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Articles 1 - 30 of 259
Full-Text Articles in Portfolio and Security Analysis
Woulda, Shoulda, Coulda? The Impact Of Predictive, Prescriptive, And Prospective Expectations On Stakeholder Reactions, Yuri Mishina, Maxine Yu, David Gomulya
Woulda, Shoulda, Coulda? The Impact Of Predictive, Prescriptive, And Prospective Expectations On Stakeholder Reactions, Yuri Mishina, Maxine Yu, David Gomulya
Research Collection Lee Kong Chian School Of Business
When and why might stakeholders react to firm activities in ways that might be different than, or even contradictory to, what we might expect based on the extant research? We draw on expectancy violation theory (EVT) and bring in the notion of heuristics and future-oriented expectations to examine this question, using a sample of investor reactions to earnings surprises from 2013 to 2019. We find that, in addition to comparing earnings to consensus earnings estimates, investors appear to compare the earnings surprises to the firm’s past performance and to its peers. Importantly, their expectations regarding future interactions with the firm …
Nominal Prices, Retail Investor Participation, And Return Momentum, Jun Du, Dashan Huang, Yu-Jane Liu, Yushui Shi, Avanidhar Subrahmanyam, Huacheng Zhang
Nominal Prices, Retail Investor Participation, And Return Momentum, Jun Du, Dashan Huang, Yu-Jane Liu, Yushui Shi, Avanidhar Subrahmanyam, Huacheng Zhang
Research Collection Lee Kong Chian School Of Business
We employ an identification strategy for retail participation to explore the link between return momentum and investing clientele. This scheme relies on strictly enforced round-lot rules in China, which financially constrain retail investors from participating in stocks with high nominal prices. We find that there is strong momentum in high-priced stocks, but no momentum on aggregate. This result supports the idea that noise trades of retail investors mask momentum, while other, more sophisticated investors contribute to momentum. We validate this notion by showing that retail investors with small (large) portfolios are less (more) prone to participating in stocks with high …
A Transaction Cost Perspective On Option Anomalies, James O'Donovan, Gloria Yang Yu
A Transaction Cost Perspective On Option Anomalies, James O'Donovan, Gloria Yang Yu
Research Collection Lee Kong Chian School Of Business
We examine the impact of transaction costs on the profitability of long-short portfolios of delta-hedged option returns. Of the 24 portfolio sort variables studied, 17 generate positive and significant gross returns, but none remain profitable after accounting for trading costs. We propose a cost-mitigation approach that restores profitability to 7 key portfolios. Furthermore, we demonstrate that the choice of delta-hedging frequency has a first-order impact on transaction costs. Our findings underscore the central role of implementation costs in shaping the investment opportunity set in equity–option markets, highlighting the need to account for transaction costs when evaluating option-based strategies.
Would Order-By-Order Auctions Be Competitive?, Thomas Ernst, Chester Spatt, Jian Sun
Would Order-By-Order Auctions Be Competitive?, Thomas Ernst, Chester Spatt, Jian Sun
Research Collection Lee Kong Chian School Of Business
We model two methods of executing segregated retail orders: brokers’ routing,whereby brokers allocate orders using the market maker’s overall performance, andorder-by-order auctions, where market makers bid on individual orders, a recent U.S.Securities and Exchange Commission proposal. Order-by-order auctions improve al-locative efficiency, but face a winner’s curse reducing retail investor welfare, partic-ularly when liquidity is limited. Additional market participants competing for retailorders fail to improve total efficiency and investor welfare when entrants possess in-formation superior to incumbent wholesalers. Our results hold when new entrants are less informed or the information structure differs. We also examine the cross-subsidization of brokers’ routing.
