Exchange traded funds (ETF) provide a means for investors to access assets indirectly that may be accessible at a high cost otherwise. I show that liquidity segmentation can explain the tendency for ETFs to trade at a premium to NAV as well as the life-cycle pattern in premiums. ETFs with larger NAV tracking error standard deviations (TESD) tend to trade at higher premiums and the liquidity benefits offered by foreign ETFs and fixed income ETFs are revealed to be the most valuable to investors. Further tests validate that TESD has the desirable properties of a liquidity segmentation measure.
This paper exploits the unique experimental setting created by nearly 1,300 new single stock futures listings on the OneChicago exchange between 2003 and 2009, to investigate the impact of derivatives introductions on the tightness of short sale constraints facing their underlying assets. After controlling explicitly for supply and demand conditions in the stock lending market, this experiment reveals a precipitous decline in active utilization rates and loan fees in the lending market, after the futures introductions. The paper provides strong evidence supporting the view that derivatives represent a viable alternative synthetic short selling venue relaxing short sale constraints facing their underlying assets.
We compare intraday impacts of Federal Reserve decision announcements and Minutes releases between 2004 and 2015 on 1,997 equity return and volatility series. We find that returns are unresponsive to either news release, but conditional volatility increases for both, manifesting immediately after each information release, and persisting for 30 Minutes post-announcement. These effects are larger for decisions than for Minutes releases. Upon stratifying firms by trading intensity, we find most “high trading intensity” firms respond to these announcements, while “low trading intensity” firms are less affected. Our results show that traders respond, albeit differently, to both sets of information releases.
Using a matched sample of separately managed accounts (SMAs) and mutual funds (MFs) with the same portfolio manager and investment style, we find that concurrently managed MFs consistently underperform their SMAs counterparts. Fund characteristics and liquidity betas fail to fully explain the underperformance. An event-study analysis finds that the weights placed into top (bottom)-performing stocks increase for existing SMAs (MFs) and negative return gaps increase for the MFs after the onset of concurrent management. We find that higher compensation collected by SMA fund managers are associated with more unseen managerial actions which positively contribute to the SMA return gap.
We examine the influence of investor conferences on firms’ stock liquidity. We find that firms participating in conferences experience a 1.4% to 2.8% increase in stock liquidity compared to non-conference firms. Consistent with investor conferences improving firm visibility, the increase in liquidity is larger for firms with low pre-conference visibility and varies predictably with conference characteristics that affect the ability of investors to revise their beliefs about the firm. However, for firms with a large investor base and high visibility, conference participation is associated with a decline in stock liquidity, consistent with investor conferences exacerbating the information asymmetry among investors.
One of the most distinct trends in capital markets over the past two decades has been the rise in the equity ownership of passive financial institutions. We propose that this rise has had a negative effect in price informativeness. By not trading around firm-specific news, passive investors reduce the firm-specific component of total volatility and increase stock correlations. Consistent with this hypothesis, we find that the growth in passive institutional ownership is robustly associated with the growth in market model R2s of individual stocks since the early 1990s. Additionally, we find a negative relation between passive ownership and earnings predictability, an informativeness proxy.
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.
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.