Individual Investors' Sentiment and Temporary Stock Price Pressure

Using data for the Hong Kong stock market, where individual investors' sentiment is likely to be influential, this study finds that the publication of individual investors' sentiment temporarily affects stock prices regardless of the publication's incompetence in predicting stock returns. Specifically, when the publication reports that more and more investors are optimistic, the return on the day just after the publication is higher and the return several days later is lower. Furthermore, the results are strongest for small stocks, and weakest for large stocks. It seems that some individual investors buy (sell) stocks when others, as reported by the publication, are optimistic (pessimistic), and that the trading causes temporary buying (selling) pressure initially and price reversals afterwards.     

行为模型新解及其实证检验

在以信息逐步扩散和投资者有限理性为主要假设的行为模型中,特定信息交易者和市场信息交易者的比例对股价行为有着重要影响：当特定信息交易者占多数时,个股收益更容易呈现正自相关;当市场信息交易者占多数时,个股收益更容易呈现负自相关。该模型可以解释成熟股市中存在基于总收益的动量效应,而中国股市中不存在基于总收益的动量效应,仅存在基于公司特定收益的动量效应;并解释了市场平均收益呈现负自相关等。另外,实证分析支持了传统的CAPM和APT定价模型中的带越小,动量效应越显著的结论。     

Momentum and Foreign Investors: Evidence from the Korean Stock Market

Abstract:

We examine whether the price impact of foreign investors on the Korean stock market from December 2000 to February 2007 generated a momentum phenomenon. In our empirical results, foreigners seem to have exerted a significantly positive impact on prices in “up” markets (periods of positive stock returns), but have had little impact on prices in “down” markets (periods of negative returns). We document that the impact of foreigners’ trades is concentrated in large companies. Most importantly, when the market is in the up state, the returns of stocks of large companies that were positively affected by foreign investors in the previous six-month period continue to increase in the subsequent six-month period. As a result, the subsequent six-month return on a past “winner” stock portfolio is significantly higher than that on a past “loser” stock portfolio. This brings to mind a momentum phenomenon that has been reported not to exist in the Korean stock market.     

Option trading after the opening bell and intraday stock return predictability

Prior literature finds that information is reflected in option markets before stock markets, but no study has explored whether option volume soon after market open has predictive power for intraday stock returns. Using novel intraday signed option-to-stock volume data, we find that a composite option trading score (OTS) in the first 30 min of market open predicts stock returns during the rest of the trading day. Such return predictability is greater for smaller stocks, stocks with higher idiosyncratic volatility, and stocks with higher bid–ask spreads relative to their options’ bid–ask spreads. Moreover, OTS is a significantly stronger predictor of intraday stock returns after overnight earnings announcements. The evidence suggests that option trading in the 30 min after the opening bell has predictive power for intraday stock returns.     

DOES VOLATILITY DECREASE AFTER REVERSE STOCK SPLITS?

Previous research documents that volatility decreases after reverse stock splits. I show that measurement effects bias observed volatility, especially for lower priced stocks. Based on observed returns, volatility decreases 25% after reverse splits. Controlling for bid–ask bounce, volatility still decreases for stocks with prices above $5.00. However, for stocks below $2.00, volatility increases slightly. The portion of observed volatility attributable to measurement effects declines as the stock price increases and as the minimum tick size decreases. Finally, there is a significant and positive cross‐sectional relation between changes in the number of trades and changes in volatility after reverse splits.     

The Dynamics of Dealer Markets Under Competition

The behavior of competing dealers in securities markets is analyzed. Securities are characterized by stochastic returns and stochastic transactions. Reservation bid and ask prices of dealers are derived under alternative assumptions about the degree to which transactions are correlated across stocks at a given time and over time in a given stock. The conditions for interdealer trading are specified, and the equilibrium distribution of dealer inventories and the equilibrium market spread are derived. Implications for the structure of securities markets are examined.     

