Animal Spirits

Are firm earnings announcements bound to confound stock traders? In their November 2011 paper entitled “Systematic Noise and News-Driven Return Reversals”, Eric So and Sean Wang examine trading behavior around quarterly earnings announcements. They define pre-announcement return as the market-adjusted return over a three-day window from five days before through three days before earnings announcement date. Each quarter, they sort stocks into quintiles by pre-announcement return, with quintile break points from the distribution of the prior calendar quarter to avoid look-ahead bias. They adjust announcement date one trading day forward for announcements after the market close. Using 183,228 earnings announcement dates and contemporaneous daily stock and stock market returns during 1990 through 2009, they find that: Keep Reading

Is science making progress in deconstructing the animal spirits at play in financial markets? In the October 2011 draft of his chapter entitled “Fear, Greed, and Financial Crises: A Cognitive Neurosciences Perspective”, Andrew Lo explores the neuroscientific underpinnings of those human behaviors most relevant to financial system risk. Citing a range of uncontrolled (opportunistic) and controlled experiments on brain operations, he finds that: Keep Reading

Does short-term (one-month) stock return reversal persist? If so, is there a best way to refine and exploit it? In their March 2012 paper entitled “Short-Term Return Reversal: the Long and the Short of It”, Zhi Da, Qianqiu Liu and Ernst Schaumburg decompose the total short-term reversal into an across-industry component (long prior-month loser industries and short prior-month winner industries) and a within- industry component (long prior-month loser and short prior-month winner stocks within each industry). They then further decompose the within-industry return reversal into three components related to: (1) variation in three-factor (market, size, book-to-market) expected stock returns; (2) underreaction/overreaction to within-industry cash flow news (relative to analyst forecasts); and, (3) a residual component attributable to discount rate news/liquidity shocks. Using monthly data for a broad sample of relatively large and liquid stocks accounting for about 75% of U.S. equity market capitalization over the period January 1982 through March 2009, they conclude that: Keep Reading

Do investors focus on dividends, thereby elevating associated stock prices as ex-dividend date approaches? In the September 2011 draft of their paper entitled “The Dividend Month Premium”, Samuel Hartzmark and David Solomon examine the price behavior of stocks with scheduled quarterly, semiannual and annual dividends during the expected dividend month and around expected ex-dividend dates. Using daily and monthly price and cash dividend data for a broad sample of U.S. stocks during January 1927 through December 2009, along with widely used risk adjustment factors, they find that: Keep Reading

Does the semantic tone of an earnings announcement, as measured independently of the level of earnings surprise, affect stock price reaction. In his September 2011 paper entitled “Short-term Reactions to News Announcements”, Michal Dzielinski investigates the effect of the tone (positive, neutral or negative) of the words in earnings announcements and other company news on stock prices from two days before to ten days after release. He averages news tone for each stock by day, with news released before (after) the market close counting as current-day (next-day) news. Using daily return data and over six million automatic, real-time Thomson Reuters news sentiment (tone) measurements (including those for over 68,000 earnings announcements) for 4,750 U.S. stocks during 2003 through 2010, he finds that: Keep Reading

Do investors in aggregate respond to “staged” CEO visibility? In the August 2011 update of their paper entitled “CEO Interviews on CNBC”, Felix Meschke and Andy Kim investigate whether planned interviews with CEOs on financial television systematically affect associated stock prices over the days before and after the interview. The authors focus on the interval from two trading days before through ten trading days after interview date. Using daily stock price and trading data associated with 6,937 CEO interviews broadcast on CNBC during June 1997 through December 2006 (9.5 years), along with contemporaneous CNBC viewership levels and corporate news, they find that: Keep Reading

What does the body of academic research say about the stock trading behaviors and outcomes for individual investors? In their June 2011 paper entitled “The Behavior of Individual”, Brad Barber and Terrance Odean survey four areas of empirical research on the behavior of individual investors trading individual stocks: (1) performance, (2) the disposition effect, (3) buying behavior and (4) diversification. Using the findings of many studies performed over the last three decades, they conclude that: Keep Reading

In his 2011 book Investing and the Irrational Mind: Rethink Risk, Outwit Optimism, and Seize Opportunities Others Miss, author Robert Koppel posits that investing has “less to do with the science of computation and more to do the art of managing one’s outlook, emotions, and consciousness.” He seeks to explain “how to overcome debilitating emotions, irrational biases, and investment fallacies and arrive at an understanding of overall market risk through an approach that identifies, assesses, and controls losses. …how we can master our irrational minds to gain the skills necessary to control our financial decisions.” Some notable points from the book are: Keep Reading

What accounts for the persistence in diversity of investor beliefs and behaviors? Why does logical inference from common data not drive common attitudes and actions? In their March 2011 paper entitled “Serotonin and Risk Taking: How Do Genes Change Financial Choices?”, Camelia Kuhnen, Gregory Samanez-Larkin and Brian Knutson investigate differences in investing beliefs and behaviors associated with variations of a single gene (the serotonin transporter). Using demographic and financial information, tests of cognitive ability and numeracy, and measurements of attitudes toward financial decisions for 60 individuals recruited to be representative of San Francisco Bay Area adults, they find that: Keep Reading

Are there internal or external signals that predict financial market panic attacks? In the February 2011 revision of their paper entitled “Predicting Economic Market Crises Using Measures of Collective Panic” (flagged by a reader), Dion Harmon, Marcus de Aguiar, David Chinellato, Dan Braha, Irving Epstein and Yaneer Bar-Yam investigate whether indications of the interplay between external shocks (news) and internal market mimicry (herding) predict U.S. stock market crises and panics. They measure the relative levels of external news and internal mimicry based on the distribution over a year of the daily fraction of stocks that move in the same direction (simply up or down). A strongly Gaussian (flattened) shape for this distribution implies that investors are focusing on business fundamentals (technical indications), and external news (internal mimicry) is therefore dominating their behavior. Left-right symmetry of this distribution implies that good news and bad news are in balance. Using random samples of daily returns of Russell 3000 stocks over the period 1985 through 2010, they find that: Keep Reading