Finance and Financial Management Commons^™

Joint News, Attention Spillover, And Market Returns Predictability, Li Guo, Lin Peng, Yubo Tao, Jun Tu

Research Collection Lee Kong Chian School Of Business

We analyze over 2.6 million news articles and propose a novel measure of joint news coverage of firms. The measure strongly and negatively predicts market returns, with a monthly R-squared of 3.93% in sample and 6.52% out of sample. The relation is causal, robust to existing predictors, and is especially strong when market uncertainty is high or when market frictions are large. At the firm level, joint news coverage is associated with a 20.3% increase in EDGAR downloads by new IPs from the investor bases of the other covered firms. Our evidence suggests that joint news triggers investor attention spillover …

Esg And The Market Return, Ran Chang, Liya Chu, Jun Tu, Bohui Zhang, Guofu Zhou

Research Collection Lee Kong Chian School Of Business

We propose an environmental, social, and governance (ESG) index. We find that it has significant power in predicting the stock market risk premium, both in- and out-of-sample, and delivers sizable economic gains for mean-variance investors in asset allocation. Although the index is extracted by using the PLS method, its predictability is robust to using alternative machine learning tools. We find further that the aggregate of environmental variables captures short-term forecasting power, while that of social or governance captures long-term. The predictive power of the ESG index stems from both cash flow and discount rate channels.

Tracking Retail Investor Activity, Ekkehart Boehmer, Charles M. Jones, Xiaoyan Zhang, Xinran Zhang

Research Collection Lee Kong Chian School Of Business

We provide an easy method to identify marketable retail purchases and sales using recent, publicly available U.S. equity transactions data. Individual stocks with net buying by retail investors outperform stocks with negative imbalances by approximately 10 bps over the following week. Less than half of the predictive power of marketable retail order imbalance is attributable to order flow persistence, while the rest cannot be explained by contrarian trading (proxy for liquidity provision) or public news sentiment. There is suggestive, but only suggestive, evidence that retail marketable orders might contain firm-level information that is not yet incorporated into prices.

The Ursinus College Investment Management Company Newsletter, Fall 2021, Scott Deacle, Maureen Cumpstone, Zachary Crebbin, Maddy Sorokanych, Michael Buck, Kareem Elghawy

Investment Management Company Newsletter

Inside this issue:

Letter from Madelynn Sorokanych '22

Letter from Michael Buck '22

At a Glance

Investment Strategies

Endowment at Work

UCIMCO Updates

Notable Trends

Semester Investment Performance

Endowment Outlook

Stock Selection Picks

Women's Fund Picks

Our Team

Special Thanks

Supporters

How to Contribute

The Profitability Of Warrant Issuers: An Empirical Investigation Of Single Stock And Index Warrants, Ichaya Wongnapakarn, Arnat Leemakdej, Chiyachantana N. Chiraphol, Pattarawan Prasarnphanich, Eakapat Manitkajornkit

Research Collection Lee Kong Chian School Of Business

This study examines the derivative warrant's profit of issuers compensated with the risk from issuing call and put derivative warrants because they have commitments in risk management and managing risk by hedging the underlying exposure. The average profit of issuers is a cumulative profit from the first trading day until the last trading day. Consistent with the imperfect competition for issuing put derivative warrants on single stock from different securities borrowing and lending advantages, the profit margin of a put warrant is higher than the call warrant. However, the profit margin from a put warrant is not necessarily higher than …

Does Industry Timing Ability Of Hedge Funds Predict Their Future Performance, Survival, And Fund Flows?, Turan G. Bali, Stephen J. Brown, Mustafa O. Caglayan, Umut Celiker

Business Faculty Publications

This paper investigates hedge funds’ ability to time industry-specific returns and shows that funds’ timing ability in the manufacturing industry improves their future performance, probability of survival, and ability to attract more capital. The results indicate that the best industry-timing hedge funds in the manufacturing sector have the highest return exposure to earnings surprises. This, together with persistently sticky earnings surprises, transparent information environment in regards to earnings releases, and large post-earnings-announcement drift in the manufacturing industry, explain to a great extent why best-timing hedge funds can generate significantly larger future returns compared to worst-timing hedge funds.

