We show that the quality of information sharing networks linking firms’ institutional investors has stock return predictability implications. We find that firms with high shareholder coordination experience less local comovement and less post earnings announcement drift, consistent with the notion that information sharing networks facilitate information diffusion and improve stock price efficiency. In support of the view that coordination acts as an information diffusion channel, we document that the stock return performance of firms with high shareholder coordination leads that of firms with low shareholder coordination.
Subtopics: ETFs · Firm risk · Herding · Mutual Funds · Short selling · Valuation
Using the informational sufficiency procedure from Forni and Gambetti (2014) along with data from McCracken and Ng (2014), we update the results of Lee (1992) and find that his Vector Autoregression (VAR) is informationally deficient. To correct this problem, we estimate a Factor Augmented VAR (FAVAR) and analyze the differences once informational deficiency is corrected with an emphasis on the relationship between real stock returns and inflation. In particular, we examine Modigliani and Cohn’s (1979) inflation illusion hypothesis, Fama’s (1983) proxy hypothesis, and the “anticipated policy hypothesis.”
This article presents a dynamic stock-valuation model in an incomplete-information environment in which the unobservable mean earnings growth rate (MEGR), is learned and price is updated continuously. We calibrate our model to the S&P 500 Composite index to empirically evaluate its performance. Of the 8.84% total risk premium we estimate, we find that the earnings growth premium is 4.57%, the short rate risk contributes 3.38%, and the learning-induced risk premium on the unknown MEGR is 0.89% (a nontrivial 10% of the total risk premium). This result highlights the significant learning effect on valuation implying an additional risk premium in an incomplete information environment.
We investigate how new information impacts quote clustering in the bond market. We find that clustering, along with quote activity, price volatility and bid-ask spreads, increases sharply in the minutes following releases of macroeconomic news. Each returns to near-normal levels within the hour. Effects are strongest for more liquid on-the-run notes and for the announcements typically associated with substantial information flow. The strong positive co-movement of clustering, quote activity, price volatility and bid-ask spreads supports the conclusion that innovations of these variables are endogenous to the arrival and incorporation of information into prices.
Recent studies claim that mutual fund managers demonstrate strong MARKET liquidity timing skills. We extend their liquidity timing tests to the four-factor case and investigate liquidity timing skills with respect to the MARKET, SIZE, VALUE and MOMENTUM factors. Contrary to these claims, we find no evidence that fund managers adjust market exposure in anticipation of market liquidity changes. We find rather strong evidence that fund managers successfully overweight small stocks as market liquidity increases. Our study also demonstrates that it is easy to misidentify SIZE liquidity timing as MARKET liquidity timing in models that focus only on MARKET liquidity timing.
We examine if a floating NAV increases the transparency of risk for investors. Using closed- income fixed income funds we find little evidence that a floating NAV helps investors better understand the value and risk of a fund when a fund’s assets trade infrequently. This potentially informs the debate regarding the adoption of a floating NAV in the money market industry. Our results suggest that it is unlikely that the benefits of floating NAV will outweigh the costs.
This study finds that, over short horizons, herding by short-term institutions promotes price discovery. In contrast, herding by long-term institutions drives stock prices away from fundamentals over the same periods. Furthermore, while the positive predictability of short-term institutional herding for stock prices is more pronounced for small stocks and stocks with high growth opportunities, the negative association between long-term institutional herding and stock prices is stronger for stocks whose valuations are highly uncertain and subjective. Finally, we show that the destabilizing effect of institutional herding persistence documented in the recent literature is entirely driven by persistent herding by long-term institutions.
We show that previous findings regarding the profitability of trend-following trading rules over intermediate horizons in futures markets also extend to individual U.S. stocks. Portfolios formed using technical indicators such as moving average or channel ratios, without employing cross-sectional rankings of any kind, tend to perform about as well as the more commonly examined momentum strategies. The profitability of these strategies appears significant, both statistically and economically, through 2007, but evidence of profitability vanishes after 2007. Market-state dependence, while clearly present, does not explain the post-2007 reduction in returns to these strategies.
Studying a large sample of publicly available data on failures to deliver, we find that stocks reaching threshold levels of failures become significantly overvalued. Where short sale constraints are especially binding, we report extreme overpricing and subsequent reversals. These findings support the overvaluation hypothesis, although the mispricing is likely to be difficult to arbitrage because of extreme shorting costs. In addition, threshold stocks with low short interest become more overvalued than threshold stocks with high short interest. This suggests that the level of short interest reflects supply-side effects when the examination conditions on the difficulty of borrowing shares.
We examine the dynamic relations among market returns, market (MV), and idiosyncratic (IV) around business cycles. Compared to the conventional view, which treats MV and IV separately, we first find that excess return on the market anticipates negative MV and IV, suggesting market return’s role as an economic indicator, with the relation stronger in recessions. Second, IV helps predict positive MV, mainly in early part of recessions, suggesting a dynamic evolution from IV to MV. Third, MV helps predict negative IV, suggesting MV may substitute IV to some extent.