In this paper, we show that momentum patterns in equity returns can arise even in a parsimonious model with rational investors having symmetric information. The special feature of our model is that investors obtain a signal before observing the true asset payoff. A more favorable signal, however, impacts both the standard deviation of the return and its skewness. Since investors under rational expectations account for the current risk properties of the asset, the risk-adjusted subsequent return is related to the signal and therefore to the previous asset return. Hence, momentum does not need to be an anomaly but can be consistent with informational market efficiency where a higher subsequent return comes from a higher standard deviation of the asset return and/or a more severe negative skewness. Due to this rationale, it can be present in the future even though investors will have no incentive to exploit it. A comparativestatic analysis of our model reveals under which conditions momentum isparticularly in effect. Furthermore, we test our approach on two different equity markets, U.S. and China which are known to be dominated by different types of investors. The structure of the model allows us to identify for which type of investor momentum pattern is especially likely. This outcome provides the basis for a more precise empirical test for the origin of momentum.
{"title":"An Explanation for Momentum With a Rational Model Under Symmetric Information — Evidence From the US and Chinese Equity Markets","authors":"C. Koziol, J. Proelss","doi":"10.2139/ssrn.3508935","DOIUrl":"https://doi.org/10.2139/ssrn.3508935","url":null,"abstract":"In this paper, we show that momentum patterns in equity returns can arise even in a parsimonious model with rational investors having symmetric information. The special feature of our model is that investors obtain a signal before observing the true asset payoff. A more favorable signal, however, impacts both the standard deviation of the return and its skewness. Since investors under rational expectations account for the current risk properties of the asset, the risk-adjusted subsequent return is related to the signal and therefore to the previous asset return. Hence, momentum does not need to be an anomaly but can be consistent with informational market efficiency where a higher subsequent return comes from a higher standard deviation of the asset return and/or a more severe negative skewness. Due to this rationale, it can be present in the future even though investors will have no incentive to exploit it. A comparativestatic analysis of our model reveals under which conditions momentum isparticularly in effect. Furthermore, we test our approach on two different equity markets, U.S. and China which are known to be dominated by different types of investors. The structure of the model allows us to identify for which type of investor momentum pattern is especially likely. This outcome provides the basis for a more precise empirical test for the origin of momentum.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"32 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121669906","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Central banks' disclosures, such as forward guidance, have a weaker effect on the economy in reality than in theoretical models. The present paper contributes to understanding how people pay attention and react to various sources of information. In a beauty-contest with information acquisition, we show that strategic complementarities give rise to a double overreaction to public disclosures by increasing agents equilibrium attention, which, in turn, increases the weight assigned to them in equilibrium action. A laboratory experiment provides evidence that the effect of strategic complementarities on the realised attention and the realised action is qualitatively consistent with theoretical predictions, though quantitatively weaker. Both the lack of attention to public disclosures and a limited level of reasoning by economic agents account for the weaker realised reaction. This suggests that it is just as important for a central bank to control reaction to public disclosures by swaying information acquisition by recipients as it is by shaping information disclosures themselves.
