We investigate the information source of active U.S. equity mutual funds’ value added using 234 public asset pricing anomalies. On average, mutual funds add value through their positive exposures to anomalies based on market information (e.g., momentum and liquidity risk) and lose value through their negative exposures to anomalies based on accounting information of firm fundamentals (e.g., investment and profitability), corroborating that both the semi-strong and weak forms of the efficient market hypothesis do not hold. We also find weak evidence that mutual funds profit from their private information, supporting the rejection of the strong form efficient market hypothesis.
{"title":"Origins of Mutual Fund Skill: Market versus Accounting Based Asset Pricing Anomalies","authors":"C. Christiansen, Ran Xing, Yue Xu","doi":"10.2139/ssrn.3742096","DOIUrl":"https://doi.org/10.2139/ssrn.3742096","url":null,"abstract":"We investigate the information source of active U.S. equity mutual funds’ value added using 234 public asset pricing anomalies. On average, mutual funds add value through their positive exposures to anomalies based on market information (e.g., momentum and liquidity risk) and lose value through their negative exposures to anomalies based on accounting information of firm fundamentals (e.g., investment and profitability), corroborating that both the semi-strong and weak forms of the efficient market hypothesis do not hold. We also find weak evidence that mutual funds profit from their private information, supporting the rejection of the strong form efficient market hypothesis.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"52 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76231041","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 document that the existing evidence that bulk volume trade classification (BVC) measures informed trading arises largely due to mis-specified tests. Simulations show that these tests detect spurious relationships in data containing only uninformed liquidity trades. We also assess the performance of BVC order imbalances in the NASDAQ HFT dataset, showing that BVC order imbalances underperform conventional order imbalance measures in detecting informed trading. The component of order flow designated by BVC as passive informed trading fails to predict returns with the correct sign. On balance, our evidence supports the use of conventional order imbalance measures to identify informed trading.
{"title":"Testing the Bulk Volume Classification Algorithm","authors":"Allen Carrion, Madhuparna Kolay","doi":"10.2139/ssrn.3746731","DOIUrl":"https://doi.org/10.2139/ssrn.3746731","url":null,"abstract":"We document that the existing evidence that bulk volume trade classification (BVC) measures informed trading arises largely due to mis-specified tests. Simulations show that these tests detect spurious relationships in data containing only uninformed liquidity trades. We also assess the performance of BVC order imbalances in the NASDAQ HFT dataset, showing that BVC order imbalances underperform conventional order imbalance measures in detecting informed trading. The component of order flow designated by BVC as passive informed trading fails to predict returns with the correct sign. On balance, our evidence supports the use of conventional order imbalance measures to identify informed trading.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"27 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90469602","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 conduct two experiments in the securities-based crowdfunding setting to investigate whether some investors avoid accounting information for psychological reasons and the consequences for investment decisions. We find in our first experiment that nonprofessional investors sometimes choose not to acquire a potential investment’s financial statements to avoid the psychological discomfort they expect from evaluating financial information. Further, despite this lack of due diligence in the high-risk crowdfunding environment, we find that the investors who avoid (versus acquire) a company’s financial statements are more willing to invest in its offering. Our second experiment demonstrates investors randomly assigned to not having (versus having) the same financial statements continue to be more willing to invest, suggesting even investors who would choose to avoid financial statements would use them if crowdfunding companies were required to display them prominently. Together, the findings indicate investors who anticipate discomfort from evaluating financial information disadvantage themselves by choosing not to acquire information they would integrate into their decisions. Our results provide one behavioral explanation for investors’ documented underuse of accounting information.
{"title":"Investors’ Information Avoidance Behavior in Securities-Based Crowdfunding","authors":"Nicole L. Cade, S. Garavaglia, Vicky B. Hoffman","doi":"10.2139/ssrn.3703278","DOIUrl":"https://doi.org/10.2139/ssrn.3703278","url":null,"abstract":"We conduct two experiments in the securities-based crowdfunding setting to investigate whether some investors avoid accounting information for psychological reasons and the consequences for investment decisions. We find in our first experiment that nonprofessional investors sometimes choose not to acquire a potential investment’s financial statements to avoid the psychological discomfort they expect from evaluating financial information. Further, despite this lack of due diligence in the high-risk crowdfunding environment, we find that the investors who avoid (versus acquire) a company’s financial statements are more willing to invest in its offering. Our second experiment demonstrates investors randomly assigned to not having (versus having) the same financial statements continue to be more willing to invest, suggesting even investors who would choose to avoid financial statements would use them if crowdfunding companies were required to display them prominently. Together, the findings indicate investors who anticipate discomfort from evaluating financial information disadvantage themselves by choosing not to acquire information they would integrate into their decisions. Our results provide one behavioral explanation for investors’ documented underuse of accounting information.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"13 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87649092","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 develops a multi-firm equilibrium model of information acquisition based on differences in firms' characteristics. It is shown that higher market-level uncertainty crowds-in investor attention to firm-level earnings announcements. Increased investor attention magnifies the earnings response coefficients of all announcing firms, but firms react differently to the increase in attention (e.g., firms with higher systematic risk attract more investor attention and their prices react more to earnings announcements). The implications of the model for the cross section of firms are tested using data on firm-level attention and return measures around earnings announcements.
