http://repub.eur.nl/res/concept/jel-G14/ Recent publications classified by JEL Code G14 en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/38216/ 2012-12-12T00:00:00Z We assess the effect of aggregate stock market illiquidity on U.S. Treasury bond risk premia. We find that the stock market illiquidity variable adds to the well established Cochrane-Piazzesi and Ludvigson-Ng factors. It explains 10%, 9%, 7%, and 7% of the one-year-ahead variation in the excess return for two-, three-, four-, and ve-year bonds respectively and increases the adjusted R2 by 3-6% across all maturities over Cochrane and Piazzesi (2005) and Ludvigson and Ng (2009) factors. The effects are highly statistically and economically significant both in and out of sample. We find that our result is robust to and is not driven by information from open interest in the futures market, long-run inflation expectations, dispersion in beliefs, and funding liquidity. We argue that stock market illiquidity is a timely variable that is related to " right-to-quality" episodes and might contain information about expected future business conditions through funding liquidity and investment channels. Bouwman, K.E. Sojli, E. Tham, W.W. http://repub.eur.nl/res/pub/38199/ 2012-11-12T00:00:00Z This paper documents that speed is crucially important for high frequency trading strategies based on U.S. macroeconomic news releases. Using order level data of the highly liquid S&P500 ETF traded on NASDAQ from January 6, 2009, to December 12, 2011, we find that a delay of 300 milliseconds (1 second) significantly reduces returns by 3.08% (7.33%) compared to instantaneous execution over all announcements in the sample. This reduction is stronger in case of high impact news and on days with high volatility. In addition, we assess the effect of algorithmic trading on market quality around macroeconomic news. Increases in algorithmic trading activity have a positive (mixed) effect on market quality measures when we use algorithmic trading proxies that capture the top of the orderbook (full orderbook). Scholtus, M.L. Dijk, D.J.C. van Frijns, B.P.M. http://repub.eur.nl/res/pub/38949/ 2012-11-01T00:00:00Z The effectiveness of any sanction depends on the costs of avoiding its restrictions. We examine whether bearish option strategies were substitutes for short sales during the September 2008 short-sale ban. We find a significant diminution in option volumes and a significant increase in option bid-ask spreads for banned stock relative to unbanned stock during the ban period. Apparent violations of the put-call parity bound became significantly more frequent for banned stocks during the ban period. We conclude that the ban acted as an effective restriction on trading in options. Grundy, B.D. Lim, B. Verwijmeren, P. http://repub.eur.nl/res/pub/37301/ 2012-09-25T00:00:00Z We study risk perception and actual decision-making by the corporate elite, where we consider CEOs, CFOs and non-executives. We collect data for many members of the elite for Netherlands-based companies using the vignettes method. We find that CEOs are more risk tolerant but do not act accordingly by demanding higher returns. CFOs and non-executives are found to be more risk-averse; but, interestingly, only the non-executives demand higher returns more than CEOs do. Differences in demanded returns across CEOs and CFOs are found to be negligible. When decision makers mature and get more experienced, they tend to ask higher returns on investment. For all members of the corporate elite it holds that overconfidence is consistently related to higher risk tolerance, whereas those degrees of overconfidence are similar. Groot, E.A. de Renes, S. Segers, R. Franses, Ph.H.B.F. http://repub.eur.nl/res/pub/32837/ 2012-07-01T00:00:00Z We examine how commonality in liquidity varies across countries and over time in ways related to supply determinants (funding liquidity of financial intermediaries) and demand determinants (correlated trading behavior of international and institutional investors, incentives to trade individual securities, and investor sentiment) of liquidity. Commonality in liquidity is greater in countries with and during times of high market volatility (especially, large market declines), greater presence of international investors, and more correlated trading activity. Our evidence is more reliably consistent with demand-side explanations and challenges the ability of the funding liquidity hypothesis to help us understand important aspects of financial market liquidity around the world, even during the recent financial crisis. Karolyi, G.A. Lee, K.-H. Dijk, M.A. van http://repub.eur.nl/res/pub/31986/ 2012-06-01T00:00:00Z This paper examines the effect of Sarbanes-Oxley provisions on 10-K filing delays. We find that tightened filing deadlines for accelerated and large accelerated filers are not associated with changes in the incidence of late filing. While Section 404 compliance does not affect filing timeliness for firms with effective internal controls, we find that about half the firms disclosing internal control weaknesses are late filers. As a consequence, many Section 404 material weakness firms experience negative abnormal returns around late filing notifications before filing the 10-K. Lastly, we find that market reactions to late filing notifications are more negative when management provides no meaningful explanation for the delay, consistent with managers' incentives to withhold bad news. Impink, J. Lubberink, M. Praag, B. van Veenman, D. http://repub.eur.nl/res/pub/32021/ 2012-03-05T00:00:00Z We examine the performance of passively managed exchange-traded funds (ETFs) that provide exposure to global emerging markets equities. We find that the tracking errors of these funds are substantially higher than previously reported levels