To understand the dynamics of investor asset demands, we develop a multiperiod general-equilibrium model driven by a single latent variable, differences in beliefs, resulting from heterogeneity in investors' confidence regarding the return dynamics of assets. Consistent with the data, investors' asset holdings are concentrated and display large and persistent heterogeneity in asset demands across investors. Moreover, demand curves are steeper than with homogeneous beliefs. The time-series and cross-sectional variation in assets' realized and expected returns, as well as their volatilities, are driven by the mean and dispersion of latent demand.
{"title":"Dynamics of Asset Demands with Confidence Heterogeneity","authors":"A. Buss, R. Uppal, G. Vilkov","doi":"10.2139/ssrn.3663843","DOIUrl":"https://doi.org/10.2139/ssrn.3663843","url":null,"abstract":"To understand the dynamics of investor asset demands, we develop a multiperiod general-equilibrium model driven by a single latent variable, differences in beliefs, resulting from heterogeneity in investors' confidence regarding the return dynamics of assets. Consistent with the data, investors' asset holdings are concentrated and display large and persistent heterogeneity in asset demands across investors. Moreover, demand curves are steeper than with homogeneous beliefs. The time-series and cross-sectional variation in assets' realized and expected returns, as well as their volatilities, are driven by the mean and dispersion of latent demand.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"36 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75460155","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}
This paper examines the effect of active attention from sophisticated market participants on managerial bad news hoarding. Using EDGAR search volume (ESV) as a direct measure, we find that, due to the increased cost of bad news disclosure, firms under greater active attention from sophisticated market participants tend to hide bad news and release it subsequently, thus increasing future stock price crash risk. The impact of EDGAR attention is stronger for firms with higher ex-ante cost of bad news disclosure. Evidence from option prices, management guidance, and accounting practices further confirms managers’ tendency to hide bad news under greater active attention. Three plausible natural experiments based on the implementation of EDGAR, shareholder distraction by other industries, and the mandatory adoption of XBRL provide a causal inference. By providing systematic evidence on the impact of attention from sophisticated market participants on managerial bad news hoarding, this paper sheds light on the pressure effect of external attention on managers’ strategic bad news disclosure.
{"title":"Standing in the Limelight: EDGAR Attention and Managerial Bad News Hoarding","authors":"Tao Chen, Jimmy Chengyuan Qu","doi":"10.2139/ssrn.3714090","DOIUrl":"https://doi.org/10.2139/ssrn.3714090","url":null,"abstract":"This paper examines the effect of active attention from sophisticated market participants on managerial bad news hoarding. Using EDGAR search volume (ESV) as a direct measure, we find that, due to the increased cost of bad news disclosure, firms under greater active attention from sophisticated market participants tend to hide bad news and release it subsequently, thus increasing future stock price crash risk. The impact of EDGAR attention is stronger for firms with higher ex-ante cost of bad news disclosure. Evidence from option prices, management guidance, and accounting practices further confirms managers’ tendency to hide bad news under greater active attention. Three plausible natural experiments based on the implementation of EDGAR, shareholder distraction by other industries, and the mandatory adoption of XBRL provide a causal inference. By providing systematic evidence on the impact of attention from sophisticated market participants on managerial bad news hoarding, this paper sheds light on the pressure effect of external attention on managers’ strategic bad news disclosure.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"26 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87303947","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}
D. Anastasiou, Antonis Ballis, Konstantinos Drakos
The present study investigates the degree of market responses through the scope of investors’ sentiment during the COVID-19 pandemic across G20 markets, by constructing a novel positive search volume index for COVID-19 (COVID19+). Our key findings, obtained using a Panel-GARCH model, indicate that an increased COVID19+ index suggests that investors decrease their COVID-19 related crisis sentiment by escalating their Google searches for positively associated COVID-19 related keywords. Specifically, we explore the predictive power of the newly constructed index on stock returns and volatility. According to our findings, investor sentiment positively (negatively) predicts the stock return (volatility) during the COVID-19. This is the first study of its kind assessing global sentiment by proposing a novel proxy and its impacts on the G20 equity market.
