Animal Spirits

Has disintermediation of trading, enabled by the Internet, changed the level of risk that individual investors/traders routinely assume? In his 2005 paper entitled “Where the Action is: Internet Stock Trading as Edgework”, Detlev Zwick argues that the transition of stock trading from pre-Internet communication modes (telephone, fax and in-person) to the computer screen creates new types of individual experiences and practices that existing economic and finance theories do not predict or understand. Using in-depth oral interviews extended by email follow-ups with 25 experienced online investors in Germany, Denmark, and the United States during 2000-2002, he concludes that: Keep Reading

During a crisis, do investors overreact in reallocating funds from risky assets (stocks) to safe 13-week Treasury bills (T-bill), with stock prices and T-bill yields consequently falling together? Once the crisis abates, do investors cthen orrect their overreaction by moving funds back from T-bills to stocks, with stock prices and T-bill yields then rising together? To test this model of investor behavior, we examine relationships between overall stock market returns and T-bill yield changes during and after dramatic declines in the T-bill yield for past and future intervals of 10, 21 and 63 trading days. Using daily closes for the S&P 500 index and T-bill yield from 1/4/60 through 8/20/07 (11,864 days when both traded), we find that: Keep Reading

Do individuals understand their actual aggregate investing/trading performance? In their July 2007 paper entitled “Why Inexperienced Investors Do Not Learn: They Don’t Know Their Past Portfolio Performance”, Markus Glaser and Martin Weber measure whether individual investors can correctly estimate personal absolute and relative stock portfolio performance. Using the responses of 215 online investors to a 2001 internet survey and actual portfolio returns for these investors during 1997-2000 as calculated from their holdings during that period, they find that: Keep Reading

Are multi-year runs of bad (good) performance by individual stocks indicative of future returns? In other words, does the long-run behavior of stocks on average persist, reverse or fade to random? In their October 2006 paper entitled “Return Reversal in UK Shares”, Glen Arnold and Rose Baker examine the magnitude, persistence and source of reversals for UK stock returns. Using monthly total return and associated fundamentals data for stocks listed on the London Stock Exchange over the prior five calendar years during 1975-2002 (48 years), they find that: Keep Reading

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