Price Pressure Effects Research Articles

Hedge Fund Activism and Information Disclosure: the Case of Germany

AbstractBased on the German regulatory framework, we provide a more detailed picture of the information disclosure process surrounding the announcement of major shareholdings of hedge funds in listed companies. We separate price and volume effects between three event dates: the transaction date when the investor reaches a notification threshold, the announcement date when potential insiders (the target firm and the regulator) receive advance information, and the publication date when the information is officially released to the public. This separation makes it possible to analyse information and price pressure effects in some detail. The paper also documents the extent and nature of delays in hedge funds’ notification behaviour.

Trading Activity Around Rights Issues

This paper provides evidence of informed trading before and after a rights issue. First, we find significant net buying and selling activity by informed traders prior to the announcement date leading to a temporary price pressure effect. Even though those results are consistent with the presence of short-term manipulative traders, we find little evidence of manipulative trading on announcement effects. Second, we show that informed traders are able to identify the issuer’s quality once all issue characteristics have been released. They trade in a direction consistent with their private information before and after the issue: they will buy (sell) shares in SEO firms with better (worse) post-issue price performance leading to a permanent price impact.

Downward-sloping Demand Curves or Price Pressure Effects? New Evidence from Japanese Seasoned Equity Issues

Downward-sloping Demand Curves or Price Pressure Effects? New Evidence from Japanese Seasoned Equity Issues

Financial panic and emerging market funds

This article studies equity investment of emerging-market funds based on the 2003–2009 weekly data and compares the dynamics of flow and return between tranquil period and financial panic based on the experience of the latest 2008–2009 global financial crisis. First, we find that the well-documented positive feedback trading is a tranquil-period phenomenon such that it is more difficult in general for emerging-market funds to attract new investment in financial panic. Second, the predictive power of flow on return is driven by a combination of price pressure and information effects in tranquil period, while the information effect dominates in financial panic. Third, the underlying co-movements or contagion of flow across the emerging-market funds influence the association between flow and return. Overall, the findings highlight the importance of accounting for state-dependent dynamics as well as cross-regional co-movements in the analysis of flow and return.

Anticipated and Repeated Shocks in Liquid Markets

This paper examines how anticipated and frequently repeated shocks are absorbed in liquid financial markets. We show that Treasury security prices in the secondary market decrease significantly in the few days leading up to Treasury auctions and recover shortly thereafter, even though the time and amount of each auction are announced in advance. The issuance cost to the Treasury Department is estimated to be between 9 and 18 basis points of the auction size, or over half a billion dollars for note issuance alone in 2007, most of which can be attributed to the price pressure effect around auction days. These results are linked to dealers’ limited risk-bearing capacity and the imperfect capital mobility of end-investors, highlighting the important role of market frictions even in very liquid financial markets.

Index composition changes and the cost of incumbency

This paper provides evidence of information effects and portfolio rebalancing effects that occur when stocks are added to or excluded from the S&P 500 index and finds that incumbents in the index realize negative excess returns when S&P revises the composition of the index. We also find that for incumbents that are in the same industry as the added firm, the price-pressure effects are mitigated by positive industry-level information and momentum effects. For index exclusions, the magnitude of the loss sustained by incumbents from the same industry as the excluded firm is larger than that realized by the non-industry incumbents, as the negative information and momentum effects reinforce the price-pressure effects. Our results suggest that changes in the composition of the index are not information-free events; however, the portfolio rebalancing effects dominate the industry information effects.

Nonlinear Dynamic Relations Between Equity Return and Equity Fund Flow: Korean Market Empirical Evidence*

AbstractThis research studies the dynamic relationship between equity returns and equity fund flows by incorporating nonlinear properties of the two variables. Nonlinear estimation based on a smooth transition autoregressive model reveals results different from those previously reported based on a linear relationship. Our empirical results find that there is significant mutual Granger causality between equity returns and equity fund flows. In addition, by introducing the dividend yield effect, significant Granger causality is also found between the three variables. This can be interpreted as meaning that demand for equities is downward sloping for both the price pressure effect and the information effect. Relatively fast regime switching and dynamic instability show that stock investment through equity funds is mostly short‐horizon‐oriented investment.

Hedge Fund Activism and Information Disclosure: The Case of Germany

Based on the German regulatory framework, we provide a more detailed picture about the information disclosure process surrounding the announcement of major shareholdings of hedge funds in listed companies. We separate price and volume effects between three event dates: the transaction date when the investor reaches a notifiable threshold, the announcement date when potential insiders (the target firm and the regulator) get advance information, and the publication date when the information is officially released to the public. The separation makes it possible to analyze information and price pressure effects in some detail. The paper also documents the extent and nature of delays in hedge funds’ notification behavior.

European investment fund flows and financial stability

Using a unique data set on quarterly European net fund flows combined with stock market data drawn from publicly available sources, this article seeks to determine whether stock market performance influences investment fund flows and whether fund flows affect stock market performance. Given that the absolute bulk of research on this issue is based on US data, the data enable an investigation into the relationship between fund flows and stock markets in a completely new institutional context. Our findings cannot confirm that fund flows impact subsequent returns or that return affects future flows. Therefore, our findings indicate that investment fund flows do not seem to contribute financial instability by inflating or deflating stock market prices. However, the data demonstrate both contemporaneous and lagged correlation between fund flows and stock market returns. We also find some (statistically insignificant) indications of price pressure effects on global stock market returns, and noise trading and investor sentiment effects on European stock market returns.