{"title":"Economic Uncertainty and Investor Attention","authors":"D. Andrei, Henry L. Friedman, N. B. Ozel","doi":"10.2139/ssrn.3128673","DOIUrl":"https://doi.org/10.2139/ssrn.3128673","url":null,"abstract":"This paper develops a multi-firm equilibrium model of information acquisition based on differences in firms' characteristics. It is shown that higher market-level uncertainty crowds-in investor attention to firm-level earnings announcements. Increased investor attention magnifies the earnings response coefficients of all announcing firms, but firms react differently to the increase in attention (e.g., firms with higher systematic risk attract more investor attention and their prices react more to earnings announcements). The implications of the model for the cross section of firms are tested using data on firm-level attention and return measures around earnings announcements.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"39 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77565100","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}
Using a sample of Chinese mutual funds from 2004 to 2019, we find that investors direct flows into (out of) funds with salient upsides (downsides), controlling for a set of known determinants of fund flows. This effect is robust to alternative measures of key variables and is more pronounced for funds with larger individual ownership. This effect is not explained by individuals’ attention-driven purchases of attention-grabbing funds, funds’ lottery-like features, or the characteristics of funds’ underlying stocks. The salience theory, which argues that extreme payoffs distort individuals’ decision weights on risky asset choices only if these payoffs stand out relative to available alternatives and thus are salient, offers a plausible explanation for this effect.
{"title":"Attention, Lottery, or Salience? The Impact of Extreme Payoffs on Chinese Mutual Fund Flows","authors":"Shiyang Hu, Cheng Xiang, Xiaofeng Quan","doi":"10.2139/ssrn.3726918","DOIUrl":"https://doi.org/10.2139/ssrn.3726918","url":null,"abstract":"Using a sample of Chinese mutual funds from 2004 to 2019, we find that investors direct flows into (out of) funds with salient upsides (downsides), controlling for a set of known determinants of fund flows. This effect is robust to alternative measures of key variables and is more pronounced for funds with larger individual ownership. This effect is not explained by individuals’ attention-driven purchases of attention-grabbing funds, funds’ lottery-like features, or the characteristics of funds’ underlying stocks. The salience theory, which argues that extreme payoffs distort individuals’ decision weights on risky asset choices only if these payoffs stand out relative to available alternatives and thus are salient, offers a plausible explanation for this effect.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"2013 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86382112","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}
Abstract We study the market for a risky asset with uncertain heterogeneous valuations. Agents seek to learn about their own valuation by acquiring private information and making inferences from the equilibrium price. As agents of one type gather more information, they pull the price closer to their valuation and further away from the valuations of other types. Thus they exert a negative learning externality on other types. This in turn implies that a lower cost of information for one type induces all agents to acquire more information. Private information production is typically not socially optimal. In the case of two types who differ in their cost of information, we can always find a Pareto improvement that entails an increase in the aggregate amount of information, with a higher proportion produced by the low-cost type.
