Affect Asset Prices Research Articles

The impact of ETFs in secondary asset markets: Experimental evidence

We examine how exchange traded funds (ETFs) affect asset pricing, and turnover in a laboratory asset market. We focus on behavior in secondary markets with or without ETF assets and whether there is zero or negative correlation in asset dividends. In the latter case, the diversification benefits of ETFs are most salient. We find that when the dividends are negatively correlated, ETFs reduce asset mispricing without decreasing market activity (turnover). When dividends are uncorrelated, the ETF has no impact on these same measures. Thus, our findings suggest that ETFs do not harm, and may in fact improve, price discovery and liquidity in asset markets.

Information acquisition and asset price volatility

I provide a channel by which information cost affects asset price volatility. Asset payoffs depend on two exogenous states, an unknown state about which buyers obtain costly information and a known state at the time of trading. Whereas the price of an asset with a higher information cost shows less sensitivity in response to changes in an unknown state, the asset price exhibits excess volatility in response to a known shock. This can explain how a small liquidty shock causes large fluctuations in asset markets.

Are consumer confidence and asset value expectations positively associated with length of daylight?: An exploration of psychological mediators between length of daylight and seasonal asset price transitions.

Many economists claim that asset price transitions, particularly stock price transitions, have a seasonal cycle affected by length of daylight. Although they claim that the seasonal affective disorder (SAD) is a mediator between the length of daylight and asset price transitions, recent studies in psychology have been inconclusive about the existence of SAD, and some economics studies disagree regarding the involvement of SAD in seasonal stock price transitions. The purpose of the present study is to examine if there is any psychological mediator linking length of daylight and seasonal asset price transitions as an alternative or supplement to SAD. As a possible mediator, we examined Japan's consumer confidence index (CCI) and asset value expectations (AVE), which indicate people's optimism for future economy and are generated from a monthly household survey by the Japanese government. We analyzed individual longitudinal data from this survey between 2004 and 2018 and estimated four fixed-effects regression models to control for time-invariant unobserved heterogeneity across individual households. The results revealed that, (i) there was a seasonal cycle of CCI and AVE; the trough occurred in December and the peak in early summer; (ii) the length of daylight time was positively associated with CCI and AVE; and (iii) the higher the latitude, the larger the seasonal cycle of CCI and AVE became. These findings suggest that the length of the daylight may affect asset price transitions through the cycle of optimism/pessimism for future economy exemplified by the CCI and AVE.

Online public opinion and asset prices: a literature review

<abstract> We review the research work undertaken to explore how online public opinion information through social media and news media affects asset prices. First, it summarizes the measurement of online public opinion from three aspects: data source of online public opinion, textual sentiment analysis, and measurement of online public opinion index. Second, it puts forward the related theoretical basis of the research on online public opinion and asset price such as the noise trading theory, arbitrage limitation demonstrations, limited attention assumption and divergence models, etc. Third, it summarizes the three transmission channels through which online public opinion affects asset prices: investor attention, investor perceptions, and investor sentiment. Last, it looks deeply into the area and classifies the empirical literature according to various sources of online public opinion chosen by the researcher. Therefore, this exploratory work contributes to the existing literature by introducing the first systematic review. </abstract>

The impact of investor sentiment for the U.S. stock market based on Fama-French 3-factor model

Particularly, it is difficult to accurately measure investor sentiment due to the inherent complexity and dynamic change. This paper tests the impact of investors’ behavior in the U.S. equity market. By using monthly data from February 2014 to December 2018, the impacts of investor sentiment are examined. Besides, Fama-French risk factors are investigated in a new multiple factor asset pricing model. Specifically, the investor sentiment is measured by six-variable composite index. Empirical results indicate that the investor sentiment is a composition of systemic risk. In this case, the Fama-French three factor model with investor sentiment factor can fully explains the return of stocks in the USA stock market. By comparing the trend of investor sentiment and market index, investor sentiment will affect asset pricing and market volatility, i.e., verifies the effectiveness of investor sentiment index in the U.S, stock market.