A Flow-Based Explanation for Return Predictability

This paper proposes and tests an investment-flow based explanation for three empirical findings about return predictability -- the persistence of mutual fund performance, the smart money effect, and stock price momentum. Motivated by prior studies, I construct a measure of demand shocks to individual stocks by projecting mutual fund flows onto the stocks they hold, and document a significant flow-induced price pressure effect in individual stock returns. Moreover, building upon prior results that capital flows to mutual funds are highly predictable, I further show that the flow-based mechanism can lead to significant stock return and mutual fund performance predictability. The main findings of the paper are that such flow-based return predictability can fully account for mutual fund performance persistence and the smart money effect, and can partially explain stock price momentum.

The dynamics of short-term mutual fund flows and returns: A time-series and cross-sectional investigation

This study analyzes the dynamics of daily mutual fund flows. A Vector Auto Regression (VAR) of flows and returns shows that the behavior of fund investors is more consistent with contrarian rather than momentum characteristics. Past fund flows have a positive impact on future fund returns, with the long-term information effect dominating the transient price-pressure effect. Seasonality in daily flows, such as day-of-week and day-of-month patterns are present, and daily flows are generally mean-reverting. Probit regressions indicate that fund investment objective, marketing policy and level of active management explain cross-sectional variation in the behavioral patterns displayed in daily flows. Our results are robust to the different methods of calculating daily flows based on whether or not the day-end TNA figures include the current-day’s flow. Throughout the analysis, we contrast the dynamics of daily flows with established results for monthly fund flows and find important differences between the two.

Dynamics of Asset Prices and Transaction Activity in Illiquid Markets: the Case of Private Commercial Real Estate

This paper investigates the relationship between capital flows, turnover and returns for the UK private real estate market. We examine a number of possible implications of capital flows and turnover on capital returns testing for evidence of a price pressure effect, ‘return chasing’ behaviour and information revelation. The main tool of analysis is a panel vector autoregressive (VAR) regression model in which institutional capital flows, turnover and returns are specified as endogenous variables in a two equation system in which we also control for macro-economic variables. Data on flows, turnover and returns are obtained for the ten market segments covering the main UK commercial real estate sectors. Our results do not support the widely-held belief among practitioners that capital flows have a ‘price pressure’ effect on property prices. However, we do find a significant positive relationship between lagged turnover and contemporaneous capital returns, suggesting that asset turnover provides increased price revelation which, in turn, reduces investment risk and increases property values.

Capital Flows and Performance: The GREIT Funds

This study presents a simple dynamic model of capital flows and returns. Using weekly data from nine global property funds, the results show that previous capital flows and returns affect the current capital flows. Furthermore, there is supporting evidence to show that previous capital flows impact on performance, which is consistent with the price-pressure effect, and liquidity effect. When facing substantial capital outflows, a portfolio would tend to depress as it approaches its liquidity limit to the point that fund managers have to sell off some stocks in their optimal portfolio, thereby affecting the overall fund performance. The overall results lends support to the smart money hypothesis in that global property fund investors tend to make strategic investment decisions rather than following market sentiment or return chasing behavior alone.

Information vs. Liquidity: Evidence from Portfolio Transition Trades

Portfolio transitions are sizable transfers of funds executed on behalf of institutional sponsors during changes of their investment strategies or funds management. Using a unique data set of portfolio transition trades, I study the evolution of security prices in response to these transactions. I document significant price pressure effects of about 40 bps induced by transition trades in the short run. I also find that price responses to purchases and sales are asymmetric in the long run. Transition purchases permanently shift stock prices to higher levels; these price changes are more significant after large trades, trades in stocks with high degrees of information asymmetry and with recently downward price dynamics. At the same time, price pressure effects of transition sales are temporary and stock prices reverse to pre-transition levels in the following weeks. These findings are consistent with information hypothesis, as the underlying motives behind transition purchases and sales are different: on average, the former are induced by information-related motives whereas the latter are triggered by liquidity-related factors.

Market Responses to Buy Recommendations Issued by Personal Finance Magazines: Effects of Information, Price-Pressure, and Company Characteristics*

This paper analyzes explicit buy recommendations for stocks published by German Personal Finance Magazines from 1995 to 2003. These recommendations earn significant abnormal returns of 2.58% within the five days around the publication day. Both the price-pressure hypothesis and the information hypothesis can be confirmed by our data. The price-pressure effect is most evident for small stocks and glamour stocks. However, whereas the initial price reaction to small stocks is additionally driven by permanent information value, this does not hold true for glamour stocks. In contrast, value stocks are associated with high cumulative abnormal returns that are solely driven by information value.

