Estrategias para la comprensión lectora.

6.1.1 Essay One

Market liquidity is influenced by various country-level factors, such as institutional characteristics and regulations. The first essay surveys the literature on liquidity issues in international stock markets, compares and contrasts empirical results across prior studies, and highlights potential areas for further investigation.

Key empirical findings in former studies are as follows. Individual stock liquidity co-moves within and across exchanges. Both liquidity level and liquidity risks are priced internationally. In the corporate finance field, liquidity is positively related to firm transparency and number of shares issued, and negatively associated with dividends paid to shareholders, while the effects of internationalisation on liquidity are inconsistent across firms and countries. The essay concludes by suggesting that, while trading environments continue to evolve (e.g. the recent development of dark pools and high- frequency trading platforms), how market attributes affect empirical results on liquidity issues are still an important area of future research.

6.1.2 Essay Two

The second essay examines the impact of investors’ risk perceptions on market liquidity using a sample of 57 countries between 1990 and 2015. Using VIX, also known as the “fear gauge”, to proxy for investor risk perception internationally (e.g. Sari, Soytas,

and Hacihasanoglu, 2011), the essay shows a 1% increase in VIX in a given month, on average, leads to a 0.68% (0.80%) increase in the value-weighted (equal-weighted) Amihud (2002) illiquidity ratio, and a 0.40% (0.30%) increase in the value-weighted

(equal-weighted) closing bid-ask spread measure of Chung and Zhang (2014) of a market in the same month. The generalised impulse response functions for shocks in VIX and liquidity measures indicate the influence of VIX on liquidity is long-lived and not driven by reverse causality.

The influence of VIX on liquidity is stronger in more economically developed and integrated markets with better country governance and no short-selling constraints, despite developed markets typically exhibiting greater liquidity level than their emerging market counterparts (e.g. Fong, Holden, and Trzcinka, 2017). The results are consistent with the idea that developed and integrated economies attract more international investors, incorporate information in a more efficient manner, and therefore are more influenced by global risk perceptions reflected in VIX.

Overall, the essay provides evidence that investors’ risk perception is an important determinant of liquidity in global markets. The findings also help explain why liquidity is more volatile in certain countries than in others, and provide implications for policymakers and regulators aiming at stabilising market liquidity.

6.1.3 Essay Three

Chung and Chuwonganant (2017) show unexpected changes in market volatility affect stock returns directly, as well as indirectly through stock liquidity in the US markets, suggesting that liquidity is an important channel through which market volatility affects stock returns. The third essay of the thesis explores the role of the stock liquidity in determining the volatility-return relation in 41 countries over the period 1990–2015, and seeks to solve the question of which market-specific characteristics affect the impact of the liquidity channel.

163 The essay begins with portfolio-level analysis. The double-sorted portfolio results show returns are significantly lower for stocks with greater liquidity sensitivity to market volatility, when market volatility shocks are controlled. The average return differential between quintile portfolios of stocks with the highest liquidity shocks and stocks with the lowest liquidity shocks within a given geographical region ranges from 0.80% to 6.02% per month, depending on the liquidity proxy used. The findings remain intact when the essay further conducts stock-level regression analysis controlling for other market- and stock-level determinants of stock returns, such as market returns and stock idiosyncratic volatility.

Following Chung and Chuwonganant (2017), the essay measures the indirect effect of volatility on returns through liquidity in a given market as the difference in monthly stock returns between stocks with liquidity shock values in the 75th and 25th percentiles, respectively, associated with a median market volatility shock. The results show country governance is a key determinant of the impact of the liquidity channel on asset returns, as stronger governance facilitates investors’ trading activity and enables information to be incorporated in security prices more efficiently. There is also evidence that the influence of the liquidity channel is stronger in markets with higher levels of market volatility and lower trading volume, and in countries with no short-selling constraints and more high-frequency trading. It is also more pronounced during crisis periods.

In summary, this essay reveals that stock liquidity is an important channel through which market volatility indirectly affects stock returns around the globe, which is distinct from the direct impact of volatility on returns. The influence of the liquidity channel varies across diverse institutional environments and over time. These findings have

implications for market participants and policymakers focusing on volatility, liquidity, and asset returns.

6.1.4 Essay Four

The fourth essay investigates market-wide liquidity and trading activity in China. A number of features of the Chinese market make it an interesting setting in which to consider liquidity and trading activity. First, Chinese listed firms tend to have a high level of non-tradable ownership; state owners have a relatively low incentive to trade unrestricted stocks and act as liquidity providers (Peng, Wei, and Yang, 2011). Second, short selling was prohibited in the Chinese market until March 2010, since then only selected stocks have been allowed to be sold short. Prior studies, such as Charoenrook and Daouk (2005) and Beber and Pagano (2013), show short selling constraints distort trading volume and liquidity. Third, the Chinese stock market is dominated by retail investors, who contribute to more than 80% of the trading volume in the market (Hilliard and Zhang, 2015), while institutional investors are the key players in mature markets such as the US. Retail investors exhibit speculative trading characteristics, and their trading behaviour historically differs from institutional investors (Kelly and Tetlock, 2017).

This essay finds trading activity in China increases more in up markets than in down markets. The results show an increase in the share volume of 8.62% and an increase in trading value of 9.58% for a one standard deviation increase in a positive market return, whereas a one standard deviation decrease in a negative market return leads to a 2.98% increase in the share volume and a 1.62% increase in trading value. The findings support the literature suggesting that less sophisticated retail investors exhibit stronger disposition effects, the tendency to hold winner stock longer than loser stocks (e.g. Dhar and Zhu, 2006). In more recent times, trading activity is significantly lower before holidays and

165 higher afterward, which also can be explained by the overrepresentation of retail investors’ trading. As noted in Meneu and Pardo (2004), retail traders are reluctant to buy shares before holidays.

While both short selling and margin trading boost trading activity in China, short selling also increases bid-ask spreads (indicating lower market liquidity). This finding supports earlier studies providing evidence that short sellers in China are likely to be informed traders (e.g. Chang, Luo, and Ren, 2014). Accordingly, their trading enlarges the information asymmetry component of the bid-ask spread. In addition, the essay documents the increased impact of global factors in the Chinese market, supporting prior studies on the success of China’s recent policy changes and reforms aiming at improving

its market efficiency and liquidity.