Monday, October 25, 2010

A fast look at some papers from the FMA

Bull and bear in front of the Frankfurt Stock ...There were several papers I went to from German schools, so an image from Germany via WikipediaI would love to say I will go back and review these more, but given time constraints I can not guarantee it, so here is a very fast look at some papers from the FMA's this past week in NYC. 

(Note there will be more papers mentioned in the coming days.  These were all from before lunch on the first day.)

Chung, Hung, and Yeh find weak support for investor sentiment being able to preduct future stock returns. Sentiment does a particularly poor job in down markets.


Anand, Irvine, Puckett, and Venkataraman  examine trading during Market crashes and report that there was a significant change in trading patterns during crash.  Notably, trading migrated to more liquid securities as transaction costs increased in the midst of the crash.  These more liquid securities tended to be larger and less volatile.  As a result, the relative volume for some in the high transaction costs/low liquidity cohort dropped by about half.  Also the more liquid securities bounced back faster.

Asparouhova, Bessembinder, and Kalcheva look at noise induced biases in the reporting of anomalies.   While not totally new,  (Think Blume and Satmbaugh 1983 and/or Arnot et al 2006),  it is well worth reading!  Indeed, it may help explain the size (about 1/2 of the size anomaly from 1963-1980!) and illiquidity anomaly better than almost anything I have seen.   (yeah it will change my class notes)

Stocks move together more than their underlying fundamentals suggest (see Shiller 1989 and many others).  Isrealsen tries to identify why this is true.  He finds that at least part of the explanation is that some analysts (especially those that either work together (now or in the past) or are otherwise "connected") lead to greater co-movement of the stocks they follow.   (My translation of this is that the previously found "excessive" correlations can be explained not only changing investor sentiment, but also a lack of independent thinking by analysts.)

Active investing has a bad name in academia.  So I watched it was with added attention when Ye defended it not from a return perspective, but when he found that active institutions reduce comovements after S&P 500 inclusions and after 2:1 splits (both events which were previously associated with increased comovements).  The intuition is that rather than just blindly doing what others are doing (as is the case in passive investing), active investors become more informed had something good to say about

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