Imperfect Information and Cross-Autocorrelation among Stock Prices

I develop a model to explain why stock returns are positively cross-autocorrelated. When market makers observe noisy signals about the value of their stocks but cannot instantaneously condition prices on the signals of other stocks, which contain marketwide information, the pricing error of one stock is correlated with the other signals. As market makers adjust prices after observing true values or previous price changes of other stocks, stock returns become positively cross-autocorrelated. If the signal quality differs among stocks, the cross-autocorrelation pattern is asymmetric. I show that both own- and cross-autocorrelations are higher when market movements are larger.     

Related securities and price discovery: Evidence from NYSE-listed Non-U.S. stocks

In this paper we analyze whether handling related securities improves a market maker's information environment and helps to incorporate new information in stock prices. Our empirical tests are focused on New York Stock Exchange specialists and the U.S. share in price discovery of 64 British and French companies cross-listed on the NYSE. We define related securities as stocks from the same country, the same region, or other foreign stocks. We find strong evidence that a higher prominence of related stocks in the specialist portfolio is associated with a higher U.S. share in price discovery of our sample firms. We interpret our findings as evidence that concentrating market makers in similar stocks reduces information asymmetries and improves the information environment as market makers can extract information relevant to a stock from order flow to related securities. To support our argument, we show that the adverse selection component of the bid–ask spread is negatively related to the prominence of other foreign stocks in the specialist portfolio.     

Against the tide: the commencement of short selling and margin trading in mainland China

China's recent removal of short‐selling and margin trading bans on selected stocks enables testing of the relative effect of margin trading and short selling. We find the prices of the shortable stocks decrease, on average, relative to peer A‐shares and cross‐listed H‐shares, suggesting that short selling dominates margin trading effects. Contrary to the regulators' intention and recent developed market empirical evidence, liquidity declines and bid‐ask spreads increase in these shortable stocks. Consistent with Ausubel (1990), these results imply that uninformed investors avoid the shortable stocks to reduce the risk of trading with informed investors.     

On the Distribution of CBOE Option Trade Prices Occurring Between Consecutive Stock Trades

This paper examines the volume distribution of option trade prices that occurs when the underlying stock price remains constant. The width of these option trade price bands provides direct evidence on the law of one price and the redundancy of options assumed in many option models. We find that index option bands are narrower than equity option bands. Furthermore, for both equity and index options, puts have narrower bandwidths than calls. In general, option price bandwidth is narrow and can be explained by the minimum price movement allowed by the Chicago Board Options Exchanges (CBOE). This supports the single price law and the redundancy assumption. The existence of bid/ask quotes on the option does not materially affect the above results although it does alter the frequency of multiple option trade prices for a given underlying stock price. We note that over 53% of option trading volume occurs without bid/ask quotes on the CBOE compared to less than 15% a decade ago. Our results suggest that the effective bid/ask spread on options is probably no larger than the minimum price movements allowed by the CBOE. Furthermore, the need for the liquidity services of market makers may be declining if the decline in quoting activity stems from cross trading (i.e. trades not involving market makers).     

Risk,Mispricing, and Value Investing

We evaluate the stock return performance of a modified version of the book-to-market strategy and its implications for market efficiency. If the previously documented superior stock return of the book-to-market strategy represents mispricing, its performance should be improved by excluding fairly valued firms with extreme book-to-market ratios. To attain this, we classify stocks as value or glamour on book-to-market ratios and accounting accruals jointly. This joint classification is likely to exclude stocks with extreme book-to-market ratios due to mismeasured accounting book values reflecting limitations underlying the accounting system. Using both 12-month buy-and-hold returns and earnings announcement returns, our results show that this joint classification generates substantially higher portfolio returns in the post-portfolio-formation year than the book-to-market classification alone with no evidence of increased risk. In addition, this superior stock return performance is more pronounced among firms held primarily by small (unsophisticated) investors and followed less closely by market participants (stock price <$10). Finally, and most importantly, financial analysts are overly optimistic (pessimistic) about earnings of glamour (value) stock, and for a subset of firms identified as overvalued by our strategy, the earnings announcement raw return, as well as abnormal return, is negative. These last results are particularly important because it is hard to envision a model consistent with rational investors holding risky stocks with predictable negative raw returns for a long period of time rather than holding fT-bills and with financial analysts systematically overestimating the earnings of these stocks while underestimating earnings of stocks that outperform the stock market.     

