Financial Markets with Trade on Risk and Return

2019 ◽  
Vol 32 (10) ◽  
pp. 4042-4078 ◽  
Author(s):  
Kevin Smith
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Private Information ◽  
Trading Volume ◽  
Variance Risk Premium ◽  
Oxford University ◽  
Editorial Decision ◽  
Variance Risk ◽  
The Relationship ◽  
Published Paper

Abstract In this paper, I develop a model in which risk-averse investors possess private information regarding both a stock’s expected payoff and its risk. These investors trade in the stock and a derivative whose payoff is driven by the stock’s risk. In equilibrium, the derivative is used to speculate on the stock’s risk and to hedge against adverse fluctuations in the stock’s risk. I analyze the derivative price and variance risk premium that arise in this equilibrium and their predictive power for stock returns. Finally, I examine the relationship between prices and trading volume in the stock and derivative. Received July 31, 2017; editorial decision December 3, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Resiliency and Stock Returns

2019 ◽  
Vol 33 (2) ◽  
pp. 747-782
Author(s):  
Jian Hua ◽  
Lin Peng ◽  
Robert A Schwartz ◽  
Nazli Sila Alan
Keyword(s):  
Stock Returns ◽  
Web Site ◽  
Trading Volume ◽  
Expected Returns ◽  
Control Variables ◽  
Oxford University ◽  
And Control ◽  
Published Paper ◽  
Extensive List ◽  
Oxford University Press

Abstract We present resiliency as a measure of liquidity and assess its relationship to expected returns. We establish a covariance-based measure, RES, that captures opening period resiliency, and use it to find a significant nonresiliency premium that ranges from 33 to 57 basis points per month. The premium persists after accounting for an extensive list of other liquidity-related measures and control variables. The results are significant for both value-weighted and equal-weighted returns, when micro-cap stocks are excluded, and for a sample of large cap stocks. The premium is particularly pronounced when trading volume is high. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Stock Volatility and the Great Depression

2018 ◽  
Vol 32 (9) ◽  
pp. 3544-3570 ◽  
Author(s):  
Gustavo S Cortes ◽  
Marc D Weidenmier
Keyword(s):  
Stock Returns ◽  
Great Depression ◽  
Stock Volatility ◽  
Stock Return Volatility ◽  
Building Permits ◽  
Oxford University ◽  
The Great Depression ◽  
Editorial Decision ◽  
High Level ◽  
Published Paper

Abstract Stock return volatility during the Great Depression has been labeled a “volatility puzzle” because the standard deviation of stock returns was 2 to 3 times higher than any other period in American history. We investigate this puzzle using a new series of building permits and leverage. Our results suggest that volatility in building permit growth and financial leverage largely explain the high level of stock volatility during the Great Depression. Markets factored in the possibility of a forthcoming economic disaster. Received September 30, 2017; editorial decision August 27, 2018 by Editor Philip E. Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

The effects of liquidity trading on insider trade timing when an underlying option is present

2018 ◽  
Vol 44 (10) ◽  
pp. 1250-1270
Author(s):  
Han Ching Huang ◽  
Pei-Shan Tung
Keyword(s):  
Stock Returns ◽  
Insider Trading ◽  
Private Information ◽  
Trading Volume ◽  
Future Research ◽  
Trading Activity ◽  
Content Type ◽  
Corporate Announcements ◽  
The Impact ◽  
The Relationship

