Stock Return Behavior Research Articles

Reflected glory and failure: international sporting success and the stock market

Motivated by psychology research showing that individual mood is affected by weather and daylight savings changes respectively, Saunders (American Economic Review 83, 1337-1345, 1993) and Kamstra et al. (American Economic Review 90, 1005-1011, 2000) find that stock prices are systematically related to these economically-neutral events. Another large psychology literature documents a similarly-strong relationship between sporting team success and fan self-esteem, a finding which raises the possibility that stock prices also respond systematically to sports results, at least in markets where the majority of investors support the same team. However, applying this hypothesis to New Zealand - a small country with a single dominant sport whose primary contests are international in nature - it is found that stock return behaviour is independent of the success of the premier national sports team. Thus, irrational investor responses to sporting contest results are transitory at best.

Examining intraday returns with buy/sell information

This paper examines high frequency stock returns with buy/sell signals. It demonstrates how such trading information could be utilized in a qualitative threshold framework to explain and predict the asymmetric behaviour of intraday stock returns. The study discovers that the buyer-dominating regime is consistently associated with negative returns, while the seller-dominating regime is consistently associated with positive returns. This is consistent with a suggestion of using the sign of the net buy/sell trading volume as the threshold indicator. Furthermore, the model renders better predicting power than that produced by a pure generalized autoregressive conditional heteroscedasticity model. Most interestingly, these results are quite robust across all 12 actively traded stocks on the Australian Stock Exchange that have been examined, and hence provide strong support for the potential usefulness of buy/sell signals and the qualitative threshold model in analysing the dynamics of high frequency financial ...

Further evidence on Asian stock return behavior

This paper examines the relationship between expected stock returns and size, and market-to-book ratio in five Asian emerging markets: India, Korea, Malaysia, Taiwan and Thailand. Overall, we find a strong size effect in all markets and a significant market-to-book effect in Korea, Malaysia and Thailand. When the tests allow for both variables, the negative relationship between size and average return is less robust; the inclusion of market-to-book equity seems to absorb the role of size in Asian stock returns. Our finding for the Asian market applies to the post-1984 period, thus questioning the assertion of Black [J. Portfolio Manage. 20 (1993) 8] and MacKinlay (1995) that “the value premium is sample-specific”. Although small firms have—to a certain extent—higher average returns than large firms in Asian markets, the market-to-book variable seems to have a consistently stronger role in average returns and would suggest that value stocks have higher average returns than growth stocks. Thus, the higher average return on value stocks in the Asian emerging markets can be considered as a local manifestation of a global phenomenon.

Applications of Regret Theory to Asset Pricing

This paper presents a theoretical model of asset pricing that analyses how the behavior of stock returns is affected by the presence of regret-averse investors on the market. The model helps to explain the excess volatility and autocorrelation of stock returns. In addition, the model predicts a positive correlation between future trading volume and the dispersion of the realized stock returns and helps to analyze how an improvement of stock market accessibility for non-professional traders affects the predictability of stock returns. Using recent stock market data the second part of the paper provides an empirical analysis of some of the model's implications.

THE DETERMINANTS FOR STOCK RETURNS IN EMERGING MARKETS: THE CASE OF TAIWAN

Whether the risk factors or firm characteristics cause the value premium of stocks still needs further investigation. This paper shows that the factor‐based models are significant but not sufficient for the stock returns in Taiwan. Size or book‐to‐market ratio alone cannot influence the stock returns under a factor‐based model. However, size along with book‐to‐market is significant under a factor‐based model. Furthermore, the risk characteristics are more influential than the factor load in stock return behavior. We conclude that employing only a factor‐based model or only risk characteristics will not consider some important content in stock returns.

Stock splits and stock return behaviour: how Germany tries to improve the attractiveness of its stock market

This paper analyses the return behaviour of German stocks following a wave of 10- for-1 stock splits. The splits were triggered by a legislative initiative (KmfG), designed to enhance the attractiveness of the German stock market. To avoid any size effects, the sample of 40 firms that executed a split during 1994–1996, was divided into two groups according to their market capitalization. Split-induced positive abnormal returns, as suggested by the signaling hypothesis, could not be revealed over the 30-day observation period. A decrease in daily trading volume was found for the sample of high market capitalization stocks. The mean difference in daily trading volume was approximately 21.9%. The results also indicate an inverse correlation between firm size and the change in trading volume. The volatility of both stock samples' daily returns has increased, supporting the results of most of the previous research. While only the high cap sample displayed a decrease in systematic risk, both samples experienced...

A Time-Series Model of Stock Returns with a Positive Short-Term Correlation and a Negative Long-Term Correlation

We study portfolio stock return behavior that exhibits both a positive autocorrelation over short horizons and a negative autocorrelation over long horizons. These autocorrelations are more significant in small size portfolios. Among various forms of temporary components in stock prices, an AR(2) component is the simplest model compatible with this pattern of returns, which yields an ARMA(2,2) model of stock returns. We show that the significance of this model is that it requires the presence of feedback trading, which is a form of irrational trades, and the market's slow adjustment to the market fundamentals, which is consistent with recent modelings of stock prices. We find that the variation of the temporary component becomes greater as the firm size gets smaller. This implies that the deviation from the market fundamentals is larger in small size portfolios than in large size portfolios.

