Extreme Negative Returns Research Articles

GEJALA OVERREACTION PADA SAHAM-SAHAM YANG TERGABUNG DALAM JAKARTA ISLAMIC INDEX DI BURSA EFEK JAKARTA

Winner-loser anomaly explained that the shares are initially generate extreme positive abnormalreturn (winner) or the extreme negative abnormal returns (loser) will experience a reversal,especially for the loser stocks that outperform the stock winner.The objective of this paper is to explore and analyze overreaction for stocks which include calculatedIslamic Index (Jakarta Islamic Index) for period 2005 - 2006. This paper used method ofDe Bond — Thaler (1985), Dissainake (1997), Adler Manurung and Pondra Permana (2005) toselect sample. Winner and loser portfolio was formed based their return and also used marketadjusted excess returns.The results show overreaction phenomenon occurred several times in the three-month observationperiod (see calculation of CAAR). But these reactions do not have a high level of consistencybecause overreactions lasted only one time so as not to represent other periods, eventhe pickles winner overreaction does not show any symptoms (all grades pickles winner positivethree months period). Statistical analysis showed no anomaly overreactions on three-monthsobservation period.Research using six monthly observation periods overreaction symptoms occur randomly in allthree replications. But the significance test results again showed the lack of overreaction at theJII. So it can be concluded that the hypothesis of overreaction in the Jakarta Islamic Index inthe period January 2005 to December 2006 can not be proven statistically. Although there aresymptoms of overreaction, the reactions are not consistent and not significant.Keyword: overreaction, Jakarta Islamic Index ( JII), return, winner, losser, market adjusted return, cumulative abnormal Return.

Price Efficiency and Short Selling

This paper investigates the effect of short-sale constrain ts on price efficiency. We use a global dataset collected from several custodians, with over 85.7 million lending supply postings and 46.4 million lending transactions from January 2004 to June 2006. This information is available weekly for 17,015 stocks in 26 markets around the world. For each stock we estimate the supply of shares available for short-selling and the borrowing fee. Our main findings are as follows. First, shortsale constraints are associated with lower price efficiency . Stocks with limited lending supply and high borrowing fees respond more slowly to market wide shocks. Second, short-sale constraints affect the distribution of weekly stock returns. Limited le nding supply is associated with higher skewness, but not with fewer extreme negative returns. Third, stocks with limited lending supply and higher borrowing fees are associated with lower R 2 s on average. This finding challenges the claim that low R 2 s are associated with higher price efficiency.

Mixture Dynamic Conditional Correlation Model

I propose a class of hybrid models to describe and predict the dynamics of a multivariate stationary random vector, e.g. a vector of stock returns. These models combine essential features of the multivariate mixture normal distribution and the conditional correlation models. I describe in detail the expectation-maximization algorithm, which makes the parameter estimation feasible and fast virtually for any random vector length. I fit the suggested models to five data sets, consisting of vectors of stock returns, with the maximal vector length of fifteen stocks. The predictive ability of this model class is compared to other widely used multivariate models, and it turns out that my models provide the best forecasts, both on average and for extreme negative returns. All necessary formulas to apply these models for important financial objectives are also provided.

The Dark Side of Outside Directors: Do They Quit When They are Most Needed?

Following surprise independent director departures, affected firms have worse stock and operating performance, are more likely to restate earnings, face shareholder litigation, suffer from an extreme negative return event, and make worse mergers and acquisitions. The announcement returns to surprise director departures are negative, suggesting that the market infers bad news from surprise departures. We use exogenous variation in independent director departures triggered by director deaths to test whether surprise independent director departures cause these negative outcomes or whether an anticipation of negative outcomes is responsible for the surprise director departure. Our evidence is more consistent with the latter.

The Risk of Beta – Investor Learning and Prospect Theory

Investors show different behaviour in falling markets and in rising markets. This paper demonstrates that the beta of individual stocks varies across the entire return distribution and that the variation depends on the frequency of the returns. While there is a symmetric u-shape increase for extreme daily returns, there is an asymmetric effect with an increased beta for extreme negative returns for weekly and monthly data. We use all constituents of the EUROSTOXX600 index over the period of 1979 until 2009, and estimate the impact of the index on the constituents for different firm-specific return regimes. The regime-dependent role of systematic risks on individual stocks is explained with investor learning for daily and weekly data and prospect theory for monthly data. The results demonstrate that the risk of a stock can be underestimated or overestimated significantly if conditional means are used and the existence of regimes is ignored.

The Dark Side of Outside Directors: Do They Quit When They are Most Needed?

Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.