Purpose The purpose of this paper is to examine whether the underlying option impacts an insider’s propensity to purchase and sell before corporate announcements, the proportion of insiders’ trading after announcements relative to before announcements, and the insider’s profitability around corporate announcements. Design/methodology/approach The authors test whether the timing information and option have impacted on the tendency of insider trade, the percentage of all shares traded by insiders in the post-announcement to pre-announcement periods and the average cumulative abnormal stock returns during the pre-announcement period. Findings Insiders’ propensity to trade before announcements is higher for stocks without options listed than for stocks with traded options. This result is stronger for unscheduled announcements than for scheduled ones. The proportion of insiders’ trade volume after announcements relative to before announcements in stocks that have not options listed is higher than those in stocks with traded options. The positive relationship between the insiders’ signed volume and the informational content of corporate announcements is stronger in stocks without traded options than in stocks with options listed. Insider trades prior to unscheduled announcement are more profitable than those before scheduled ones. Research limitations/implications The paper examines whether there is a difference between the effects of optioned stock and non-optioned stock. Roll et al. (2010) use the relative trading volume of options to stock ratio (O/S) to proxy for informed options trading activity. Future research could explore the impact of O/S. Moreover, the authors examine how insiders with private information use such information to trade in their own firms. Mehta et al. (2017) argue that insiders also use private information to facilitate trading (shadow trading) in linked firms, such as supply chain partners or competitors. Therefore, future research could consider the impact of shadow trading. Social implications Since the insider’s propensity to buy before announcements in stocks without options listed is larger than in stocks with traded options and the relationship is stronger for unscheduled announcements than for scheduled ones, the efforts of regulators should focus on monitoring insider trading in stocks without options listed prior to unscheduled announcements. Originality/value First, Lei and Wang (2014) find that the increasing pattern of insider’s propensity to trade before unscheduled announcements is larger than that before scheduled announcements. The authors document the underlying option has impacted the insider’s propensity to purchase and sell, and the relationship is stronger for unscheduled announcements than for scheduled ones. Second, related studies show insider’s trading activity has shifted from periods before corporate announcements to periods after corporate announcements to decrease litigation risk. This paper find the underlying option has influenced the proportion of insiders’ trading after announcements relative to before announcements when the illegal insider trade-related penalties increase.

Learning, Fast or Slow

2019 ◽  
Vol 10 (1) ◽  
pp. 61-93 ◽  
Author(s):  
Brad M Barber ◽  
Yi-Tsung Lee ◽  
Yu-Jane Liu ◽  
Terrance Odean ◽  
Ke Zhang
Keyword(s):  
Trading Volume ◽  
Learning Models ◽  
Day Trading ◽  
Rational Models ◽  
Oxford University ◽  
Rational Learning ◽  
History Of ◽  
Editorial Decision ◽  
Speculative Trading ◽  
Published Paper

Abstract Rational models claim “trading to learn” explains widespread excessive speculative trading and challenge behavioral explanations of excessive trading. We argue rational learning models do not explain speculative trading by studying day traders in Taiwan. Consistent with previous studies of learning, unprofitable day traders are more likely than profitable traders to quit. Consistent with models of overconfidence and biased learning (but not with rational learning), the aggregate performance of day traders is negative; 74% of day trading volume is generated by traders with a history of losses; and 97% of day traders are likely to lose money in future day trading. Received: March 4, 2019; Editorial decision: May 16, 2019 by Editor: Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals First to “Read” the News: News Analytics and Algorithmic Trading

2019 ◽  
Vol 10 (1) ◽  
pp. 122-178 ◽  
Author(s):  
Bastian von Beschwitz ◽  
Donald B Keim ◽  
Massimo Massa
Keyword(s):  
Stock Price ◽  
Trading Volume ◽  
Press Releases ◽  
Oxford University ◽  
Volume Response ◽  
Speed Up ◽  
Editorial Decision ◽  
Price Distortions ◽  
Published Paper ◽  
Identification Strategy

Abstract Exploiting a unique identification strategy based on inaccurate news analytics, we document an effect of news analytics on the market independent of the informational content of the news. We show that news analytics speed up the stock price and trading volume response to articles, but reduce liquidity. Inaccurate news analytics lead to small price distortions that are corrected quickly. The market impact of news analytics is greatest for press releases, as news analytics exhibit a particular skill in “seeing through” the positive spin of press releases. Furthermore, we provide evidence that high-frequency traders rely on the information from news analytics for directional trading on company-specific news. Received: May 17, 2018; Editorial decision: June 14, 2019 by Editor: Thierry Foucault. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Information Content of Skewness Risk Premium

