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Momentum Trading and Limits to ArbitrageArmstrong, William 2012 May 1900 (has links)
An extensive body of research supports the momentum strategy's persistence but disagrees on the underlying source of its profitability. A key obstacle to distinguishing between behavioral and rational explanations of momentum is that mispricing is unobservable. This dissertation studies the endogenous relationship between momentum trading and mispricing. The basic idea is that momentum trades can impede arbitrage when they are in the opposite direction of arbitrage trades and reinforce arbitrage when they are in the same direction. A simple model suggests that when momentum trades reinforce the arbitrage process, momentum strategy returns contain relatively less mispricing than when momentum trades impede the arbitrage process. Empirical results show that an arbitrage-reinforcing strategy has significantly higher average returns that are largely related to risk and do not reverse in subsequent periods, while an arbitrage-impeding strategy exhibits significant long-term reversal consistent with more mispricing. Additional tests show that winners have higher future growth rates than losers consistent with cross-sectional differences in expected returns. Overall, the evidence suggests that momentum profitability is largely related to risk which is partially masked by mispricing. An important implication of this model is that, like noise traders, trading strategies that do not condition on relative value can impede arbitrage.
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Common risk factors in bank stocksViale, Ariel Marcelo 17 September 2007 (has links)
This dissertation provides evidence on the risk factors that are priced in bank
equities. Alternative empirical models with precedent in the nonfinancial asset pricing
literature are tested, including the single-factor Capital Asset Pricing Model (CAPM),
three-factor Fama-French model, and Intertemporal Capital Asset Pricing Model
(ICAPM).
The empirical results indicate that an unconditional two-factor Intertemporal
Capital Asset Pricing Model (ICAPM) model, that includes the stock market excess
return and shocks to the slope of the yield curve, is useful in explaining the cross-section
of bank stock returns. I find no evidence, however, that firm specific factors, such as size
and book-to-market ratios, are priced in bank stock returns. These results have a number
of practical implications for event studies of banking firms, estimation of bank cost of
capital and investment performance, as well as regulatory initiatives to utilize market
discipline to evaluate bank risk under Basel II.
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Three Essays in Investments:Kim, Jinyoung January 2024 (has links)
Thesis advisor: David H. Solomon / My dissertation comprises three essays delving into questions that contemporary investors encounter in the ever-evolving landscape of investments. The first essay examines how the presence of public pension funds as limited partners influences venture capitalists' (VCs) risk-taking behaviors. It notes that investments by public pension funds in the venture capital market have increased over the past two decades, and these funds possess unique objective functions compared to other venture capital investors. Findings suggest that VCs backed by public pensions tend to invest in startups with lower-risk profiles, such as those with technologies related to public companies, numerous patents, and later funding rounds, leading to more frequent and quicker exits but lower returns. To establish causality, I employ an instrumental variable evaluating the likelihood of public pension funding based on the location of funds initiated during a typical fundraising cycle in a venture capital firm. Furthermore, I find that public pensions prefer venture capital firms with a track record of conservatively managing funds, particularly those pensions that have previously engaged with such firms. The second essay shifts focus to the stock market, documenting higher returns from companies developing new technologies. The advancement of new technologies is pivotal to an economy’s potential, yet it carries inherent risks. As per investment theories, investors demand premiums for holding stocks associated with high uncertainty, prompting questions about whether they are adequately compensated for investing in companies undertaking highly uncertain projects. A novel application of a graph-neural network model identifies new technology patent publications annually, enabling the calculation of firms' exposure to new technologies. With the measure, I find that portfolios with high new-tech exposure outperform those with low exposure, driven by significant risk premiums. This sheds light on the positive correlation between idiosyncratic risk and stock returns, contributing to our understanding of the market's valuation of technological innovation. The third essay presents a systematic analysis of stock market valuations of Corporate Social Responsibility (CSR) initiatives. The study identifies public demand for CSR as a pivotal factor in enhancing the value of CSR activities. Analyzing market reactions to CSR activities via cumulative abnormal returns, the research finds overall neutral market responses. Nonetheless, it finds that heightened public concern for specific issues can sway market reactions positively. Also, when CSR initiatives employ strategies that extend beyond the capabilities of individuals, the market responses tend to be favorable. The paper further shows that firms strategically increase their CSR activities and choose implementation modes, aiming to enhance their value. To explain why market reactions are, on average, neutral, I further provide evidence suggesting reasons such as virtue signaling, a lack of understanding of the importance of profitability, and other executive motives. Together, these essays deepen our understanding of investments by exploring how financial market participants, corporate endeavors in technological advancements, and societal expectations for corporate social responsibility influence investor behavior and asset prices. / Thesis (PhD) — Boston College, 2024. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.
