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.     

The Day-of-the-Week and the Week-of-the-Month Effects: An Analysis of Investors' Trading Activities

This study examines the positive Monday returns detected in the stock market during the 1988–1998 period and finds that (a) the positive Monday returns are concentrated in the first and the third weeks of the month, and (b) they are related to the increasing trading activities of institutional investors.     

The cost of overconfidence in public information

We investigate the effects of investor overconfidence in public information on cross-sectional asset returns. The results show that investors in the US equity market are overconfident about public signals for mature firms that are relatively easy to price—old, large, and dividend-paying firms, value firms, and firms with a higher proportion of tangible assets, little external financing, and low sales growth. However, the effects of the overconfidence on cross-sectional stock returns are reversed quickly and comprise more than half of the short-term return reversals. The risk-adjusted cost of being overconfident about the noisy public signals, measured by return reversals of hedge portfolios formed on unexpected responses, is over 1.1% per month in the first month after portfolio formation, and is still significant despite the active arbitrage trading in the 2000s.     

Asymmetric investor behavior between buyside and sellside: Evidence from investor classes in the Sri Lankan stock market

Using unique trading data for investor classes from Sri Lanka, this study finds asymmetric investor behavior between buyside and sellside in large trades. Investors are positive feedback traders on the buyside and contrarians on the sellside. Domestic investors exhibit more feedback and contrarian behavior than foreign investors, suggesting that foreign investors are more informed on the buyside and less informed on the sellside. Individuals are more feedback and contrarian traders than institutions. Foreign institutional investor sales do not precede, coincide with, or lead to significant returns. Trades do not lead to price momentum or reversals, but leave a permanent positive price effect.     

US and Domestic Market Gains and Asian Investors’ Overconfident Trading Behavior

We find that subsequent to both US and domestic market gains, both Asian individual and institutional investors increase their trading and that this effect is more pronounced in bull markets, in periods of relatively favorable investor sentiment, in periods of extremely high market returns, and in markets with short‐sale constraints. We also find that individual investors trade more in response to market gains than institutional investors. Moreover, we find that further integration of Asian stock markets with US stock markets after the Asian financial crisis in 1998 is an important reason for Asian investors’ response to US market gains.     

Long-term reversals in the corporate bond market

Long-term reversals in corporate bonds are economically and statistically significant in a comprehensive sample spanning the period 1977 to 2017. Such reversals are stronger for bonds with high credit risk and more binding regulatory, capital, and funding liquidity constraints. Bond long-term reversal is not a manifestation of the equity counterpart and is mainly driven by long-term losers. A long-term reversal factor carries a sizable premium and is not explained by long-established equity and bond market factors. Thus, past returns capture investors’ ex-ante risk assessment and the degree of institutional constraints they face, so losing bonds command higher expected returns.     

Flight-to-safety and retail investor behavior

Flight-to-safety (FTS) episodes are associated with substantial yet short-lived changes in expected returns on equities and bonds. These price changes are typically surrounded by active trading and/or risk transfer between different investors. Using aggregate net exchanges, flows from bond to equity mutual funds, in the US for a period 1984 until 2015, I empirically investigate retail investor behavior around FTS episodes. Overall, I find a reversal statistical relation between net exchanges and market excess returns. A one-standard-deviation shock to net exchanges leads to an increase of market excess return of 1.75%, of which 72% is reversed within 5 months. In particular, FTS episodes are preceded by periods where more risk averse investors, e.g. retail investors, rebalance their portfolios towards risky assets. A trading strategy that is based on signals from past net exchanges outperforms the market portfolio, significantly during FTS periods by 1.4% monthly. However, I find that the observed reversal relationship is not necessarily due to price ‘noise’ induced by uninformed trading. It is more reasonable that the sudden increase in market stress and selling of risky assets is caused by other demand/supply shocks driven by increased economic uncertainty.     

Intraweek and intraday trade patterns and dynamics

This paper investigates informed traders' order-splitting strategies on different days of the week and times of the day for a sample of stocks traded on the Australian Stock Exchange. Based on cumulative price changes, we document that informed traders tend to use medium size trades. We find that informed investors concentrate their strategic trading on Mondays and particularly during the first trading hour. In addition, informed investors also use large size trades around market opening and closing, as well as on days other than Mondays and Fridays. These results are more pronounced for the large market capitalization stocks.     

