The disposition effect and investor experience

We examine whether investing experience can dampen the disposition effect, that is, the fact that investors seem to hold on to their losing stocks to a greater extent than they hold on to their winning stocks. To do so, we devise a computer program that simulates the stock market. We use the program in an experiment with two groups of subjects, namely experienced investors and undergraduate students (the inexperienced investors). As a control procedure, we consider random trade decisions made by robot subjects. We find that though both human subjects show the disposition effect, the more experienced investors are less affected.     

Identifying the interaction between stock market returns and trading flows of investor types: Looking into the day using daily data

This paper introduces a new method for identifying the simultaneity between returns and trading flows. The proposed method enables us to identify the intraday interaction using daily data, and provides measures of the information content of trading flows, and their instantaneous response to public information and information revealed by market prices. Applying this method to daily data on investor types from the Korea Stock Exchange, we find significant intraday bi-directional interaction between flows and returns and their latent common drivers, altering some of the results of the previous literature based on Cholesky assumptions. Thus, we obtain a number of new insights concerning the behavior of investor types.     

Irrational investor response to stock splits in an emerging market

Using the creation and collapse of the Cyprus stock market bubble as a backdrop, we document substantial positive abnormal returns around the announcement and execution of stock splits in Cyprus. Split-induced returns cannot be explained by variables proxying for conventional liquidity and signalling hypotheses for stock-split activity. Positive split-induced returns are largely reversed in the post-split months. Post-split stock underperformance is inversely related to, and thus appears to be a correction for, the significant market overreaction at split execution. We suggest an investor irrationality explanation for these results, arguing that stock splits were associated with the creation of the bubble due to the inability of investors to understand splits correctly. We conclude that educating investors in emerging markets to process information correctly will improve the efficiency of such markets.     

Volatility forecasting in the Chinese commodity futures market with intraday data

Given the unique institutional regulations in the Chinese commodity futures market as well as the characteristics of the data it generates, we utilize contracts with three months to delivery, the most liquid contract series, to systematically explore volatility forecasting for aluminum, copper, fuel oil, and sugar at the daily and three intraday sampling frequencies. We adopt popular volatility models in the literature and assess the forecasts obtained via these models against alternative proxies for the true volatility. Our results suggest that the long memory property is an essential feature in the commodity futures volatility dynamics and that the ARFIMA model consistently produces the best forecasts or forecasts not inferior to the best in statistical terms.     

The S&P500 index effect reconsidered: Evidence from overnight and intraday stock price performance and volume

This study focuses on S&P500 inclusions and deletions, examining the impact of potential overnight price adjustment after the announcement of an S&P500 index change. We find evidence of a significant overnight price change that diminishes the returns available to speculators although there are still profits available from the first day after announcement until a few days after the actual event. More importantly, observing the tick-by-tick stock price performance and volume effects on the key days during the event window for the first time, we find evidence of consistent trading patterns during trading hours. A separate analysis of NASDAQ and NYSE listed stocks allows for a detailed examination of the price and volume effect at an intra-day level. We find that index funds appear to cluster their rebalancing activities near to and after the close on the event date, suggesting that they are more concerned with tracking error than profit.     

The reaction of asset prices to macroeconomic announcements in new EU markets: Evidence from intraday data

We estimate the impact of macroeconomic news on composite stock returns in three emerging European Union financial markets (the Budapest BUX, Prague PX-50, and Warsaw WIG-20), using intraday data and macroeconomic announcements. Our contribution is twofold. We employ a larger set of macroeconomic data releases than used in previous studies and also use intraday data, an excess impact approach, and foreign news to provide more reliable inferences. Composite stock returns are computed based on 5-min intervals (ticks) and macroeconomic news are measured based on the deviations of the actual announcement values from their expectations. Overall, we find that all three new EU stock markets are subject to significant spillovers directly via the composite index returns from the EU, the U.S. and neighboring markets; Budapest exhibits the strongest spillover effect, followed by Warsaw and Prague. The Czech and Hungarian markets are also subject to spillovers indirectly through the transmission of macroeconomic news. The impact of EU-wide announcements is evidenced more in the case of Hungary, while the Czech market is more impacted by U.S. news. The Polish market is marginally affected by EU news. In addition, after decomposing pooled announcements, we show that the impact of multiple announcements is stronger than that of single news. Our results suggest that the impact of foreign macroeconomic announcements goes beyond the impact of the foreign stock markets on Central and Eastern European indices. We also discuss the implications of the findings for financial stability in the three emerging European markets.     

