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Theses and Dissertations

Three Essays on Financial Markets Open Access


Other title
Business Cycle
Stock Market
Type of item
Degree grantor
University of Alberta
Author or creator
Zhang, Lu
Supervisor and department
Morck, Randall (Finance and Statistical Analysis)
Examining committee member and department
Nakamura, Alice (Finance Finance and Statistical Analysis)
Huson, Mark (Finance Finance and Statistical Analysis)
Szostak, Rick (Economics)
David, McLean (Finance Finance and Statistical Analysis)
Goetzmann, William (Finance, Yale)
Faculty of Business
Date accepted
Graduation date
Doctor of Philosophy
Degree level
This thesis consists of three essays. The first essay studies the ability of stock return idiosyncrasy to predict future economic conditions over time. The second essay investigates the technological innovation and creative destruction during the 1920s and the 1930s, one of the most innovative periods in the 20th century. The third essay tests the performance of an investment strategy using information about past market-wide comovement. Stock return idiosyncrasy, defined as the ratio of firm-specific to systematic risk in individual stock returns, contains information about future growth rate in real GDP, industrial production, real fixed assets investment, and unemployment. Forecasts are generally significant one-quarter-ahead, particularly after World War II. These effects persist after controlling for other potential leading economic indicators, both in-sample and out-of-sample. These findings are consistent with information generating firms, presumably uniquely well-informed about economic conditions because their core business is information, adjusting their information production before downturns. The second essay studies the process of creative destruction during the technological revolution in the 1920s and 1930s. Intensified creative destruction magnifies the performance gap between winner and loser firms, and thus elevates firm-specific stock return variation. We find high firm-specific return variation in innovative industries and firms during the 1920s boom and the subsequent depression. We also find some evidence of elevated firm-specific return variation in manufacturing sectors with higher labor productivity, more research staff and more extensive electrification. In the third essay, we define the directional market-wide comovement measure as the proportion of stocks moving up together. Positing that high comovement reflects large fund inflows, we devise an investment strategy of entering the market whenever positive directional market-wide comovement passes a certain threshold. Specifically, this comovement-based investment strategy holds the market index when the market-wide upward comovement in the prior one to four weeks is above the fourth decile of the historical comovement distribution, and invests in the risk-free asset otherwise. During the sample period of 1954 to 2014, this strategy outperforms the NYSE value-weighted market index by 6.42% per year. Out of sample tests using NASDAQ stocks and TSE stocks validate the strategy. Our findings suggest that market-wide upward comovement identifies periods of market run-ups, when unsophisticated investor buying is apt to be driven by herding or information cascades.
Permission is hereby granted to the University of Alberta Libraries to reproduce single copies of this thesis and to lend or sell such copies for private, scholarly or scientific research purposes only. The author reserves all other publication and other rights in association with the copyright in the thesis and, except as herein before provided, neither the thesis nor any substantial portion thereof may be printed or otherwise reproduced in any material form whatsoever without the author's prior written permission.
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