modified: 16 Jul 2021 13:16

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