Essays on international trade and stock market performance in China

This thesis examines different factors that affect risk and return of equities of Chinese firms engaging in international trades through three studies. The first study investigates the sensitivity of exchange rate fluctuations to firm returns through exchange rate exposure. We improve methodologies employing in existing studies by constructing a firm-specific exchange rate index based on destination-specific export and import values. The empirical results show that our improvement can detect more percentage of firms showing significant exchange rate exposure than conventional approaches and that higher proportion of Chinese firms are exposed to exchange rate when the exchange rate regime is changed from fixed to managed float. The second study decomposes risk premium of Chinese exporting firms by their export destinations to assess if return from exporting to each country is well rewarded for the risk taken, that is, having a positive risk premium. Risk premium of firms is assumed to be influenced by risk premium from a domestic market, risk premium contributions from current export destination countries and from potential export destination countries. Our methodology of risk premium decomposition takes into account the time-varying nature of risk factors of exports. The empirical results reveal that trading in a domestic market provides positive risk premium while current and potential exports can provide positive or negative risk premia depending on destination countries. The last study explores volatility spillovers to Chinese stocks over trade, exchange rate and stock market liberalization events in China. We investigate volatility spillovers from the major stock markets in the US, the UK and Japan to Chinese stocks. Besides, we also breakdown Chinese stocks by portfolios of exporting, domestic manufacturing and domestic services firms to investigate both volatility spillovers from foreign stock markets and volatility spillovers across portfolios. The stock return volatility of one variable is decomposed into its own volatility and volatility spillovers from others. The empirical results show that the nature and extent of volatility spillovers to Chinese stocks vary across economic liberalization episodes. Moreover, the main contributor of volatility spillovers from foreign markets is the US stock market. Nonetheless, in all events, the major source of volatility for Chinese stocks is mainly from shocks in Chinese market rather than shocks in international stock markets