Liquidity Comovement And Index Effect

Stock comovement refers to the positive correlation between stocks' price or rate of return.If the positive correlation exceeds the range that can be explained by the fundamental factors,it is called excessive comovement.The generalized comovement includes not only the comovement of return,but also the comovement of stock liquidity and volatility.Neoclassical finance has not reached an agreement on the causes of stock comovement;while with the development of behavioral finance,more and more research has provided evidence for the interpretation logic of behavioral finance.Stock comovement is a common phenomenon in the stock market.Research on comovement is of great significance to traditional asset pricing,investment strategy construction and supervision of financial market risks.The index effect is an important issue in studying the operating mechanism of the stock market and the behavior of the participants of the stock market,and is also an important issue in studying the effectiveness of the market.In view of the important role of the CSI 300 Index in China's stock market,it is of great theoretical and practical significance to correctly understand the liquidity comovement effect and the return comovement effect of the constituents of the CSI 300 Index and to explore the causes.First of all,based on the research of scholars at home and abroad,this paper summarizes the theories of two types of stock comovement--the comovement caused by fundamentals and excessive comovement caused by investor sentiment or market friction,and uses three behavioral finance views to explain the reasons for comovement effect of the CSI 300 Index constituents,which are category view,habitat view,and information diffusion view.Secondly,this paper obtains the samples of the CSI 300 Index inclusions and deletions between April 2006 and June 2017,and uses event study method to establish models for empirical analysis.Besides,we design robustness tests to exclude the impact of industry,company size and stock market crash.Finally,we draw the following conclusions:(1)The results of binary regression indicate that when a stock is included in the CSI 300 Index,its comovement with index in both price and liquidity is significantly enhanced,while non-index beta is significantly reduced;for deletion events,it turns out just the opposite.The results of calendar time tests further validate this conclusion;(2)in the empirical analysis of liquidity comovement effect and return comovement effect,it is found that inclusion effect is greater than deletion effect both in the event time regression and in the calendar time regression;(3)for the more recent data,which is 2012-2017 sub-sample,the results show considerably stronger comovement effect than those in the 2006-2011 sub-sample.This is especially supportive of the category and habitat views;(4)by introducing the basis between the CSI 300 Index future and spot and generating an intersection variable,we studied the impact of index arbitrage on the return comovement of CSI 300 Index constituents.The results show that,when a stock does not belong to index constituents,the coefficient of the intersection variable is not significant;when a stock belongs to index constituents,the coefficient is significantly positive,which indicates that the index arbitrage transactions can enhance the comovement of index constituents returns.And it also proves that the trading of the CSI 300 Index funds is one of the reasons for the excessive comovement effect of CSI 300 Index constituents;(5)it is found that with the impact of liquidity on return removed,the return comovement of the CSI 300 Index constituents still exists and doesn't become weaker,which indicates that the comovement of liquidity premium caused by liquidity comovement of the CSI 300 Index constituents has little impact on the return comovement.The main contributions of this paper are twofold:first,we open up a new perspective in the study of stock comovement,which is liquidity comovement.We prove that the CSI 300 Index constituents have both excessive return comovement and liquidity co-movement.Analysis from multiple angles helps us have a better understanding of stock comovement.Second,in the analysis of return comovement,compared with other research,this paper came to some different conclusions.For example,the effect on comovement of inclusion events is greater than that of deletion events.Besides,we proved the influence of index arbitrage transactions on return comovement of stocks in the CSI 300 Index.