Relations between mutual fund flows and stock market returns in Korea

This paper analyses relations between stock market returns and mutual fund flows in Korea. A positive relationship exists between stock market returns and mutual fund flows, measured as stock purchases and sales and net trading volumes. In aggregate, mutual funds are negative feedback traders. Standard causality tests suggest that it is predominantly returns that drive flows, while stock sales may contain information about returns. After controlling for declining markets, the results suggest Korean equity fund managers tend to increase stock purchases in times of rising market volatility, possibly disregarding fundamental information, and to sell in times of wide dispersion in investor beliefs.     

The relationship between short interest and stock returns in the Canadian market

This paper provides new insight into the relationship between short sales and stock market returns using a sample of stocks sold short in Canada. Short interest is defined in relation to trading volume. The results strongly support the assertion that short sales and excess returns are contemporaneously negatively correlated in Canada. The paper further finds that excess returns are more negative for small firms because the supply of shortable shares is constrained for these firms. Excess returns are less negative for stocks with associated options and convertible bonds. Importantly, the evidence is consistent with the proposition that informed traders short sell Canadian interlisted stocks in Canada, rather than the US, to exploit lower execution costs. Together the results suggest that less restrictive regulation of short sales will improve the efficiency of markets.     

Heterogeneous Beliefs, Speculation, and the Equity Premium

Agents with heterogeneous beliefs about fundamental growth do not share risks perfectly but instead speculate with each other on the relative accuracy of their models' predictions. They face the risk that market prices move more in line with the trading models of competing agents than with their own. Less risk‐averse agents speculate more aggressively and demand higher risk premiums. My calibrated model generates countercyclical consumption volatility, earnings forecast dispersion, and cross‐sectional consumption dispersion. With a risk aversion coefficient less than one, agents' speculation causes half the observed equity premium and lowers the riskless rate by about 1%.     

The second moment matters! Cross-sectional dispersion of firm valuations and expected returns

Behavioral theories predict that firm valuation dispersion in the cross-section (“dispersion”) measures aggregate overpricing caused by investor overconfidence and should be negatively related to expected aggregate returns. This paper develops and tests these hypotheses. Consistent with the model predictions, I find that measures of dispersion are positively related to aggregate valuations, trading volume, idiosyncratic volatility, past market returns, and current and future investor sentiment indexes. Dispersion is a strong negative predictor of subsequent short- and long-term market excess returns. Market beta is positively related to stock returns when the beginning-of-period dispersion is low and this relationship reverses when initial dispersion is high. A simple forecast model based on dispersion significantly outperforms a naive model based on historical equity premium in out-of-sample tests and the predictability is stronger in economic downturns.     

How are shorts informed? : Short sellers,news, and information processing

We find that a substantial portion of short sellers' trading advantage comes from their ability to analyze publicly available information. Using a database of short sales combined with a database of news releases, we show that the well-documented negative relation between short sales and future returns is twice as large on news days and four times as large on days with negative news. Further, we find that the most informed short sales are not from market makers but rather from clients, and we find only weak evidence that short sellers anticipate news events. Overall, the evidence suggests that public news provides valuable trading opportunities for short sellers who are skilled information processors.     

An exploration of call centre agents' CRM software use,customer orientation and job performance in the customer relationship maintenance phase

Exploratory research techniques are used to examine the relationships between call centre agents' customer relationship management (CRM) software use, agents' customer orientation, and agents' job performance in the maintenance phase of customer relationships. Maintenance activities, which focus on customer retention and cross- and up-selling, are important to study because prior research suggests they have the strongest effect on company performance. In the financial services industry, CRM software applications supporting retention and cross-/up-selling activities benefit firms by raising revenues and reducing costs. The context for this exploratory research is that of in-bound customer service and sales call centres at three different financial institutions. Based on the analysis of data from key informants across these different contexts, this research suggests that CRM software use is a separate antecedent of call centre agent job performance and has a minimal relationship with customer orientation. Given the suggestive nature of exploratory research results, further research is warranted.     

Asymmetric Volume‐Return Relation and Concentrated Trading in LIFFE Futures

This study demonstrates that intraday volume and return on LIFFE interest rate and currency futures exhibit an asymmetric volume‐return relationship characterised by significantly larger volume associated with negative returns than with non‐negative returns. This finding is unlike the stylised asymmetric relation often observed in equity markets, where the volume on price rise is larger than the volume on price decline. The asymmetric relationship in LIFFE futures is also found to be dynamic as the direction of asymmetry can reverse during the day. It has been argued in the past that a costly short sale restriction that requires a higher transaction cost on a short position than on a long position is responsible for the asymmetric effect in equity markets. Since such a restriction is absent in futures markets, they should not exhibit any asymmetric volume behaviour. Based on the results of this research, the costly short sale hypothesis is rejected. An alternative explanation of the asymmetric relation observed in futures is presented based on recent information models that take into consideration asymmetrically‐informed traders, their dispersion of beliefs, quality and quantity of the information signal, and how the traders process it. The paper also confirms a strong U‐shape trading pattern in 15‐minute volume, but no such pattern is identified in intraday returns.     

Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market

Short‐sales practices in the Hong Kong stock market are unique in that only stocks on a list of designated securities can be sold short. By analyzing the price effects following the addition of individual stocks to the list, we find that short‐sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks for which wider dispersion of investor opinions exists. These findings are consistent with Miller's (1977) intuition and other optimism models. We also document higher volatility and less positive skewness of individual stock returns when short sales are allowed.     

Forecast Dispersion and the Cross Section of Expected Returns

Recent work by Diether, Malloy, and Scherbina (2002) has established a negative relationship between stock returns and the dispersion of analysts' earnings forecasts. I offer a simple explanation for this phenomenon based on the interpretation of dispersion as a proxy for unpriced information risk arising when asset values are unobservable. The relationship then follows from a general options‐pricing result: For a levered firm, expected returns should always decrease with the level of idiosyncratic asset risk. This story is formalized with a straightforward model. Reasonable parameter values produce large effects, and the theory's main empirical prediction is supported in cross‐sectional tests.     

Connecting two markets: An equilibrium framework for shorts,longs, and stock loans

We analyze a reduced-form framework for understanding the equity loan market's impact on share prices. We show that hard-to-borrow stocks will have distinct return patterns, responding more to shocks in the supply of shares available, and to changes in the heterogeneity of investor beliefs, than other stocks. We conduct two empirical tests in which we find strong support for these equilibrium predictions. In our first test, we take advantage of a tax-driven exogenous shock to share loan supply and find that when supply is reduced around dividend record dates, prices of hard-to-borrow stocks increase 1.1% while prices of easy-to-borrow stocks are unaffected. In our second test, we find that hard-to-borrow stocks have 4.8% lower three-month returns than other stocks, with negative returns concentrated in stocks with high heterogeneity in investor beliefs. Thus, we extend the Diether, Malloy, and Scherbina (2002) result that stocks with a greater dispersion of investor beliefs have lower returns.     

Consumption, Aggregate Wealth, and Expected Stock Returns

This paper studies the role of fluctuations in the aggregate consumption–wealth ratio for predicting stock returns. Using U.S. quarterly stock market data, we find that these fluctuations in the consumption–wealth ratio are strong predictors of both real stock returns and excess returns over a Treasury bill rate. We also find that this variable is a better forecaster of future returns at short and intermediate horizons than is the dividend yield, the dividend payout ratio, and several other popular forecasting variables. Why should the consumption–wealth ratio forecast asset returns? We show that a wide class of optimal models of consumer behavior imply that the log consumption–aggregate wealth (human capital plus asset holdings) ratio summarizes expected returns on aggregate wealth, or the market portfolio. Although this ratio is not observable, we provide assumptions under which its important predictive components for future asset returns may be expressed in terms of observable variables, namely in terms of consumption, asset holdings and labor income. The framework implies that these variables are cointegrated, and that deviations from this shared trend summarize agents' expectations of future returns on the market portfolio.     

Linear beta pricing with efficient/inefficient benchmarks and short-selling restrictions

We provide two security pricing models that can be used when short sales of risky securities are not permitted. The first model uses a benchmark located on the expected return-standard deviation efficient frontier without short sales and presents security expected returns as a weighted linear function of two betas, one induced by the benchmark and the other adjusting for the short-sale constraints. The second model uses a benchmark that is inefficient relative to the efficient frontier, does not allow short sales, and expresses security returns as a weighted linear function of three betas:one induced by the inefficient benchmark, and the other two adjusting simultaneously for the short-sales restrictions and the benchmark's inefficiency.These results complement the linear pricing models that link expected returns and betas by allowing, for efficient or inefficient expected return-standard deviation, benchmarks with restricted short sales.     

Corporate Sales, Equity Trading, and Risk

This paper proposes and investigates an explanation for a positive association between the signed value of common share returns and trading activity. The mixture of distributions model for stock returns and trading is applied with the added assumption that product sales for a firm is the directing process which generates the flow of information to equity markets. Because trading depends upon information arrival, sales and trading are positively related. Also, because contribution margin is positive, cash flows increase with sales. Dependence of both cash flows and trading on sales implies that returns and trading are also positively related. This explanation is tested in this paper.     