Equity Capital Flows and Demand for REITs

REITs are attractive to investors due to their unique characteristics such as high dividend yields, low correlation with common stocks, and a potential hedge against inflation. Thus the market demand curve of REIT equities may not be horizontal. This paper examines the shape of the market demand curve for REIT equities by employing REIT equity capital flows as a proxy for REIT aggregate demand. Our results do not support a downward demand curve for REIT equities. That is, we do not find evidence for the price-pressure effect in REIT returns. Instead, we find it is REIT returns that affect REIT equity capital flows rather than REIT equity flows that affect REIT returns. The results are consistent when we allow for the presence of market fundamental variables in our analysis. In addition, a variance decomposition analysis suggests that REIT equity capital flows do not cause revisions in expected cash flows (dividends) that are strong enough to impact REIT returns. Thus our findings are consistent with implications that the market demand curve for REIT equities is horizontal.

Do demand curves for stocks slope down?: Evidence from aggregate data

We examine whether the aggregate demand curve for stocks is downward sloping. As a proxy for aggregate demand, we use net outflows (dividends plus repurchases less net issues) from the stock market scaled by the previous year's market capitalization. To disentangle the information and price pressure effects from the demand curve effects, we use an information-free demographic variable as an instrument and look at the relation between annual changes in aggregate demand and excess market return. We find that information-free changes in the annual aggregate demand for stocks do not lead to changes in the annual excess market return. This finding supports long-term horizontal demand curves for stocks.

Abnormal Returns in the Vicinity of Insider Transactions: Unbiased Estimates for Germany

Several studies focusing on the US and the UK have shown, that abnormal returns tend to be negative on the days before insider purchases, positive on the transactions days and on the following days. For insider sales it is the other way around, but the absolute effects are smaller. Around the announcement days similar effects exist. In many cases more transactions and/or announcements take place on subsequent days, possibly having different directions and/or involving different buyers/sellers. We argue that because of the different signs of the abnormal returns before and after day 0, estimates based on all available observations could be biased. This is the first study to our knowledge which proposes and uses non-overlapping observations in this context. We confirm the above findings using German data for the two year period following the introduction of insider regulations in Germany in July 2002. Like in the UK, the effects around the announcement date are considerably larger than in the US. Unlike in the US and the UK, the effects are much more pronounced around sales. Due to our use of non-overlapping data, we can show these effects much more clearly than prior studies of the German market. In our cross-sectional regressions, net trading intensity on the announcement day, a variable suggested by Lakonishok/Lee (2001) is the most important explanatory vari-able for the cumulative abnormal returns from day -1 to day +1. When we look at the days 0 to +5, the explanatory power of the net trading intensity (NI) is considerably smaller. We conclude that diversification and liquidity motives together with price pres-sure effects are mainly responsible for the results.

Interpreting Announcement Effects using Market Microstructure: An Intraday Examination of Convertible Bond Calls

Convertible bond calls typically lead to highly significant stock market reactions. Current explanations for these large price changes are divided between information and price pressure theories. While empirical work to date has documented the negative effects of so-called in-the-money calls (or conversion forcing calls) and the positive effects for out-of-the-money calls, it has proven difficult to distinguish this dichotomy. This paper takes a new and more detailed look at the announcement effects of convertible bond calls using a unique dataset of in- as well as out-of-the-money calls in the U.S. from the period 1993 to 2003. By augmenting this dataset, which includes the announcement time stamp, with intraday equity market data, it is possible to separate out information and price pressure effects. Results of this analysis show the announcement of an out-of-the-money call is quickly incorporated into stock prices whereas it takes several hours before the stock price has been fully adjusted for an in-the-money call. The slow stock market reaction to in-the-money calls is associate prolonged trade order imbalances consistent with the explanation that price pressures are the main reason for negative announcement effects. In contrast, the immediate stock market reaction to out-of-the-money calls is not associated with trade imbalances and is consistent with the information theories presented in the literature. This paper not only makes an important contribution to the existing literature on convertible bonds, but is also relevant for the large body of literature with event studies of announcement effects that may be explained by either information or resulting price pressures.

Behavior and Effects of Foreign Investors on Istanbul Stock Exchange

This paper analyzes the effects of foreign investors on the Istanbul Stock Exchange (ISE), as well as their behavior when trading on the Turkish stock market. Using a VAR model with net foreign portfolio inflow and US Dollar returns of ISE as endogenous variables, we show that there is a monthly contemporaneous relationship between these variables, and therefore when foreign investors enter the Turkish market, the ISE index raises contemporaneously, and vice-versa. However, this cannot be considered as a long-run process of base broadening, since net foreign portfolio inflow and the first difference of Foreign Portfolio Holdings are stationary over the period analyzed. Evidence of negative feedback trading was found, suggesting that these investors adopt contrarian strategies when trading in the Turkish market. This behavior is not in line with the results of previous empirical studies, which either found no feedback trading, or evidence of positive feedback trading. Also, we found no price pressure effect created by foreign investors. We give robustness to our results through the use of control variables and different lag-structure specifications. Therefore, on the basis of our findings, foreign investors cannot be blamed for causing instability in Turkey. On the contrary, the negative feedback strategy tends to smooth market movements instead of exacerbating them. In this way, foreign equity investment seems to be beneficial to the Turkish stock market.