The Gender Effects Of Covid: Evidence From Equity Analysts, Frank Weikai Li, Baolian Wang
The Gender Effects Of Covid: Evidence From Equity Analysts, Frank Weikai Li, Baolian Wang
Research Collection Lee Kong Chian School Of Business
We use COVID-19 and sell-side analysts as an experiment to study the effects of gender on labor productivity. We find that the forecast accuracy of female analysts declined more than that of male analysts, especially when schools were closed and among analysts who were more likely to have young children, were inexperienced, were busier, or lived in southern states of the US. Relative to male analysts, females also reduced their forecast timeliness and resorted to more heuristic forecasts but did not reduce coverage or updating frequency. Relative to pre pandemic, female analysts’ careers were more negatively affected than male analysts’. …
Covid-19 And Investors' Trading Behavior: Evidence From The New Zealand Equity Market, Finn West Wilkinson, Marinela Adriana Finta, Olena Onishchenko
Covid-19 And Investors' Trading Behavior: Evidence From The New Zealand Equity Market, Finn West Wilkinson, Marinela Adriana Finta, Olena Onishchenko
Research Collection Lee Kong Chian School Of Business
This paper examines the trading behavior of retail and institutional investors during the COVID-19 pandemic in New Zealand. Using transaction-level data, it compares how retail and institutional investors trade over the government announcements, lockdown, and reopening periods. Retail and institutional investors' trading intensifies around government announcements, which facilitates attenuating illiquidity during the lockdown. Nevertheless, while retail trading is substantially more prominent during the lockdown than over the control and reopening periods, institutional investors do not trade significantly more per se or on announcements during the lockdown but trade less during the reopening. Their trading also relates to contemporaneous returns, and …
Is Carbon Risk Priced In The Cross Section Of Corporate Bond Returns?, Tinghua Duan, Frank Weikai Li, Quan Wen
Is Carbon Risk Priced In The Cross Section Of Corporate Bond Returns?, Tinghua Duan, Frank Weikai Li, Quan Wen
Research Collection Lee Kong Chian School Of Business
This article examines the pricing of a firm’s carbon risk in the corporate bond market. Contrary to the “carbon risk premium” hypothesis, bonds of more carbon-intensive firms earn significantly lower returns. This effect cannot be explained by a comprehensive list of bond characteristics and exposure to known risk factors. Investigating sources of the low carbon alpha, we find the underperformance of bonds issued by carbon-intensive firms cannot be fully explained by divestment from institutional investors. Instead, our evidence is most consistent with investor underreaction to the predictability of carbon intensity for firm cash-flow news, creditworthiness, and environmental incidents.
Fomo And The Ico: The Changing Salience Of Quality Signals, Simon J.D. Schillebeeckx, Sandzhar Tazhibaev, Johannes Gartner
Fomo And The Ico: The Changing Salience Of Quality Signals, Simon J.D. Schillebeeckx, Sandzhar Tazhibaev, Johannes Gartner
Research Collection Lee Kong Chian School Of Business
The manuscript investigates whether the individual personality trait, Fear of Missing Out (FOMO)—typically considered negative—influences the willingness of individuals to contribute to Initial Coin Offerings (ICOs), a phenomenon that emerged after the blockchain revolution. We conducted both qualitative and quantitative work in this space and present the results of an international survey, including a conjoint experiment. Theoretically, we anchor our study in signaling theory and propose that signal valence (the positive or negative interpretation of a signal) can diverge from signal intent. Specifically, we find that candidate ICO funders with strong FOMO behave predictably irrationally. They are more likely to …
Who Profits From Trading Options?, Jianfeng Hu, Antonia Kirilova, Gilbert Seongkyu Park, Doojin Ryu
Who Profits From Trading Options?, Jianfeng Hu, Antonia Kirilova, Gilbert Seongkyu Park, Doojin Ryu
Research Collection Lee Kong Chian School Of Business
We use account-level transaction data to examine trading styles and profitability in a leading derivatives market. Approximately 66% of active retail investors predominantly hold simple, one-sided positions in only one class of options, whereas institutional investors are more likely to use complex strategies. Hypothesizing that the complexity of trading styles reflects investors' skills, we examine the effect of options trading styles on investment performance. We find that retail investors using simple strategies lose to the rest of the market. For both retail and institutional investors, selling volatility is the most successful strategy. We conclude that these style effects are persistent …
Price Discovery On Decentralized Exchanges, Agostino Capponi, Ruizhe Jia, Shihao Yu
Price Discovery On Decentralized Exchanges, Agostino Capponi, Ruizhe Jia, Shihao Yu
Research Collection Lee Kong Chian School Of Business
Decentralized exchanges (DEXs) allow traders to express their willingness to pay for quick execution through a public priority fee bidding mechanism. This influences the trading strategy of informed traders and creates a distinct price discovery process on DEXs compared to centralized exchanges. We present empirical evidence that high-fee DEX trades contain more private information. Informed traders bid high fees not only to avoid execution risk from blockchain congestion, but also to compete for execution priority. Using a dataset of Ethereum mempool orders, we demonstrate that informed traders employ a ``jump bidding'' strategy, placing high initial bids to deter potential competitors.
