Animal Spirits

Do earnings forecasts contain information that investors can exploit to generate abnormal stock returns, or does the market efficiently discount these forecasts? In the November 2006 version of their paper entitled “Forecasted Earnings per Share and the Cross Section of Expected Stock Returns”, Ling Cen, John Wei and Jie Zhang investigate whether stocks with high forecasted earnings per share (FEPS) substantially outperform those with low forecasts, after controlling for commonly used risk factors. Using data for a large sample of NYSE, AMEX and Nasdaq-listed common stocks for the period January 1983 through December 2005 (712,563 stock-month observations), they conclude that: Keep Reading

Are investors/traders motivated primarily by absolute wealth or relative wealth? Is outperforming peers a strong motivation? In the February 2007 draft of his paper entitled “Why Risk is Not Related to Return”, Eric Falkenstein examines evidence for and implications of relative wealth as the principal motivator of investors. Using a wide range of examples, he argues that: Keep Reading

How does main-stream media (MSM) coverage of companies relate to returns on their stocks? Does coverage reduce risk by disseminating information? In their February 2007 paper entitled “Media Coverage and the Cross-Section of Stock Returns”, Lily Fang and Joel Peress examine how media coverage (Wall Street Journal, New York Times, USA Today and Washington Post) relates to stock returns. Using article counts and other data (on trading, accounting, analyst coverage and ownership) for all NYSE-lilsted companies and 500 randomly selected Nasdaq-listed companies over the period 1993-2002, they find that: Keep Reading

Do macroenvironmental variables affect stock returns by influencing aggregate investor mood? In their February 2007 paper entitled “Mood and Uk Equity Pricing”, Michael Dowling and Brian Lucey investigate the relationship between between a variety of mood variables (temperature, precipitation, wind speed, geomagnetic storms, Seasonal Affective Disorder, Daylight Savings Time Changes and lunar phases) and returns for a broad UK stock index and a small-capitalization UK stock index. Using daily data for the period 12/12/04-11/10/04, they conclude that: Keep Reading

As the esteemed, erudite chorus of the downside constantly reminds us, Bear Claus: Keep Reading

When the market trend challenges their beliefs, what do we hear from market “experts?” Keep Reading

Proponents of rational markets build on a common-sense foundation of reward for risk, with price variability (beta) as the fundamental risk. Since this single source of risk does not predict asset prices very well, rationalists have empirically appended to their models other sources of risk (proxied by size, value and momentum factors) in search of better predictions. Proponents of behavioral finance counter with innate cognitive and emotional biases (irrationality) as causes of rational model failures. Is there a way to prove one of these two views more correct? Should rationalists look for additional risk factors? Does some third perspective offer insight? In their January 2007 preliminary paper entitled “Failure of Asset Pricing Models: Transaction Cost, Irrationality, or Missing Factors” Joon Chae and Cheol-Won Yang tackle these questions. Using monthly stock return data for 700 Korean firms over the period December 1997 to November 2004 (84 months), along with associated measures for both potential degree of trader rationality (sophistication) and transaction costs, they conclude that: Keep Reading

…is fear as a sales pitch. Keep Reading

What is the role of journalists in the stock selection process? Are they experts, signal amplifiers or noise amplifiers? Is their collective view short-term or long-term? In two recent papers, Alexander Kerl and Andreas Walter examine the nature and value of the stock filtering role of journalists writing for German personal finance magazines (such as Effecten-Spiegel and Börse Online). Keep Reading

Is more investment information always better? Are there unintended consequences for individual investors/traders acquiring investment information? Specifically, do individual investors/traders systematically acquire information to support rational future decision-making, or do they focus on information that confirms (and builds overconfidence in) decisions already made? The following two recent studies examine these questions, with results as follows: Keep Reading