信息不对称、过度自信与股价变动

信息传导的非同步和投资者情绪变化是股票市场的两个典型特征,前者会引发投资者之间出现信息不对称问题,后者主要体现为投资者过度自信,两者共同作用影响股票价格变动。本文将信息不对称和投资者过度自信情绪置于同一个分析框架,建立两阶段动态序贯定价理论模型研究现实市场上信息传导过程中股价变动的内在机制。结果表明:(1)面临新信息的进入,投资者对股票收益预期的调整与均衡价格之间具有正相关关系;(2)面临有利消息时,过度自信投资者比例越大,股票的均衡价格越高,投资收益将越低;面临不利消息时则相反;(3)随着过度自信投资者比例以及过度自信程度升高,市场风险溢价将下降;(4)投资者群体在信息传导过程中出现分化,对股价变动形成异质信念,未获取信息和获取信息但未出现过度自信的投资者认为股价被高估,获取信息且出现过度自信的投资者认为价格被低估,促使更多的交易,引发市场成交量和股价变动;(5)过度自信投资者比例与过度自信程度提高均会对市场效率产生正向影响,而对市场深度具有负向效应。最后,基于理论结果对非对称性和持续性等典型的市场波动性特征进行解释。     

名义价格幻觉——基于证券分析师目标价格预测的经验证据

本文利用证券分析师发布的股票目标价格预测,为名义价格幻觉提供了能够直接反映心理预期的经验证据。研究发现,证券分析师对低价股未来收益的心理预期显著高于高价股,该行为偏误在规模小、上市时间短、股票波动性大、财务透明度低和无形资产占比高等估值难度更大的股票中表现得更加明显。我们还利用股票送转,对证券分析师是否受到名义价格幻觉的影响做进一步验证,发现由送转引起的与基本面无关的名义价格下降显著提升了证券分析师对股票未来回报的心理预期。进一步研究表明,上述发现并不是因为证券分析师准确预见了低价股和高价股未来有不同的投资机会,也不是为了最大化其供职证券公司的利益而有意迎合投资者。     

Liquidity and Returns to Target Shareholders in the Market for Corporate Control: Evidence from the US Markets

In this paper we analyze how stock market liquidity affects the abnormal return to target firms in mergers and tender offers. We predict that target firms with poorer stock market liquidity receive larger announcement day abnormal returns based on the following considerations. First, target firms with poorer stock market liquidity receive greater liquidity improvements after a merger or tender offer. Second, deals that involve less liquid targets are less anticipated and/or more likely to be completed. Third, less liquid stocks have more diverse reservation prices across shareholders and thus require a higher takeover return. Consistent with these expectations, we show that abnormal returns to target firms’ shareholders are significantly and positively related to the difference in liquidity (measured by the bid‐ask spread) between acquirers and targets as well as the magnitude of target firms’ liquidity improvement.     

STOCK PRICES AND INFLATION

Numerous empirical studies establish that inflation has a negative short‐run effect on stock returns but few studies report a positive, long‐run Fisher effect for stock returns. Using stock price and goods price data from six industrial countries, we show that long‐run Fisher elasticities of stock prices with respect to goods prices exceed unity and range from 1.04 to 1.65, which tends to support the Fisher effect. We also find that the time path of the response of stock prices to a shock in goods prices exhibits an initial negative response, which turns positive over longer horizons. These results help reconcile previous short‐run and long‐run empirical evidence on stock returns and inflation. Also, they reveal that stock prices have a long memory with respect to inflation shocks, such that investors should expect stocks to be a good inflation hedge over a long holding period. JEL Classification: G12     