Risk, return, and sentiment in a virtual asset market

The joint-hypothesis problem casts doubt on the results of market efficiency research. Specifically, it is hard to assess to what extent financial markets reflect economic fundamentals or mispricing. To address this issue, we study price formation in a large virtual asset market where fundamentals are predetermined and publicly known. We find that a number of well-established determinants of returns from the real world also affect asset prices in this market, despite the absence of systematic risk. The results suggest that prices in real financial markets include a substantial behavioral component, which is likely underestimated in canonical asset pricing tests.

Heterogeneous-agent asset pricing

Conventional asset pricing theory suggests that investors receive no compensation for idiosyncratic risk, but several studies indicate that it may play an important role. This paper makes clear exactly when these risks affect asset prices in a comprehensive framework with jumps and heterogeneous recursive preferences. While cross-sectional endowment risk always affects the riskfree rate and equity volatility, it is irrelevant to risk premia given exogenous returns if and only if all agents have additively separable preferences. It is irrelevant to risk premia given endogenous returns if and only if all agents have identical, time-additive power utility and cross-sectional risk is uncorrelated with aggregate consumption risk. The framework admits explicit asset pricing solutions that directly apply to a broad set of economic settings. The applicability of the framework is demonstrated in a general equilibrium model with recursive-utility agents who can invest in a riskfree bond, the stock market, and their own inalienable human capital, which is subject to risk of an idiosyncratic disaster.

Using Social Media to Identify the Effects of Congressional Viewpoints on Asset Prices

This paper examines the extent to which individual politicians affect asset prices using a high-frequency identification approach. We exploit the regular flow of viewpoints contained in a large volume of tweets from members of US Congress. Congressional tweets targeting individual firms are collected and classified based on their tone. Supportive (critical) tweets increase (decrease) stock prices of the targeted firm in minutes around the tweet. The price response persists for several days, during which analysts revise their forecasts about the firm cash flows. Selected politician tweets linked to legislation affect the stock prices of firms in the same industry as the targeted firm. The timeline of politician viewpoints within a particular bill exhibits surges in relevant news that predict roll call votes months before the signing of the bill. We highlight how the social media accounts of politicians are a valuable source of political news.

Financial market effects of FOMC projections

I examine the impact of the forecasts released by the Federal Open Market Committee (FOMC) in the Summary of Economic Projections over the period of April 2011 through March 2019. I find that changes in the median FOMC federal funds rate forecast did impact asset prices, but forecasts of output and inflation did not have any effect, which may be surprising based on the literature regarding the “Fed information effect” channel. Further, the dispersion in the federal funds rate forecast does not affect asset prices though it does impact the degree of uncertainty regarding future monetary policy. Finally, I find that most of forward guidance can be summarized through the change in the median federal funds rate forecast for the end of the following year.

Does Collateral Value Affect Asset Prices? Evidence from a Natural Experiment in Texas

AbstractDoes the ability to pledge an asset as collateral, after purchase, affect its price? This paper identifies the impact of collateral service flows on house prices, exploiting a plausibly exogenous constitutional amendment in Texas that legalized home equity loans in 1998. The law change increased Texas house prices 4 $\%$; this is price-based evidence that households are credit-constrained and value home equity loans to facilitate consumption smoothing. Prices rose more in locations with inelastic supply, higher prelaw house prices, higher income, and lower unemployment. These estimates reveal that richer households value the option to pledge their home as collateral more strongly.