{"title":"Information Acquisition with Heterogeneous Valuations","authors":"Rohit Rahi","doi":"10.2139/ssrn.3433403","DOIUrl":"https://doi.org/10.2139/ssrn.3433403","url":null,"abstract":"Abstract We study the market for a risky asset with uncertain heterogeneous valuations. Agents seek to learn about their own valuation by acquiring private information and making inferences from the equilibrium price. As agents of one type gather more information, they pull the price closer to their valuation and further away from the valuations of other types. Thus they exert a negative learning externality on other types. This in turn implies that a lower cost of information for one type induces all agents to acquire more information. Private information production is typically not socially optimal. In the case of two types who differ in their cost of information, we can always find a Pareto improvement that entails an increase in the aggregate amount of information, with a higher proportion produced by the low-cost type.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"34 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82758362","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}
Despite the rapid growth of passive ownership over the past 30 years, there is no consensus on how or why passive ownership affects stock price informativeness. This paper provides a new answer to this question by examining how passive ownership changes investors' incentives to acquire information. I develop a model where passive ownership affects how many investors gather information, and how investors allocate attention between systematic and idiosyncratic risk. The model also links investors' learning decisions to price informativeness through quantities that are readily observable in the data: trading volume, returns and volatility. The model's predictions motivate three new measures of price informativeness, all of which declined on average over the past 30 years. In the cross-section, increases in passive ownership are negatively correlated with price informativeness. To establish causality, I show that price informativeness decreases after quasi-exogenous increases in passive ownership arising from index additions and rebalancing.
{"title":"Passive Ownership and Price Informativeness","authors":"Marco Sammon","doi":"10.2139/ssrn.3243910","DOIUrl":"https://doi.org/10.2139/ssrn.3243910","url":null,"abstract":"Despite the rapid growth of passive ownership over the past 30 years, there is no consensus on how or why passive ownership affects stock price informativeness. This paper provides a new answer to this question by examining how passive ownership changes investors' incentives to acquire information. I develop a model where passive ownership affects how many investors gather information, and how investors allocate attention between systematic and idiosyncratic risk. The model also links investors' learning decisions to price informativeness through quantities that are readily observable in the data: trading volume, returns and volatility. The model's predictions motivate three new measures of price informativeness, all of which declined on average over the past 30 years. In the cross-section, increases in passive ownership are negatively correlated with price informativeness. To establish causality, I show that price informativeness decreases after quasi-exogenous increases in passive ownership arising from index additions and rebalancing.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90876186","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 use a novel dataset from a leading FinTech company (S3 Partners) to study the ability of short interest to predict the cross-section of U.S. stock returns. We find that short interest (i.e. the quantity of shares shorted expressed as the fraction of shares outstanding) is a bearish indicator, consistent with theoretical predictions and with the intuition that short sellers are informed traders. The hedged portfolio long (short) in the top (bottom) short-interest decile generates an annual 4-Factor Fama-French alfa of -7.6% when weighting stocks equally and of -6.24% when weighting stocks based on market capitalization. Conditioning on past returns improves the predictive accuracy of short interest: the hedged short-interest portfolio that only uses stocks that appreciated the most in the past six months generates an alfa of -17.88%. Multivariate regressions that control for other known drivers of stock returns (e.g. size, value and liquidity) confirm the validity of these findings. In both Fama-MacBeth and Panel regressions we find that a one standard deviation increase in short interest predicts a drop in future adjusted returns of between 4.3% and 9.3%.
{"title":"Short Selling Activity and Future Returns: Evidence from FinTech Data","authors":"Antonio Gargano","doi":"10.2139/ssrn.3775338","DOIUrl":"https://doi.org/10.2139/ssrn.3775338","url":null,"abstract":"We use a novel dataset from a leading FinTech company (S3 Partners) to study the ability of short interest to predict the cross-section of U.S. stock returns. We find that short interest (i.e. the quantity of shares shorted expressed as the fraction of shares outstanding) is a bearish indicator, consistent with theoretical predictions and with the intuition that short sellers are informed traders. The hedged portfolio long (short) in the top (bottom) short-interest decile generates an annual 4-Factor Fama-French alfa of -7.6% when weighting stocks equally and of -6.24% when weighting stocks based on market capitalization. Conditioning on past returns improves the predictive accuracy of short interest: the hedged short-interest portfolio that only uses stocks that appreciated the most in the past six months generates an alfa of -17.88%. Multivariate regressions that control for other known drivers of stock returns (e.g. size, value and liquidity) confirm the validity of these findings. In both Fama-MacBeth and Panel regressions we find that a one standard deviation increase in short interest predicts a drop in future adjusted returns of between 4.3% and 9.3%. <br>","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"63 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88908825","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}
Iqbal Thonse Hawaldar, Felicia Ramona Birau, C. Spulbar, Babitha Rohit, Prakash Pinto, Rajesha T.M., Fabrizio Di Sciorio
The purpose of the present study is to provide further evidence of the weak form efficiency of the Bahrain Bourse. The research methodology is based on daily closing index values of the Bahrain Bourse from 2011 to 2015 in order to test the efficiency of the stock market while runs test, Autocorrelation Function, and advance tools such as ARCH and GARCH models and Hurst Index to provide further evidence of the weak form efficiency of the Bahrain stock market. For instance, a volatile and inefficient stock market has a negative impact on the textile and apparel industry in the Kingdom of Bahrain, which is one of the most prosperous and attractive industries in the country. The empirical results revealed that Bahrain stock market does not follow a normal distribution and the successive price changes are not independent. Further, ARCH effect is significant and indicative of a time-varying conditional volatility. There is an arbitrage opportunity and extreme mispricing in the Bahrain stock market as indicated by the GARCH (1,1) model. The results of the Hurst exponent also confirm the inefficiency of the market. The results of these tests are consistently indicating that the Bahrain stock market is inefficient.
