ROBUSTNESS OF THE HEADQUARTERS‐CITY EFFECT ON STOCK RETURNS

Recent studies report that U.S. firms headquartered near each other experience positive comovement in their stock returns, a finding suggestive of local biases in equity trading activity. We investigate the robustness of these findings and find that including additional pricing factors in models for monthly stock returns materially reduces the magnitude of the headquarters‐city effect in stock returns. Additionally, we find that an implicit null hypothesis of zero local return comovement is inappropriate as there is positive comovement between a stock's return and returns on portfolios of stocks from nonheadquarters cities, on average. Nevertheless, results benchmarked against estimates based on resampling methods indicate a significant and robust headquarters‐city effect in stock returns.     

Risk factor and industry effects in the cross-country comovement of momentum returns

This paper examines the sources of cross-country comovement of momentum returns over the 1975–2004 period. Using data on more than 17,000 individual firms across 100 industries from 40 countries, we document the profitability of country-neutral individual firm, industry, and industry-adjusted return momentum. We show that country-neutral momentum returns are significantly correlated across countries, the correlation is time-varying, and that comovement among industries cannot explain the comovement of country-neutral momentum returns. However, we find that standard risk factor models do explain a significant portion of the cross-country comovement of momentum returns, even though they do not explain average momentum returns.     

Price-based return comovement

Similarly priced stocks move together. Stocks that undergo splits experience an increase in comovement with low-priced stocks and a decrease in their comovement with high-priced stocks. Price-based comovement is not explained by economic fundamentals, firm size, or changes in liquidity or information diffusion. The shift in comovement following splits is greater for large stocks, high-priced stocks, and when investor sentiment is high. In the full cross-section, price-based portfolios explain variation in stock-level returns after controlling for movements in the market and industry portfolios as well as portfolios based on size, book-to-market, transaction costs, and return momentum. The results suggest that investors categorize stocks based on price.     

Risk adjustment and momentum sources

We show that the conventional procedure of risk adjustment by running full-sample time-series Fama-French three-factor regressions is not appropriate for momentum portfolios because the procedure fails to allow for the systematic dynamics of momentum portfolio factor loadings. We propose a simple procedure to adjust risks associated with the Fama-French three factors for momentum portfolios. Using our proposed method, the Fama-French three factors can explain approximately 40% of momentum profits generated by individual stocks and nearly all of momentum returns from style portfolios.     

Asset pricing: A tale of two days

We show that asset prices behave very differently on days when important macroeconomic news is scheduled for announcement. In addition to significantly higher average returns for risky assets on announcement days, return patterns are much easier to reconcile with standard asset pricing theories, both cross-sectionally and over time. On such days, stock market beta is strongly related to average returns. This positive relation holds for individual stocks, for various test portfolios, and even for bonds and currencies, suggesting that beta is after all an important measure of systematic risk. Furthermore, a robust risk–return trade-off exists on announcement days. Expected variance is positively related to future aggregated quarterly announcement day returns, but not to aggregated non-announcement day returns. We explore the implications of our findings in the context of various asset pricing models.     

Asymmetric dynamics of stock price continuation

This paper finds that the dynamics of stock price continuation are asymmetrical, in terms of both business cycles and past performances. During times of recession, stock returns are explained differently for past losers and winners; the level of credit quality dominates the return dynamics for extreme losers, while levels of information-based trading activity and information ambiguity contribute to winners’ medium-term returns. Such asymmetry is proposed as the source of insignificant profits achieved using conventional momentum strategies. On the other hand, in times of expansion, conventional asset pricing factors are found to affect stock returns with a dependence on the level of credit quality; this suggests that more profitable momentum strategies remain to be discovered.     

Momentum strategies in commodity futures markets

The article tests for the presence of short-term continuation and long-term reversal in commodity futures prices. While contrarian strategies do not work, the article identifies 13 profitable momentum strategies that generate 9.38% average return a year. A closer analysis of the constituents of the long–short portfolios reveals that the momentum strategies buy backwardated contracts and sell contangoed contracts. The correlation between the momentum returns and the returns of traditional asset classes is also found to be low, making the commodity-based relative-strength portfolios excellent candidates for inclusion in well-diversified portfolios.     

Momentum in Australian style portfolios: risk or inefficiency?