Siphoned Apart: A Portfolio Perspective On Order Flow Segmentation, Markus Baldauf, Joshua Mollner, Bart Zhou Yueshen
Siphoned Apart: A Portfolio Perspective On Order Flow Segmentation, Markus Baldauf, Joshua Mollner, Bart Zhou Yueshen
Research Collection Lee Kong Chian School Of Business
We study liquidity supply in fragmented markets. Market makers intermediate heterogeneous order flows, trading off spread revenue against inventory costs. Applying our model to payment for order flow (PFOF), we demonstrate that portfolio-based considerations of inventory management incentivize market makers to segment retail orders by siphoning them off-exchange. Banning order flow segmentation reduces total welfare, can make trading more costly for all investors, and can resolve a prisoner's dilemma among market makers. These results differentiate our inventory-based model from the existing information-based theories of PFOF.
Do Underwriters Short-Change Corporations Issuing Bonds?, Jeremy C. Goh, Lisa (Zongfei) Yang
Do Underwriters Short-Change Corporations Issuing Bonds?, Jeremy C. Goh, Lisa (Zongfei) Yang
Research Collection Lee Kong Chian School Of Business
We confirm prior evidence that bonds on average are offered at prices below their immediate post-offer secondary market prices. However, in cases where banks lead–manage their own bond offerings the underpricing is significantly less as compared with other non-self-marketed offerings. These findings are robust across various matched samples and selection models. Our results suggest that the bond offering process is characterized by substantive agency conflicts between shareholders of corporations (issuers) and underwriters.
Diverse Hedge Funds, Yan Lu, Narayan Y. Naik, Melvyn Teo
Diverse Hedge Funds, Yan Lu, Narayan Y. Naik, Melvyn Teo
Research Collection Lee Kong Chian School Of Business
Hedge fund teams with heterogeneous educational backgrounds, academic specializations, work experiences, genders, and races, outperform homogeneous teams after adjusting for risk and fund characteristics. An event study of manager team transitions, instrumental variable regressions, and an analysis of managers who simultaneously operate solo- and team-managed funds address endogeneity concerns. Diverse teams deliver superior returns by arbitraging more stock anomalies, avoiding behavioral biases, and minimizing downside risks. Moreover, diversity allows hedge funds to circumvent capacity constraints and generate persistent performance. Our results suggest that diversity adds value in asset management. Authors have furnished an Internet Appendix, which is available on the …
What Difference Do The New Factor Models Make In Portfolio Allocation?, Frank J. Fabozzi, Dashan Huang, Fuwei Jiang, Jiexun Wang
What Difference Do The New Factor Models Make In Portfolio Allocation?, Frank J. Fabozzi, Dashan Huang, Fuwei Jiang, Jiexun Wang
Research Collection Lee Kong Chian School Of Business
This paper compares the Hou-Xue-Zhang four-factor model with the Fama-French five-factor model from an investing perspective both in- and out-of-sample. Without margin requirements and model uncertainty, the Hou-Xue-Zhang model outperforms the Fama-French model. However, the outperformance could become negligible if an investor is subject to margin requirements and model uncertainty. The Hou-Xue-Zhang model shows similar power as the Fama-French model in describing the covariance matrix of asset returns. Overall, the two models do not make a difference for investing in a realistic setting.
Derivatives And Market (Il)Liquidity, Shiyang Huang, Bart Zhou Yueshen, Cheng Zhang
Derivatives And Market (Il)Liquidity, Shiyang Huang, Bart Zhou Yueshen, Cheng Zhang
Research Collection Lee Kong Chian School Of Business
We study how derivatives (with nonlinear payoffs) affect the underlying assets liquidity. In a rational expectations equilibrium, informed investors expect low conditional volatility and sell derivatives to the others. These derivative trades affect different investors utility differently, possibly amplifying liquidity risk. As investors delta hedge their derivative positions, price impact in the underlying drops, suggesting improved liquidity, because informed trading is diluted. In contrast, effects on price reversal are ambiguous, depending on investors relative delta hedging sensitivity, i.e., the gamma of the derivatives. The model cautions of potential disconnections between illiquidity measures and liquidity risk premium due to derivatives trading.