Market Segmentation and Stock Return Behavior in Domestic and ADR Markets: Evidence from Some Emerging Countries

This paper analyzes the stock return behavior in domestic and international markets when companies from Brazil and Argentina have their stocks cross-listed in domestic Stock Exchange and International Stock Exchange. It also analyzes evidences of Market Segmentation Hypothesis in Brazilian stock market. The segmentation model of Hietala [3], tested by Jithendranathan, Nirmalanandan & Tandon [5], is extended in this paper. In the period from July, 1997 to June, 2000 the ADRs and their underlying stocks were influenced by their domestic market. Some differences between ADRs prices and underlying stocks prices were found.

Factor Models Under Firm Characteristics in Emerging Markets: A Study of Taiwan Stock Returns

Fama and French (1993) propose a three-factor model to describe the stock return behavior. However, it is challenged that stock returns are determined by firm characteristics rather than certain common factors. We are curious if a factor-based model with more factors can mitigate the effects of firm characteristics on stock returns. Our results show that the factor-based models are significant but not sufficient for the stock returns in Taiwan. Size or book-to-market ratio alone cannot influence the stock returns under a factor-based model. However, size along with book-to-market is significant under a factor-based model. Furthermore, the risk characteristics are more influential than the factor loading in the behaviors of stock returns. We conclude that either factor-based models or firm characteristics alone cannot fully explain the stock return behaviors in Taiwan Stock Exchange. Employing only factor-based model or only risk characteristics will lose some important contents in the stock returns.

The impact of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) on the value of S&L stocks

This study examines the effects of the Financial Reform, Recovery, and Enforcement Act of 1989 on the stock returns to shareholders of publicly traded savings and loans (S&Ls). Abnormal returns to stockholders are measured in response to each new piece of information concerning the passage of the Act. Using weekly data to have the largest possible sample, we found two significant time periods: a) the initial announcement of the Act and b) the time of passage and signing of the Act into law. We also provide evidence that stock return behavior differed between large and small S&Ls.

Zur empirischen Identifikation von Risikofaktoren bei Modellen der Arbitrage Pricing Theory (On the empirical identification of risk factors in arbitrage pricing models)

In the last ten years multiple factor models were widely used both in the academic and the real world as the leading paradigm describing the behavior of stock returns. Unfortunately, so far academic research has not succeeded in theoretically deriving which factors influence stock returns. An important class of APT models are the fundamental factor models. They rely on the empirical finding that company attributes such as market capitalization, book to market ratio, dividend yield, etc. are posited to have an impact on average stock returns. As a result of a multiple cross-sectional regression one determines which variables have discriminatory power, i.e. have significant factor returns. Another important class of APT models are the macroeconomic factor models. These models assume that the addition of macroeconomic variables leads to an improvement in the explanation of the cross-section of expected returns. A security’s sensitivities to the factors are called the factor betas of the security. The macroeconomic factor models estimate a firm’s factor betas by time-series regression. In the present paper it is shown that empirical tests of multiple factor models based on the cross-section of sample mean returns may be misleading. In general, the empirical studies are based on a pricing relation that contains idiosyncratic risk. Then, the correct econometric specification results in a cross-sectional regression model that can no longer be estimated because there are asset specific intercepts. Estimating a traditional cross-sectional relationship between sample mean returns and factor betas (including a single intercept) renders the least squares estimates of the regression coefficients biased. As a consequence conclusions about the significance of the included risk factors are wrong. Therefore, some of the „anomalies“ found in empirical studies may be due to this bias. Moreover, it is shown that even in the case of an exact pricing relation the underlying factors of the return generating process must be known. However, this contradicts the attempt to identify the risk factors empirically using a cross-sectional regression model. * Fur hilfreiche Hinweise zu einer fruheren Fassung dieses Aufsatzes mochten wir zwei anonymen Gutachtern danken. Operations Research Spektrum 20/2, 1998, 123-134.

The Behaviour of UK Stock Prices and Returns: is the Market Efficient?

The Behaviour of UK Stock Prices and Returns: is the Market Efficient?

The bid-ask bounce effect and the spread size effect: Evidence from the Taiwan stock market

This paper examines stock return behavior on the Taiwan stock exchange which employs a call market trading mechanism. We show that, similar to the stock returns generated under a continuous trading mechanism, the call market stock prices bounce between the bid and ask price. Furthermore, we illustrate that, in a call market, bid-ask errors can induce two types of measurement errors: (1) the bid-ask bounce and (2) the spread size error. Each of these errors is likely to cause negative autocorrelation in observed returns. For stock return behavior analysis, the optimal return series, which is characterized by minimum bid-ask errors, can be defined as the returns calculated by averaging the bid and ask prices.

