Stock Market Bubbles: Effects on Fixed Investment and FinancialMarket Open Access

Abstract

Abstract Stock Market Bubbles: Effects on Fixed Investment and Financial Market By Yan Li

Previous studies on stock market bubbles have developed theoretical models showing that the stock market bubble is a determinant of the stock price, and the presence of bubbles is also supported by empirical evidence. Based on these results, this dissertation further explores the effects of stock market bubbles on fixed investment and financial market. The first research question focuses on testing the hypothesis that stock returns are more sensitive to investor sentiment during stock market crashes than during stock market booms. The empirical results confirm that sentiment betas are asymmetric across stock market cycles. The next research question aims to examine the dynamic effects of stock market misvaluation on firm fixed investment. We apply a Bayesian vector autoregression (BVAR) model to calculate the impulse response function of investment to misvaluation shock. And we find that investment responds 47%-55% at maximum annually to one standard deviation of misvaluation. Finally, we address why stock return volatility is typically higher after the stock market falls than after it rises (referred as asymmetric volatility). By maximizing the likelihood functions of dividends and stock reruns from a quadratic generalized autoregressive conditional heteroscedasticity (QGARCH) model, we decompose this asymmetric volatility into the volatility feedback effect due to dividend news, and the bubble effect explained by bubble news.

Table of Contents

Content Chapter 1: INTRODUCTION Chapter 2: DOES INVESTOR SENTIMENT HAVE A LARGER EFFECT ON BEAR MARKETS OR BULL MARKETS? 2.1 Introduction 2.2 The hypothesis 2.3 Specifications of stock market booms and crashes 2.4 Sentiment measures 2.5. Data and estimation methods 2.5.1 Data 2.5.2 Estimation methods 2.6 Empirical results 2.7 Robustness check 2.7.1 Daily index return sentiment asymmetry 2.7.2 Portfolio returns sentiment asymmetry 2.7.3 Asymmetric response check for other risk factors 2.8 Conclusion Chapter 3: FIXED INVESTMENT AND THE STOCK MARKET: EVIDENCE FROM BVAR MODELS 3.1 Introduction 3.2 Measure of misvaluation 3.2.1 Market q 3.2.2 Fundamental q 3.2.3 Misvaluation 3.3 The methodology: BVAR 3.3.1 VAR framework 3.3.2 Minnesota prior 3.3.3 Sims and Zha prior (SZ prior) 3.4. Model specifications 3.4.1 The model 3.4.2 Hyperparameter specifications 3.5 Data and empirical results 3.5.1 Data 3.5.2 Empirical results 3.6 Robustness check 3.6.1 IRF using VAR model 3.6.2 Forecasting error comparison between BVAR and VAR models 3.7 Conclusion Chapter 4: STOCK MARKET BUBBLES, FUNDEFENTALS AND VOLIYILIY ASYMMETRY 4.1 Introduction 4.2 The asymmetric model with bubbles 4.2.1 Rational bubbles 4.2.2 The decomposition of excess stock returns 4.2.3 News about dividends and bubbles 4.2.4 Correlations of stock returns and volatility 4.3 Data and empirical results 4.3.1 Data and estimation methods 4.3.2 Empirical results 4.3.3 The economic importance of the bubble effect 4.4 Conclusion

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School	Laney Graduate School
Department	Economics
Degree	PhD
Submission	Dissertation
Language	English
Research Field	Economics, Finance
Keyword	Investor sentiment Asymmetric volatility Stock market bubbles BVAR model
Committee Chair / Thesis Advisor	Krause, Stefan, Emory University Zha, Tao, Emory University
Committee Members	Chirinko, Robert, Emory University Luger, Richard, Emory University

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