{"title":"Further Evidence on Efficiency of Bahrain Bourse: A High Challenge for Other Industries","authors":"Iqbal Thonse Hawaldar, Felicia Ramona Birau, C. Spulbar, Babitha Rohit, Prakash Pinto, Rajesha T.M., Fabrizio Di Sciorio","doi":"10.2139/ssrn.3721673","DOIUrl":"https://doi.org/10.2139/ssrn.3721673","url":null,"abstract":"The purpose of the present study is to provide further evidence of the weak form efficiency of the Bahrain Bourse. The research methodology is based on daily closing index values of the Bahrain Bourse from 2011 to 2015 in order to test the efficiency of the stock market while runs test, Autocorrelation Function, and advance tools such as ARCH and GARCH models and Hurst Index to provide further evidence of the weak form efficiency of the Bahrain stock market. For instance, a volatile and inefficient stock market has a negative impact on the textile and apparel industry in the Kingdom of Bahrain, which is one of the most prosperous and attractive industries in the country. The empirical results revealed that Bahrain stock market does not follow a normal distribution and the successive price changes are not independent. Further, ARCH effect is significant and indicative of a time-varying conditional volatility. There is an arbitrage opportunity and extreme mispricing in the Bahrain stock market as indicated by the GARCH (1,1) model. The results of the Hurst exponent also confirm the inefficiency of the market. The results of these tests are consistently indicating that the Bahrain stock market is inefficient.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"38 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77662999","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 provide robust evidence that the price of analysts' dispersion risk in the cross-section of stock returns changes sign over time, and in particular, turns positive (negative) in periods of high (low) analysts' dispersion. Our result holds for a set of portfolios that are double-sorted on their betas and their coefficients on aggregate dispersion, as well as 36 different sets of test portfolios created by Kenneth French. We construct a general equilibrium model in which analysts of different types have heterogeneous beliefs about aggregate earnings growth. The consumer does not trust either analyst fully, and dynamically adjusts the weight given to each analyst, given the history of their past forecast performance. In equilibrium, each asset's risk premium depends on its exposure to three factors: (i) the market portfolio, (ii) the macroeconomic factor, and, (iii) a ``flight-to-safety'' factor. The first term decreases with dispersion, while the third term increases. These changes occurs because investors shift into assets with lower cash flow betas during periods of high dispersion. We find strong support for such a flight-to-safety in the data.
{"title":"When is the Price of Dispersion Risk Positive?","authors":"A. David, Amel Farhat","doi":"10.2139/ssrn.3718945","DOIUrl":"https://doi.org/10.2139/ssrn.3718945","url":null,"abstract":"<br>We provide robust evidence that the price of analysts' dispersion risk in the cross-section of stock returns changes sign over time, and in particular, turns positive (negative) in periods of high (low) analysts' dispersion. Our result holds for a set of portfolios that are double-sorted on their betas and their coefficients on aggregate dispersion, as well as 36 different sets of test portfolios created by Kenneth French. We construct a general equilibrium model in which analysts of different types have heterogeneous beliefs about aggregate earnings growth. The consumer does not trust either analyst fully, and dynamically adjusts the weight given to each analyst, given the history of their past forecast performance. In equilibrium, each asset's risk premium depends on its exposure to three factors: (i) the market portfolio, (ii) the macroeconomic factor, and, (iii) a ``flight-to-safety'' factor. The first term decreases with dispersion, while the third term increases. These changes occurs because investors shift into assets with lower cash flow betas during periods of high dispersion. We find strong support for such a flight-to-safety in the data.","PeriodicalId":18611,"journal":{"name":"Microeconomics: General Equilibrium & Disequilibrium Models of Financial Markets eJournal","volume":"143 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-10-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73630545","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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