We propose a clustering-based dimensionality reduction approach to minimum variance portfolio optimization. Rather than constructing the global minimum variance (GMV) portfolio over the full stock universe, which is subject to severe estimation error due to high-dimensionality, we apply Ward’s hierarchical clustering to partition stocks into groups of similarly behaving assets, select one representative per cluster, and optimize on the resulting low-dimensional sub-universe. We show theoretically that clustering preserves the factor structure and yields a better-conditioned covariance matrix than random selection. Empirically, on the Chinese A-share market, the proposed strategies substantially outperform the full-universe benchmark, with gains robust to transaction costs.

This study examines the impact of Economic Policy Uncertainty (EPU) on the stock price crash risk of Chinese commercial banks. In addition, it explores how Governance and Digital Transparency curtail the effect of EPU on stock price crash risk. Using a sample of 50 Chinese A-share-listed banks from 2012 to 2024, the study reveals that EPU significantly increased the banks’ stock price crash risk. The findings are robust to alternative measures of EPU and stock price crash risk. Further, governance and FinTech adoption mitigate the positive effect. The mitigating effect persists across high- and low-risk bank subsamples. In addition, we perform a battery of analyses to support our main findings. These findings have important theoretical and practical implications.

Whether risk aversion is time varying and countercyclical is central to modern asset pricing, yet evidence remains limited and is based mainly on experimental, survey, or aggregate stock market data. We provide individual-level evidence from 10 million Chinese auto insurance contracts from 2011 to 2017, estimating policyholders’ risk aversion from deductible choices. We find that risk aversion is time varying and countercyclical. The estimates are negatively related to lottery and stock trading, positively related to insurance sales and bond trading, and vary with psychological factors, including seasonal mood, “zodiac year,” and calendar events.

This paper identifies the marginal investors in China’s stock market and examines their impact on stock pricing. To clearly distinguish between the equity constraint channel and the debt constraint channel, we construct the capital ratio factor and the debt constraint factor for banks and securities companies, the two most critical financial intermediaries in China’s stock market. Our results demonstrate that banks indeed serve as marginal investors and influence stock market efficiency primarily through the equity capital constraint channel. Furthermore, we find that the bank capital ratio factor significantly explains stock mispricing in China, with the single-factor model based on bank equity capital producing substantially smaller pricing errors compared to traditional multi-factor models.

How do market-design reforms affect secondary-market liquidity in an emerging equity market? We examine China’s ChiNext reform, which combined registration-based IPO issuance with changes in secondary-market trading rules. Using firm-month observations and high-frequency order-book data, we compare incumbent ChiNext firms with Main Board firms in a difference-in-differences framework. The results show that the reform significantly improves secondary-market liquidity, with consistent evidence across alternative DID estimators and liquidity measures. Dynamic estimates show comparable pre-reform movements and increasingly favorable liquidity outcomes after implementation. Cross-sectional analysis indicates stronger liquidity improvements among larger and more profitable firms. Microstructure results show narrower quoted spreads, broadly stable displayed depth, and a shift in order flow toward buyer-initiated trading. Overall, the findings demonstrate that the integrated ChiNext reform package improved secondary-market liquidity and reshaped the cross-sectional distribution of liquidity gains, highlighting the market-quality consequences of institutional reform in emerging equity markets.

This paper investigates whether and how independent director-affiliated corporate donations affect stock price crash risk in China. We find a significant positive relationship between affiliated donations and future crash risk. The relationship is more significant for firms with weak internal governance and limited external monitoring, when affiliated directors serve on the audit committee, and in non-state-owned enterprises. Overall, our findings suggest that the social ties built through affiliated donations undermine rather than enhance director monitoring, and that agency theory has more explanatory power than resource dependence theory for understanding the impact of affiliated donations on stock price crash risk.

This study investigates the impact of employee ownership on firms’ investment responsiveness to stock market feedback. Using data from Chinese listed firms, we find that employee ownership significantly enhances the sensitivity of corporate investment to Tobin’s q. This effect is more pronounced in firms with higher information asymmetry, greater labor intensity, weaker corporate governance, and higher financial distress risk. While employee ownership is linked to increased subsequent profitability volatility, it also mitigates financial mismatch and downside operating risk. Our findings also suggest that employee ownership drives a shift in corporate strategy, leading to more aggressive approaches and improved risk preferences. These results highlight the role of employee ownership in mitigating agency problems and enhancing firms’ ability to incorporate market information into investment decisions.

Investors’ prior experiences with a stock substantially affect their willingness to repurchase it. This paper explores the repurchase effect, a psychological bias in which investors are reluctant to repurchase stocks that have appreciated after a prior sale. To quantify this bias, we develop a novel stock-level measure, termed Repur, and investigate its implications for cross-sectional asset pricing. Our findings show that stocks with higher Repur tend to experience reduced future buying pressure from investors, which in turn results in lower subsequent returns. Economically, long-short portfolios based on Repur yield annualized abnormal returns exceeding 23% for equal-weighted and 11% for value-weighted risk-adjusted returns. Further analyses show that the pricing effect of Repur is more pronounced following periods of high investor sentiment, for stocks with greater arbitrage constraints, and for firms with smaller investor bases. Out-of-sample evidence from China confirms the significant pricing impact of the repurchase effect.

This study integrates microstructure theory with asset pricing to investigates how the idiosyncratic volatility (IVOL) puzzle operates through specialized liquidity risk channels in China’s A-shares market. We employ intraday transactions data to perform a novel decomposition of liquidity into its variable (informational) and fixed (transitory) components. We show that the anomalous negative relationship between IVOL and future returns emerges from the intricate interaction of liquidity risk exposure, information and arbitrage constraints, and measurement biases. Specifically, the variable component tied to informed trading and adverse selection exposes high-IVOL stocks to greater arbitrage risk during liquidity shocks, while the fixed component exacerbates their vulnerability to short-term market-making cost fluctuations. Our results reveal that the IVOL puzzle is not a statistical artifact but a rational pricing phenomenon driven by omitted liquidity risk, mediated by the country’s unique institutional environment and monetary conditions.

The essay delves into the impact of environmental uncertainty on asymmetric mispricing utilizing the data from listed firms in China spanning from 2007 to 2023. Our analysis reveals that environmental uncertainty amplifies stock mispricing within capital markets, whether upward or downward. Diverging from prior research, we distinguish between upward and downward mispricing and reveal the black box of environmental uncertainty affecting stock mispricing from dual channels. Specifically, environmental uncertainty intensifies upward mispricing through heightened earnings management and exacerbates downward mispricing by boosting investor irrationality. Furthermore, we explore the heterogeneous impact of different media coverage. In the downward mispricing sample, negative media exacerbated the relationship between the two, while positive coverage played a mitigating role. In the upward mispricing sample, only negative reports have a significant impact, and mitigate the impact of uncertainty on mispricing. Our research on media heterogeneity once again proves that it is a double-edged sword. Our research indicates that improving the capacity to recognize different mispricing mechanisms in various market directions can greatly boost decision-making efficiency. Meanwhile, it is vital to strengthen professional ethics in media organizations and encourage more objective reporting. These efforts can jointly contribute to improve he efficiency of emerging capital markets.