Do the prices of stock index futures in Asia overreact to U.S. market returns?

We extend the overreaction study to interaction of international markets and find that intraday price reversals exist in Asian index futures markets following extreme movement in U.S. market. Profitable opportunities exist after considering transaction cost. We show that the reversal cannot be explained by rational arguments such as risk, liquidity and bid-ask spread. We further observe that a magnitude effect exists. Overreaction is more prominent in the latter period than in the initial period. After calm-down periods, overreaction is greatly reduced. These observations support the explanation that the source of price reversals lies in behavioral biases.     

Stock Returns following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance

We examine stock returns following large one-day price declines and find that the bid-ask bounce and the degree of market liquidity explain short-term price reversals. Further, we do not find evidence consistent with the overreaction hypothesis. We observe that securities with large one-day price declines perform poorly over an extended time horizon.     

The Information Content of Dividend Initiations and Firm Size: An Analysis Using Bid-Ask Spreads

The bid-ask spread of stock prices is examined for a sample of dividend initiating firms. The average percentage and dollar bid-ask spreads increase significantly on the day preceding the Wall Street Journal Index announcement date, possibly reflecting, on average, the market maker's anticipatory uncertainty. The day -1 increase in spread is inversely associated with firm size, an information environment proxy, after considering the simultaneous effects of dividend yield, returns variance, dollar trading volume and share price. The average percentage spread declines significantly on day 0 from its day -1 level and remains lower, on average, over a 365 day post-announcement period than 90 day pre-announcement levels. Similar results are obtained for dollar spread averages. The post-announcement percentage spread decline suggests a resolution of uncertainty, and is positively associated with the dividend yield. Dividend initiation announcements appear to reduce informational asymmetry.     

Further Evidence On Investor Overreaction and Stock Market Seasonality

In a previous paper, we found systematic price reversals for stocks that experience extreme long-term gains or losses: Past losers significantly outperform past winners. We interpreted this finding as consistent with the behavioral hypothesis of investor overreaction. In this follow-up paper, additional evidence is reported that supports the overreaction hypothesis and that is inconsistent with two alternative hypotheses based on firm size and differences in risk, as measured by CAPM-betas. The seasonal pattern of returns is also examined. Excess returns in January are related to both short-term and long-term past performance, as well as to the previous year market return.     

Short-term overreaction to specific events: Evidence from an emerging market

This paper investigates the short-term overreaction to specific events and whether stock prices are predictable in the Egyptian stock exchange (EGX). We find evidence of the short-term overreaction in the EGX. Losers (“bad news” portfolios) significantly outperform winners (“good news” portfolios) and investors can earn abnormal return by selling the winners and buying losers. Terrorist attacks have negative and significant abnormal returns for three days post event followed by price reversals on day four post event. Whereas, the tensions in the Middle East region have a negative and significant abnormal returns on event day followed by price reversals on day one post event. Moreover, the formation of a new government has no effect on the average abnormal returns post event in the EGX. The results also show that small firms tend to have greater price reversals compared to large firms. Overall, our results provide evidence of the leakage of information in the EGX.     

EMPIRICAL EVIDENCE ON THE IMPACT OF THE BID-ASK SPREAD ON THE CHARACTERISTICS OF CRSP DAILY RETURNS

It is widely recognized that Center for Research in Security Prices (CRSP) returns may differ from “true” returns because of the bid-ask effect. Using a large sample of New York Stock Exchange and American Stock Exchange securities, I confirm a discernible bid-ask effect, the magnitude and importance of which decrease with the security's price level (increase with the spread). I find volatility estimates using CRSP returns to be greater than those based on quote returns. However, market model properties, such as β and R², are generally unaffected. Bid-ask effects are clearly apparent in event studies, but because of certain offsetting effects commonly used test statistics remain unaffected. Low-priced stocks (below $2.00) do not conform to these patterns. Finally, the evidence raises the possibility that the existing literature on filter rule tests may underestimate the bid-ask spread component of transaction costs.     

Changes in REIT Liquidity 1988?C2007: Evidence from Daily Data

In this study, we present panel-data evidence on REIT liquidity and its determinants over the 1988?C2007 period. We focus upon liquidity measures that do not require micro-structure data (1) to facilitate use of our results as benchmarks for comparisons with results from international markets for which micro-structure data may be unavailable, (2) to provide benchmarks that do not require access to costly (and voluminous) micro-structure data. We find that REIT liquidity improved during the early and mid-1990s, deteriorated during the late 1990s, and then improved dramatically during 2000?C2006, with the notable exception of 2007. Liquidity improved the most for REITs traded on the NYSE, and was an order of magnitude better than liquidity of REITs traded on the AMEX or NASDAQ. We link the deterioration in liquidity observed in 2007 to the investment portfolio of a REIT. We find that the percentage bid-ask spread is highly correlated with the measure of price impact proposed by Amihud (2002). We provide panel-data evidence on the key determinants of the percentage bid-ask spread that largely confirms the results reported by Bhasin et al. (1997) for 1990 and 1994: the percentage spread is a positive function of the volatility of stock returns, and a negative function of dollar volume turnover, share price and market capitalization. Finally, we provide evidence that these results obtained using daily closing bid- and ask-prices are not qualitatively different from those obtained using market micro-structure data. This suggests that we can use liquidity measures based upon readily available daily return data rather than being forced to rely upon market micro-structure data.     