The Top 5 Predictable Effects of New Entries in Robinhood’s ‘100 Most Popular’ List

The trading app Robinhood maintains a list of the 100 stocks most widely held by its users. Using a novel dataset of stock popularity with Robinhood user, I focus on new securities that enter the list. I document the strong effect that salience of new Top 100 listing events has on the attention of Robinhood users, who are between 5 to 7 times likelier to buy these newly listed securities. The resulting demand causes a dramatic, though short-term price increase. A strategy that buys stocks a day after listing and sells them two days later, obtains a return of 458% over the period studied, compared with 24% generated by the market. This effect is mostly observed in smaller stocks, and is not accompanied by market-wide trading. Since retail investors tend to consume information available exclusively within their app or web site of choice, these apps wield increasingly more influence on how investors make trading decisions, even through means as simple as a list. As FinTech reduces trading costs and attracts users, this power can reach beyond the app's ecosystem to the market itself, to directly affecting asset prices.

COVID-19, Political Orientation and Residential Real Estate Prices

This paper investigates whether political orientation influences residential real estate prices and returns during COVID-19 pandemic. Using county level housing data from January to June 2020, we document that Democratic counties, politically aligned counties, counties with higher prosocial scores and greater liberal news viewership experience a significant decline in house prices and returns in response to COVID-19 cases and deaths. Overall, our findings suggest that political orientation is an important dimension that affect asset prices.

Overselling winners and losers: How mutual fund managers' trading behavior affects asset prices

We link a seemingly biased trading behavior to equilibrium asset prices. U.S. equity mutual fund managers tend to sell both their big winners and big losers. This selling pressure pushes down current prices and leads to higher future returns; aggregating across funds, we find that securities for which investors have large unrealized gains and losses outperform in the subsequent month. Funds with larger turnover, shorter holding period, and higher expense ratios, are significantly more likely to manifest this trading pattern, and unrealized profits from such funds have stronger return predictability. This cross-sectional return predictability is difficult to reconcile with alternative explanations.

Optimal Investment Strategy under the CEV Model with Stochastic Interest Rate

Interest rate is an important macrofactor that affects asset prices in the financial market. As the interest rate in the real market has the property of fluctuation, it might lead to a great bias in asset allocation if we only view the interest rate as a constant in portfolio management. In this paper, we mainly study an optimal investment strategy problem by employing a constant elasticity of variance (CEV) process and stochastic interest rate. The assets of investment for individuals are supposed to be composed of one risk-free asset and one risky asset. The interest rate for risk-free asset is assumed to follow the Cox–Ingersoll–Ross (CIR) process, and the price of risky asset follows the CEV process. The objective is to maximize the expected utility of terminal wealth. By applying the dual method, Legendre transformation, and asymptotic expansion approach, we successfully obtain an asymptotic solution for the optimal investment strategy under constant absolute risk aversion (CARA) utility function. In the end, some numerical examples are provided to support our theoretical results and to illustrate the effect of stochastic interest rates and some other model parameters on the optimal investment strategy.

Herding in Chile: the case of equity trading in the Chilean pension fund market

The phenomena of ‘herding’ or herd behavior can have important effects when it manifests in equity markets as co-movement in trades of institutional money managers. On one hand, the assetsunder management are so large in comparison with the size of themarket that the trades of these managers affect asset prices, evenmore so if many managers trade in the same direction. On the otherhand, commissions and fees paid by investors are supposedly leviedin exchange for an expert management of the investors’ capital.Thus, a manager that simply imitates the behavior of others does notadd value with her work. The present study is the first to report theresults of two measures of herding used to study this phenomenon inthe equity portions of Chilean AFP (pension) funds. One measure isthe widely used Lakonishok, Vishny y Shleifer (1992) metric, theother is a relatively newer measure presented in Sias (2004). Using adataset of monthly fund trades during the period 2003-2011, bothmeasures find herding in the Chilean market which, while moderatein intensity, is still higher than that reported in the stock markets ofdeveloped countries. More interesting is the asymmetry of results:herding is stronger during times of market crisis, and almostdisappears during periods when the economy expands. These resultshave important implications for performance evaluation and valueadded of the pension funds managed by the AFPs, as well as theimpact of their trades in the stability of the stock market.

