Are stocks dumped or neglected by analysts' inferior investments to covered stocks?

We compare the long-term stock price and operating performance of firms that are followed by analysts to those that are not over the period of 1994-2005. While analysts are skillful in identifying quality firms for coverage, the market is efficient in pricing both covered and neglected stocks such that risk-adjusted stock returns are compatible between the two groups. However, dumped stocks consistently outperform covered stocks with significant risk-adjusted returns across different market conditions and regulatory environments. Hence, investors might earn better returns by investing in dumped stocks, but the higher returns may represent compensation for greater search costs and information risk associated with investing in these stocks.     

The lead–lag relationship between equities and stock index futures markets around information releases

This paper documents a strengthening in the lead of stock index futures returns over stock index returns around macroeconomic information releases. Some evidence of a strengthening in feedback from the equities market to the futures market and weakening in the lead of the futures market around major stock‐specific information releases is also provided. This is consistent with the hypothesis that investors with better marketwide information prefer to trade in stock index futures while investors with stock‐specific information prefer to trade in underlying stocks. A small weakening in the contemporaneous relationship between stock index futures returns and stock index returns around both types of releases is also documented. This is consistent with disintegration in the relationship between the two markets associated with noise induced volatility. One by‐product of this study is new comparative evidence on the performance of adjustments for infrequent trading of index stocks based on a commonly used ARMA technique versus recalculation of the stock index using quote midpoints. The results suggest that the quote midpoint index performs at least as well as the ARMA adjusted index across the entire sample period, as well as around the different types of information releases. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:467–487, 2000     

The relationship between currency carry trades and U.S. stocks

The article examines the relationship between daily returns of currency carry trades and U.S. stocks from January 1995 through September 2010. Carry trade and stock returns are highly correlated with no Granger‐causality in either direction. An EGARCH model shows that significant volatility spillovers flow from the stock market to the carry‐trade market, but not vice versa. The markets are more correlated in periods of high volatility. Volatilities in both markets also increase more with negative innovations than positive innovations. A sectoral analysis of the index suggests that volatilities of cyclical stocks have more impact than noncyclical stocks on carry trades.     

Switching Between the Banking and Metals and Mining Sectors of Australia*

Using the Australian banking and metals and mining industries as the categories in the Barberis and Shleifer model, this study demonstrates switching in the Australian stock market. Switching occurs when investors move into an industry by selling off stocks of an alternate industry, thus causing negative lagged cross‐correlation between those industries. Our results, based on daily returns, suggest that category‐level investor sentiment may drive observed switching patterns in the Australian stock market and not fundamental risk factors. Our results also show that switching does not necessarily only occur between value and growth stocks or large‐cap and small‐cap stocks.     

Dispersion in Analysts’ Earnings Forecasts and Market Efficiency

Recent studies show that firms with higher analysts’ earnings forecasts dispersion subsequently have lower returns than firms with lower forecasts dispersion. This paper evaluates alternative explanations for the dispersion–return relation using a stochastic dominance approach. We aim to discriminate between the hypothesis that some asset pricing models can explain the puzzling negative relation between dispersion and stock returns, and the alternative hypothesis that the dispersion effect is mainly driven by investor irrationality and thus is an evidence of a failure of efficient markets. We find that low dispersion stocks dominate high dispersion stocks by second‐ and third‐order stochastic dominance over the period from 1976 to 2012. Our results imply that any investor who is risk‐averse and prefers positive skewness would unambiguously prefer low dispersion stocks to high dispersion stocks. We conclude that the dispersion effect is more likely evidence of market inefficiency, rather than a result of omitted risk factors.     

Factor Exposures of Foreign Equity Capital in a Domestic Stock Market: Evidence from Korea

In this paper, we examine the factor exposures of foreign equity capital in a domestic stock market in order to understand its risk‐taking behavior and sources of returns in the market. Using data from Korea for the 1999–2013 period, we find that foreigners are strongly exposed to the idiosyncratic volatility (IVOL) factor, which is long on low‐IVOL stocks and short on high‐IVOL stocks. That is, foreign equity capital is typically allocated to low‐IVOL stocks and profits from the return differential between low‐IVOL and high‐IVOL stocks. We also find that foreign equity capital moves in a way that it is loaded more on the IVOL factor when the IVOL factor premium is larger. We discuss the comparative advantage of foreign equity capital in bearing the IVOL factor risk and the role of information asymmetry between locals and foreigners in this risk sharing. We also provide additional empirical results that support our interpretation.     

