Two Essays on Return Synchronicity


Student thesis: Doctoral Thesis

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Award date28 Aug 2017


Return synchronicity is a commonly used measure to capture how individual security’s return co-moves with the underlying market return. This thesis provides a comprehensive investigation about the information interpretation of return synchronicity by innovatively introducing the specific events intensity rationale. Two studies are involved. The first one is to apply the synchronicity measure in the bond market and figure out how information environment affects bond return synchronicity with the rating change rationale that works behind. The other one is to take advantage of the rating change disclose for corporate bond, and establish empirical evidence for the events intensity rationale in explaining the heterogeneity of stock return synchronicity cross-sectionally and along the time dimension.

More specifically, the first essay studies the information interpretation of return synchronicity in the context of the corporate bond market. I find that bonds under better information environment, i.e. investment-grade bonds, bonds without split ratings, and bonds issued by public listed firms are associated with lower likelihoods of rating change occurrence and are more synchronous with the market. I verify the events intensity rationale that lies behind by utilizing rating change announcement as a proxy for the specific event and show that bond-years with rating change announcements exhibit lower return comovements. This negative effect is more pronounced for rating downgrades relative to rating upgrades. All the results remain robust after controlling bond characteristics, industry and year fixed effects, adopting alternative synchronicity construction methodologies, and using sample aggregated at issuer-level.

The second essay aims to provide the very first comprehensive empirical evidence for the firm-specific events intensity rationale (Roll, 1988) that help interpret cross-sectional variation among stock return comovements. I directly materialize the idiosyncratic events intensity using rating change announcement for the firm’s outstanding public bonds. This characterization takes advantage of the information disclosure from the corporate bond market, with which I establish a robust negative relationship between rating change occurrence (intensity) with stock return synchronicity, and empirically verify the validity of events intensity in characterizing idiosyncratic variation. I also find that synchronicity decreases more for firm-years with rating downgrades especially “Fallen Angel” events, larger change magnitudes, initial rating changes, being listed in AMEX/NYSE, and when markets are of lower volatilities. Besides, this negative impact of rating change on stock return synchronicity weakens after the implementation of TRACE and during the financial crisis period as investors may better anticipate the specific events and further lower down events surprises incorporated in the stock prices.