{"title":"On the Construction of a Positive Sentiment Index for COVID-19: Evidence from G20 Stock Markets","authors":"D. Anastasiou, Antonis Ballis, Konstantinos Drakos","doi":"10.2139/ssrn.3895548","DOIUrl":"https://doi.org/10.2139/ssrn.3895548","url":null,"abstract":"The present study investigates the degree of market responses through the scope of investors’ sentiment during the COVID-19 pandemic across G20 markets, by constructing a novel positive search volume index for COVID-19 (COVID19+). Our key findings, obtained using a Panel-GARCH model, indicate that an increased COVID19+ index suggests that investors decrease their COVID-19 related crisis sentiment by escalating their Google searches for positively associated COVID-19 related keywords. Specifically, we explore the predictive power of the newly constructed index on stock returns and volatility. According to our findings, investor sentiment positively (negatively) predicts the stock return (volatility) during the COVID-19. This is the first study of its kind assessing global sentiment by proposing a novel proxy and its impacts on the G20 equity market.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"14 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80850932","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}
This article presents an equilibrium-based multi-agent optimal consumption and portfolio problem incorporating sentiments, where multiple agents have heterogeneous (optimistic, pessimistic, neutral) views on fundamental risks represented by Brownian motions. Each agent maximizes its expected utility on consumption under its subjective probability measure, reflecting its heterogeneous views on fundamental risks. Specifically, we formulate the individual optimization problem as an optimal consumption and portfolio problem with a choice of a probability measure, which we solve by a Malliavin calculus approach. Moreover, we provide the state-price density process in a market equilibrium that includes information on the interest rate and the market price of risk. Finally, we present numerical examples on an interest rate model, which show how the multiple agents' views on the fundamental risks affect the yield curve shapes.
{"title":"Equilibrium Multi-Agent Model With Heterogeneous Views on Fundamental Risks","authors":"Keisuke Kizaki, Taiga Saito, Akihiko Takahashi","doi":"10.2139/ssrn.3892972","DOIUrl":"https://doi.org/10.2139/ssrn.3892972","url":null,"abstract":"This article presents an equilibrium-based multi-agent optimal consumption and portfolio problem incorporating sentiments, where multiple agents have heterogeneous (optimistic, pessimistic, neutral) views on fundamental risks represented by Brownian motions. Each agent maximizes its expected utility on consumption under its subjective probability measure, reflecting its heterogeneous views on fundamental risks. Specifically, we formulate the individual optimization problem as an optimal consumption and portfolio problem with a choice of a probability measure, which we solve by a Malliavin calculus approach. Moreover, we provide the state-price density process in a market equilibrium that includes information on the interest rate and the market price of risk. Finally, we present numerical examples on an interest rate model, which show how the multiple agents' views on the fundamental risks affect the yield curve shapes.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"47 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80826092","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}
Consensus estimates, formed by taking an average of analyst forecasts, play an important role in capital markets (e.g., provide investors with a proxy for earnings expectations). We show I/B/E/S, a prominent information intermediary, removes 6% of one-quarter-ahead earnings forecasts before calculating the consensus and among the 23% of firm-quarters with at least one forecast removed, this figure rises to 16%. We provide evidence suggesting that I/B/E/S subjectively applies policies that govern its removal decisions and accepts feedback from firms that contributes to this subjectivity. Specifically, we find optimistic forecasts are removed more frequently than pessimistic forecasts, and such asymmetry increases further when removals allow firms to meet or beat the consensus. Furthermore, we find that these effects are more pronounced when managers’ incentives to just meet or beat the consensus are stronger (i.e., higher subsequent insider sales or higher compensation delta), or managers have greater ability to influence I/B/E/S. Lastly, we demonstrate that these subjective removals benefit I/B/E/S by improving consensus accuracy, explaining why I/B/E/S is willing to be influenced by firms.