What Drives Stock Price Behavior Following Extreme One-Day Returns

We identify samples of losers and winners by selecting daily stock price returns in excess of 10% (sign ignored) and determine whether these samples over‐ or underreact. We then identify “informed” events, which correspond to announcements in the Wall Street Journal(WSJ), and “uninformed” events, which are not explained in the WSJ. For winners, there is overreaction in response to uninformed events but no overreaction on average in response to informed events. This finding suggests the degree of overreaction to new information depends on whether the cause of the extreme stock price change is publicly released.     

Do Low‐Priced Stocks Drive Long‐Term Contrarian Performance on the London Stock Exchange?

We investigate whether low‐priced stocks drive long‐term contrarian performance on the U.K. market. We find that contrarian performance at low, middle, and high price levels is positive. On the Fama‐French risk adjusted basis, we find both low‐priced and middle‐priced losers have significantly positive returns. When we adjust returns by market and liquidity risk, only middle‐priced losers maintain their positive returns. Our results reveal that low‐priced stocks are not fully responsible for contrarian performance. Our empirical evidence is generally consistent with the overreaction hypothesis and behavioral models of value investing.     

DUAL CLASS SHARES: ARE THERE RETURNS DIFFERENCES?

We examine dual classes of shares with identical dividends and liquidation treatment, but with different voting rights. We extend previous dud class studies by examining bid-ask adjusted prices and by examining returns after controlling for bid-ask spread and market value differences between voting classes. We establish that voting right differences, although related to price differences between superior and restricted voting shares, do not impact on average returns behavior. These findings are consistent with previously forwarded voting premium hypotheses.     

Do Stock Market Investors Overreact?

This paper investigates the evidence on the stock market overreaction hypothesis (ORH), which holds that, if stock prices systematically overshoot as a consequence of excessive investor optimism or pessimism, price reversals should be predictable from past price performance. The ORH stands in contradiction to the efficient markets hypothesis which is a cornerstone of financial economics. This study is unique in the overreaction literature because it is restricted to larger and better-known listed companies, whose shares are more frequently traded. This restriction more or less eliminates two alternative explanations to the overreaction hypothesis: it minimises the influence of bid-ask biases and infrequent trading, and reduces the possibility that reversals are primarily a small-firm phenomenon. The paper also investigates a third alternative explanation, namely that time-varying risk explains the reversal effect. The study employs unbiased methods of return computation and uses data from 1975 to 1991 for nearly 1,000 UK companies. Overall, the evidence appears to be consistent with the overreaction hypothesis, subject to certain qualifications.     

Does short selling improve stock price efficiency and liquidity? Evidence from a natural experiment in China

China introduced short selling for designated stocks in March 2010. Using this important policy change as a natural experiment, we examine the effect of short selling on stock price efficiency and liquidity. We show that the introduction of short selling significantly improves price efficiency, as measured by the differences in individual stock responses to market returns and the delay in price adjustments. Short selling also enhances stock liquidity, as measured by bid-ask spread and Amihud [2002. ‘Illiquidity and Stock Returns: Cross-section and Time-series Effects.’ Journal of Financial Markets 5: 31–56] illiquidity measure; and reduces stock volatility. Overall, our results suggest that short selling helps to stabilize asset prices, provides additional liquidity and improves market quality, even in an emerging economy with a less developed stock market than that in the US and Europe.     

Momentum profits in the Australian equity market: A matched firm approach

This paper examines momentum trading strategies within the Australian equity market over the period 1990 to 2007, inclusive. We analyse excess returns employing both Jegadeesh and Titman's (Jegadeesh, N., Titman, S., 1993. “Returns to buying winners and selling losers: implications for stock market efficiency”. The Journal of Finance, 48:65–91) zero cost investment portfolio approach and a matched control firm approach. We also allow for short sale restrictions, liquidity constraints and transaction costs in the form of bid-ask spreads. Testing reveals that both the Jegadeesh and Titman (Jegadeesh, N., and Titman, S. (1993). “Returns to buying winners and selling losers: implications for stock market efficiency”. The Journal of Finance, 48:65–91.) zero cost investment portfolio approach and the matched control firm approach yield excess profits. While the implementation of short sale restraints increases momentum profitability, the subsequent inclusion of bid-ask spreads results in a reduction in these gains. Further, we find that executing a momentum strategy in Australia results in statistically significant dollar profits.     