for developed markets ETFs. ETFs that use statistical index replication techniques turn out to be especially prone to high tracking errors, and particularly so during periods of high cross-sectional dispersion in stock returns. At the same time, we find no convincing evidence that these funds earn higher returns than ETFs that rely on full-replication techniques. Blitz, D.C. Huij, J.J. http://repub.eur.nl/res/pub/25718/ 2012-02-01T00:00:00Z Several studies report that abnormal returns associated with short-term reversal investment strategies diminish once trading costs are taken into account. We show that the impact of trading costs on the strategies' profitability can largely be attributed to excessively trading in small cap stocks. Limiting the stock universe to large cap stocks significantly reduces trading costs. Applying a more sophisticated portfolio construction algorithm to lower turnover reduces trading costs even further. Our finding that reversal strategies generate 30-50 basis points per week net of trading costs poses a serious challenge to standard rational asset pricing models. Our findings also have important implications for the understanding and practical implementation of reversal strategies. Groot, W. de Huij, J.J. Zhou, W. http://repub.eur.nl/res/pub/31778/ 2012-02-01T00:00:00Z This paper investigates the importance of speed for technical trading rule performance for three highly liquid ETFs listed on NASDAQ over the period January 6, 2009 up to September 30, 2009. In addition we examine the characteristics of market activity over the day and within subperiods corresponding to hours, minutes, and seconds. Speed has a clear impact on the return of technical trading rules. For strategies that yield a positive return when they experience no delay, a delay of 200 milliseconds is enough to lower performance significantly. On low volatility days this is already the case for delays larger than 50 milliseconds. In addition, the importance of speed for trading rule performance increases over time. Market activity follows a U-shape over the day with a spike at 10:00AM due to macroeconomic announcements and is characterized by periodic activity within the day, hour, minute, and second. Scholtus, M.L. Dijk, D.J.C. van http://repub.eur.nl/res/pub/32160/ 2012-01-27T00:00:00Z We use earnings forecasts from a cross-sectional model to proxy for cash flow expectations and estimate the implied cost of capital (ICC) for a large sample of firms over 1968-2008. The earnings forecasts generated by the cross-sectional model are superior to analysts' forecasts in terms of coverage, forecast bias, and earnings response coefficient. Moreover, the model-based ICC is a more reliable proxy for expected returns than the ICC based on analysts' forecasts. We present evidence on the cross-sectional relation between firm-level characteristics and ex ante expected returns using the model-based ICC. Hou, K. Dijk, M.A. van Zhang, Y. http://repub.eur.nl/res/pub/22252/ 2011-06-01T00:00:00Z Conventional momentum strategies exhibit substantial time-varying exposures to the Fama and French factors. We show that these exposures can be reduced by ranking stocks on residual stock returns instead of total returns. As a consequence, residual momentum earns risk-adjusted profits that are about twice as large as those associated with total return momentum; is more consistent over time; and less concentrated in the extremes of the cross-section of stocks. Our results are inconsistent with the notion that the momentum phenomenon can be attributed to a priced risk factor or market microstructure effects. Blitz, D.C. Huij, J.J. Martens, M.P.E. http://repub.eur.nl/res/pub/21590/ 2010-09-01T00:00:00Z The popular investment strategy in the literature is to use only past performance to select mutual funds. We investigate whether an investor can select superior funds by additionally using fund characteristics. After considering the fund fees, we find that combining information on past performance, turnover ratio, and ability produces a yearly excess net return of 8.0%, whereas an investment strategy that uses only past performance generates 7.1%. Adjusting for systematic risks, and then using fund characteristics, increases yearly alpha significantly from 0.8% to 1.7%. The strategy that also uses fund characteristics requires less turnover. Budiono, D.P. Martens, M.P.E. http://repub.eur.nl/res/pub/18568/ 2010-04-01T00:00:00Z We study the effects of FOMC announcements of federal funds target rate decisions on individual stock returns, volatilities and correlations at the intraday level. For all three characteristics we find that the stock market responds differently to positive and negative target rate surprises. First, the average response to positive surprises (that is, bad news for stocks) is larger. Second, in case of bad news the mere occurrence of a surprise matters most, whereas for good news its magnitude is more important. These new insights are possible due to the use of high-frequency intraday data. Chulia-Soler, H. Martens, M.P.E. Dijk, D.J.C. van http://repub.eur.nl/res/pub/19217/ 2010-04-01T00:00:00Z Abstract This paper establishes a robust link between the trading behavior of institutions and the book-to-market effect. Building on work by Daniel and Titman (2006), who argue that the book-to-market effect is driven by the reversal of intangible returns, I find that institutions tend to buy (sell) shares in response to positive (negative) intangible information and that the reversal of the intangible return is most pronounced among stocks for which a large proportion of active institutions trade in the direction of intangible information. Furthermore, the book-to-market effect is large and significant in stocks with intense past institutional trading but nonexistent