The Initial Return and Its Conditional Return Volatility: Evidence from the Chinese IPO Market

M. Monica Hussein () and Zhong-Guo Zhou ()
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M. Monica Hussein: California State University, Northridge, Department of Finance, Financial Planning, and Insurance, David Nazarian College of Business and Economics, 18111 Nordhoff Street, Northridge, CA 91330-8379, United States
Zhong-Guo Zhou: California State University, Northridge, Department of Finance, Financial Planning, and Insurance, David Nazarian College of Business and Economics, 18111 Nordhoff Street, Northridge, CA 91330-8379, United States

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2014, vol. 17, issue 04, 1-32

Abstract: This paper investigates the monthly initial return and its conditional return volatility for Chinese IPOs. We find that the mean initial return (IR) and cross-sectional return volatility are highly auto- and cross-correlated, and time-varying. We propose a system of two simultaneous equations: a GARCH-in-mean (GARCH-M) process with an ARMA(1,1) adjustment in the residuals for the IR and an EGARCH process for the conditional return volatility, assuming that the IR and its conditional return volatility are linear functions of the same market, firm- and offer-specific characteristics. We find that the model captures both time-series and cross-sectional correlations at the mean and variance levels. Our findings suggest that the conditional return volatility affects the IRpositivelyandsignificantly, in addition to the traditional market, firm- and offer-specific characteristics. IPOs with higher conditional return volatility, as a proxy for information asymmetry, tend to be underpriced more. The paper demonstrates the merit of using a conditional variance model, along with time series and cross-sectional analysis to price Chinese IPOs.

Keywords: Chinese IPO underpricing; monthly initial return; conditional return volatility; model specification; auto- and cross-correlations; time series and cross-sectional analysis; G11; G12; G15 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2014
References: View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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DOI: 10.1142/S0219091514500222

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