Are Bond Returns Predictable With Real-Time Macro Data?, Dashan Huang, Fuwei Jiang, Kunpeng Li, Guoshi Tong, Guofu Zhou
Are Bond Returns Predictable With Real-Time Macro Data?, Dashan Huang, Fuwei Jiang, Kunpeng Li, Guoshi Tong, Guofu Zhou
Research Collection Lee Kong Chian School Of Business
We investigate the predictability of bond returns using real-time macro variables and consider the possibility of a nonlinear predictive relationship and the presence of weak factors. To address these issues, we propose a scaled sufficient forecasting (sSUFF) method and analyze its asymptotic properties. Using both the existing and the new method, we find empirically that real-time macro variables have significant forecasting power both in-sample and out-of-sample. Moreover, they generate sizable economic values, and their predictability is not spanned by the yield curve. We also observe that the forecasted bond returns are countercyclical, and the magnitude of predictability is stronger during …
Tail Risk Hedging: The Search For Cheap Options, Poh Ling Neo, Chyng Wen Tee
Tail Risk Hedging: The Search For Cheap Options, Poh Ling Neo, Chyng Wen Tee
Research Collection Lee Kong Chian School Of Business
The authors find that a simple heuristic of sorting liquid equity options by dollar price to construct a portfolio of cheap put options leads to a surprisingly robust hedge for tail risk – the superior performance holds even when compared against more advanced empirical strategies. Further investigation reveals the asymmetry in market correlation under different market conditions as the mechanism of this robust hedging performance. The cheap options selected by the heuristic comprises of stocks with diverse firm characteristics. The correlation spike accompanying tail risk events leads to the majority of these put options moving into-the-money (ITM), thus compensating the …
Option Market Maker Hedging And Stock Market Liquidity, James O′Donovan, Gloria Yang Yu, Jinyuan Zhang
Option Market Maker Hedging And Stock Market Liquidity, James O′Donovan, Gloria Yang Yu, Jinyuan Zhang
Research Collection Lee Kong Chian School Of Business
This paper demonstrates that option market maker hedging impacts the liquidity of underlying stocks. Options contracts have zero net supply, and option market makers engage in delta hedging to manage the risk of their net imbalances, unlike option end-users. Consequently, when option market makers hold a net short (long) position, their dynamic hedging demands liquidity from (or supplies liquidity to) the underlying stock, leading to market destabilization (or stabilization). Leveraging proprietary option exchange data that categorizes option trading by trader type, we document this effect and show that it is stronger for stocks where liquidity supply is expected to be …
Hfts And Dealer Banks: Liquidity And Price Discovery In Fx Trading, Wenqian Huang, Peter O'Neill, Angelo Ranaldo, Shihao Yu
Hfts And Dealer Banks: Liquidity And Price Discovery In Fx Trading, Wenqian Huang, Peter O'Neill, Angelo Ranaldo, Shihao Yu
Research Collection Lee Kong Chian School Of Business
In this paper, we characterise the liquidity provision and price discovery roles of dealers and HFTs in the FX spot market during the sample period between 2012 and 2015. We find that they have different responses to adverse market conditions: HFT liquidity provision is less sensitive to spikes in market-wide volatility, while dealer bank liquidity is more robust ahead of scheduled macroeconomic news announcements when adverse selection risk is high. In periods of extreme levels of volatility, such as the `Swiss De-peg' event in our sample, HFTs appear to withdraw almost all liquidity while dealers remain. In normal times, we …
Peer Effects In Equity Research, Kenny Phua, Mandy Tham, Chi Shen Wei
Peer Effects In Equity Research, Kenny Phua, Mandy Tham, Chi Shen Wei
Research Collection Lee Kong Chian School Of Business
We study the importance of peer effects among sell-side analysts who work at the same brokerage house, but cover different firms. By mapping the information network within each brokerage, we identify analysts who occupy central positions in their network. Central analysts incorporate more information from their coworkers and produce better research. Using shocks to network structures around brokerage mergers, we identify the influence of peer effects and the importance of industry expertise on analysts’ performance. A portfolio strategy that exploits the forecast revisions of central analysts earns up to 24% per annum.