The SEC's retail investor 2.0: Interactive data and the rise of calculative accountability

The Securities and Exchange Commission (SEC) in the United States mandated a new digital reporting system for US companies in late 2008. The new generation of information provision has been dubbed by Chairman Cox, ‘interactive data’ (SEC, 2006a). Despite the promise of its name, we find that in the development of the project retail investors are invoked as calculative actors rather than engaged in dialogue. Similarly, the potential for the underlying technology to be applied in ways to encourage new forms of accountability appears to be forfeited in the interests of enrolling company filers.We theorise the activities of the SEC and in particular its chairman at the time, Christopher Cox, over a three year period, both prior to and following the ‘credit crisis’. We argue that individuals and institutions play a central role in advancing the socio-technical project that is constituted by interactive data. We adopt insights from ANT (Callon, 1986, Latour, 1987, Latour, 2005b) and governmentality (Miller, 2008, Miller and Rose, 2008) to show how regulators and the proponents of the technology have acted as spokespersons for the interactive data technology and the retail investor. We examine the way in which calculative accountability has been privileged in the SEC's construction of the retail investor as concerned with atomised, quantitative data (Kamuf, 2007, Roberts, 2009, Tsoukas, 1997). We find that the possibilities for the democratising effects of digital information on the Internet has not been realised in the interactive data project and that it contains risks for the very investors the SEC claims to seek to protect.     

Simultaneous monetary policy announcements and international stock markets response: An intraday analysis

This paper investigates the return and volatility response of major European and US equity indices to monetary policy surprises by utilizing extensive intraday data on 5-min price quotes along with a comprehensive dataset on monetary policy decisions and macroeconomic news announcements. The results indicate that the monetary policy decisions generally exert immediate and significant influence on stock index returns and volatilities in both European and the US markets. The findings also show that press conferences held by the European Central Bank (ECB) that follow monetary policy decisions on the same day have a clear impact on European index return volatilities. This implies that they convey additional important information to market participants. Overall, our analysis suggests that the use of high frequency data is critical to separate the effect of monetary policy actions from those of macroeconomic news announcements on stock index returns and volatilities.     

Interdependence and dynamics in currency futures markets: A multivariate analysis of intraday data

This paper investigates long-term interdependencies and short-term dynamics in currency futures utilizing intraday data for six major foreign currencies: the British Pound, Deutsche Mark, Swiss Franc, Australian Dollar, Canadian Dollar, and Japanese Yen. Lack of cointegration (CI) among the foreign exchange futures is found to be the prevailing mode of behavior, but some temporary deviations from the no-CI condition are detected. There is a notable overlap between detected CI relationships and the timing of policy changes, world events, and regime shifts, indicating that the observed CIs are event-driven. The robustness of the CI results is checked with respect to variations in the model, lag structure, data period, sample horizon, and currency basket grouping. Impulse–response functions (IRFs) reveal that currency markets are in general efficient and absorb new information within the day. The interdependence among currencies is found to be asymmetric.     

Unexpected distractions and investor attention to corporate announcements

Review of Accounting Studies - We investigate how unexpected distractions affect investor reactions to corporate earnings announcements. We use a daily news pressure (DNP) index as a proxy for the...     

Interactive data and retail investor decision‐making: an experimental study

The results of an experimental study of retail investors' use of eXtensible Business Reporting Language tagged (interactive) data and PDF format for making investment decisions are reported. The main finding is that data format made no difference to participants' ability to locate and integrate information from statement footnotes to improve investment decisions. Interactive data were perceived by participants as quick and ‘accurate’, but it failed to facilitate the identification of the adjustment needed to make the ratios accurate for comparison. An important implication is that regulators and software designers should work to reduce user reliance on the comparability of ratios generated automatically using interactive data.     

Micro and macro price dynamics in daily data

Using Japanese daily scanner data with three billion observations of prices and quantities from 1988 to 2005, this paper investigates micro and macro price dynamics. These data reveal that the frequency of price changes is much larger than that found in standard monthly datasets. The price change frequency exhibits a clear trend and strong across-store heterogeneity, which casts doubts on standard New Keynesian assumptions. The Consumer Price Index (CPI) based on scanner data appears to track the official CPI relatively well, except for a period in which the latter arguably had an upward bias.     

