The Predictive Power Of Financial Regulatory Intensity On Asset Price

Since the financial crisis in 2008,all the countries in the world have been rethinking on the origin of the crisis.They have further realized the important role of financial regulation in the operation of the capital market.Since the establishment of China's capital market,both its scale and structure have developed rapidly after the reform of stock market standardization.On the one hand,as an essential financing platform for firms,the efficiency of the capital market directly determines the financing ability of the listed companies,which has important impact on the development of the future operation and the ability of its decision-making.On the other hand,the fairness and transparency of the capital market also directly affect the level of investment returns,which further affect the activity of the capital market.However,factors that affect the price level and volatility are relatively complex,and the government's financial regulatory factors are particularly prominent.More importantly,China's capital market is sensitive to the government's regulatory policy,and the changes of financial regulation(i.e.,the severe degree of regulation)virtually guides the operation of the capital market.Therefore,it is of great practical significance to study the influence of financial regulatory on asset pricing and discussing its prediction effect on the capital market.This paper uses news reports in China to construct the financial regulatory intensity index through the establishment of a dictionary of financial regulation vocabulary.This paper discusses the characteristics of China's capital market and gives the corresponding empirical analysis results from the following aspects.First of all,this paper introduces the financial regulation intensity index on the basis of capital asset pricing model.From this perspective,we find that investors expect the impact of the changes of financial regulatory environment on the stock market through the government's control and implementation of financial regulatory policies communicated in the news media.Therefore,investors require compensation for the risk exposure,resulting in the high beta assets show significantly higher returns than low-beta assets.This result still exists after controlling the size,book-to-market ratio,and momentum.In addition,the market-weighted return results are better than the equal-weight weighted results.Second,we conducted a cross-sectional test on stock return data,which mainly focused on the significance and symbol of financial regulation risk coefficient(beta)in the regression,to determine the explanatory power of this risk for stock return.Moreover,we also conduct Fama-Macbeth estimates.The results show that financial regulatory risk has a positive effect,and it still remains after controlling for other firm characteristics factors.Third,the test based on the heterogeneity of enterprises shows that whether the company is a state-owned enterprise or not,the sensitivity of stock returns to the uncertainty of regulatory policy is significant.This shows that as a kind of uncertainty impact,financial regulatory policy has a significant impact on the whole industry.However,compared with the state-owned enterprises which can rely on the advantages of government resources to resist the impact of external uncertainty,the non-state-owned enterprises often need to rely on their own ability to resist the uncertainty risks when facing the impact of external policies.Therefore,in the process of investment decision-making,investors should not only consider the systematic factors,but also grasp the heterogeneity characteristics of enterprises.According to their own investment preferences,combined with the risk and return characteristics of enterprises,they should improve the judgment ability and accuracy of policy effects.Secondly,this paper studies the determinants of the expected return of the cross-section of bonds by using the data of Chinese corporate bonds and corporate bonds.Different from previous studies,we test the relationship between bond characteristics such as bond sensitivity coefficient(beta),maturity yield,duration and convexity,and bond expected return.The main conclusions of this chapter are as follows:(1)Different from the previous studies,in order to better explore China's bond market,we introduced the index reflecting financial regulatory of China's capital market.To explore the impact of financial regulatory intensity on cross-sectional returns of China's bond market,the empirical results show that financial regulatory intensity can indeed affect bond returns to a certain extent,that is,short high beta bonds,long low beta bonds can obtain significantly positive returns;(2)The above long space strategy can obtain significant yield after controlling the bond features such as bond issuance,issued time,bond term,maturity yield,duration,convexity,etc;(3)After controlling the risk of financial regulatory uncertainty,the constructed portfolio can also obtain significant yield.In order to ensure the robustness of the results,we also test the economic policy uncertainty index constructed by Baker et al.And the results show that the above conclusions are also valid for the index.Thirdly,based on the univariate regression model,this paper analyzes the impact of financial regulatory intensity on the expected returns of Chinese stock market in time series.The results show that the financial regulatory intensity index makes a positive forecast on the expected return of China's stock market.The empirical results show that stock return gradually increases with the improvement of financial regulatory intensity.This positive forecast is statistically significant.More importantly,the adjusted R~2 is greater than that after considering some macroeconomic forecast indicators and uncertainty indicators.In addition,this paper also further tests the predictability of the economic policy uncertainty on China's capital market.The results show that the economic policy uncertainty has a completely opposite result,that is,the higher the degree of uncertainty of China's macroeconomic,the lower the stock market return.Fourthly,we construct a binary VAR model including bond market returns and financial supervision intensity.We find that when a unit of financial regulatory intensity is applied to the bond market,there will be a big fluctuation immediately.The influence will gradually weaken after the fourth period.When the bond market is affected by an impact of financial regulation,it will lead to an overall decline in bond return.The prediction results based on VAR system show that the changes of bond market return are more from its own influence,and the contribution of financial regulatory intensity is only about 1.2%.The change of bond market income is more directly related to the maturity,rating and interest rate.As a kind of macro impact,financial regulatory intensity will not produce effect in the current period,so the effect of financial supervision intensity is not as obvious as that of stock market.Finally,the conclusion of this paper has some meaningful guidance for the regulatory level of China's capital market.First of all,we measure the intensity of regulatory of China's capital market by building a new financial regulatory index.We explore the cross-sectional returns of the stock and the bond market by using this index,which is conducive to market participants'comprehensive understanding the risk characteristics of financial regulatory uncertainty.secondly,this paper analyzes the risk characteristics of financial regulatory uncertainty in terms of economic effect.Authorities should not only give full play to the positive role of financial regulatory uncertainty in asset pricing,but also reasonably control the risk of capital market volatility caused by financial regulatory.As China's capital market system is still imperfect,the regulatory level needs to formulate corresponding policies and regulations according to the various conditions of the market,so the policies and measures issued by the regulatory authorities will cause corresponding economic risks,resulting in arbitrage opportunities,so the government needs to comprehensively measure the economic consequences caused by regulatory policies,so as to establish a policy coordination mechanism and macro-control mechanism In a word,the regulatory authorities need to pay more attention to the impact of micro-subject behavior in the capital market,and improve the rational degree of investors by strengthening the guidance of micro subject expectations.