Dependence between the global gold market and emerging stock markets (E7+1): Evidence from Granger causality using quantile and quantile‐on‐quantile regression methods

This study examined the dependence between gold and stocks during 2002–18 in seven emerging countries. The study combined the bivariate cross‐quantilogram introduced recently with quantile‐on‐quantile regression (QQR) approaches to conduct comprehensive and complementary analyses. The QQR results for the full sample revealed a weak positive dependence in all the quantiles of gold and stock returns across all the countries selected during mild market conditions. The results for pre and post‐crisis periods largely were consistent with those obtained for the full sample, except for Turkey (pre‐crisis), and China and Indonesia (post‐crisis). The results of the causality test‐in‐mean (return) and that of the causality test‐in‐variance revealed no causal relation between stock and gold in the pre‐crisis period, while causality ran only from gold to some stocks in the post‐crisis period. Further, while there was volatility causality running only from gold to stocks during the pre‐crisis period, the volatility causality between the two markets was very high during the post‐crisis period. Therefore, we suggest that gold may have been a hedge for stocks during the pre‐crisis compared to the post‐crisis period. Further, international risk factors should be considered in optimal investment decisions between domestic and global markets' assets (stocks and gold).     

Fama–French in China: Size and Value Factors in Chinese Stock Returns

We investigate the size and value factors in the cross‐section of returns for the Chinese stock market. We find a significant size effect but no robust value effect. A zero‐cost small‐minus‐big (SMB) portfolio earns an average premium of 0.61% per month, which is statistically significant with a t‐value of 2.89 and economically important. In contrast, neither the market portfolio nor the zero‐cost high‐minus‐low (HML) portfolio has average premiums that are statistically different from zero. In both time‐series regressions and Fama–MacBeth cross‐sectional tests, SMB represents the strongest factor in explaining the cross‐section of Chinese stock returns. Our results contradict several existing studies which document a value effect. We show that this difference comes from the extreme values in a few months in the early years of the market with a small number of stocks and high volatility. Their impact becomes insignificant with a longer sample and proper volatility adjustment.     

Institutional Ownership and Future Stock Returns: An International Perspective

We investigate the risk‐adjusted performance of the aggregate equity holdings and trades of 13,807 active mutual funds located in 16 countries between 2001 and 2014. Using portfolio sorts, we find weak evidence that institutional holdings exhibit positive subsequent risk‐adjusted returns. However, any outperformance is unlikely to stem from short‐term informational advantage: stocks bought do not outperform stocks sold in the subsequent quarter. This finding is robust to regressions of subsequent stock returns on changes in institutional ownership and holds for different measurements of institutional trading.     

Market Timing With Moving Averages

I present evidence that a moving average (MA) trading strategy has a greater average return and skewness as well as a lower variance compared to buying and holding the underlying asset using monthly returns of value‐weighted US decile portfolios sorted by market size, book‐to‐market, and momentum, and seven international markets as well as 18,000 individual US stocks. The MA strategy generates risk‐adjusted returns of 3–7% per year after transaction costs. The performance of the MA strategy is driven largely by the volatility of stock returns and resembles the payoffs of an at‐the‐money protective put on the underlying buy‐and‐hold return. Conditional factor models with macroeconomic variables, especially the default premium, can explain some of the abnormal returns. Standard market timing tests reveal ample evidence regarding the timing ability of the MA strategy.     

Do single‐stock circuit breakers provide a safety net for Canadian investors?

This study looks at the market impact of recent regulatory changes in Canada that provide for trading halts on individual stocks that experience large upside or downside movements. The focus is on all stocks traded on the Toronto Stock Exchange since the inception of the single‐stock circuit breaker rule (SSCB) in February 2012, to replace the short‐sale uptick rule. The results support pricing efficiency: material information that caused the circuit breaker is incorporated in stock prices on the day of the halt (neither overreaction nor underreaction), with no decline in market liquidity. Using trade‐by‐trade data constructed on five‐minute trading intervals, we refine the daily results, and show that shocks in realized volatility are focused in the 10‐minute trading interval surrounding the halts. While circuit breakers provide a limited safety net for investors when their stocks are subject to severe volatility, they do not allow for a quick turnaround for stocks experiencing severe price decline events.     

Further evidence on Asian stock return behavior

This paper examines the relationship between expected stock returns and size, and market-to-book ratio in five Asian emerging markets: India, Korea, Malaysia, Taiwan and Thailand. Overall, we find a strong size effect in all markets and a significant market-to-book effect in Korea, Malaysia and Thailand. When the tests allow for both variables, the negative relationship between size and average return is less robust; the inclusion of market-to-book equity seems to absorb the role of size in Asian stock returns. Our finding for the Asian market applies to the post-1984 period, thus questioning the assertion of Black [J. Portfolio Manage. 20 (1993) 8] and MacKinlay (1995) that “the value premium is sample-specific”. Although small firms have—to a certain extent—higher average returns than large firms in Asian markets, the market-to-book variable seems to have a consistently stronger role in average returns and would suggest that value stocks have higher average returns than growth stocks. Thus, the higher average return on value stocks in the Asian emerging markets can be considered as a local manifestation of a global phenomenon.     

Wealth‐to‐Income Ratio and Stock Market Movements: Evidence from a Nonparametric Causality Test

We use a nonparametric causality‐in‐quantile test to analyze the predictive ability of the wealth‐to‐income ratio (wy) for excess stock returns and their volatility. Our results reveal that the wy is nonlinearly related with excess stock returns, and hence, results from linear Granger causality tests cannot be deemed robust. When we apply the nonparametric causality‐in‐quantile test, we find that the wy can predict excess stock returns over the majority of the conditional distribution, with the exception being the extreme ends, that is, when the market is in deep bear or bull phases. However, the wy has no predictability for the volatility of excess stock returns.     