{"title":"Double Overreaction in Beauty-Contests With Information Acquisition: Theory and Experiment","authors":"Romain Baeriswyl, Kene Boun My, Camille Cornand","doi":"10.2139/ssrn.3491096","DOIUrl":"https://doi.org/10.2139/ssrn.3491096","url":null,"abstract":"Central banks' disclosures, such as forward guidance, have a weaker effect on the economy in reality than in theoretical models. The present paper contributes to understanding how people pay attention and react to various sources of information. In a beauty-contest with information acquisition, we show that strategic complementarities give rise to a double overreaction to public disclosures by increasing agents equilibrium attention, which, in turn, increases the weight assigned to them in equilibrium action. A laboratory experiment provides evidence that the effect of strategic complementarities on the realised attention and the realised action is qualitatively consistent with theoretical predictions, though quantitatively weaker. Both the lack of attention to public disclosures and a limited level of reasoning by economic agents account for the weaker realised reaction. This suggests that it is just as important for a central bank to control reaction to public disclosures by swaying information acquisition by recipients as it is by shaping information disclosures themselves.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"2016 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121406539","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In the literature short sellers are often considered to be informed investors. By accessing a data set of disclosed large European short selling positions with the data of the increase and decrease of positions I model the returns of the short sellers. I find no significant alpha returns in the aggregated portfolio of short sellers, but a high focus on pursuing the Jegadeesh and Titman (1993) momentum factor strategy. Furthermore, on average, shares show significant negative (positive) abnormal returns before short seller increase (decrease) short positions, suggesting that short sellers do not act as contrarians but follow the trend. Distinguishing between events of short sellers with positive or negative momentum loading reveals even stronger evidence for trend following of momentum short sellers. However, short sellers with a negative momentum loading trade as contrarians, thus increase (decrease) their short positions after positive (negative) abnormal returns.
{"title":"Momentum in Short Selling: The Two Faces of Short Sellers","authors":"K. Urbanke","doi":"10.2139/ssrn.3550672","DOIUrl":"https://doi.org/10.2139/ssrn.3550672","url":null,"abstract":"In the literature short sellers are often considered to be informed investors. By accessing a data set of disclosed large European short selling positions with the data of the increase and decrease of positions I model the returns of the short sellers. I find no significant alpha returns in the aggregated portfolio of short sellers, but a high focus on pursuing the Jegadeesh and Titman (1993) momentum factor strategy. Furthermore, on average, shares show significant negative (positive) abnormal returns before short seller increase (decrease) short positions, suggesting that short sellers do not act as contrarians but follow the trend. Distinguishing between events of short sellers with positive or negative momentum loading reveals even stronger evidence for trend following of momentum short sellers. However, short sellers with a negative momentum loading trade as contrarians, thus increase (decrease) their short positions after positive (negative) abnormal returns.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133571984","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We analyze a principal-agent model in which an effort-averse agent can manipulate a publicly observable performance report. The principal cannot observe the agent's cost of effort, her effort choice, and whether she manipulated the report. An optimal contract links compensation to both the eventually realized output and the (possibly manipulated) report, since both are informative about effort provision. We show that the optimal contract may incentivize selective manipulation of an unfavorable report by an agent who exerted a high level of effort. Doing so can convert a "falsely" negative report into a positive one, thereby making the report more informative about the agent's effort choice.
{"title":"Lying to Speak the Truth: Selective Manipulation and Improved Information Transmission","authors":"Paul Povel, Günter Strobl","doi":"10.2139/ssrn.3488734","DOIUrl":"https://doi.org/10.2139/ssrn.3488734","url":null,"abstract":"We analyze a principal-agent model in which an effort-averse agent can manipulate a publicly observable performance report. The principal cannot observe the agent's cost of effort, her effort choice, and whether she manipulated the report. An optimal contract links compensation to both the eventually realized output and the (possibly manipulated) report, since both are informative about effort provision. We show that the optimal contract may incentivize selective manipulation of an unfavorable report by an agent who exerted a high level of effort. Doing so can convert a \"falsely\" negative report into a positive one, thereby making the report more informative about the agent's effort choice.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"639 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121984927","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A Principal owns a project consisting of several tasks. Tasks differ, both in their innate success probabilities and their incremental benefits. Moreover, specialists must be engaged to perform these tasks. Subject to moral hazard and adverse selection, in what order should the Principal commission the tasks and when should she terminate the project? What ex-ante investments into changing tasks' characteristics yield the highest marginal profit? These issues arise in diverse areas, from outsourcing drug R&D to sequencing proxy wars. We show that, despite informational constraints, a simple index - a task's effective marginal contribution - determines the optimal schedule/mechanism.