{"title":"Truncating Optimism","authors":"Zachary R. Kaplan, Xiumin Martin, Yifang Xie","doi":"10.2139/ssrn.3213833","DOIUrl":"https://doi.org/10.2139/ssrn.3213833","url":null,"abstract":"Consensus estimates, formed by taking an average of analyst forecasts, play an important role in capital markets (e.g., provide investors with a proxy for earnings expectations). We show I/B/E/S, a prominent information intermediary, removes 6% of one-quarter-ahead earnings forecasts before calculating the consensus and among the 23% of firm-quarters with at least one forecast removed, this figure rises to 16%. We provide evidence suggesting that I/B/E/S subjectively applies policies that govern its removal decisions and accepts feedback from firms that contributes to this subjectivity. Specifically, we find optimistic forecasts are removed more frequently than pessimistic forecasts, and such asymmetry increases further when removals allow firms to meet or beat the consensus. Furthermore, we find that these effects are more pronounced when managers’ incentives to just meet or beat the consensus are stronger (i.e., higher subsequent insider sales or higher compensation delta), or managers have greater ability to influence I/B/E/S. Lastly, we demonstrate that these subjective removals benefit I/B/E/S by improving consensus accuracy, explaining why I/B/E/S is willing to be influenced by firms.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"31 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87811666","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 a two-agent equilibrium model with two goods where we interpret the agents as countries. We analyze the effect of an endogenous habit specification where each country benchmarks its consumption decision against the decision of the other country. We show that endogenous habits can generate high equity premia and low interest rates. Our framework allows to study setups where agents cooperate or do not cooperate. The optimality conditions of the non-cooperative setting are similar to models that consider agents with exogenous habit levels. Although the size of the equity premia and the risk-free rate are of the same order of magnitude in both settings, the consumption allocations are more even in the cooperative situation.
{"title":"Endogenous Habits and Equilibrium Asset Prices","authors":"H. Kraft, André Meyer-Wehmann, F. Seifried","doi":"10.2139/ssrn.3878691","DOIUrl":"https://doi.org/10.2139/ssrn.3878691","url":null,"abstract":"We study a two-agent equilibrium model with two goods where we interpret the agents as countries. We analyze the effect of an endogenous habit specification where each country benchmarks its consumption decision against the decision of the other country. We show that endogenous habits can generate high equity premia and low interest rates. Our framework allows to study setups where agents cooperate or do not cooperate. The optimality conditions of the non-cooperative setting are similar to models that consider agents with exogenous habit levels. Although the size of the equity premia and the risk-free rate are of the same order of magnitude in both settings, the consumption allocations are more even in the cooperative situation.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"158 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74035254","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}
Accounting literature offers three possible determinants of informationally driven trading volume at earnings announcements: differential interpretation of public news, pre-announcement difference in beliefs, and signal strength. We empirically test, conditional on the level of earnings news, which determinant best explains earnings announcement volume. First, consistent with the notion that differential interpretation by itself without a change in the mean of investor valuations (a typical metric of signal strength) is unlikely to drive volume, we document a strong association between volume and signed contemporaneous stock returns. We also show that, at all levels of earnings news, trading volume is most consistently associated with proxies of signal strength. However, we predict and find that volume also reflects differential interpretation for bad news but not for good news due to short sale dynamics. We confirm this asymmetry by observing a decrease in trading volume only for bad news firms after an exogenous reduction in investor disagreement, the staggered EDGAR implementation. Lastly, we find that proxies for the third determinant, pre-announcement belief difference, are the least significant in explaining trading volume. Overall, our results suggest that trading volume at earnings announcements is most reflective of the quantity and quality of information released, but its dynamics vary considerably with the nature of the disclosed news.
