Essays on financial markets
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Date
10/07/2019Item status
Restricted AccessEmbargo end date
10/07/2020Author
Zhu, Lizhen
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Abstract
This thesis comprises three empirical studies, which investigate the
influential factors of financial markets and their participants’ behaviour. These
studies can be read independently.
Using a sample of European banks, the first study, “Corruption culture
and bank short-termism”, provides evidence that country-level corruption is
strongly associated with short-termism (a behaviour that focuses on short-term
benefits at the expense of long-term shareholders’ wealth growth). To
measure short-termism, I construct a multi-dimensional index which
combines earnings management, tail risk, and short-term debt ratio. I show
that banks headquartered in countries that are more corrupt behave more
short-sightedly than banks headquartered in countries that are less corrupt. I
further demonstrate that foreign shareholders act as a channel through which
corruption is imported. For banks located in countries with a lower than
average corruption level, having more shareholdings by investors domiciled
in countries that are more corrupt leads to more short-termism. This study
highlights the link between bank short-termism and corruption of both
headquartered countries and foreign shareholders.
The second study, “Macroeconomic and political uncertainty and cross
sectional return dispersion around the world”, examines whether return
dispersion (the cross sectional variation in stock returns) could be used to
measure the macroeconomic and political uncertainty of international
financial markets. I show that return dispersion is able to capture
uncertainties including local and global business cycles, international political
instability, market general uncertainties, international country risk, and
economic policy uncertainty. Stocks that are more sensitive to return
dispersion have higher returns. Moreover, I compare return dispersion with
another commonly used uncertainty measure: implied volatility. I find that
they capture different aspects of uncertainty. This study aims to provide a
simple and easy-to-use measure of uncertainty for both academic purposes
and professional practice.
The third study, “The performance of asset allocation strategies across
datasets and over time”, evaluates the ex-ante performance of various
commonly used asset allocation strategies including equal weighting, mean
variance weighting, risk parity weighting, minimum variance weighting, equal
risk contribution weighting, and maximum diversification weighting. The
results show that there are no statistically significant differences between
asset allocation strategies if the portfolios are based on country or industry
indices. If the portfolios are formed of stocks or multi-asset classes, then the
differences between strategies are large; however, none of the strategies can
consistently outperform the others over time. I also identify that the
implementation of the mean variance rule leads to wide fluctuation in risk
shifting, which is undesirable for investors. Last but not least, I illustrate how
all of the strategies are far from ex-ante optimal.