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Three Essays on Market Efficiency and Limits to ArbitrageTayal, Jitendra 28 March 2016 (has links)
This dissertation consists of three essays. The first essay focuses on idiosyncratic volatility as a primary arbitrage cost for short sellers. Previous studies document (i) negative abnormal returns for high relative short interest (RSI) stocks, and (ii) positive abnormal returns for low RSI stocks. We examine whether these market inefficiencies can be explained by arbitrage limitations, especially firms' idiosyncratic risk. Consistent with limits to arbitrage hypothesis, we document an abnormal return of -1.74% per month for high RSI stocks (>=95th percentile) with high idiosyncratic volatility. However, for similar level of high RSI, abnormal returns are economically and statistically insignificant for stocks with low idiosyncratic volatility. For stocks with low RSI, the returns are positively related to idiosyncratic volatility. These results imply that idiosyncratic risk is a potential reason for the inability of arbitrageurs to extract returns from high and low RSI portfolios.
The second essay investigates market efficiency in the absence of limits to arbitrage on short selling. Theoretical predictions and empirical results are ambiguous about the effect of short sale constraints on security prices. Since these constraints cannot be eliminated in equity markets, we use trades from futures markets where there is no distinction between short and long positions. With no external constraints on short positions, we document a weekend effect in futures markets which is a result of asymmetric risk between long and short positions around weekends. The premium is higher in periods of high volatility when short sellers are unwilling to accept higher levels of risk. On the other hand, riskiness of long positions does not seem to have a similar impact on prices.
The third essay studies investor behaviors that generate mispricing by examining relationship between stock price and future returns. Based on traditional finance theory, valuation should not depend on nominal stock prices. However, recent literature documents that preference of retail investors for low price stocks results in their overvaluation. Motivated by this preference, we re-examine the relationship between stock price and expected return for the entire U.S. stock market. We find that stock price and expected returns are positively related if price is not confounded with size. Results in this paper show that, controlled for size, high price stocks significantly outperform low price stocks by an abnormal 0.40% per month. This return premium is attributed to individual investors' preference for low price stocks. Consistent with costly arbitrage, the return differential between high and low price stocks is highest for the stocks which are difficulty to arbitrage. The results are robust to price cut-off of $5, and in different sub-periods. / Ph. D.
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Nominella Prisets Betydelse på Ex-Dagen : Ytterligare motiv för företag att genomföra aktiesplit?Lardner, Simon, Willner, Pierre January 2016 (has links)
Denna studies syfte är att testa om det finns ett statistiskt samband mellan det nominella aktiepriset och ex-dagseffekten på Nasdaq OMX Stockholm. Ett tydligt samband skulle därmed vara ett ytterligare motiv till företagens beslut om genomförandet av aktiesplit för att revidera aktiens nominella pris. Studiens hypotes lyder därför att det finns ett negativt samband mellan det nominella aktiepriset och ex-dagseffekten, som visats i tidigare studie på den amerikanska börsen NYSE. Studien har genomförts i positivistisk tradition genom statistiska analyser och tester för att klargöra ett eventuellt samband mellan den beroende variabeln ex-dagseffekten och den oberoende variabeln nominella priset. All empirisk data har hämtats från databasen Thomson Reuter Datastream, sammanställts i Excel kalkylblad, analyserats i statistikprogrammet MiniTab och redovisats i två uppsättningar. Studiens resultat visar inget samband mellan det nominella priset och ex-dagseffekten under perioden 2011 till 2015. Nollhypotesen kan inte förkastas och resultaten indikerar försumbar korrelation och förklaringsgrad genom regression. Resultatet är annorlunda från en tidigare studie som konstaterat ett tydligt samband mellan samma variabler på börsen i USA. Det teoretiska bidraget består främst av besvarandet av studiens syfte där det nominella prisets betydelse ter sig annorlunda på den svenska marknaden mot den amerikanska. Det praktiska bidraget från studien ger företagsledare för börsnoterade bolag samt fondbolag och aktörer på den finansiella marknaden en utökad kunskap om rådande förhållanden på marknaden för att förbättra beslutsunderlaget vid eventuella aktiesplittar eller investeringar. Som förslag till fortsatt forskning uppmuntras det att undersöka huruvida det nominella prisets betydelse skiljer sig mellan olika marknader. Förslagsvis kan framtida studier mäta effektiviteten på stockholmsbörsen på dagen för aktiesplit som också i teorin är en mätbar händelse på de finansiella marknaderna under rätt förutsättningar. / The aim of this study is to test for a correlated connection between the nominal stockprice and the price-drop-to-dividend ratio on the Swedish stock market Nasdaq OMX Stockholm. A strong correlated connection would be another motive for company managers to implement a stock split to reduce the nominal stock price. Therefore the hypothesis of the study is that there is a negative correlation between the two variables, just as shown in a recent study on the American stockmarket NYSE. This study has been computed with a positivistic approach through statistical tests and analysis to discover an eventual correlated connection between the dependent variable price-drop-to-dividend ratio and the independent variable nominal price. All empirical data was collected from Thomson Reuter Datastream, compiled in Excel worksheet, analyzed with statistical software MiniTab and presented in two sets of data. The result of this study shows no correlated connection between the nominal stock price and the pricedrop-to-dividend ratio during the period of 2011 to 2015. The null hypothesis can not be rejected and the results of the analysis indicate negligible correlation and coefficient of determination through regression, regardless which sets of data observed. The result is different to a recent study which has shown a significant correlated connection between the same two variables on the American stock market NYSE. The theoretical contribution comprises foremost of answering the aim of the study where the nominal prices impact acts differently on the Swedish stock market compared to the American. Also a presenting of the mean value of price-fall-to-dividend ratio for the period examined is a theoretical contribution. The practical contribution from this study give managers for listed companies along with fund managers and operators on the financial markets an increased knowledge about current influences on the market which improves their ability to make decisions about stock split and future investments. For future studies we suggest to do more research on how the impact of nominal prices differ among markets. Tentatively future research can measure the stockholm market efficiency on the day of stocksplit which according to theory is another measureable event on the financial markets under the right circumstances.
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