Publication Type
PhD Dissertation
Version
publishedVersion
Publication Date
3-2024
Abstract
The dissertation consists of three chapters on empirical asset pricing. The first chapter examines
the market return predictability of media coverage on climate change. Specifically, we introduce a
comprehensive media climate change concern (ΔCMCCC) index, derived from unexpected climate
change coverage across diverse media channels, including print (newspapers), voice (radio), and
video (television). We show that this index negatively predicts aggregate stock market returns, both
in-sample and out-of-sample, offering potential gains for investors. Our findings emphasize the
media’s influence on market returns through climate change discussions, mainly via the cash-flow
channel. This reveals possible shifts in product demand, while demand for green or brown stocks
may not be altered as expected, possibly due to institutional investors engaging in “greenwashing”
by overstating their environmental commitments. Existing studies such as Tetlock (2007) assess
the market predictability effect from news sentiment, and a recent work by Bybee, Kelly, Manela,
and Xiu (2023) investigate the topic-specific sentiment. Despite the heightened prominence of
climate change in recent media coverage, there exists a gap in research investigating whether
discussions on climate change can affect the aggregate stock market. Thus, this paper addresses
the gap by presenting market-level evidence regarding the impact of media coverage on climate
change.
The second chapter delves into a comprehensive analysis of how trading volume can either
mitigate or amplify stock mispricing. Existing studies have presented varying perspectives, with
some interpreting trading volume as a measure of disagreement, potentially amplifying mispricing
(MISP). Conversely, others argue that trading volume, as an indicator of attention, can mitigate
certain forms of mispricing, such as earnings momentum. Our research findings highlight that the
impact of trading volume on mispricing is contingent upon the predominant source of mispricing,
whether it stems from limited attention or investor biases and the volume state (high or low). To
elaborate, trading volume exhibits a close correlation with attention among low-volume stocks,
then mitigating mispricing driven by limited attention, such as Post-Earnings Announcement
Drift (PEAD). Conversely, among high-volume stocks, trading volume is closely associated with
disagreement, which may amplify mispricing due to investors’ biases, such as Financing Factor
(FIN). This research reconciles previous conflicting results and advances our understanding of
these multifaceted dynamics inherent in trading volume.
The third chapter investigates the cross-sectional heterogeneity in the risk-return trade-off.
Traditional asset pricing theory suggests that higher risk should be rewarded with higher expected
returns. However, the empirical studies have yet to reach a consensus regarding the existence
of such a positive risk-return trade-off. Thus, in the paper, we propose a novel psychological
explanation that anchoring on the psychological barrier of 52-week extreme price leads to the
observed heterogeneity in the risk-return trade-off. Specifically, we find negative risk-return
relation among stocks with prices far from their 52-week high prices, and positive risk-return
relation among stocks with prices near their 52-week high prices. It indicates investors consider
the 52-week extreme prices as a psychological barrier when evaluating risk: they are more likely
to push down (up) the prices of the risky stocks (lower) when the stock prices are close (far) to
the 52-week high, resulting in a positive (negative) risk-return trade-off among stocks at 52-week
high (low). We further rule out the alternative explanations including investors’ underreaction to
bad news, disposition effect, liquidity effect and investors’ lottery preference.
Keywords
Asset Pricing, Climate Change, News Media, Trading Volume, Mispricing, Behavioral Finance
Degree Awarded
PhD in Business (Finance)
Discipline
Finance | Finance and Financial Management
Supervisor(s)
TU, Jun
First Page
1
Last Page
160
Publisher
Singapore Management University
City or Country
Singapore
Citation
WANG, Luying.
Essays on empirical asset pricing. (2024). 1-160.
Available at: https://ink.library.smu.edu.sg/etd_coll/567
Copyright Owner and License
Author
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.