Volume, Opinion Divergence, and Returns: A Study of Post–Earnings Announcement Drift

This paper examines the relationship between post–earnings announcement returns and different measures of volume at the earnings date. We find that post‐event returns are strictly increasing in the component of volume that is unexplained by prior trading activity. We interpret unexplained volume as an indicator of opinion divergence among investors and conclude that post‐event returns are increasing in ex ante opinion divergence. Our evidence is consistent with Varian [1985] , who suggests that opinion divergence may be treated as an additional risk factor affecting asset prices.     

Ex Ante Skewness and Expected Stock Returns

We use option prices to estimate ex ante higher moments of the underlying individual securities’ risk‐neutral returns distribution. We find that individual securities’ risk‐neutral volatility, skewness, and kurtosis are strongly related to future returns. Specifically, we find a negative (positive) relation between ex ante volatility (kurtosis) and subsequent returns in the cross‐section, and more ex ante negatively (positively) skewed returns yield subsequent higher (lower) returns. We analyze the extent to which these returns relations represent compensation for risk and find evidence that, even after controlling for differences in co‐moments, individual securities’ skewness matters.     

Trading volume and short-horizon contrarian profits: Evidence from the Malaysian market

We provide evidence on short-term predictability of stock returns on the Malaysian stock market. We examine the relation between return predictability and the level of trading activity. This is particularly relevant in emerging stock markets, where thin trading is more pervasive. We find that the returns from a contrarian portfolio strategy are positively related to the level of trading activity in the securities. Specifically, the contrarian profits on actively and frequently traded securities are significantly higher than that generated from the low trading activity securities. We find that the differential behavior of high- and low-volume securities is not subsumed by the size effect, although for the small firms, the volume–predictability relation is most pronounced. We also suggest that the price patterns may be related to the institutional arrangement in the Malaysian stock market.     

Ex post and ex ante returns and risks under different maturities of treasury bonds: evidence from developed and emerging markets

Based on asset pricing theory, reward/risk ratios vary positively with maturity of Treasury securities. We study the effect of increasing Treasury bonds' maturity on ex post and ex ante returns and risks in developed and emerging countries. As maturity increases, we show that ex post and ex ante returns are negative and they decrease while ex post and ex ante risks increase in developed countries, resulting in a sharp increase in the ex post and ex ante coefficient of variation. This indicates that investors are negatively rewarded for the risk they face for investing in Treasury bonds in developed markets. In emerging markets, as maturity increases, ex post and ex ante returns are positive for medium and long maturities and they increase while ex ante risk decreases with maturity. As maturity increases, the coefficient of variation in emerging and developed markets increases, indicating that reward to investors for facing extra risk decreases as maturity increases; however, investors are much better rewarded in emerging than developed markets.     

The Effectiveness of Technical Trading for Arab Stocks

In this paper, we examine the profitability of technical analysis for a cross section of individual Arab stocks. Our analysis, undertaken from the perspective of an Islamic investor, reveals that technical trading rules do not yield economically or statistically significant returns. While our results uncover some scant statistical evidence of technical trading rule profitability, risk adjusting the returns weakens the evidence in favor of predictability. Furthermore, break-even transaction costs do not exceed estimated transaction costs or bid-ask spreads in the markets examined.     

Exploiting short-run predictability

This paper measures the utility gains from exploiting short-run predictability in the volatility of stock returns in a dynamic model in the the presence of transaction costs, short-selling constraints and estimation risk. We find that utility gains are quite significant, both ex ante and out-of-sample.     

Real-time macroeconomic data and ex ante stock return predictability

We report results on the ex ante predictability of monthly excess stock returns in Germany using real-time and revised macroeconomic data. Our real-time macroeconomic data cover the period 1994-2005. We report that the contribution of real-time macroeconomic data to ex ante stock return predictability is similar to that of revised macroeconomic data. Moreover, the performance of an investor who had to rely on noisy real-time macroeconomic data would have been similar to the performance of an investor who had access to revised macroeconomic data.     