Risk and return of U.S. water transportation stocks over time and over bull and bear market conditions

The aim of this paper is to investigate the behaviour of water transportation company stock returns in the U.S. stock exchanges from 1985 to 1994 in order to determine whether the systematic risk of this industry is different from that of the ‘average’ company in the market, whether it has changed over the ten year period, over bull and bear market conditions, and whether there is a firm ‘size’ effect in the industry. In the context of the Capital Asset Pricing Model (Capm), we find that the systematic risk of the shipping industry return is not different from that of the ‘average’ company. It is also found that the covariance of water transportation companies with respect to the overall stock market return did not change over the ten year period although it appears that it has changed over normal upward/downward market movements. There is also reasonable evidence that the intercept of the equation might have changed over normal upward/downward market movements. Finally, we document contradictory evidence regarding the size effect; during the period 1985–1989 we find small companies to have significantly higher returns and risk while during the period 1990–1994 medium size companies tend to have higher risk than small and large firms, which is not however compensated by higher returns.

AGENCY CONFLICT AND CORPORATE STRATEGY: THE EFFECT OF DIVESTMENT ON CORPORATE VALUE

Among the various stakeholders of a firm, senior managers are the most likely targets for private and public political pressures. Other stakeholder groups are less visible and may be perceived as less influential in corporate strategy formulation and implementation. In some situations, consequently, senior executives may adopt corporate strategies in response to political pressures even if these strategies may be costly to shareholders. In this study, a special case is examined: the effect of divestment of South African business units on firm value. Using data from 1984 through 1990, we examine the impact that announcements of divestments have upon the stock return behavior of publicly traded firms. Our results indicate that significant and negative excess returns accrue to shares of companies announcing divestments of South African operations. These results are supportive of the premise that noneconomic pressures may influence managerial strategies rather than value-enhancement goals. © 1997 by John Wiley & Sons, Ltd.

Stock market volatility and the business cycle

This paper investigates the joint time series behavior of monthly stock returns and growth in industrial production. We find that stock returns are well characterized by year-long episodes of high volatility, separated by longer quiet periods. Real output growth, on the other hand, is subject to abrupt changes in the mean associated with economic recessions. We study a bivariate model in which these two changes are driven by related unobserved variables, and conclude that economic recessions are the primary factor that drives fluctuations in the volatility of stock returns. This framework proves useful both for forecasting stock volatility and for identifying and forecasting economic turning points.

Macrofactor Conditional Volatilities, Time‐Varying Risk Premia and Stock Return Behavior

AbstractAn Arbitrage Pricing Model is estimated in which the risk premia vary in proportion to the conditional volatilities of the macroeconomic innovations which follow an autoregressive specification. The conditional volatilities of the macroeconomic innovations exhibit strong timevariation from month to month. For size‐ranked portfolios of all the shares traded on the Toronto Stock Exchange over the period from March 1962 through March 1988, five macrofactors (namely, the lag of industrial production, the Canadian index of 10 leading indicators, the U.S. composite index of 12 leading indicators, the exchange rate and the residual market factor) have time‐varying and priced risk premia. The small‐firm effect is absent in the risk‐adjusted returns, and a significant portion of the observed January seasonality is explained by the model with time‐varying risk premia.

Behavior of earnings, stock returns, accruals, and analysts' forecasts following negative annual earnings

AbstractThis study documents the behavior of earnings, abnormal stock returns, analysts' earnings forecasts, and accounting accruals following years in which companies report negative annual earnings. Changes in accounting accruals (earnings minus operating cash flows) frequently are used as proxies for managerial manipulation of earnings numbers. Our evidence indicates that earnings typically increase sharply in the year following a loss. The earnings increases are due to improved operating cash flows, not to accounting “window dressing.” However, financial analysts expect even better earnings performance than the rebounding firms are able to provide. Investors also appear not to understand the post‐loss behavior of annual earnings. Therefore, the market commonly is disappointed by the earnings increases, and the result, on average, is negative excess stock returns. The excess returns are correlated with analysts' earnings forecast errors, which proxy for the market's failure to understand post‐loss earnings behavior.

RISK, SEASONALITY AND THE ASYMMETRIC BEHAVIOUR OF STOCK RETURNS

For some time there has been a puzzle surrounding the seasonal behaviour of stock returns. This paper demonstrates that there is an asymmetric relationship between systematic risk and return across the different months of the year for both large and small firms. In the case of both large and small firms systematic risk appears to be priced in only two months of the year, January and April. During the other months no persistent relationship between systematic risk and return appears to exist. The paper also shows that when systematic risk is priced, the size of the systematic risk premium is higher for large firms than for small firms and varies significantly across the months of the year.

Calendar effects and the pricing of risk: the UK evidence

For some time there has been a puzzle surrounding the seasonal behaviour of stock returns. This paper demonstrates that there is an asymmetric relationship between risk and return across the different months of the year. The paper finds that systematic risk is only priced during the months of January, April and July. Variance risk and firm size are priced during several months of the year including January. An analysis of the relative behaviour of size based securities reveals that firm capitalization makes a valuable contribution to the magnitude of risk premiums.