Price limit performance: New evidence from a quasi-natural experiment in China's ChiNext market

This study examines the impact of daily price limits on market performance and trading activity by using a quasi-natural experiment in China. It focuses on the case of the ChiNext market, where the daily price limits of stocks increased from 10% to 20% in 2020. The results show that, initially, the stock prices and occurrences of 10% price limit hits increase, but then decline after the new price limits have been implemented. The level of trading liquidity and volatility increases significantly, with a greater impact on the short term than the long term. These price limit performances are more pronounced for stocks with additional retail interest. The analysis of detailed trading data reveals that institutional investors initially purchase ChiNext stocks in large quantities, followed by retail investors who purchase smaller quantities. In the long run, institutional investors tend to increase their holdings, while retail investors tend to sell their holdings. Additionally, there is a temporary increase in investor attention, price synchronicity, and stock risks, followed by a decline. The findings suggest that wider price limits increase trading volumes and enhance long-term market efficiency, but encourage immediate price manipulation, causing short-term overreactions and long-term reversals. This study provides valuable insights for building an effective price limit system.     

Trends in market reactions: stock dividends and rights offerings at Istanbul stock exchange

This paper examines the existence of different price reactions to the implementation of stock dividends and rights offerings as the stock market matures over time and the investor mix changes. For that purpose market reactions at the Istanbul Stock Exchange (ISE) are Investigated during three sub-periods displaying different developmental phases of the market defined in terms of institutional framework, transactions volumes and related investor profiles. Differences in price reactions and the accompanying trading volumes are tested as the investor mix changes and small investors enter ISE due to the cultivating of awareness about the stock market. Other possible causes of excess returns such as prior knowledge about the stocks being traded or a preferred trading range are also tested. Considering the characteristics of thinly traded emerging markets, non-parametric tests are employed besides traditional event study methodology and results are immune to the choice of relevant test statistics. The results indicate that the changing mix of investors shift the timing of market reaction from announcement to implementation of stock dividends and rights offerings. Since individual investors, who are attracted by lower relative prices, are not expected to be prompt in timing, excess returns persist over longer event windows and are accompanied by increasing trading volumes.     

Do Fund Flow‐Return Relations Depend on the Type of Investor? A Research Note

This study investigates whether the relation between aggregate fund flow and market returns differs between retail and institutional funds. For the retail fund sample, we document a contemporaneous relation between flow and market returns and also find evidence of feedback trading. In contrast, there is little evidence of a relation between flow and market returns for the institutional fund sample. Consequently, it appears that retail and institutional fund investors use different investment strategies, with retail investors following a more naive strategy. We find no evidence of flow inducing price pressure for either type of fund.     

Price Discovery and Dissemination of Private Information by Loan Syndicate Participants

We delineate key channels through which flows of confidential information to loan syndicate participants impact the dynamics of information arrival in prices. We isolate the timing of private information flows by estimating the speed of price discovery over quarterly earnings cycles in both secondary syndicated loan and equity markets. We identify borrowers disseminating private information to lenders relatively early in the cycle with firms exhibiting relatively early price discovery in the secondary loan market, documenting that price discovery is faster for loans subject to financial covenants, particularly earnings‐based covenants; for borrowers who experience covenant violations; for borrowers with high credit risk; and for loans syndicated by relationship‐based lenders or highly reputable lead arrangers. We then ask whether early access to private information in the loan market accelerates the speed of information arrival in stock prices. We document that the stock returns of firms identified with earlier private information dissemination to lenders indeed exhibit faster price discovery in the stock market, but only when institutional investors are involved in the firm's syndicated loans. Further, the positive relation between institutional lending and the speed of stock price discovery is more pronounced in relatively weak public disclosure environments. These results are consistent with institutional lenders systematically exploiting confidential syndicate information via trading in the equity market.     

Momentum in weekly returns: the role of intermediate‐horizon past performance

Gutierrez and Kelly (2008) recently documented momentum in weekly returns. Using the Australian market as a setting, we find that stocks with high 1‐week returns exhibit a continuation in returns up to 1 year after a brief initial return reversal. However, after controlling for the intermediate‐horizon past performance, the continuation in returns after 1‐week returns disappears. These findings suggest that different past investment horizons contain separate information about price momentum and that intermediate‐term trends dominate short‐term trends in driving future returns. Overall, we show that understanding momentum over different horizons facilitates the design of more profitable trading strategies.     