2018 ◽  
Vol 26 (4) ◽  
pp. 391-423
Author(s):  
Seok Goo Nam ◽  
Byung Jin Kang
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Asset Returns ◽  
Investment Strategy ◽  
Investment Strategies ◽  
Option Prices ◽  
Underlying Asset ◽  
Variance Risk Premium ◽  
The Difference ◽  
Variance Risk

The variance risk premium defined as the difference between risk neutral variance and physical variance is one of the most crucial information recovered from option prices. It does not, however, reflect the asymmetry in upside and downside movements of underlying asset returns, and also has limitation in reflecting asymmetric preference of investors over gains and losses. In this sense, this paper decomposes variance risk premium into downside - and upside-variance risk premium, and then derives the skewness risk premium and examines its effectiveness in predicting future underlying asset returns. Using KOSPI200 option prices, we obtained the following results. First, we found out that the estimated skewness risk premium has meaningful forecasting power for future stock returns, while the estimated variance risk premium has little forecasting power. Second, by utilizing our results of skewness risk premium, we developed a profitable investment strategy, which verifies the effectiveness of skewness risk premium in predicting future stock returns. In conclusion, the empirical results of this paper can contribute to the literature in that it helps us understand why variance risk premium, in most global markets except the US market, has not been successful in forecasting future stock returns. In addition, our results showing the profitability of investment strategies based on skewness risk premium can also give important implications to practitioners.

scholarly journals Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash

2020 ◽  
Vol 9 (3) ◽  
pp. 593-621 ◽  
Author(s):  
Rui Albuquerque ◽  
Yrjo Koskinen ◽  
Shuai Yang ◽  
Chendi Zhang
Keyword(s):  
Stock Market ◽  
Stock Returns ◽  
Web Site ◽  
Return Volatility ◽  
Stock Market Crash ◽  
Profit Margins ◽  
Oxford University ◽  
Operating Profit ◽  
Editorial Decision ◽  
Published Paper

Abstract The COVID-19 pandemic and the subsequent lockdown brought about an exogenous and unparalleled stock market crash. The crisis thus provides a unique opportunity to test theories of environmental and social (ES) policies. This paper shows that stocks with higher ES ratings have significantly higher returns, lower return volatility, and higher operating profit margins during the first quarter of 2020. ES firms with higher advertising expenditures experience higher stock returns, and stocks held by more ES-oriented investors experience less return volatility during the crash. This paper highlights the importance of customer and investor loyalty to the resiliency of ES stocks. (JEL G12, G32, M14) Received: June 3, 2020; editorial decision June 24, 2020 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

How Are Bankers Paid?

2021 ◽  
Author(s):  
Benjamin Bennett ◽  
Radhakrishnan Gopalan ◽  
Anjan Thakor
Keyword(s):  
Stock Returns ◽  
Short Term ◽  
Small Bank ◽  
Nonperforming Loans ◽  
Oxford University ◽  
Highly Sensitive ◽  
Demand Deposit ◽  
Editorial Decision ◽  
Published Paper ◽  
Measures Of Performance

Abstract We empirically examine bank CEOs’ compensation. We find that bank CEOs (a) are paid less than their nonfinancial counterparts, an effect driven by the CEOs of small bank; (b) experienced declining compensation during 2007–2009 (the hardest-hit banks cut compensation more) but pay is now 24% higher than precrisis levels; (c) are paid more at larger banks, those with less nonperforming loans, those with a higher proportion of noninterest income, and those with less demand-deposit dependence; and (d) have pay highly sensitive to ROA and ROE, but not stock returns. Tail risk is higher when compensation depends more on short-term measures of performance. (JEL, F34, G32, G33, G38, K42) Received July 3, 2019; editorial decision December 13, 2020 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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