Sentiment and Price Formation: Interactions and Regime Shifts

The time-series relationship between investor sentiment and market returns, in particular the direction and size of the effects, remains ambiguous, being assessed under the restrictive assumption of linearity. This paper reveals the presence of four, intuitive, regimes in price and sentiment formation in the US stock market at the monthly level over the period 1965-2003, even after controlling for various economic and financial factors. An optimistic state of high returns (occurrence probability: 44%) alternates with a pessimistic state of low returns (35%), while two infrequent, highly volatile states capture temporal irregularities: episodes of extreme negative returns and strong pessimism (13%) and a reversal phase of intense optimism (8%). Five main findings arise: i) In the high return (low return) state, only individual (institutional) sentiment is influential, being a contrarian (momentum) signal for the subsequent return and responding positively (negatively) but weakly to its lagged value. In the former case, the impact of sentiment is consistent with correction of a previous mispricing, possibly induced by individuals, while in the latter, it indicates institutions' correct predictive ability. ii) The impact of institutional sentiment is substantial but constrained in the pessimistic state, while the effect of individual sentiment is moderate but augmented substantially at irregular times. iii) Individuals interpret institutional optimism as a positive signal, whereas institutions perceive individuals' optimism as a contrarian indicator. iv) Total arbitrage cost exerts a positive impact on both subsequent returns and institutional optimism. v) Interest rates' reductions amplify investors' optimism at irregular times, most evidently during the market reversal phase.

Optimisation in the presence of tail-dependence and tail risk: A heuristic approach for strategic asset allocation

This paper presents a method to overcome the classical drawbacks of the Monte Carlo methods for the asset allocation, that is, resampling, deeply dependent on the multinormal assumption. This approach allows to set a derivative-free barrier against joint extreme negative returns (tail-dependence or contagion) and extreme (negative) returns (univariate tail risk) not considered in the multinormal framework. This barrier is set through an extensive use of copulas and Extreme Value Theory. The model has been applied on a sample of 11 euro-denominated asset classes with historical inputs. The weights have been tested on simulated (multivariate Student's t) returns and with real out-of-the sample returns. A comparison has been performed with the asset allocation given by the resampling method. The results provide evidence of a barrier against extreme negative returns occurring simultaneously. Furthermore, the model is totally distribution-free and therefore it does not involve any a priori decision on the marginal distributions for asset returns. The cost of this approach (loss of Sharpe ratio), in our example, is negligible.

Optimization with Tail-Dependence and Tail Risk: A Copula Based Approach for Strategic Asset Allocation

This paper proposes a method to overcome the classical drawbacks of the Monte Carlo methods for the asset allocation, namely resampling, deeply dependent upon the multinormal assumption. The proposed approach allows to set a barrier against joint extreme negative returns (tail-dependence) and extreme (negative) returns (univariate tail risk) not included in the multivariate normal distribution. The dangerous tail-dependence between asset returns is considered by using a copula based approach instead of the multinormal Monte Carlo simulation. Then the proposed model has been applied on a sample of eleven euro-denominated asset classes with historical inputs and the consequent asset weights have been tested on multivariate Student's t returns and on a set of out-of-the sample real returns. The results of this model provide evidence of a barrier against extreme negative returns occurring simultaneously. The proposed model is distribution-free and therefore it does not involve any a priori decision on the marginal distributions for asset returns.

Coexceedances in financial markets—a quantile regression analysis of contagion

This article introduces a new model to analyze financial contagion based on a modified coexceedance measure. We use the quantile regression framework to examine the occurrences and the degrees of coexceedances. Contagion is defined as the crisis-specific coexceedance not explained by the covariates for different quantiles. Our approach can identify the extent of contagion and also reveal linear and non-linear linkages between contagion and its determinants. Estimation results for daily stock index returns show that “some” contagion exists and is predictable within and across regions. Furthermore, contagion depends on a regional (world) market return and its volatility and is stronger for extreme negative returns than for extreme positive returns. An analysis of the evolution of coexceedances additionally reveals clusters of extremes. Finally, the computation of conditional densities shows the impact of different influence factors on the entire conditional distribution of coexceedances.

A New Approach to Measuring Financial Contagion

This article proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions. We characterize the extent of contagion, its economic significance, and its determinants using a multinomial logistic regression model. Applying our approach to daily returns of emerging markets during the 1990s, we find that contagion is predictable and depends on regional interest rates, exchange rate changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed.

A New Approach to Measuring Financial Contagion

This paper proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the co-incidence of extreme return shocks across countries within a region and across regions that cannot be explained by linear propagation models of shocks. We characterize the extent of contagion, its economic significance, and its determinants using a multinomial logistic regression model. Applying our approach to daily returns of emerging markets during the 1990s, we find that contagion, when measured by the co-incidence within and across regions of extreme return shocks, is predictable and depends on regional interest rates, exchange rate changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed.

A TEST FOR THE WINNER‐LOSER ANOMALY IN THE AUSTRALIAN EQUITY MARKET: 1958–87

The winner-loser anomaly implies that investors can earn arbitrage profits by purchasing shares which have earned extreme negative returns, and selling short shares which have earned extreme positive returns. Previous U.S. evidence has shown that these companies undergo price reversals in periods following their extreme return behaviour. Such behaviour is anomalous in the sense that it appears inconsistent with market efficiency. This thesis tests for the existence of the winner-loser anomaly in the Australian equity market, using monthly data for the period 1958 to 1987. It is found that extreme winners undergo price reversals, but extreme losers continue to earn negative abnormal returns. The difference between the loser and winner portfolios is not statistically significant, and hence it appears that the winner-loser anomaly is not present in the Australian market. These results are found to be robust with respect to variants of methodological procedure.