Explaining Monday Returns

The Monday effect is reexamined using two stock indexes and a sample of 452 individual stocks that trade on the London Stock Exchange. The results based on conventional test methods reveal a negative average return on Monday. Extending the analysis to examine the effects of various possible influences simultaneously, the average Monday return becomes positive and does not differ significantly from the average returns of most other days of the week. Fortnight, ex‐dividend day, account period, (bad) news flow, trading activity, and bid‐ask spread effects are all controlled for. The results broadly support the trading time hypothesis.     

Capital Gains Tax Overhang and Price Pressure

I study whether the capital gains tax is an impediment to selling by some investors and if so, to what degree associated delayed selling affects stock prices. I find that selling decisions by institutions serving tax‐sensitive clients are sensitive to cumulative capital gains, a pattern not observed for institutions with predominantly tax‐exempt clients. Moreover, tax‐related underselling impacts stock prices during large earnings surprises for stocks held primarily by tax‐sensitive investors. The corresponding price reactions are less negative (more positive) with higher cumulative capital gains. This price pressure pattern is more severe when arbitrage is more costly.     

Short selling and stock returns: Evidence from the UK

The practice of shorting stocks was put forward as one of the causes of the recent financial crisis whereas Shiller (2003), for example, considers shorting an essential element of an efficient market. Shorting involves selling borrowed stocks and subsequently closing the position by purchasing and returning the stock to the lender. A profit will be realised if the stock's price decreases. Shorting enables investors who do not own a perceived overvalued stock to sell. Using a high-frequency UK dataset for the period between September 2003 and April 2010, our findings suggest shorting indicates evidence of overvalued stocks as significantly negative abnormal stock returns appear to follow an increase in shorting. These results do not hold, however, for shorting which occurs around the ex-dividend date. We further find that these results hold during the recent financial crisis.     

Did institutions herd during the internet bubble?

We examine the trading behavior of institutional investors during the internet bubble and crash of 1998–2001, and its impact on stock prices. Similar to some recent findings concerning the trading behavior of hedge funds and NASDAQ 100 stocks, we find that during the bubble all types of institutions herded with great intensity into internet stocks for a comprehensive sample of institutional investors and internet stocks. In addition to this, we present three entirely new results. First, institutional herding was much greater than what can be explained by momentum trading. Second, institutions as a group continued to increase their holdings of internet stocks for two quarters past the market peak during the first quarter of 2000, and three quarters past the peak for individual stock prices, suggesting that institutions were unable to time the price peaks. Finally and most importantly, we find positive abnormal returns contemporaneous with institutional herding and negative abnormal returns (reversals) at the point that herding ceased. This finding suggests that institutions’ trading created temporary price pressures, and may have contributed to the bubble.     

Short-sale refinancing and price adjustment speed to bad news: Evidence from a quasi-natural experiment in China

Short selling may accelerate stock price adjustment to negative news. However, the literature provides mixed evidence for this prediction. Using short-sale refinancing and a staggered difference-in-differences (DID) model, this paper explores the effect of short selling on stock price adjustment. Our results show that (1) short-sale refinancing improves the speed of stock price adjustment to negative news. This result holds after we control for endogeneity. (2) The positive relationship between short-sale refinancing and stock price adjustment speed is significant in subsamples of stocks with higher earnings management or lower accuracy of analyst forecasts, indicating that firms with more opaque information are more likely to be targeted by short sellers. In subsamples of stocks with a higher ownership concentration or lower ownership by institutional investors, short selling is more likely to increase the speed of stock price adjustment, indicating that ownership structure may influence negative news mining. (3) As short-sale refinancing exacerbates the absorption of bad news by stock prices, it increases crash risk. This study enriches the research on the economic consequences of short selling and provides empirical evidence supporting regulations on short selling in China.