A behavioral explanation of the value anomaly based on time-varying return reversals

We investigate the dynamics of the value anomaly in order to identify the driving forces of the anomaly. We show that the large positive value-minus-growth portfolio returns are explained by an over-reaction (under-reaction) to the positive (negative) market movements in short, specific time periods, during which the average returns of value-minus-growth portfolios are more than 2% a month. We propose an explanation based on behavioral biases: the dynamics of the value anomaly reflect the increased speed of return reversals subsequent to overreaction. Two conditions that increase the return reversals are proposed: when investors respond to public signals asymmetrically or when public signals become noisy. Our empirical results reveal that the value anomaly is explained by either one of these two channels.     

Presidential Address: Asset Price Dynamics with Slow‐Moving Capital

I describe asset price dynamics caused by the slow movement of investment capital to trading opportunities. The pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal. The amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade, such as search costs for trading counterparties or time to raise capital by intermediaries. I discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions, which subsided afterward. After presenting examples of price reactions to supply shocks in normal market settings, I offer a simple illustrative model of price dynamics associated with slow‐moving capital due to the presence of inattentive investors.     

Real Estate Investment Trusts and Stock Price Reversals

A trigger value of –5% is used to identify a sample of real estate trusts (REITS) that experience substantial one-day price declines. Abnormal returns are then calculated for the subsequent two-day period. The results of this study suggest stock price reversals are associated with extreme stock price declines for REITS. Hence, it appears the market overreacts at the time unfavorable information about REITS is disseminated. The degree of reversal across the sample is assessed according to variables such as the initial price decline (day 0), pre-event leakage (day –1), size (capitalization), the type of real estate investment trust, and relative trading volume.     

Calendar Anomalies: The Case of International Property Shares

In this paper we analyze the price dynamics of international property shares for the ten most prominent markets from around the world plus South-Africa. We focus on the presence of calendar effects in daily and monthly price returns and examine these effects both over time and across countries. For the daily returns we find price anomalies for Fridays and Mondays in all markets. Friday returns tend to be the highest of the week, while Mondays are weakest. We find that these patterns were most prominent during the 1980s and early 1990s and in the smaller markets in our sample. For the monthly returns we found little evidence for price irregularities. In most cases January was superior to most other months, but these differences lacked statistical significance. More interesting was the sell in May effect that seemed to be present in ten out of 11 markets. Price returns during the winter season outperformed the summer months and in five countries these difference were both economically and statistically significant. Finally, we looked at firm level returns to isolate the drivers of these infamous calendar effects. The day-of-the-week effect appears to be most pronounced among small and young firms that have little or no institutional investors. Large and long-established listed real estate firms with a large portion of loyal block-holders experience no significant price patterns during the trading week.

Information,hedging demand,and institutional investors: Evidence from the Taiwan Futures Exchange

This paper examines the effect of hedging demand by various types of institutional investor on subsequent returns and volatility. Using data from the Taiwan Futures Exchange, empirical results indicate that the hedging demand of foreign investors has a significant negative impact on subsequent returns and volatility. In addition, trading strategies based on the extreme hedging demand of foreigners are positively correlated with trading performance. Furthermore, there is evidence to show that returns (volatility) also affect the subsequent hedging demand of foreign investors, suggesting a feedback relation. Finally, the hedging demand of foreign investors has a greater impact on subsequent returns and volatility after global financial turmoil. Accordingly, this paper concludes that foreign investors are informed hedgers in the Taiwan futures market, especially after global financial turmoil.     

短期羊群行为的影响因素与价格效应——基于高频数据的实证检验

通过创新性地使用日内高频交易数据对A股市场中的羊群行为进行研究,本文发现:(1)羊群行为具有短期脆弱性特征,随着度量频率的提高,羊群行为的程度严格递增。(2)信息不对称程度、机构投资者比例、股票规模等因素,会显著影响短期羊群行为程度。(3)短期羊群行为会伴随着明显的价格反转:短期买入(卖出)羊群行为后,股票的超额收益显著为负(正),并且短期羊群行为越显著,价格反转的程度越大。(4)价格反转效应存在不对称性:规模越大、交易越活跃的股票,短期买入羊群行为的价格反转越明显,而短期卖出羊群行为的价格反转越不明显。     

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.