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Loews Philadelphia, Commonwealth Hall A2
American Finance Association
Friday, Jan. 5, 2018 8:00 AM - 10:00 AM
- Chair: Jianfeng Yu, Tsinghua University
Competition and Momentum Profits
AbstractFama and French (2008) point out that momentum is the premier anomaly confronting the finance profession. We develop a measure of buy-side competition for momentum investing and show that it explains abnormal momentum returns. Momentum is profitable when buy-side competition for exploiting momentum is low, including in the post-2000 sample. Momentum generates monthly alpha of more than 130 basis points, when competition is low, but does not yield significant alpha when competition is high.
ETF Arbitrage and Return Predictability
AbstractMany ﬁnance models assume the existence of noise traders who push asset prices away from fundamental values. Yet empirically, these “animal spirits” are challenging to observe because fundamental values are inherently unobservable. We examine a novel database of trades by ETF authorized participants who speciﬁcally trade to correct violations of the law of one price. These trades allow us to measure arbitrage activity. We show that noise traders do not cancel each other out and arbitrage activity is associated with predictable price distortions. Our analysis indicates that noise traders exert a non-fundamental impact on market outcomes even when arbitrageurs are active. Thus, noise traders are not simply noise, they impact prices.
A Tug of War: Overnight Versus Intraday Expected Returns
AbstractWe provide new evidence about the cross-section of average stock returns through a careful examination of exactly when expected returns occur. Momentum and short-term reversal profits accrue entirely overnight while profits to all other trading strategies studied occur entirely intraday. In fact, for many of these anomalies, their overnight/intraday returns are larger than close-to-close returns as there is a partially-offsetting intraday/overnight premium of the opposite sign. We postulate that our findings are potentially consistent with a clientele explanation. We first document strong overnight and intraday return continuation, as well as cross-period reversal effects, all lasting for years. Using this novel overnight/intraday clientele lens, we argue that a relatively large difference between overnight and intraday returns reveals the extent to which investor clienteles are engaged in a "tug of war" over the direction of the strategy in question. All else equal, if the current tug of war is more contentious, the side betting to take advantage of the close-to-close pattern is more likely to be constrained and thus are more likely to leave part of the abnormal returns unexploited. Indeed, a one-standard-deviation increase in a strategy's smoothed overnight-intraday return spread forecasts a close-to-close strategy return in the following month that is 1% higher.
Michigan State University
Ohio State University and NBER
University of California-San Diego
- G1 - General Financial Markets