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Foreign Equity Portfolio Flows and Local Markets: Two Examples from the Istanbul Stock ExchangeKonukoglu, Ali Emre 16 March 2011 (has links)
This thesis analyzes the nature of foreign equity trades in relation to their effects
on local markets. My goal is to contribute to the understanding of equity flows of foreign investors and their effect on the local markets. The thesis consists of two
chapters, both of which employ a novel data set that is consisted of monthly equity
flows by foreign investors at Istanbul Stock Exchange of Turkey.
The first chapter, Foreign Ownership and World Market Integration, aims to explain the de facto financial market integration with global markets with foreign equity
ownership using a novel data set of foreign portfolio flows at the individual stock level.
The main result is the positive link between global nancial integration and past portfolio in flows by foreign investors on the cross-section of local stocks. The results have high economic significance: Across individual stocks a 1.4% increase in foreign portfolio inflows corresponds to up to 3.3% greater relative explanatory power of the global factor in explaining local stock returns in the following month. The results are indicative of a causal link: The lead-lag effect between foreign portfolio inflows and financial integration does not exist in the opposite direction. I show that stocks that experience an increase in foreign ownership are not more financially integrated in the past, i.e. the foreign portfolio flows are not a response to increased financial integration.
The second chapter is titled as Uninformed Momentum Traders and it studies the
relationship between momentum trading and information. I present evidence that
supports the hypothesis that momentum trading is linked to a lack of information. I
document significant momentum trading by foreign investors in stocks on which they
potentially have more informational disadvantages. Small stocks, stocks with high
volatility and low liquidity, stocks that are financially less integrated and have greater foreign exchange risk are subject to greater momentum trading. Moreover, stocks on
which foreign trades indicate lower future profitability are subject to higher momentum trading. Additionally, I show that momentum trades by foreign investors exert
contemporaneous price pressure and have no valuable longer-run information content.
The contemporaneous price pressure of 2.30% per month is followed by a significant
return reversal in the following two quarters. Finally, there is strong evidence that foreign investors do not possess local market speci c information. Momentum trading
by foreign investors is triggered by the past profitability of the momentum factor in
the local market. However, the negative pro tability of momentum makes momentum trading a sub-optimal trading strategy.
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Foreign Equity Portfolio Flows and Local Markets: Two Examples from the Istanbul Stock ExchangeKonukoglu, Ali Emre 16 March 2011 (has links)
This thesis analyzes the nature of foreign equity trades in relation to their effects
on local markets. My goal is to contribute to the understanding of equity flows of foreign investors and their effect on the local markets. The thesis consists of two
chapters, both of which employ a novel data set that is consisted of monthly equity
flows by foreign investors at Istanbul Stock Exchange of Turkey.
The first chapter, Foreign Ownership and World Market Integration, aims to explain the de facto financial market integration with global markets with foreign equity
ownership using a novel data set of foreign portfolio flows at the individual stock level.
The main result is the positive link between global nancial integration and past portfolio in flows by foreign investors on the cross-section of local stocks. The results have high economic significance: Across individual stocks a 1.4% increase in foreign portfolio inflows corresponds to up to 3.3% greater relative explanatory power of the global factor in explaining local stock returns in the following month. The results are indicative of a causal link: The lead-lag effect between foreign portfolio inflows and financial integration does not exist in the opposite direction. I show that stocks that experience an increase in foreign ownership are not more financially integrated in the past, i.e. the foreign portfolio flows are not a response to increased financial integration.
The second chapter is titled as Uninformed Momentum Traders and it studies the
relationship between momentum trading and information. I present evidence that
supports the hypothesis that momentum trading is linked to a lack of information. I
document significant momentum trading by foreign investors in stocks on which they
potentially have more informational disadvantages. Small stocks, stocks with high
volatility and low liquidity, stocks that are financially less integrated and have greater foreign exchange risk are subject to greater momentum trading. Moreover, stocks on
which foreign trades indicate lower future profitability are subject to higher momentum trading. Additionally, I show that momentum trades by foreign investors exert
contemporaneous price pressure and have no valuable longer-run information content.
The contemporaneous price pressure of 2.30% per month is followed by a significant
return reversal in the following two quarters. Finally, there is strong evidence that foreign investors do not possess local market speci c information. Momentum trading
by foreign investors is triggered by the past profitability of the momentum factor in
the local market. However, the negative pro tability of momentum makes momentum trading a sub-optimal trading strategy.