A Review On Derivative Hedging Using Reinforcement Learning, Peng Liu
A Review On Derivative Hedging Using Reinforcement Learning, Peng Liu
Research Collection Lee Kong Chian School Of Business
Hedging is a common trading activity to manage the risk of engaging in transactions that involve derivatives such as options. Perfect and timely hedging, however, is an impossible task in the real market that characterizes discrete-time transactions with costs. Recent years have witnessed reinforcement learning (RL) in formulating optimal hedging strategies. Specifically, different RL algorithms have been applied to learn the optimal offsetting position based on market conditions, offering an automatic risk management solution that proposes optimal hedging strategies while catering to both market dynamics and restrictions. In this article, the author provides a comprehensive review of the use of …
Simultaneous Multilateral Search, Sergei Glebkin, Bart Zhou Yueshen, Ji Shen
Simultaneous Multilateral Search, Sergei Glebkin, Bart Zhou Yueshen, Ji Shen
Research Collection Lee Kong Chian School Of Business
This paper studies simultaneous multilateral search (SMS) in over-the-counter markets: When searching, a customer simultaneously contacts several dealers and trades with the one offering the best quote. Higher search intensity (how often one can search) improves welfare, but higher search capacity (how many dealers one can contact) might be harmful. When the market is in distress, customers might inefficiently favor bilateral bargaining (BB) over SMS. Such a preference for BB speaks to the sluggish adoption of SMS trading, like request-for-quote protocols, in over-the-counter markets. Furthermore, a market-wide shift to SMS may not be socially optimal.
Presidential Economic Approval Rating And The Cross-Section Of Stock Returns, Zilin Chen, Zhi Da, Dashan Huang, Liyao Wang
Presidential Economic Approval Rating And The Cross-Section Of Stock Returns, Zilin Chen, Zhi Da, Dashan Huang, Liyao Wang
Research Collection Lee Kong Chian School Of Business
We construct a monthly presidential economic approval rating (PEAR) index from 1981 to 2019, by averaging ratings on the president’s handling of the economy across various national polls. In the cross-section, stocks with high betas to changes in the PEAR index significantly under-perform those with low betas by 1.00% per month in the future, on a risk-adjusted basis. The low PEAR beta premium persists up to one year, and is present in various sub-samples and even in other G7 countries. PEAR beta dynamically reveals a firm’s perceived alignment to the incumbent president’s economic policies and investors seem to misprice such …
Responsible Hedge Funds, Hao Liang, Lin Sun, Song Wee Melvyn Teo
Responsible Hedge Funds, Hao Liang, Lin Sun, Song Wee Melvyn Teo
Research Collection Lee Kong Chian School Of Business
Hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. Consistent with an agency explanation, the underperformance is driven by PRI signatories with low environmental, social, and governance (ESG) exposures and is greater for hedge funds with poor incentive alignment. To address endogeneity, we exploit regulatory reforms that enhance stewardship and show that the ESG exposure and relative performance of signatory funds improve post reforms. Our findings suggest that some hedge funds endorse responsible investment to pander …
Information Acquisition And Expected Returns: Evidence From Edgar Search Traffic, Frank Weikai Li, Chengzhu Sun
Information Acquisition And Expected Returns: Evidence From Edgar Search Traffic, Frank Weikai Li, Chengzhu Sun
Research Collection Lee Kong Chian School Of Business
This paper examines expected return information embedded in investors' information acquisition activity. Using a novel dataset containing investors' access of company filings through SEC's EDGAR system, we reverse engineer their expectations over future payoffs and show that the abnormal number of IPs searching for firms' financial statements strongly predict future returns. The return predictability stems from investors allocating more effort to firms with improving fundamentals and following exogeneous shock to underpricing. A long-short portfolio based on our measure of information acquisition activity generate monthly abnormal return of 80 basis points and does not reverse over the long-run.. In addition, the …
Do Alpha Males Deliver Alpha? Facial Width-To-Height Ratio And Hedge Funds, Yan Lu, Melvyn Teo
Do Alpha Males Deliver Alpha? Facial Width-To-Height Ratio And Hedge Funds, Yan Lu, Melvyn Teo
Research Collection Lee Kong Chian School Of Business
An abundance of evidence relates facial width-to-height ratio (fWHR) to masculine behaviors in males. We show that hedge funds operated by high-fWHR managers underperform those operated by low-fWHR managers, bear greater downside risk, are more susceptible to fire sales, and fail more often. High-fWHR managers compensate for their underperformance by marketing their funds more aggressively, thereby garnering higher flows and fee revenues. By exploiting major personal events that shape testosterone, namely marriage and fatherhood, we trace the biological mechanism underlying the relation between fWHR and investment performance to circulating testosterone. Our findings are robust and extend to equity mutual funds.