Pro forma disclosure and investor sophistication: External validation of experimental evidence using archival data

Insights on how ordinary, less-sophisticated investors interpret and process management-issued pro forma earnings numbers are useful to regulators because of concerns that pro forma disclosures are misleading to ordinary investors. Two recent experimental studies [Frederickson, J. R., & Miller, J. S. (2004). The effects of pro forma earnings disclosures on analysts’ and nonprofessional investors’ equity valuation judgments. The Accounting Review, 79(3), 667–686; Elliott, W. B. (2006). Are investors influenced by pro forma emphasis and reconciliations in earnings announcements? The Accounting Review, 81(1), 113–133] find that the existence of a pro forma number in the earnings press release as well as the relative placement of the pro forma and GAAP earnings figures within the press release affect the judgments of less-sophisticated investors but not those of more-sophisticated investors. Experimental and archival methodologies complement one another and results that persist in both settings are likely to be robust to both internal and external validity concerns. Therefore, we complement experimental evidence using trade-size-based proxies constructed from intraday transactions data to distinguish the trading activities of less-sophisticated investors from more-sophisticated investors. Our results suggest that less-sophisticated investors rely significantly more on quarterly earnings press releases that include a pro forma number than on those that do not, while more-sophisticated investors exhibit the opposite behavior. This result is consistent with Frederickson and Miller’s experimental evidence. Further, consistent with Elliott’s results, we find that less-sophisticated investors rely more on the pro forma figure when it is placed before the GAAP earnings number in the press release, while more-sophisticated investors’ trading behavior is unaffected by the relative placement of the two earnings metrics. We conclude that the existence of a pro forma number as well as its strategic placement in the press release generally affect the judgments of less-sophisticated (but not more-sophisticated) investors and these inferences are robust because they persist in both experimental and archival settings.     

News sentiment and the investor fear gauge

This note examines the relationship between aggregate news sentiment and changes in the implied volatility index (VIX). A significant negative contemporaneous relationship between changes in VIX and news sentiment is discovered. The relationship is asymmetric whereby changes in VIX are larger following the release of negative news items.     

The intraday speed of adjustment of stock prices to earnings and dividend announcements

This paper examines the effects of Broad Tape news releases of earnings and dividend announcements on three aspects of intraday stock price behavior: mean returns, return variance, and serial correlation in consecutive price changes. The initial price reaction is evident in the first pair of price changes following the release (i.e., within a few minutes, at most). The returns earned by simple trading rules dissipate within five to ten minutes, although significant returns are detected in the overnight period and at the opening of trading on the next day. Disturbances in the variance and serial correlation persist for several hours and extend into the following trading day. As a class, dividend announcements induce much less activity than do earnings, although the response to dividend changes is comparable to the earnings announcement effect.     

Interday and intraday volatility: Additional evidence from the Shanghai Stock Exchange

After examining both the interday and intraday return volatility of the Shanghai Composite Stock Index, it was found that the open-to-open return variance is consistently greater than the close-to-close variance. Examining the volatility of interday returns and variance ratio tests with five-minute intervals reveals an L-shaped pattern, or more precisely, two L-shaped patterns, starting with a small hump during both the morning and the afternoon sessions, with the morning session having a much higher interday volatility than the afternoon session. This L-shaped interday volatility is supported by the similarly shaped intraday volatility pattern. This result suggests that the high volatility of intraday returns for the market open is not entirely due to the trading mechanisms (call auction in the market opening) but also due to both the accumulated overnight information and the trading halt effect. The five-minute breaks after the auction and blind auction procedures are the two major driving forces which exaggerate the high intraday volatility observed at the market open.

Individual investor perceptions and behavior during the financial crisis

Combining monthly survey data with matching trading records, we examine how individual investor perceptions change and drive trading and risk-taking behavior during the 2008–2009 financial crisis. We find that investor perceptions fluctuate significantly during the crisis, with risk tolerance and risk perceptions being less volatile than return expectations. During the worst months of the crisis, investors’ return expectations and risk tolerance decrease, while their risk perceptions increase. Towards the end of the crisis, investor perceptions recover. We document substantial swings in trading and risk-taking behavior that are driven by changes in investor perceptions. Overall, individual investors continue to trade actively and do not de-risk their investment portfolios during the crisis.     

Testing for intraday interdependence and volatility spillover among the euro, the pound and the Swiss franc markets

To examine intraday interdependence and volatility spillover among the euro, the pound and the Swiss franc, we employ the varying-correlation model of multivariate generalized autoregressive conditional heteroskedasticity. Our main findings are (1) return volatility in the euro spills into the pound and the Swiss franc; and (2) these markets are highly integrated with the euro, and the degree of interdependence is state-dependent: euro news has a simultaneous impact on the pound and the Swiss franc, and co-movements of these currencies and the euro become much higher in proportion to the arrival of news of the euro.     

Evaluation of the effect of investor psychology on an artificial stock market through its degree of efficiency

The main objective of this article is to develop a Cellular Automaton Model in which more than one type of stockbroker interact, and where the use and exchange of information between investors describe the complexity measured through the estimation of the Hurst exponent. This exponent represents an efficient or random market when it has a value equal to 0.5. Thanks to the various proposals, it can be determined in this investigation that a rational component must exist in the simulator in order to generate an efficient behavior.