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Forecasting The Earnings Of Maximum Daily Return And Its Relationship To Idiosyncratic Volatility

Posted on:2017-02-01Degree:MasterType:Thesis
Country:ChinaCandidate:G Y WangFull Text:PDF
GTID:2359330512474408Subject:Financial engineering
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Gambling is a common social phenomenon,though with the continuous development of human society,the form of gambling has changed a lot,gambling has been exist in people's life.From a specific perspective,because people are born loving adventure,and gambling happens to satisfy people's this kind of nature,the gambling-like preferences,have been entrenched,known as "gambling preferences".Gambling preferences behavior suggests that investors have certain preferences for some kind of assets,which is different from the classic asset pricing theory,the theory told us that we can hold fully diversified portfolio to offset every firm's own risk.Study the gambling preferences of the stock market,can improve the traditional asset pricing theory,correct and improve the asset pricing theory and makes the asset pricing theory do better in practice.The study about gambling preferences and investor behavior is mainly in two aspects in the world.On the one hand,the main research is about the potential role of gambling preferences in investment decisions,which is Represented by Friedman and Savage(1943),Markowitz(1952),Kahneman and Tversky(1979,1992),Shiller(1989,2000),Shefrin and Statman(2000),Statman(2002),Barberis and Huang(2008).They Focused on researching people's gambling preferences from the perspective of behavioral finance.Among them,the most representative theory is Prospect Theory putted forward by Kahneman and Tversky(1979)and the cumulative prospect theory putted forward by Tversky and Kahneman(1992).In the framework of the cumulative prospect theory,gambling preferences of investors got explanation,Barberis and Huang(2008)argue that investors may be think too much about the low probability events and significantly have a preference for positively skewed stock.·After Kumar first defined the lottery-like stocks' characteristics as low price,high quality and high qualities of skewness,more and more people begin to research on gambling preferences from the other perspective.according to the three indicators of the lottery-like stock proposed by Kumar(2009),scholars at home and abroad analyzed,extracted and processed into easily metrics to do empirical studies on gambling preferences among national markets.According to the index of lottery-like stocks,research papers can be broadly divided into two categories:one is single index,the other one is composite index.Single index refers to only use low price,high quality or high quality of skewness to distinguish whether it is lottery-like stock or not,the composite index refers to use two or more than two features to distinguish.At present,the research about our country's gambling preferences mostly used composite index.But the composite index calculated complexly,not easily observed,and differ from individual investor's behavior who tend to assume that the movements of the future stock price can be told by its passed trend.In order to choose an index that can reflect traders' gambling preferences well,we choose maximum daily yield of last month as the gambling preferences' index.At the same time,according to the existing literature,we proposed two hypotheses in this paper.Hypothesis 1:the maximum daily yield is negatively related to the future stock returns.Hypothesis 2:the maximum daily yield can explain "the idiosyncratic volatility puzzle".The research time interval of This paper is July 1997 to December 2015.The main method is cross-sectional regression.We first studied the relationship between maximum daily yield and the future stock returns,we did three times cross-sectional regression contained different variables.In the first cross-sectional regression,the explanatory variables was only maximum daily yield;in the Second cross-sectional regression,the explanatory variables contained the company size,book value ratio,market risk and momentum in addition to maximum daily yield;in the Third cross-sectional regression,the explanatory variables were maximum daily yield,the company size,book value ratio,market risk,momentum,also included the illiquid;The explained variables was the monthly stock returns of the next month.The reason why we Designed three cross-sectional regression,is that we want to see whether the ability that maximum daily yield's explains the future stock returns significantly negative or not.Then we continue to test the second hypothesis that the maximum daily yield can explain idiosyncratic volatility puzzle.We first tested in our stock market the idiosyncratic volatility puzzle exist or not.Similar to the above,we also conducted three times cross-sectional regression contained different explanation of variables.the explanatory variables in the first regression equation was idiosyncratic volatility,the explanatory variables in the second regression equation were idiosyncratic volatility,company size,book value ratio,market risk and momentum,and the explanatory variables in the third regression equation were idiosyncratic volatility,company size,book value ratio,market risk,the momentum and illiquid.Of course,the explained variable of the three regression equations were monthly stock returns of next month.By adding different explanatory variables into the regression equations,we want to test whether the idiosyncratic volatility puzzle exists or not.Then,we began to study the relationship between the maximum daily yield and idiosyncratic volatility.Similarly,in order to make contrast to the results that described in the previous section,we also do the cross-sectional regression three times.the explanatory variable in the first regression equation were idiosyncratic volatility and maximum daily yield,the explanatory variables in the second regression equation were idiosyncratic volatility,company size,book value ratio,market risk,maximum daily yield and momentum,the explanatory variables in the third regression equation were idiosyncratic volatility,company size,book value ratio,market risk,momentum,illiquid and maximum daily yield.Of course,the explained variable of three regression equations was monthly stock returns of the next month.We want to see after joining the maximum daily yield in the regression equations,the idiosyncratic volatility puzzle exists or not.Finally,we made robustness test between the maximum daily yield and the stock returns of the next month.In this article,we get the following conclusions through the above study:(1)In our country's stock market,there exists a robust negative correlation between the maximum daily yield and future stock returns.(2)Through our study,we found that once controlled the maximum daily yield of last month,there is still a negative relationship between idiosyncratic volatility and stock returns in the future,but the ability that idiosyncratic volatility explains the future stock returns reduced,and so we think the maximum daily yield has certain ability to explain the idiosyncratic volatility puzzle.
Keywords/Search Tags:gambling preferences, maximum daily return, idiosyncratic volatility, cross-sectional regression
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