{"title":"Optimal Task Scheduling under Moral Hazard & Adverse Selection","authors":"M. Agastya, Oleksii Birulin","doi":"10.2139/ssrn.3486561","DOIUrl":"https://doi.org/10.2139/ssrn.3486561","url":null,"abstract":"A Principal owns a project consisting of several tasks. Tasks differ, both in their innate success probabilities and their incremental benefits. Moreover, specialists must be engaged to perform these tasks. Subject to moral hazard and adverse selection, in what order should the Principal commission the tasks and when should she terminate the project? What ex-ante investments into changing tasks' characteristics yield the highest marginal profit? These issues arise in diverse areas, from outsourcing drug R&D to sequencing proxy wars. We show that, despite informational constraints, a simple index - a task's effective marginal contribution - determines the optimal schedule/mechanism.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126256843","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A patient seller interacts with a sequence of myopic consumers. Each period, the seller chooses the quality of his product, and a consumer decides whether to trust the seller after she observes the seller’s actions in the last K periods (limited memory) and at least one previous consumer’s action (observational learning). However, the consumer cannot observe the seller’s action in the current period. With positive probability, the seller is a commitment type who plays his Stackelberg action in every period. I show that under limited memory and observational learning, consumers are concerned that the seller will not play his Stackelberg action when he has a positive reputation and will play his Stackelberg action after he has lost his reputation. Such a concern leads to equilibria where the seller receives a low payoff from building a reputation. I also show that my reputation failure result hinges on consumers’ observational learning.
{"title":"Reputation Building under Observational Learning","authors":"H. Pei","doi":"10.2139/ssrn.3626511","DOIUrl":"https://doi.org/10.2139/ssrn.3626511","url":null,"abstract":"\u0000 A patient seller interacts with a sequence of myopic consumers. Each period, the seller chooses the quality of his product, and a consumer decides whether to trust the seller after she observes the seller’s actions in the last K periods (limited memory) and at least one previous consumer’s action (observational learning). However, the consumer cannot observe the seller’s action in the current period. With positive probability, the seller is a commitment type who plays his Stackelberg action in every period. I show that under limited memory and observational learning, consumers are concerned that the seller will not play his Stackelberg action when he has a positive reputation and will play his Stackelberg action after he has lost his reputation. Such a concern leads to equilibria where the seller receives a low payoff from building a reputation. I also show that my reputation failure result hinges on consumers’ observational learning.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"47 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125628940","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the trade-off venture capitalists encounter in a financing framework under moral hazard. The venture capitalist has the option to supply funds either within a revenue-sharing contract or via equity but faces a hidden effort problem. While projects with a low degree of moral hazard yield higher returns to the venture capitalist when financed by equity, revenue-sharing contracts become superior as moral hazard increases. At high moral hazard levels, revenue sharing becomes the sole financing option and hence can raise welfare. We apply our model in the context of initial coin offerings as a modern form of revenue sharing.
{"title":"When Equity Fails – An Appraisal of Revenue Sharing As the Last Resort","authors":"C. Haas, Thomas Heyden","doi":"10.2139/ssrn.3402623","DOIUrl":"https://doi.org/10.2139/ssrn.3402623","url":null,"abstract":"We study the trade-off venture capitalists encounter in a financing framework under moral hazard. The venture capitalist has the option to supply funds either within a revenue-sharing contract or via equity but faces a hidden effort problem. While projects with a low degree of moral hazard yield higher returns to the venture capitalist when financed by equity, revenue-sharing contracts become superior as moral hazard increases. At high moral hazard levels, revenue sharing becomes the sole financing option and hence can raise welfare. We apply our model in the context of initial coin offerings as a modern form of revenue sharing.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"85 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124924975","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper studies a dynamic communication game in the presence of adverse selection and career concerns. A forecaster of privately known competence, who cares about his reputation, chooses the timing of the forecast regarding the outcome of some future event. We find that in all equilibria in a sufficiently general class earlier reports are more credible. Further, any report hurts the forecaster’s reputation in the short run, with later reports incurring larger penalties. The reputation of a silent forecaster, on the other hand, gradually improves over time.