THE POSSIBILITY OF ESTIMATING RISK PREMIA IN ASSET PRICING MODELS

The authors show that estimates of risk premia on the market based on capital asset pricing models or arbitrage pricing theories can only be estimates of the ex post or sample risk premium on the market and cannot be interpreted as better estimates of the ex ante premium than those provided by sample averages of data. The ex ante premium drops out of the generating function for the returns used in the second-pass regressions. Although previous estimates of nonmarket premia have failed to take appropriate account of the population mean, that mean can in fact be estimated and appropriate adjustments made. Various approaches to estimating the ex ante risk premium and the population mean are discussed.     

Insider Trading, Investment, and Liquidity: A Welfare Analysis

We compare equilibrium trading outcomes with and without participation by an informed insider, assuming inflexible ex ante aggregate investment choices by agents. Noise trading arises from aggregate uncertainty regarding other agents' intertemporal consumption preferences. The welfare levels of outsiders can thus be ascertained. The allocations without insider trading are not ex ante Pareto efficient, because our model differs from standard ones with negative exponential utility functions and normal returns. We characterize the circumstances under which the revelation of payoff-relevant information via prices—arising from insider trading—benefits outsiders with stochastic liquidity needs, by improving risk-sharing among them.     

Reward-to-Risk Ratios in the Treasury-Bill Market

We estimate the ex‐ante reward per unit of spot‐rate volatility (the reward‐to‐risk ratio) for U.S. Treasury bills on a monthly basis and find that these ratios vary predictably over time. Reward‐to‐risk ratios are positively autocorrelated; month‐to‐month changes in these ratios are negatively autocorrelated. Variation in these ratios contributes at least as much variation to ex‐ante excess returns as does variation in interest‐rate volatility. Because ex‐ante volatility and the rewards to volatility vary independently, variation in ex‐ante premiums is greater than the variation attributable to changing volatility alone.     

Pricing Currency Risks

The currency market features a small cross-section, and conditional expected returns can be characterized by few signals: interest differential, trend, and mean reversion. We exploit these properties to construct the ex ante mean-variance efficient portfolio of individual currencies. The portfolio is updated in real time and prices all prominent currency trading strategies, conditionally and unconditionally. The fraction of risk in these assets that does not affect their risk premiums is at least 85%. Extant explanations of carry strategies based on intermediary capital or global volatility are related to these unpriced components, while consumption growth is related to the priced component of returns.     

Implied Spot Rates as Predictors of Currency Returns: A Note

Currency call option transactions data and the Black-Scholes option pricing model, as modified by Merton for continuous dividends and as adapted to currency options by Biger and Hull and by Garman and Kohlhagen, are used to imply spot foreign exchange rates. The proportional deviation between implied and simultaneously observed spot rates is found to be a direct and statistically significant determinant of subsequent returns on foreign currency holdings after controlling for interest rate differentials. Further, an ex ante trading rule reveals that the additional information contained in implied rates often is sufficient to generate significant economic profits.     

Importance of skewness in decision making: Evidence from the Indian stock exchange

In this paper our goal is to examine the importance of skewness in decision making, in particular on investor utility. We use time-series daily data on sectoral stock returns on the Indian stock exchange. We test for sectoral stock return predictability using commonly used financial ratios, namely, the price-to-book, dividend yield and price-earnings. We find strong evidence of predictability. Using this evidence of predictability, we forecast sectoral stock returns for each of the sectors in our sample, allowing us to devise trading strategies that account for skewness of returns. We discover evidence that accounting for skewness leads not only to higher utility compared to a model that ignores skewness, but utility is sector-dependent.     

Value at risk and the cross-section of hedge fund returns

Using two large hedge fund databases, this paper empirically tests the presence and significance of a cross-sectional relation between hedge fund returns and value at risk (VaR). The univariate and bivariate portfolio-level analyses as well as the fund-level regression results indicate a significantly positive relation between VaR and the cross-section of expected returns on live funds. During the period of January 1995 to December 2003, the live funds with high VaR outperform those with low VaR by an annual return difference of 9%. This risk-return tradeoff holds even after controlling for age, size, and liquidity factors. Furthermore, the risk profile of defunct funds is found to be different from that of live funds. The relation between downside risk and expected return is found to be negative for defunct funds because taking high risk by these funds can wipe out fund capital, and hence they become defunct. Meanwhile, voluntary closure makes some well performed funds with large assets and low risk fall into the defunct category. Hence, the risk-return relation for defunct funds is more complicated than what implies by survival. We demonstrate how to distinguish live funds from defunct funds on an ex ante basis. A trading rule based on buying the expected to live funds and selling the expected to disappear funds provides an annual profit of 8–10% depending on the investment horizons.     

