ESSAYS ON RETURN PREDICTABILITY IN EQUITY MARKET AND CORPORATE BOND MARKET

Whether asset returns are predictable is among the most enduring issues in finance. The thesis explores the return predictability through the following two chapters. In Chapter One, I examine the return predictability associated with short interest ratio in the equity market. Specifcally, I investigate the relation between short-selling activity and expected returns for stocks with different ratings to assess the implications of fnancial distress. I fnd that the predictive power of short interest is concentrated in the worst-rated stocks and the long- short trading strategy generates abnormal proft only for these stocks. The proft is derived primarily from taking the long position in the stocks with the largest decrease in short interest. These frms are more likely to experience a rating upgrade subsequently, and short interest changes predict their future earnings. In Chapter Two, I target the return predictability in the credit market. Specifically, I investigate whether investor sentiment can predict the cross-section of corporate bond returns. To my knowledge, existing proxies for credit market sentiment are all aggregate measures. For the frst time, I propose an investor sentiment measure at the bond level and fnd that it has strong cross-sectional predictive power for corporate bond returns. A long-short portfolio that buys low sentiment bonds and shorts high sentiment bonds generates economically and statistically signifcant returns. This proftability is robust to various controls. The sentiment index contains rich information for economic fundamentals and perform equally well as existing aggregate measures of Gilchrist and Zakrajsek (2012); Lopez-Salido et al. (2017).

Grantor dc:publisher

State University of New York at Buffalo

Year dc:date.issued

2018

Author dc:creator

• Guo, Xu

Contributors dc:contributor

• Wu, Chunchi
• Economics

• finance

Statement dc:rights

• Users of works found in University at Buffalo Institutional Repository (UBIR) are responsible for identifying and contacting the copyright owner for permission to reuse. University at Buffalo Libraries do not manage rights for copyright-protected works and cannot assist with permissions.
• Copyright retained by author.

Language dc:language

eng

Handle dc:identifier

http://hdl.handle.net/10477/78077

OAI record oai:identifier

https://ubir.buffalo.edu/oai/request?verb=GetRecord&metadataPrefix=qdc&identifier=oai%3Aubir.buffalo.edu%3A10477%2F78077