Momentum strategies have been reported to be successful across a range of different markets and asset classes. Three possible explanations for momentum have been hypothesised: risk, return continuation and excessive co‐movement of stock returns compared with dividends. Lewellen (2002) adds to this literature by providing evidence of strong momentum returns in style portfolios that can be explained by negative cross‐serial correlation, a result which supports the excess co‐movement hypothesis. We report robust evidence of style momentum in the Australian market and use the Jegadeesh and Titman (1995) return decomposition to show that this momentum strategy is predominately explained by positive autocorrelation. Our results support the return continuation hypothesis and confirm Chen and Hong's (2002) assertion that Lewellen's (2002) explanation of style momentum returns does not stand up out‐of‐sample.     

Idiosyncratic momentum and the cross‐section of stock returns: Further evidence

In this article, we evaluate the profitability and economic source of the predictive power of the idiosyncratic momentum effect, by using five popular asset pricing models to construct the idiosyncratic momentum. We show that all five idiosyncratic momentum strategies produce similar return predictability and consistently outperform the conventional momentum strategy in the cross‐sectional pricing of equity portfolios and individual stocks. This positive effect of idiosyncratic momentum on returns is consistent with the investment capital asset pricing model (CAPM). Further analysis reveals that the firm‐level idiosyncratic momentum effect cannot extend to the aggregate stock market.     

Timescale-dependent stock market comovement: BRICs vs. developed markets

This paper examines the differences in the asset return comovement of the BRIC countries (Brazil, Russia, India and China), the other developed economies in their regions (Canada, Hong Kong and Australia) and the major industrialized economies (the U.K., Germany and Japan) with respect to the U.S. for different return periods. The novelty of the paper is that the stock return indices are decomposed to several timescales using wavelet analysis and that the results are further used as inputs for the dynamic conditional correlation (DCC) framework, which is used as a measure of comovement. The results propose that the level of stock market comovement depends on regional aspects, the level of development and especially on the timescale of returns. These factors should be carefully considered in designing internationally diversified portfolios. The BRICs provide some portfolio diversification benefits, but it is not justifiable to treat all BRICs as a homogeneous group of emerging economies in terms of stock market comovement.     

On the relationship between concentration of prospect theory/mental accounting investors,cointegration, and momentum

We examine the role of cointegration between stock prices and their estimated fundamental values in return momentum. We find that the positive relationship between capital gains overhang and future stock returns in Grinblatt and Han (2005) is significantly stronger among the “non-cointegrated” group of stocks as compared with the “cointegrated” group of stocks. Further, for the cointegrated stocks, the slower the speed of adjustment to the cointegrating equilibrium, the greater (smaller) is the future return of stocks with unrealized capital gains (losses). These findings are robust to various firm characteristics including firm size, book-to-market ratio, past returns, idiosyncratic volatility, dispersion in analysts’ earnings forecasts, turnover, individual investor ownership, and industry returns.     

On the Stability of the Cross‐Section of Expected Stock Returns in the Cross‐Section: Understanding the Curious Role of Share Turnover

In this paper, we shed further light on cross‐sectional predictors of stock return performance. Specifically, we explore whether the cross‐section of expected stock returns is robust within stock groups sorted by past monthly return. We find that the book/market and momentum effects are remarkably robust to sorting on past returns. However, share turnover is negatively related to future returns for stocks with abnormally low stock price performance in the recent past, but postively related to returns for well‐performing stocks. This casts doubt on the use of turnover as a liquidity proxy, but is consistent with turnover being a proxy for momentum trading which pushes prices in the direction of past price movements. Our results are robust to both NYSE/AMEX and Nasdaq stocks, and also robust to stratifying the sample by time period.     

The Return of the Size Anomaly: Evidence from the German Stock Market

This paper examines the size effect in the German stock market and intends to address several unanswered issues on this widely known anomaly. Unlike recent evidence of a reversal of the size anomaly this study documents a conditional relation between size and returns. I also detect strong momentum across size portfolios. The results indicate that the marginal effect of firm size on stock returns is conditional on the firm's past performance. I use an instrumental variable estimation to address Berk's critique of a simultaneity bias in prior studies on the small firm effect and to investigate the economic rationale behind firm size as an explanatory variable for the variation in stock returns. The analysis in this paper indicates that firm size captures firm characteristic components in stock returns and that this regularity cannot be explained by differences in systematic risk.     