Marketability As Real Option: The Cross Sectional Variation of Overnight Returns in China

This paper provides new empirical evidence for the way in which non-marketability affects asset prices in financial markets. Critically, the results rely on the unique trading friction T+1 rule in the Chinese A-share market. Consistent with the predictions derived from Longstaff (1995) and option pricing theory, overnight returns of A-share stocks are negative on average, decreasing with asset volatilities, volatility risks, and jump risks. The upper bound of the marketability option is restricted by the average holding period of the asset and is smaller when there are substitutional marketability instruments. Thus, the marketability-option-related variables could explain the negative overnight returns of illiquidity, short-term reversal, and momentum.

Analysis of the Capital Asset Pricing Model: Application to General Electric Performance

In the world of investment, the essential question is, to what degree does the risk of a security influence its expected return? The Capital Asset Pricing Model (CAPM) helps in answering this question. CAPM showed that the risk which can be spread away when seized together with other investments in a particular portfolio should not affect asset price. The adequacy of the CAPM theory as a measurement tool of the relationship between a security’s beta and the expected return of a security is now seriously challenged as it has a set of assumptions that are mostly criticized by their absence in reality. This research re-examines these assumptions (markets are ideal, all investors are averse to risk, markets are highly efficient, Beta coefficient is the only measure of risk and markets are in equilibrium) by applying them to measure the performance of General Electric between March 2017 and March 2020. The methodology adopted in this study is quantitative approach. The main finding of this research indicates that the risk-free rate decreased, the risk increased and the expected return moved up and down in each year. Therefore, the failure of the CAPM in empirical tests implies that most applications of the model are invalid.

A Productivity Risks Driving q-Factor Model

I incorporate the productivity risks into an investment-based q-factor asset pricing model. The productivity risks factors largely summarize the cross-sectional portfolio return, where the time-varying volatility plays an important role. A parsimonious q-factor model driven by productivity risks explains about 90% variation of return of 25 Size/BM portfolios and 75% variation of return of 160 portfolios, which is comparable to the Fama-French multifactor models, the Carhart (1997) four-factor model, and the Hou, Mo, Xue & Zhang (2020) augmented q-factor model. As such, productivity risks significantly affect asset prices and can be one of the potential forces driving investment-based factor models.

The Impact of ETFs on Asset Markets: Experimental Evidence

We examine how exchange traded funds (ETFs) affect asset pricing, and trade volume in a laboratory asset market. We focus on behavior in secondary markets with or without ETF assets and whether there is zero or negative correlation in asset dividends. In the latter case, the diversification benefits of ETFs are most salient. We find that when the dividends are negatively correlated, ETFs reduce mispricing without decreasing trading volume. When dividends are uncorrelated, the ETF has no impact on these same measures. Thus, our findings suggest that ETFs do not harm, and may in fact improve, price discovery and liquidity in asset markets.

EXPECTATION-DRIVEN ASSET PRICE FLUCTUATIONS UNDER THE SPIRIT OF CAPITALISM HYPOTHESIS: THE ROLE OF HETEROGENEITY

In this paper, I study how heterogeneity amongst agents affects the occurrence of expectation-driven asset price fluctuations in a pure exchange economy à la Lucas, with infinitely lived households, under the hypothesis of spirit of capitalism (SOC). I consider heterogeneous households in terms of preferences, endowments, and initial wealth, and capture the SOC through preferences for wealth. Preferences for wealth are the key element of this paper in a twofold aspect. First, they explain the occurrence of asset price fluctuations driven by self-fulfilling changes in expectations. Second, heterogeneity in endowments affects asset price level and dynamics only if preferences are heterogeneous. For instance, if agents with the strongest SOC are also the rich in terms of endowments, heterogeneity in endowments heightens the asset price level in the long run and destabilizes by enlarging the range of parameter values for which expectation-driven asset price fluctuations occur.