Essays on empirical asset pricing

Abstract

This dissertation consists of four essays in empirical asset pricing. The first essay studies the asset pricing implication of inefficient information intermediaries based on empirical evidence from US corporate bond market. Asset managers not only manage investment capital delegated by investors but also synthesize and disseminate information for investors' capital allocation. I argue that asset managers delay the information transmission to investors due to a conflict of interests. Consequently, investors' capital allocation in response to information is delayed, resulting in market inefficiencies. I test this argument and its asset pricing implications in the corporate bond market. The main finding is that the delayed information transmission by corporate bond funds leads to price momentum in the corporate bond market. In addition, the delayed information transmission by corporate bond funds generates cross-bond return predictability among corporate bonds that are held by common fund owners. Finally, this paper sheds light on the over-valuation of high beta bonds relative to low beta bonds (beta anomaly) in the corporate bond market.

The second essay provides a psychological explanation for the delayed price response to news about economically linked firms. The main finding is that the return predictability of economically linked firms depends on the nearness to the 52-week high stock price. The interaction between news about economically linked firms and the nearness to the 52-week high can partially explain the underreaction to news about customers, geographic neighbors, industry peers, or foreign industries. In addition, analysts react to news about economically linked firms but the 52-week high effect reduces such reactions, providing direct evidence that the 52-week high affects the belief-updating process.

The third essay re-examines the puzzling pattern of lead-lag returns among economically-linked firms. The results show that investors consistently underreact to information from lead firms that arrives continuously, while information with the same cumulative returns arriving in discrete amounts is quickly absorbed into price. This finding holds across many different types of economic linkages, including shared-analyst-coverage. The conclusion is that the “frog in the pan” (FIP) momentum effect is pervasive in co-momentum settings, suggesting that information discreteness (ID) serves as a cognitive trigger that reduces investor inattention and improves inter-firm news transmission.

The fourth essay demonstrates that a broad set of asset pricing factors or anomalies are significantly exposed to ``noise trader risk," and the noise trader risk is priced in factor premia. The main findings are: i) mutual funds' flow-induced trades of factors are uninformed as they generate a large price impact on factor returns, followed by a complete reversal; ii) asset pricing factors are subject to flow-driven noise trader risk in that expected variation (covariation) of flow-induced noise trading strongly forecasts variance (covariance) of factor returns; iii) factor premia are higher when flow-driven noise trader risk is expected to be more salient. Overall, the results indicate that the flow-driven noise trader risk is significantly priced into factor premia.