{"title":"Timing of Predictions in Dynamic Cheap Talk: Experts vs. Quacks","authors":"A. Smirnov, E. Starkov","doi":"10.2139/ssrn.3485707","DOIUrl":"https://doi.org/10.2139/ssrn.3485707","url":null,"abstract":"The paper studies a dynamic communication game in the presence of adverse selection and career concerns. A forecaster of privately known competence, who cares about his reputation, chooses the timing of the forecast regarding the outcome of some future event. We find that in all equilibria in a sufficiently general class earlier reports are more credible. Further, any report hurts the forecaster’s reputation in the short run, with later reports incurring larger penalties. The reputation of a silent forecaster, on the other hand, gradually improves over time.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115070057","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We propose an empirical framework for Cournot oligopoly with private information about costs. First, considering a linear demand with a random intercept, we characterize the Bayesian Cournot-Nash equilibrium and determine its testable implications. Then we establish nonparametric identification of the joint distribution of demand and market-specific technology shock, and then firm-specific cost distributions. Following the identification steps, we propose a likelihood-based estimation method, and for illustration, apply it to the global upstream market for crude oil. We also extend the baseline model to include either conduct parameters, nonlinear demand, or selective entry.
{"title":"Empirical Framework for Cournot Oligopoly with Private Information","authors":"Gaurab Aryal, Federico Zincenko","doi":"10.2139/ssrn.3482154","DOIUrl":"https://doi.org/10.2139/ssrn.3482154","url":null,"abstract":"We propose an empirical framework for Cournot oligopoly with private information about costs. First, considering a linear demand with a random intercept, we characterize the Bayesian Cournot-Nash equilibrium and determine its testable implications. Then we establish nonparametric identification of the joint distribution of demand and market-specific technology shock, and then firm-specific cost distributions. Following the identification steps, we propose a likelihood-based estimation method, and for illustration, apply it to the global upstream market for crude oil. We also extend the baseline model to include either conduct parameters, nonlinear demand, or selective entry.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133452040","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We extend the literature by investigating whether analysts cater their coverage to investor information demand. Results suggest that analysts’ coverage is contemporaneously positively associated with investor information demand, and negatively associated with the previous time periods information demand. However, the magnitude of the contemporaneous positive association is greater than the magnitude of the proceeding negative association. This implies analyst following significantly increases on firms which have more retail and institutional information demand, but partially revert their coverage after the information demand shock. Furthermore, results suggest that analysts cater their coverage more towards institutional investors, relative to retail investors. These results suggest that analysts focus their coverage on companies that have garnered the most interest from investors, thus potentially maximizing the utility of the information the analyst disseminates.
{"title":"Do Analysts Cater to Investor Information Demand?","authors":"M. Hossain, Benjamin A. Jansen, Jon Taylor","doi":"10.2139/ssrn.3480609","DOIUrl":"https://doi.org/10.2139/ssrn.3480609","url":null,"abstract":"We extend the literature by investigating whether analysts cater their coverage to investor information demand. Results suggest that analysts’ coverage is contemporaneously positively associated with investor information demand, and negatively associated with the previous time periods information demand. However, the magnitude of the contemporaneous positive association is greater than the magnitude of the proceeding negative association. This implies analyst following significantly increases on firms which have more retail and institutional information demand, but partially revert their coverage after the information demand shock. Furthermore, results suggest that analysts cater their coverage more towards institutional investors, relative to retail investors. These results suggest that analysts focus their coverage on companies that have garnered the most interest from investors, thus potentially maximizing the utility of the information the analyst disseminates.","PeriodicalId":119201,"journal":{"name":"Microeconomics: Asymmetric & Private Information eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-11-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129890751","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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