Empirical Methods in Accounting and Finance
Introduction
The mean-variance relationship has long been a focus in finance literature. Traditional finance theories propose a positive mean-variance relationship , or risk-return tradeoff (Merton, 1973), i.e. bearing high (low) risk should be reward by high (low) returns, empirical studies documents at best inconclusive evidence with three mainstreams due to different economic settings and volatility model section. French et al. (1987), Scruggs (1998), Ghysels et al. (2005), Lundblad (2007). Pastor et al. (2008), Brandt and Wang (2010), and Rossi and Timmermann (2015), among others find the risk-return tradeoff despite being significant in some cases. On the other hand, Nelson (1991), Brandt and Kang (2004), Baker et al. (2011), Fiore and Saha (2015), and Booth et al. (2016), among others, documents a negative mean-variance relationship. Turner et al. (1989) Glosten et al. (1993), Sun et al. (2017), Wang et al .(2017), among others, report both positive and negative relationship between risk and returns.
A wide range of theories are proposed to explain the weak risk-return tradeoff, such as investor sentiment (Yu and Yuan, 2011; Wang, 2018a&b; Wang and Duxbury, 2021) and differences in overnight and intraday returns (Wang, 2021).
In line with the above, answer the following requirements:
Required:
1. Discuss the empirical designs in (i) Yu and Yuan (2011) and Wang (2018a), and (ii)Wang (2018b) and Wang and Duxbury (2021) (20 MARKS)
2. Critically review literature, and summarize and evaluate approaches to construct proxies for the investors sentiment. (12 MARKS)
3. Suppose that you decide to extend Wang (2021) to another developed market. Select the market and justify your selection (8 MARKS)
4. For the selected market, show present and interpret descriptive statistics of stocks returns for the whole sample period, along with high- and low-sentiment periods.(15 MARKS)
5. Use the rolling window method to filter conditional volatility. Present and interpret descriptive statistics of conditional volatility for the whole sample period, along with high- and low-sentiment period.(20 MARKS)
6. Examine the mean-variance relation for the whole sample period, along with high-and low-sentiment periods interpret.(25 MARKS)