The coskewness puzzle

We propose a novel approach to testing non-linear stochastic discount factor (SDF) specifications that arise in rational representative investor models. Our approach does not require overly-restrictive assumptions about the shape of investors’ preferences, typically imposed by the extant literature, and is based instead on restrictions that rule out “good deals”, i.e., arbitrage opportunities as well as unduly large Sharpe ratios. We apply this framework to test the empirical admissibility of 3 and 4-moment versions of the CAPM. We find that, while coskewness and cokurtosis risk help price a number of stock strategies and portfolios, including static strategies based on a fine industry-level diversification, momentum strategies and portfolios managed on the basis of available information, the CAPM and its 3 and 4-moment versions cannot provide an exhaustive account of observed asset returns.     

Cashflow news,the value premium and an asset pricing view on European stock market integration

The decomposition of national CAPM market betas of European countries’ value and growth portfolio returns into cashflow and discount rate news driven components reveals that i) high average returns on value portfolios are associated with disproportionately high sensitivity to national cashflow news which corroborates recent evidence for the U.S. and ii) two-beta variants of national CAPMs capture the cross-sectional dispersion in European stock returns. The latter finding is suggestive of relatively well integrated stock markets among the core European countries and reflects basic asset pricing theory. One (national) discount factor should price any (international) asset.     

Reward-risk momentum strategies using classical tempered stable distribution

We implement momentum strategies using reward-risk measures as ranking criteria based on classical tempered stable distribution. Performances and risk characteristics for the alternative portfolios are obtained in various asset classes and markets. The reward-risk momentum strategies with lower volatility levels outperform the traditional momentum strategy regardless of asset class and market. Additionally, the alternative portfolios are not only less riskier in risk measures such as VaR, CVaR and maximum drawdown but also characterized by thinner downside tails. Similar patterns in performance and risk profile are also found at the level of each ranking basket in the reward-risk portfolios. Higher factor-neutral returns achieved by the reward-risk momentum strategies are statistically significant and large portions of the performances are not explained by the Carhart four-factor model.     

Correlation and return dispersion dynamics in Chinese markets

This paper studies the relation between firm-level return dispersions and correlations among Chinese stocks during periods of unusually large upward and downward swings. We analyze individual stock returns across 18 sectors and test if return dispersions and stock correlations show asymmetric patterns for extreme up and down markets. Evidence from studies on U.S. stocks suggests that equity return correlations tend to be much greater on the downside than on the upside and that the degree of comovement gets even stronger during extreme market states. However, in the case of Chinese stock market, we find that higher downside correlations apply to only stocks within the Financial sector. With the exception of Financial stocks, we find that stock correlations are significantly higher during up markets, rather than down markets. Regarding firm-level return dispersions, our findings are consistent with rational asset pricing model predictions. We find that equity return dispersions are significantly higher during periods of large price changes.     

Communication and Comovement: Evidence from Online Stock Forums

We study investor communication and stock comovement using a novel data set from an active online stock forum in China. We find substantial comovement among the returns of a stock and its “related stocks,” which are frequently discussed in the subforum dedicated to the given stock. Comovement is greater when the discussion of related stocks is more intensive. Further, the effect of communication on comovement is stronger for stocks associated with higher information uncertainty. Codiscussed stocks are more actively traded and experience more correlated trading. A trading strategy that exploits communication‐driven comovement generates abnormal returns. Our findings highlight the impact of investor communication on asset comovement.     

Attention allocation and international stock return comovement: Evidence from the Bitcoin market

We employ extreme Bitcoin returns as exogenous shock events to investigate the impact of investor attention allocation on worldwide stock return comovement. We find that (1) these shock events decrease worldwide stock return comovement, (2) there is an asymmetric effect in which a crash shock event has a greater impact on return comovement than a jump shock event, and (3) the impact of these shock events on equity comovement is more pronounced in emerging markets. Our results suggest that identifying extreme Bitcoin returns will benefit portfolio construction. Our results may be of considerable interest to investors, as well as to academics interested in portfolio diversification, asset comovement, and cryptocurrencies.