Bitcoin and sentiment

Baker and Wurgler identify high sentiment betas with small startup firms that have great growth potential. On the surface, cryptocurrencies share important features in common with high sentiment beta stocks. This paper investigates the degree to which, during the period July 18, 2010–February 26, 2018, the return to bitcoin displayed the characteristics of a high sentiment beta stock. Using a sentiment-dependent factor model, the analysis indicates that in large measure, bitcoin returns resembled returns to high sentiment beta stocks. Additionally, we show that bitcoin's expected returns are low when sentiment measured by Volatility Index is high while expected returns are high when sentiment is low.     

Show me the money: Option moneyness concentration and future stock returns

Informed traders often use options that are not in-the-money due to higher potential gains for a smaller upfront cost. Thus, trading activity by option moneyness should be a gauge of informed option trading. We construct a dollar volume-weighted average moneyness measure to capture option trading activity at different moneyness levels. Stock returns increase with this measure, suggesting more trading activity in options with higher leverage predicts future stock returns. Our results hold cross-sectionally and at the portfolio level yielding a Fama–French five-factor α of 12% per year for all stocks and 33% per year for high implied volatility stocks.     

The Calendar Structure of the Japanese Stock Market: The ‘Sell in May Effect’ versus the ‘Dekansho‐bushi Effect’

We report on a seasonal pattern that has persisted in the Japanese stock market for more than half a century: Mean stock returns are significantly positive for months during the first half of the calendar year and significantly negative for months during the second half. Dubbed the Dekansho‐bushi effect, this seasonality is independent of other known calendar anomalies, such as the so‐called January effect. The Dekansho‐bushi effect should be distinguished from the ‘sell in May effect,’ because Japanese stocks perform well in June and poorly in November and December. The Dekansho‐bushi effect varies in magnitude among firms and is particularly significant among small firms with high book‐to‐market ratios. Nonetheless, the effect exists, regardless of a company's size or book‐to‐market ratio.     

BRIC and the U.S. financial crisis: An empirical investigation of stock and bond markets

We examine empirical evidence of the behavior of stocks and bonds from BRIC nations by using daily data from January 2003 to July 2010. We present unconditional and conditional empirical results depending upon a simple measure of U.S. financial stress. In the long term, BRIC bond markets deviate much more from the U.S. financial stress measure than the BRIC bonds and stocks that deviate among themselves. Stock and bond return correlations for Brazil and Russia are significantly large and negative. The own correlations are more important in determining the evolution of the conditional correlations relative to unexpected news. Dynamic conditional correlations between stock returns, bond returns and U.S. financial stress increase after the Lehman Brothers' event in September 2008, except for the bond returns in India.     

The Disappearing January/Turn of the Year Effect: Evidence From Stock Index Futures and Cash Markets

This study examines the returns, relative to the S&P 500, on cash indices and futures tracking smaller stocks around the turn of the year. While we control for volatility clustering, return autocorrelation in small stock indices, and other calendar effects, our main focus is the evolution of the turn of the year effect through time: in particular, whether the effect is smaller or takes place earlier subsequent to the introduction of the S&P Midcap and Russell 2000 futures in 1993. We find that evidence of a traditional turn of the year effect, in both cash and futures, is confined to the pre‐1993 period. Post‐1993, there are no abnormal returns during the turn of the year window as a whole. Interestingly, returns in this period remain high on the last trading day of December, but they are negative across the first five trading days of January. In addition, post‐1993, we often observe significant abnormal returns prior to the traditional turn of the year, i.e., in the pre‐Christmas and post‐Christmas windows. Taken together, our results suggest that market participants may be eliminating the turn of the year effect with the aid of two new futures contracts that are well suited to this purpose. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:755–784, 2004     

Machine learning and the cross-section of emerging market stock returns

This paper compares various machine learning models to predict the cross-section of emerging market stock returns. We document that allowing for non-linearities and interactions leads to economically and statistically superior out-of-sample returns compared to traditional linear models. Although we find that both linear and machine learning models show higher predictability for stocks associated with higher limits to arbitrage, we also show that this effect is less pronounced for non-linear models. Furthermore, significant net returns can be achieved when accounting for transaction costs, short-selling constraints, and limiting our investment universe to big stocks only.     

Option trading and the cross-listed stock returns: Evidence from Chinese A–H shares

We empirically investigate the effects of option trading on the cross-listed stock returns. Using dual-listed stocks in mainland China (A) and Hong Kong (H) stock exchanges, we show that option order imbalance (OI) positively and significantly predicts daily stock returns for both markets, controlling for risk factors and firm characteristics. Informed trading rather than price pressure better explain the predictability. High OI stocks have higher trading volume and present lottery-like properties. Three important events significantly affect the predictive power of OI, consistent with the improved market quality and the episode of speculative trading. Robustness checks support the main findings.