THE INFLUENCE OF ORGANIZED OPTIONS TRADING ON STOCK PRICE BEHAVIOR FOLLOWING LARGE ONE-DAY STOCK PRICE DECLINES

In this study I examine the effect of organized options trading on stock price behavior immediately following stock price declines of 10 percent or more. A matched-pair sample of National Market System option and nonoption firms are analyzed from June 1985 through December 1992. After controlling for the bid-ask bounce, firm size, share price, return standard deviation, and beta, I find that three-day cumulative abnormal returns for option firms are approximately 1.57 percent less than those for nonoption firms. Thus, options trading enhances stock market efficiency and/or liquidity. However, no profitable trading strategies are indicated.     

Liquidity Provision and Noise Trading: Evidence from the "Investment Dartboard" Column

How does increased noise trading affect market liquidity and trading costs? We use The Wall Street Journal's “Investment Dartboard” column, which stimulates noise trading, as a natural experiment to evaluate models of the bid-ask spread. We find that substantial increases in trading volume and significant but temporary abnormal returns occur when analysts recommend stocks in this column, especially when recommendations come from analysts with successful contest track records. We also find an increase in liquidity and a decrease in the adverse selection component of the bid-ask spread.     

Long-Term Market Overreaction: The Effect of Low-Priced Stocks

Conrad and Kaul (1993) report that most of De Bondt and Thaler's (1985) long-term overreaction findings can be attributed to a combination of bid-ask effects when monthly cumulative average returns (CARs) are used, and price, rather than prior returns. In direct tests, we find little difference in test-period returns whether CARs or buy-and-hold returns are used, and that price has little predictive ability in cross-sectional regressions. The difference in findings between this study and Conrad and Kaul's is primarily due to their statistical methodology. They confound cross-sectional patterns and aggregate time-series mean reversion, and introduce a survivor bias. Their procedures increase the influence of price at the expense of prior returns.     

Is the Mean Return of Hotel Real Estate Stocks Apt to Overreact to Past Performance?

This study examines the return patterns of hotel real estate stocks in the U.S. during the period from 1990 to 2007.We find that the magnitude and persistence of future mean returns of hotel real estate stocks can be predicted based on past returns, past earnings surprise, trading volume, firm size, and holding period. The empirical evidence found from this paper confirms that short-horizon contrarian profits can be partially explained by the lead-lag effects, while in the intermediate-term price momentum profits and long-term contrarian profits can be partially attributed to the firms’ overreaction to past price changes. Our results support the contrarian/overreaction hypothesis, and they are inconsistent with the Fama-French risk-based hypothesis or the underreaction hypothesis. The study also confirms the earning underreaction hypothesis and finds the high volume stocks tend to earn high momentum profits in the intermediate-term. The study finds that the earning momentum effect for hotel stocks is more short-lived and smaller in magnitude than the market average. Price momentum portfolios (or contrarian portfolios) of big hotel firms underperform small hotel firms and the hotel price momentum portfolio (or contrarian portfolios) significantly underperform the overall market over the intermediate-term (or the long-term). These findings imply that the U.S. hotel industry, particularly the big hotel firms, have experienced relatively conservative growth in the sample period. It suggests that a conservative hotel growth strategy accompanied by an internal-oriented financing policy is proper in a period of prosperity.     

Intraday price reversals in the US stock index futures market: A 15-year study

This paper gives a long-term assessment of intraday price reversals in the US stock index futures market following large price changes at the market open. We find highly significant intraday price reversals over a 15-year period (November 1987–September 2002) as well as significant intraday reversals in our yearly and day-of-the-week investigations. Moreover, the strength of the intraday overreaction phenomenon seems more pronounced following large positive price changes at the market open. That being said, the question of whether a trader can consistently profit from this information remains open as the significance of intraday price reversals is sharply reduced when gross trading results are adjusted by a bid–ask proxy for transactions costs.     

Analysis of REIT IPOs Using a Market Microstructure Approach: Anomalous Behavior or Asset Structure

In this research, we examine and present new evidence on the market activity following the initial public offering (IPO) of a real estate investment trust (REIT) using microstructure data. We analyze the bid-ask spread differences for REIT securities compared to common stocks and closed-end funds for all IPOs between 1985 and 1988. Our results show that REITs, as a whole sample, experience significantly greater bid-ask spreads immediately following the IPO compared to common stocks and funds. However, this outcome is driven by the equity REIT sample, with the mortgage REIT sample having significantly smaller bid-ask spreads. This is in contrast to the evidence documented by Nelling, Mahoney, Hildebrand, and Goldstein (1995). We attribute our result to the underlying asset structure (such as equity, hybrid, and mortgage portfolios) of the various REITs. Overall, however, we find that bid-ask spreads for REITs are similar to those of common stock when both asset structure and the traditional determinants of the spread (share price, trade volume, and returns variance) are considered.