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Three Essays in Financial EconomicsJulio, Ivan F. 06 August 2013 (has links)
No description available.
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Essays on empirical asset pricingWei, Chishen 24 October 2011 (has links)
This dissertation contains two essays that use empirical techniques to shed light on open questions in the asset pricing literature. In the first essay, I investigate whether foreign institutional investors affect stock liquidity in domestic equity markets. The evidence indicates that stocks with higher foreign institutional ownership subsequently experience higher liquidity. However, it is difficult to interpret the causal relation of this finding because institutional investors self-select into more liquid stocks. To solve this problem, I exploit a provision in the 2003 US dividend tax cut which extends tax-relief to dividends from US tax-treaty countries but not to dividends from non-treaty countries. This natural experiment suggests a causal link between foreign institutional investors and liquidity. Consistent with the predictions of theoretical models, I find that liquidity improves due to foreign institutional investors increasing information competition.
In the second essay, I introduce a new measure of difference of opinion using mutual fund portfolio weights to test prominent competing theories of the effect of heterogeneous beliefs on asset prices. The over-valuation theory (Miller (1977)) proposes that in the presence of short-sale constraints stock prices reflects only the view of optimistic investors which implies lower subsequent returns. Alternatively, neo-classical asset pricing models (Williams (1977), Merton (1987)) suggest that differences of opinions indicate high levels of information uncertainty or risk which implies higher expected returns. My initial result finds no support for the over-valuation theory. Instead, the measure used in this study finds that high differences of opinion stocks weakly outperform low differences of opinion stocks by 2.42% annually which is more consistent with the information uncertainty explanation. / text
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The conditional relationship between beta and returns: a re-assessment.Freeman, Mark C., Guermat, C. January 2006 (has links)
No / Several recent empirical tests of the Capital Asset Pricing Model have been based on the conditional relationship between betas and market returns. This paper shows that this method needs reconsideration. An adjusted version of this test is presented. It is then demonstrated that the adjusted technique has similar, or lower, power to the more easily implemented CAPM test of Fama and MacBeth (1973) if returns are normally distributed.
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Essays on Fund Families: Ties and Trade OffsSpilker, Harold Dean January 2017 (has links)
Thesis advisor: Ronnie Sadka / In the first essay of this dissertation, I study the impact that hedge fund manager connections have on investment ideas. I find that hedge fund managers who previously worked at the same prior hedge fund invest more similarly, hold more overlapping portfolios, and trade and overweight the same stocks relative to managers who do not share an employment connection. Overall, these results support theoretical prediction that networked managers share ideas that leads to price discovery for commonly held stocks. The second essay analyzes the role of ETFs in mutual fund families and is joint work with Caitlin Dannhauser. We study mutual fund and ETF twins - index funds from the same family that follow the same benchmark. We find that mutual fund twins have lower overall tax burdens while ETF twins have higher long-term yields and unrealized capital gains, but are compensated with lower expense ratios. Fund families benefit because twin offerings generate higher flows than their non-twin peers. These results support previous research that mutual fund families use diversification and subsidization to benefit the overall family. In the third essay, I study the use of latent factors in explaining hedge fund returns. Using an alternative latent factor estimator, asymptotic principal components (APC), I find explains more of the common variation of hedge fund returns on average and does so with greater efficiency than that found in the literature. I also identify an increase in the common variation across hedge fund excess return in the time-series via the extracted latent factors. My results suggest an impetus for future researchers to employ APC factors when characterizing hedge fund performance. / Thesis (PhD) — Boston College, 2017. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.
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Essays on illiquidity premiumPereira, Ricardo Buscariolli 23 May 2014 (has links)
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Previous issue date: 2014-05-23 / This dissertation is composed of three related essays on the relationship between illiquidity and returns. Chapter 1 describes the time-series properties of the relationship between market illiquidity and market return using both yearly and monthly datasets. We find that stationarized versions of the illiquidity measure have a positive, significant, and puzzling high premium. In Chapter 2, we estimate the response of illiquidity to a shock to returns, assuming that causality runs from returns to illiquidity and find that an increase in firms' returns lowers illiquidity. In Chapter 3 we take both effects into account and account for the endogeneity of returns and illiquidity to estimate the liquidity premium. We find evidence that the illiquidity premium is a smaller than the previous evidence suggests. Finally, Chapter 4 shows topics for future research where we describe a return decomposition with illiquidity costs.
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