Can Limits to Arbitrage Explain Stock Price Idiosyncratic Volatility Premium Puzzle in China’s A-Share Market?

Investigating the existence and causes of idiosyncratic volatility premium puzzle in developing stock market can enrich the research on this asset pricing puzzle. To investigate the existence and whether limits to arbitrage in China’s A-share market can explain the idiosyncratic volatility premium puzzle, this paper uses listed stocks in China’s A-share market from 2002 to 2019 as a sample. We calculate three individual measures and one comprehensive measure of limits to arbitrage based on Chinese specific regulations. After that, we conduct univariate portfolios analysis, regression analysis, and bivariate portfolios analysis to obtain evidence. We prove that idiosyncratic volatility premium puzzle exists in China’s A-share market and is robust and that limits to arbitrage in this market can partly explain this asset pricing puzzle. This paper enriches research on asset pricing anomaly and can help us evaluate the effect of China’s A-share market reform.

Value versus growth in PIIGS stock markets

Purpose The purpose of this paper is to construct and evaluate value and growth portfolios in Portugal, Italy, Ireland, Greece and Spain, which are commonly known as the EU PIIGS, from 2003 to 2015. Previous research evidence suggests that stocks trading at a lower price relative to their fundamentals (value stocks) tend to outperform stocks that trade at higher prices (growth stocks) in the long run. Although this market anomaly has been studied immensely worldwide, especially for the US stock market, there is no clear evidence whether such an assertion is applicable in less-renowned countries. Design/methodology/approach The paper utilises Fama and Macbeth (1973) regressions and its model extensions. Findings This paper finds a significant value premium in these countries, which is compatible with previous studies conducted worldwide. Originality/value To the best of the authors’ knowledge, this is the first attempt to examine this asset pricing anomaly in the PIIGS.

Novel market inefficiencies from early Victorian times

A previously unknown pricing anomaly existed for a few years in the late 1840s in the British government bond market, in which the larger and more liquid of two very large bonds was underpriced. None of the published mechanisms explains this phenomenon. It may be related to another pricing anomaly that existed for much of the nineteenth century in which terminable annuities were significantly underpriced relative to so-called ‘perpetual’ annuities that dominated the government bond market. The reasons for these mispricings seem to lie in the early Victorian culture, since the basic economic incentives as well as laws and institutions were essentially the familiar modern ones. This provides new perspectives on the origins and nature of modern corporate capitalism.

The January effect anomaly: effect on the returns-earnings association

Purpose – The purpose of this paper is to examine the January effect, a well-documented capital markets pricing anomaly in which January return premiums are observed to be on average higher than in other months of the year. Extant literature focusses primarily on investor trading behaviors and incentives. This study is different in that it investigates the link between the unusually high returns characteristic of the January effect and accounting earnings, a popular measure that investors use to judge firm value. Design/methodology/approach – The empirical model used in this study is derived from the analytical framework of Ohlson (1995) and Feltham and Ohlson (1995), which explains returns as a function of current and future accounting earnings. Isolating firms that exhibit January effect return premiums from those that do not offers a deeper look at the characteristics of the anomaly. Regression analyses are carried out using a modified Fama-MacBeth (1973) methodology. Quarterly earnings and returns data are drawn from Compustat and CRSP. Findings – The main finding is that the association between January returns and first quarter earnings is unexpectedly and significantly negative, not positive as predicted by the model. Coefficient signs for the other three quarters behave as expected. Additional analyses highlight a difference in the returns-earnings association between firms affected by the anomaly and those that are not. Robustness checks indicate that the findings are not spurious. Originality/value – Rather than applying trading or multifactor economic models that rely on some level of market inefficiency or irrational investor behavior, this study uses an accounting valuation approach that relies on neither. The unexpected negative association between January effect returns and earnings suggests that other factor(s) besides earnings may play into valuation judgments for investors in such firms, and invites further research.