Stock Market Return Expectations: Some General Properties

This paper examines how and how well do leading economists forecast stock market returns. This question is fundamental in finance, since the Capital Asset Pricing foundation rests upon assumptions about the properties of investors' expectations for stock market returns. The results reveal that economists' expectations of market returns as exemplified in Livingston's data do not meet the necessary conditions of efficiency. It should be noted however, that in later period some improvement in the quality of economists' forecasts was observed.     

Individual Investors and Volatility

We show that retail trading activity has a positive effect on the volatility of stock returns, which suggests that retail investors behave as noise traders. To identify this effect, we use a reform of the French stock market that raises the relative cost of speculative trading for retail investors. The daily return volatility of the stocks affected by the reform falls by 20 basis points (a quarter of the sample standard deviation of the return volatility) relative to other stocks. For affected stocks, we also find a significant decrease in the magnitude of return reversals and the price impact of trades.     

Individual Investors and Local Bias

The paper tests whether individuals have value‐relevant information about local stocks (where “local” is defined as being headquartered near where an investor lives). Our methodology uses two types of calendar‐time portfolios—one based on holdings and one based on transactions. Portfolios of local holdings do not generate abnormal performance (alphas are zero). When studying transactions, purchases of local stocks significantly underperform sales of local stocks. The underperformance remains when focusing on stocks with potentially high levels of information asymmetries. We conclude that individuals do not help incorporate information into stock prices. Our conclusions directly contradict existing studies.     

A Study of the Disposition Effect for Individual Investors in the Taiwan Stock Market

We examine the disposition effect and identify its potential attributes for individual Taiwanese investors. The results indicate several interesting findings. First, only 26 percent of Taiwanese individual investors report slight gains in a bull market. Second, level of education is significantly associated with the disposition effect. Investors holding college or advance degrees have a lower disposition effect. Third, the status of gains or losses is also related to the disposition effect. The disposition effect is stronger in the losers' group. Finally, three preliminary elements, namely, avoiding regret, maximizing profits, and seeking pride, are highly correlated with respect to each other and this observation is backed up by the concept of the disposition effect.     

Diagnostic Expectations and Stock Returns

We revisit La Porta's finding that returns on stocks with the most optimistic analyst long‐term earnings growth forecasts are lower than those on stocks with the most pessimistic forecasts. We document the joint dynamics of fundamentals, expectations, and returns of these portfolios, and explain the facts using a model of belief formation based on the representativeness heuristic. Analysts forecast fundamentals from observed earnings growth, but overreact to news by exaggerating the probability of states that have become more likely. We find support for the model's predictions. A quantitative estimation of the model accounts for the key patterns in the data.     

Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. The average household earns an annual return of 16.4 percent, tilts its common stock investment toward high-beta, small, value stocks, and turns over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth.     

Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options

This article provides several new insights into the economicsources of skewness. First, we document the differential pricingof individual equity options versus the market index and relateit to variations in return skewness. Second, we show how riskaversion introduces skewness in the risk-neutral density. Third,we derive laws that decompose individual return skewness intoa systematic component and an idiosyncratic component. Empiricalanalysis of OEX options and 30 stocks demonstrates that individualrisk-neutral distributions differ from that of the market indexby being far less negatively skewed. This article explains thepresence and evolution of risk-neutral skewness over time andin the cross section of individual stocks.     

Stock and bond returns with Moody Investors

We present a tractable, linear model for the simultaneous pricing of stock and bond returns that incorporates stochastic risk aversion. In this model, analytic solutions for endogenous stock and bond prices and returns are readily calculated. After estimating the parameters of the model by the general method of moments, we investigate a series of classic puzzles of the empirical asset pricing literature. In particular, our model is shown to jointly accommodate the mean and volatility of equity and long term bond risk premia as well as salient features of the nominal short rate, the dividend yield, and the term spread. Also, the model matches the evidence for predictability of excess stock and bond returns. However, the stock–bond return correlation implied by the model is somewhat higher than that in the data.     