Short Sales Constraints and Momentum in Stock Returns

Abstract:   We show that stock characteristics identified by D'Avolio (2002) provide a reliable index of the mostly unobservable short sales constraints. Specifically, we find that this index is positively related to the level of short interest and to short selling costs implied by the disparity in prices in the options and stock markets, and is negatively related to future returns. Using this index, we show that the magnitude of momentum returns for the period 1984 to 2001 is positively related to short sales constraints, and loser stocks rather than winner stocks drive this result. We conclude that short sales constraints are important in preventing arbitrage of momentum in stock returns.     

Difference of opinion and the cross-section of equity returns: Australian evidence

This paper examines the relationship between difference of opinion among investors and the return on Australian equities. The paper is the first to employ dispersion in analysts' earnings forecasts, abnormal turnover and idiosyncratic volatility as proxies for difference of opinion. We document a negative relationship between difference of opinion and stock returns when dispersion in analysts' forecasts and idiosyncratic volatility are employed as proxies. This result provides support for Miller's (1977) model and is consistent with the findings of Diether et al. (2002). In contrast, we find mixed results when using abnormal turnover to proxy difference of opinion.     

Efficiency and the Bear: Short Sales and Markets Around the World

We analyze cross‐sectional and time‐series information from 46 equity markets around the world to consider whether short sales restrictions affect the efficiency of the market and the distributional characteristics of returns to individual stocks and market indices. We find some evidence that prices incorporate negative information faster in countries where short sales are allowed and practiced. A common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic. We find strong evidence that in markets where short selling is either prohibited or not practiced, market returns display significantly less negative skewness.     

Investment opportunities and share repurchases

We examine the over-investment motivation for share repurchases using a sample of 139 Real Estate Investment Trusts (REITs) between 1996 and 2010. By combining a REIT's property portfolio data with project ROAs from the underlying real estate market, we are able to create a unique measure of the firm's investment opportunity set. Controlling for other possible buyback rationales, we find that poor investment opportunities are related to higher levels of share repurchases. Conditioning on investment opportunities, we find that the level of cash is positively related to repurchases only for low investment opportunity set firms. We also find a negative relationship between share repurchase announcement returns and investment opportunities.     

Stock returns and beta,firms size,E/P,CF/P,book-to-market,and sales growth: evidence from Singapore and Malaysia

Using data from Singapore and Malaysia for the period 1988–1996, this paper examines the relationship between stock returns and beta, size, the earnings-to-price ratio, the cash flow-to-price ratio, the book-to-market equity ratio, and sales growth (SG). We find the presence of anomalies in these emerging markets. There is a conditional relationship between beta and stock returns for both countries. During months with positive market excess returns, there is a significant positive relationship. We also find a negative relationship between beta and stock returns during months with negative market excess returns. We document the existence of a negative relationship between stock returns and size for both countries. For Singapore, we also document a negative relationship between returns and SG. For Malaysia, we find a positive relationship between returns and the E/P ratio. These relationships are only significant in non-January months.     

Portfolio Returns,Market Volatility,and Seasonality

This paper examines three important issues related to the relationship between stock returns and volatility. First, are Duffee's (1995) findings of the relationship between individual stock returns and volatility valid at the portfolio level? Second, is there a seasonality of the market return volatility? Lastly, do size portfolio returns react symmetrically to the market volatility during business cycles? We find that the market volatility exhibits strong autocorrelation and small size portfolio returns exhibit seasonality. However, this phenomenon is not present in large size portfolios. For the entire sample period of 1962–1995, the highest average monthly volatility occurred in October, followed by November, and then January. Examining the two sub-sample periods, we find that the average market volatility increases by 15.4% in the second sample period of 1980–1995 compared to the first sample period of 1962–1979. During the contraction period, the average market volatility is 60.9% higher than that during the expansion period. Using a binary regression model, we find that size portfolio returns react asymmetrically with the market volatility during business cycles. This paper documents a strongly negative contemporaneous relationship between the size portfolio returns and the market volatility that is consistent with the previous findings at the aggregate level, but is inconsistent with the findings at the individual firm level. In contrast with the previous findings, however, we find an ambiguous relationship between the percentage change in the market volatility and the contemporaneous stock portfolio returns. This ambiguity is attributed to strongly negative contemporaneous and one-month ahead relationships between the market volatility and portfolio returns.

     

The impact of naked short selling on the securities lending and equity market

This paper examines the impact of naked short selling on equity markets where it is restricted to securities on an approved list. Consistent with Miller's (1977) intuition, stocks with the highest dispersion of opinions and short sale constraints are the only stocks to exhibit significant and negative abnormal returns in the post-event period. We also find slightly higher stock return volatility and a small reduction in liquidity when naked short sales are allowed. Overall, it impairs market quality (liquidity and volatility), although there appears to be some improvement in price efficiency in stocks with high short sale constraints.