{"title":"Asymmetric Determinants of Trading Volume at Earnings Announcements","authors":"Alina Lerman, Qin Tan","doi":"10.2139/ssrn.3310682","DOIUrl":"https://doi.org/10.2139/ssrn.3310682","url":null,"abstract":"Accounting literature offers three possible determinants of informationally driven trading volume at earnings announcements: differential interpretation of public news, pre-announcement difference in beliefs, and signal strength. We empirically test, conditional on the level of earnings news, which determinant best explains earnings announcement volume. First, consistent with the notion that differential interpretation by itself without a change in the mean of investor valuations (a typical metric of signal strength) is unlikely to drive volume, we document a strong association between volume and signed contemporaneous stock returns. We also show that, at all levels of earnings news, trading volume is most consistently associated with proxies of signal strength. However, we predict and find that volume also reflects differential interpretation for bad news but not for good news due to short sale dynamics. We confirm this asymmetry by observing a decrease in trading volume only for bad news firms after an exogenous reduction in investor disagreement, the staggered EDGAR implementation. Lastly, we find that proxies for the third determinant, pre-announcement belief difference, are the least significant in explaining trading volume. Overall, our results suggest that trading volume at earnings announcements is most reflective of the quantity and quality of information released, but its dynamics vary considerably with the nature of the disclosed news.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"12 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-05-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87822260","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 strive to seek optimality, but often find ourselves trapped in bad "optimal" solutions that are either local optimizers, or too rigid to leave any room for errors, or simply based on wrong models. A way to break this "curse of optimality" is to engage exploration through randomization. Exploration broadens search space, provides flexibility, and facilitates learning via trial and error. We review some of the latest development of this exploratory approach in the stochastic control setting with continuous time and spaces.
{"title":"Curse of Optimality, and How We Break It","authors":"X. Zhou","doi":"10.2139/ssrn.3845462","DOIUrl":"https://doi.org/10.2139/ssrn.3845462","url":null,"abstract":"We strive to seek optimality, but often find ourselves trapped in bad \"optimal\" solutions that are either local optimizers, or too rigid to leave any room for errors, or simply based on wrong models. A way to break this \"curse of optimality\" is to engage exploration through randomization. Exploration broadens search space, provides flexibility, and facilitates learning via trial and error. We review some of the latest development of this exploratory approach in the stochastic control setting with continuous time and spaces.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"12 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-04-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87618720","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}
Pub Date : 2021-04-12DOI: 10.1016/J.JACCECO.2021.101417
Travis Dyer
{"title":"The Demand for Public Information by Local and Nonlocal Investors: Evidence from Investor-Level Data","authors":"Travis Dyer","doi":"10.1016/J.JACCECO.2021.101417","DOIUrl":"https://doi.org/10.1016/J.JACCECO.2021.101417","url":null,"abstract":"","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"35 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-04-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87371817","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}
Similarity between two stocks is measured by the distance between their characteristics such as price, size, book-to-market, return on assets, and investment-to-assets. We find that after a stock's most similar stocks have experienced high (low) returns in the past month, this focal stock tends to earn an abnormally high (low) return in the current month. The long-short portfolio strategy sorted on similar-stocks' past average return earns a monthly CAPM alpha of 1.25% and a Fama-French six-factor alpha of 0.85%. This similarity effect is robust after controlling for style investing and a wide range of well-known firm-level characteristics that can predict returns in the cross section. Our result is consistent with the increased propensity for investors to buy other stocks with similar characteristics after experiencing positive returns for a currently held stock. We also explore other potential explanations for our findings.
{"title":"Similar Stocks","authors":"Wei He, Yuehan Wang, Jianfeng Yu","doi":"10.2139/ssrn.3815595","DOIUrl":"https://doi.org/10.2139/ssrn.3815595","url":null,"abstract":"Similarity between two stocks is measured by the distance between their characteristics such as price, size, book-to-market, return on assets, and investment-to-assets. We find that after a stock's most similar stocks have experienced high (low) returns in the past month, this focal stock tends to earn an abnormally high (low) return in the current month. The long-short portfolio strategy sorted on similar-stocks' past average return earns a monthly CAPM alpha of 1.25% and a Fama-French six-factor alpha of 0.85%. This similarity effect is robust after controlling for style investing and a wide range of well-known firm-level characteristics that can predict returns in the cross section. Our result is consistent with the increased propensity for investors to buy other stocks with similar characteristics after experiencing positive returns for a currently held stock. We also explore other potential explanations for our findings.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"39 10 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-03-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77535552","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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