超额资本结构与股票收益

利用一个被解释变量为实际资本结构的线性回归模型来估计超额资本结构,线性回归模型的残差被定义为超额资本结构.研究发现,超额资本结构和股票收益成正关系.投资者未能认识到超额资本结构中的有关未来投资支出的信息,这使得投资者对股票给予错误的定价.投资者可以利用超额资本结构建立投资策略并取得正投资收益.     

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.     

Expectations and the Cross-Section of Stock Returns

Previous research has shown that stocks with low prices relative to book value, cash flow, earnings, or dividends (that is, value stocks) earn high returns. Value stocks may earn high returns because they are more risky. Alternatively, systematic errors in expectations may explain the high returns earned by value stocks. I test for the existence of systematic errors using survey data on forecasts by stock market analysts. I show that investment strategies that seek to exploit errors in analysts' forecasts earn superior returns because expectations about future growth in earnings are too extreme.     

交易偏好、公司特征与股票收益——基于我国个体投资者交易数据的实证检验

噪音交易是影响股票收益的重要风险因素,对于那些噪音交易活跃、套利成本较高的股票,噪音交易者需求变动对股票价格的影响更为显著。本文以我国个体投资者2006年-2011年的交易数据为样本,按照公司特征对样本股进行分组,发现个体投资者对小盘、低价、高账面市值比、高收益和高特质波动的股票具有更强的交易偏好,且对股票需求的变动存在显著的系统相关性,个体投资者需求变动对股票价格的影响程度与其交易偏好有关。本文的研究结论为个体投资者交易行为理论提供了有价值的实证支持。     

我国证券市场投资者的认知偏差分析

投资者作为证券市场的行为主体,其最主要的特征就是依据市场信息做出投资决策.目前我国证券市场上投资者典型地存在"投资者认知偏差"问题.本文对我国证券市场投资者的构成和认知偏差进行了分析,描述了我国证券市场中投资者的结构特征,同时论证了投资者具有损失厌恶与风险偏好共同存在、过度自信、后悔厌恶、可用性偏差等认知偏差.     

International Stock Return Comovements

We examine international stock return comovements using country‐industry and country‐style portfolios as the base portfolios. We first establish that parsimonious risk‐based factor models capture the data covariance structure better than the popular Heston–Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, there is no evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short‐lived phenomenon. Third, large growth stocks are more correlated across countries than are small value stocks, and the difference has increased over time.     

Session Topic: Individual Investors and Mutual Funds

Summary . The modern theory of finance suggests that most investors should put part or all of their money into a “market portfolio” mixed with borrowing or lending. Empirical evidence generally supports the theory, but there are some unanswered questions about the composition of the best market portfolio, about the apparent attractiveness of low risk stocks relative to high risk stocks, and about ways of minimizing transaction costs. Attempts to create a fund based on these principles and to make it available to a large number of investors have uncovered some important problems. Legal costs due to government regulation, the costs of managing a fund, and especially the costs of selling it are all much higher than one might expect. Despite these problems, efforts to create such funds seem destined for eventual success.     

Stock returns and volatility following the September 11 attacks: Evidence from 53 equity markets

September 11 attacks matter, and why not? Given that globalization has integrated financial markets, the magnitudes of the effect of the September 11 attacks on global markets are expected to be pervasive. We used data from 53 equity markets to investigate the short term impact of the September 11 attacks on markets' returns and volatility. Our empirical findings indicate that the impact of the attacks resulted in significant increases in volatility across regions and over the study period. However, stock returns experienced significant negative returns in the short-run but recovered quickly afterwards. Nevertheless, we find that the impact of the attacks on financial markets varied across regions. The implication here is that the less integrated regions (e.g., Middle East and North Africa) are with the international economy, the less exposed they are to shocks.     

Stock Return Volatility and Dividend Announcements

This paper is based on models presented in Kim and Verrecchia (1991a, 1991b) relating to share price volatility and the quality of announcements. It investigates the differences in informational quality between dividend cuts and dividend rises, and between interim and final dividend announcements. The results indicate that when dividends are cut, the interim announcement is perceived as being more significant than the final, whereas the reverse is true when dividends are increased. Implied standard deviations suggest that volatility is expected to peak on the day of final announcements. A peak is also expected after interim announcements of a cut in dividend, but not after announcements of an increase.