Essays on Empirical Asset Pricing and Behavioural Finance

Abstract

This thesis comprises three chapters. In the first, Digesting the Profitability and Investment Premia: Evidence from the Short-selling Activity', we highlight the different effects of short-selling activity on the profitability and investment premia. We find that the profitability premium disappears among the stocks with high short-selling activity, whereas the short-selling has no impact on the investment premium. We also show that the profitability premium is more likely than the investment premium to be associated with the sentiment-driven mispricing, which is eliminated among the heavily shorted stocks. Collectively, these results suggest that the two new premia have different underlying attributions. Although the profitability premium is more consistent with the mispricing interpretation, the investment premium is not. The second chapter is titled 'Historical Highs and the Cross-section of Stock Returns'. In this chapter, we examine the return predictability of the historical high in the cross-section of stock returns. We hypothesise that investors anchor on the historical highs and overreact to bad news while stock prices are far below their historical highs. Consistently, a zero-investment strategy by buying stocks with prices far away from, and selling stocks with prices close to, the historical highs achieves significantly positive returns in a holding period of up to five years. We provide evidence that the confusion caused by share splits makes the historical high effect much weaker. In addition, we find that the return persistence can be explained by investors' tendency to hold losers too long and sell winners too soon. In the third chapter, 'Equity Lending and Stock Returns', we examine the effects of security lending on the US stock markets. Research has shown that the demand side of short-selling activity has significant effects on the stock returns. In this chapter, we focus on the supply channel and show that a decrease in lendable supply positively predicts stock returns in the cross-section. Further, we find that active institutional investors play an important role in setting the lendable supply. Moreover, the return predictability of the change in the lendable supply is stronger among the underpriced stocks and is unlikely to be caused by the relaxation of short-sale constraints. Lastly, we provide evidence that the return spread is significantly higher following low sentiment, suggesting that the zero-cost strategy offers a great hedge to other sentiment-driven anomalies. Show more