A Dynamic Delegated Investment Model Of Spacs, Dan Luo, Jian Sun

Research Collection Lee Kong Chian School Of Business

We study SPACs in a continuous-time delegated investment model. Our model is built upon three unique features of SPACs: the sponsor and the investor are only partially aligned, a SPAC has a short time horizon, and the investor has the final control over investment approval. Due to the misalignment in incentives, the sponsor has an increasing incentive to propose unprofitable projects to the investor; in response, the investor exerts more stringent screening based on her information. Although the screening helps curb the sponsor’s moral hazard, it also dampens the disciplining effect of partial alignment in incentives. When the investor’s information …

Are Disagreements Agreeable? Evidence From Information Aggregation, Dashan Huang, Jiangyuan Li, Liyao Wang

Research Collection Lee Kong Chian School Of Business

Disagreement measures are known to predict cross-sectional stock returns but fail to predict market returns. This paper proposes a partial least squares disagreement index by aggregating information across individual disagreement measures and shows that this index significantly predicts market returns both in- and out-of-sample. Consistent with the theory in Atmaz and Basak (2018), the disagreement index asymmetrically predicts market returns with greater power in high-sentiment periods, is positively associated with investor expectations of market returns, predicts market returns through a cash flow channel, and can explain the positive volume-volatility relationship.

The Pricing Of Initial Public Offering And Market Efficiency, Chiyachantana N. Chiraphol

Research Collection Lee Kong Chian School Of Business

This study investigates long-run performance of Thai initial public offerings (IPOs). To examine the longrun performance of Thai IPOs, we compute buy-and-hold abnormal returns and cumulative abnormal returns for two years after the IPOs. We find strong evidence of long run underpricing in Thai market. Specifically, the average buy-and-hold abnormal returns and cumulative abnormal returns are 64.5% and 18.4% respectively. However, our multi-variate analysis does not indicate a strong relation between long-run underperformance and firm-specific factors, such as firm size, firm age, investment banker reputation and firm profitability.

Speed Acquisition, Shiyang Huang, Bart Zhou Yueshen

Research Collection Lee Kong Chian School Of Business

Speed is a salient feature of modern financial markets. This paper studies investors' speed acquisition together with their information acquisition. Speed heterogeneity arises in equilibrium, fragmenting the information aggregation process with a nonmonotone impact on price informativeness. Various competition effects drive speed and information to be either substitutes or complements. The model cautions the possible dysfunction of price discovery: An improving information technology might complement speed acquisition, which shifts the concentration of price discovery over time, possibly hurting price informativeness. Novel predictions are discussed regarding investor composition and their investment performance.

Hedge Funds And Their Prime Broker Analysts, Sung Gon Chung, Manoj Kulchania, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

Are sell-side analysts reluctant to go against the investment views of their hedge funds when these hedge funds are their prime brokerage clients? We show that prime broker analysts tend to upgrade stocks recently bought by their clients. For stocks with upgraded recommendations, post-announcement cumulative abnormal returns are significantly lower for those purchased by the prime brokerage clients. Our results are stronger with high-dollar-turnover clients who generate more trading commissions. We also find that a hedge fund with a large bet on a stock has a stronger incentive to pressure the fund’s prime brokers to issue a favorable recommendation on …

Analyst Teams, Bingxu Fang, Ole-Kristian Hope

Research Collection School Of Accountancy

This paper examines the impact of teamwork on sell-side analysts’ performance. Using a hand-collected sample of over 50,000 analyst research reports, we find that analyst teams issue more than 70% of annual earnings forecasts. In contrast, most prior research implicitly assumes that forecasts are issued by individual analysts. We document that analyst teams generate more accurate earnings forecasts than individual analysts and that the stock market reacts more strongly to forecast revisions issued by teams. Analyst teams also cover more firms, issue earnings forecasts more frequently, and issue less stale forecasts. Analysts working in teams are more likely to be …

Japanese Monetary Policy And Its Impact On Stock Market Implied Volatility During Pleasant And Unpleasant Weather, Marinela Adriana Finta

Research Collection Lee Kong Chian School Of Business

We investigate the effect of Japan's Monetary Policy Meeting releases on the intraday dynamics of the Nikkei Stock Average Volatility Index and its futures during pleasant and unpleasant weather. We show that at the time of a monetary policy release when the temperature is pleasant, there is a significant decline in Japanese equities' implied volatility and futures, which lasts for about 10 min and 5 min, respectively. This decline is longer and exhibits a greater variation when releases occur during cold days. Finally, we emphasize the achievable economic profits and losses, given the reaction of Nikkei VI futures to the …