Understanding Investor Sentiment: The Case of Soccer

We examine the extent to which the stock market's inefficient responses to resolutions of uncertainty depend on investors’ biased ex ante beliefs regarding the probability distribution of future event outcomes or their ex post irrational reactions to these outcomes. We use a sample of publicly traded European soccer clubs and analyze their returns around important matches. Using a novel proxy for investors’ expectations based on contracts traded on betting exchanges (prediction markets), we find that within our sample, investor sentiment is attributable, in part, to a systematic bias in investors’ ex ante expectations. Investors are overly optimistic about their teams’ prospects ex ante and, on average, end up disappointed ex post, leading to negative postgame abnormal returns. Our evidence may have important implications for firms’ investment decisions and corporate control transactions.     

Stock Options as Lotteries

We investigate the relationship between ex ante total skewness and holding returns on individual equity options. Recent theoretical developments predict a negative relationship between total skewness and average returns, in contrast to the traditional view that only coskewness is priced. We find, consistent with recent theory, that total skewness exhibits a strong negative relationship with average option returns. Differences in average returns for option portfolios sorted on ex ante skewness range from 10% to 50% per week, even after controlling for risk. Our findings suggest that these large premiums compensate intermediaries for bearing unhedgeable risk when accommodating investor demand for lottery‐like options.     

On the distribution and estimation of trading costs

This paper investigates the uncertainty about the trading costs associated with a given portfolio strategy. I derive accurate approximations of the ex ante probability distributions of proportional trading costs and portfolio turnover under the conventional assumption of normal asset returns. Based on these approximations, I express the expected trading costs as a function of asset and portfolio characteristics. All else equal, the expected trading costs increase with: i) the deviations of the expected asset returns from the expected portfolio return, ii) the assets' volatility and iii) the portfolio volatility. At the same time, they decrease with the covariance between the assets and the portfolio. Furthermore, I propose novel estimators of the expected turnover and trading costs and show that they offer small bias and low variance, even when the sample size is small. Finally, I incorporate my results into a portfolio selection framework to produce portfolios with low levels of risk and trading costs. Several experiments with real and simulated data confirm the practical value of the results.     

TIME-VARYING FACTORS AND CROSS-AUTOCORRELATIONS IN SHORT-HORIZON STOCK RETURNS

In this paper I show that the lead-lag pattern between large and small market value portfolio returns is consistent with differential variations in their expected return components. I find that the larger predictability of returns on the portfolio of small stocks may be due to a higher exposure of these firms to persistent (time-varying) latent factors. Additional evidence suggests that the asymmetric predictability cannot be fully explained by lagged price adjustments to common factor shocks: (i) lagged returns on large stocks do not have a strong causal effect on returns on small stocks; (ii) trading volume is positively related to own- and cross-autocorrelations in weekly portfolio returns; and (iii) significant cross-autocorrelation exists between current returns on large stocks and lagged returns on small stocks when trading volume is high.     

Are Securitized Real Estate Returns more Predictable than Stock Returns?

This paper examines whether the predictability of securitized real estate returns differs from that of stock returns. It also provides a cross-country comparison of securitized real estate return predictability. In contrast to most of the literature on this issue, the analysis is not based on a multifactor asset pricing framework as such analyses may bias the results. We use a time series approach and thus create a level playing field to compare the predictability of the two asset classes. Forecasts are performed with ARMA and ARMA–EGARCH models and evaluated by comparing the entire empirical distributions of prediction errors, as well as with a trading strategy. The results, based on daily data for the 1990–2007 period, show that securitized real estate returns are generally more predictable than stock returns in countries with mature and well established REIT regimes. ARMA–EGARCH models are found to have portfolio outperformance potential even in the presence of transaction costs, with generally better results for securitized real estate than for stocks.