Can Shorts Predict Returns? A Global Perspective, Ekkehart Boehmer, Zsuzsa R. Huszar, Yanchu Wang, Xiaoyan Zhang, Xinran Zhang
Can Shorts Predict Returns? A Global Perspective, Ekkehart Boehmer, Zsuzsa R. Huszar, Yanchu Wang, Xiaoyan Zhang, Xinran Zhang
Research Collection Lee Kong Chian School Of Business
Using multiple short-sale measures, we examine the predictive power of short sales for future stock returns in 38 countries from July 2006 to December 2014. We find that the days-to-cover ratio and the utilization ratio measures have the most robust predictive power for future stock returns in the global capital market. Our results display significant cross-country and cross-firm differences in the predictive power of alternative short-sale measures. The predictive power of shorts is stronger in countries with nonprohibitive short sale regulations and for stocks with relatively low liquidity, high shorting fees, and low price efficiency.
Market Manipulation Around Seasoned Equity Offerings: Evidence Prior To The Global Financial Crisis Of 2007-2009, Charlie Charoenwong, Kuan Yong David Ding, Ping Wang
Market Manipulation Around Seasoned Equity Offerings: Evidence Prior To The Global Financial Crisis Of 2007-2009, Charlie Charoenwong, Kuan Yong David Ding, Ping Wang
Research Collection Lee Kong Chian School Of Business
Since the adoption of the SEC’s Rule 10b-21 in 1988, many researchers have been concerned over the effectiveness of short sales constraints in preventing manipulative trading in the derivatives market. We analyze whether options can be used as synthetic short sale instruments to manipulate stock prices before a seasoned equity offer. Due to the existence of strict short sales constraints in the equity market and market makers’ anticipation of manipulative trading, it would be very costly for a manipulator to drive stock prices down artificially either by short selling in the equity market or by using synthetic short sales in …
Investor Sentiment And Paradigm Shifts In Equity Premium Forecasting, Liya Chu, Kai Li, Tony Xue-Zhong He, Jun Tu
Investor Sentiment And Paradigm Shifts In Equity Premium Forecasting, Liya Chu, Kai Li, Tony Xue-Zhong He, Jun Tu
Research Collection Lee Kong Chian School Of Business
This study investigates the impact of investor sentiment on excess equity return forecasting. A high (low) investor sentiment may weaken the connection between fundamental economic (behavioral-based non-fundamental) predictors and market returns. We find that although fundamental variables can be strong predictors when sentiment is low, they tend to lose their predictive power when investor sentiment is high. Non-fundamental predictors perform well during high-sentiment periods while their predictive ability deteriorates when investor sentiment is low. These paradigm shifts in equity return forecasting provide a key to understanding and resolving the lack of predictive power for both fundamental and non-fundamental variables debated …
High Sex Ratios And Household Portfolio Choice In China, Wenchao Li, Changcheng Song, Shu Xu, Junjian Yi
High Sex Ratios And Household Portfolio Choice In China, Wenchao Li, Changcheng Song, Shu Xu, Junjian Yi
Research Collection Lee Kong Chian School Of Business
This paper studies how high sex ratios (more men than women) affect household portfolio choice. Using data from a nationally representative Chinese household finance survey, we find that a 1 standard deviation increase in the sex ratio would raise the stock market participation rate by 2.9 percentage points or 52.2 percent for families with a son relative to families with a daughter. Our estimates imply that rising sex ratios explain around 10 percent of the significant growth in China’s stock market size in recent decades.