in stocks with moderate institutional trading. This influence of institutional trading on the book-to-market effect is distinct from that of firm size. These results are consistent with the view that the tendency of institutions to trade in the direction of intangible information exacerbates price overreaction, thereby contributing to the value premium. Jiang, H. http://repub.eur.nl/res/pub/18013/ 2010-01-27T00:00:00Z Many firms conduct a conference call with analysts shortly after the quarterly earnings announcement. In these calls, management discusses the completed quarter, and analysts can ask questions. Due to SEC requirements, conference calls in the United States are virtually always live webcasted. A growing number of investors listens in on conference calls, suggesting that calls are useful for investor decision-making. This research clarifies the role of conference calls by analysing a large sample of conference call transcripts, analyst forecasts, and contemporaneous stock market reactions. The study investigates why conference calls are useful. The analysis shows that managers who provide little information in their presentation are actively probed by analysts, and the discussion with analysts becomes longer. Hence, the interactivity of the call enriches the information environment. In a second study, evidence is presented that information about intangible assets is one of the items in conference calls that moves stock markets. This study also shows that managers use the conference call to learn about the information needs of analysts with respect to intangible assets. A third study, suggests that sell-side analysts do not voice their true beliefs on conference calls in an attempt to favour their buy-side clients. Collectively, these results provide evidence that conference calls with analysts enrich the information environment, but their usefulness may be restricted by analyst incentives. Roelofsen, E.M. http://repub.eur.nl/res/pub/17525/ 2009-12-10T00:00:00Z Bubbles can persist because investors are better off riding bubbles. We define bubbles in a natural way as significant, prolonged deviations from fundamental values measured by the well-known asset pricing models. Our real-time bubble detection system shows that –using US industry returns– periods of both higher volatility and higher abnormal returns follow noisy positive bubble signals. However, for the typical investor the risk-return trade-off improves. Riding bubbles generates annual abnormal returns of three to nine percent. These conclusions are robust to different assumptions and our system allows for alternative multifactor models as proxies for fundamental value. Günster, N.K. Kole, H.J.W.G. Jacobsen, B. http://repub.eur.nl/res/pub/22276/ 2009-06-01T00:00:00Z We analyse the relationship between credit default swap (CDS), bond and stock markets during 2000–2002. Focusing on the intertemporal co-movement, we examine monthly, weekly and daily lead-lag relationships in a vector autoregressive model and the adjustment between markets caused by cointegration. First, we find that stock returns lead CDS and bond spread changes. Second, CDS spread changes Granger cause bond spread changes for a higher number of firms than vice versa. Third, the CDS market is more sensitive to the stock market than the bond market and the strength of the co-movement increases the lower the credit quality and the larger the bond issues. Finally, the CDS market contributes more to price discovery than the bond market and this effect is stronger for US than for European firms. Norden, L. Weber, M. http://repub.eur.nl/res/pub/16300/ 2009-05-01T00:00:00Z We develop a new likelihood-based approach to sign trades in the absence of quotes. It is equally efficient as existing MCMC methods, but more than 10 times faster. It can deal with the occurrence of multiple trades at the same time, and noisily observed trade times. We apply this method to a high-frequency dataset of the 30Y U.S. treasury futures to investigate the role of the market maker. Most theory characterizes him as an uninformed passive liquidity supplier. Our results suggest that some market makers actively demand liquidity for a substantial part of the day and are informed speculators. Wel, M. van der Menkveld, A.J. Sarkar, A. http://repub.eur.nl/res/pub/31290/ 2009-04-01T00:00:00Z This paper examines the impact of option trading on individual investor performance. The results show that most investors incur substantial losses on their option investments, which are much larger than the losses from equity trading. We attribute the detrimental impact of option trading on investor performance to poor market timing that results from overreaction to past stock market returns. High trading costs further contribute to the poor returns on option investments. Gambling and entertainment appear to be the most important motivations for trading options while hedging motives only play a minor role. We also provide strong evidence of performance persistence among option traders. Bauer, R. Cosemans, M.M.J.E. Eichholtz, P.M.A. http://repub.eur.nl/res/pub/23436/ 2009-03-01T00:00:00Z We analyze a dynamic microstructure model in which a dealer market (DM) and a crossing network (CN) interact for three informational settings. A key result is that coexistence of trading systems generates systematic patterns in order flow, which depend on the degree of transparency. Further, we study overall welfare, measured by the gains from trade of all agents, and compare it with the maximum overall welfare. The discrepancy between both measures is attributable to two inefficiencies. Due to these inefficiencies, introducing a CN next to a DM, as well as increasing the transparency level, not necessarily produces greater overall welfare. Degryse, H. Achter, M.A. van Wuyts, G.