Bitcoin As A Viable Alternative To Legacy Reserve Assets: Reasons, Risks, And Adoption, Jeffry Blake Dunson Ii

Senior Honors Theses

Reserve assets include commodities, currencies, or other capital held by institutions as a hedge against the fluctuations of external factors. While the United States’ rise to power helped establish the US dollar as the most predominant reserve asset of the past fifty years, current events & the fast pace of technological advancement has exposed some limitations in the system. Blockchain technology has allowed for assets with cryptographically verifiable integrity that fundamentally depart from the US dollar standard and has potential to overhaul reserve assets as we know it. The course of this research details the downsides of legacy reserve assets, …

Hedge Fund Performance With The Treynor-Black Model, Gurkamal S. Pannu

Honors Theses

This paper seeks to analyze the information ratio differences between long/short hedge funds over the past two decades using the Treynor-Black model. The Treynor-Black model is a method to derive an optimal portfolio allocation across safe and risky assets, based off of expected alphas of active investments and the unsystematic volatility that can be attributed to each given security. We first developed and implemented a model to forecast information ratios on a database of long/short hedge funds. With the predicted information ratios, we calculated out-of-sample allocation weights from a Treynor-Black active portfolio model. These weights were then tested in a …

The Role Of The Iex In A Fragmented Market System, Cameron Spicer

Honors College

Over the past several decades, the secondary market system has evolved into a more complex and fragmented system than it once was. The Investor’s Exchange (IEX) emerged in 2014 in rebellion of purportedly unethical High-Frequency Trading (HFT) behaviors in the markets. Using a novel, proprietary model for trade matching along with providing other services, the IEX has become a respectable player in the market system that prides itself on transparency and fairness. This paper explores the role that IEX has played in market fragmentation since its inception using empirical and historical analysis. The empirical analysis focuses primarily on a recent …

Analyst Talent, Information, And Investment Strategies, Zhichuan Li, Stephen R. Foerster, Zhenyang Tang, Chongyu Dang

Business Publications

Analyst talent, rather than the number of analysts following a firm, matters most to investors. We find: 1) Analysts with greater “natural” forecasting talent—controlling for experience, brokerage affiliation, and task complexity—contribute relatively more firm-specific rather than industry or market information; 2) Earnings forecasts by low-talent analysts may lead to substantial mispricing; 3) When earnings surprises are large, post-earnings-announcement drift is more prominent among firms covered by low-talent analysts; 4) Firms with low-talent analysts have significantly more insider trading prior to positive earnings news; and 5) Investing following insider trading is more profitable in stocks followed by low-talent analysts.

The Ursinus College Investment Management Company Newsletter, Spring 2021, Scott Deacle, George Psaradakis, Jacob Kang, Kareem Elghawy, Wendy Luo

Investment Management Company Newsletter

Inside this issue:

Letter from Kareem Elghawy '22

Letter from Wendy Luo '21

At a Glance

Investment Strategies

Endowment at Work

UCIMCO Updates

Fall Semester Investment Performance

Endowment Outlook

Stock Selection Picks

Women's Fund Picks

Our Team

Supporters

How to Contribute

Japanese Monetary Policy And Its Impact On Stock Market Implied Volatility During Pleasant And Unpleasant Weather, Marinela Adriana Finta

Research Collection Lee Kong Chian School Of Business

We investigate the effect of Japan’s Monetary Policy Meeting releases on the intraday dynamics of the Nikkei Stock Average Volatility Index and its futures during pleasant and unpleasant weather. We show that at the time of a monetary policy release when the temperature is pleasant, there is a significant decline in Japanese equities’ implied volatility and futures, which lasts for about 10 minutes and 5 minutes, respectively. This decline is longer and exhibits a greater variation when releases occur during cold days. Finally, we emphasize the achievable economic profits and losses, given the reaction of Nikkei VI futures to the …

Hedge Fund Franchises, William Fung, David Hsieh, Narayan Naik, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

We investigate the growth strategies of hedge fund firms. We find that firms with successful first funds are able to launch follow-on funds that charge higher performance fees, set more onerous redemption terms, and attract greater inflows. Motivated by the aforementioned spillover effects, first funds outperform follow-on funds, after adjusting for risk. Consistent with the agency view, greater incentive alignment moderates the performance differential between first and follow-on funds. Moreover, multiple-product firms underperform single-product firms but harvest greater fee revenues, thereby hurting investors while benefitting firm partners. Investors respond to this growth strategy by redeeming from first funds of firms …