Analysts, News, Media and Market Sentiment
Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM
- Chair: David Solomon, Boston College
Fully Closed: Individual Responses to Realized Capital Gains and Losses
AbstractWe use transaction-level data for portfolio holdings and trades as well as account balances, income, and spending of a large sample of retail investors to explore how individuals respond to paper versus realized capital gains and losses. To identify the effects of realized gains and losses, we exploit plausibly exogenous mutual fund liquidations. Specifically, we estimate the marginal propensity to reinvest out of one dollar received from a forced sale event when the investor either achieved a capital gain or a loss relative to his or her initial investment. Theoretically, if individuals held optimized portfolios, the marginal propensity to reinvest out of forced liquidations should be 100% independent of realizing a gain or a loss. Individuals should just reinvest all of their liquidity immediately into a fund with similar characteristics. Empirically, individuals keep a share of their newly found liquidity in cash, save it, consume it, or reinvest it into different funds, stocks, or bonds. Moreover, individuals reinvest 89% if the forced sale resulted in a capital gain, but only 46% in the event of a loss. Such differential treatment of gains and losses is inconsistent with active rebalancing or tax considerations but consistent with mental accounting and the idea that individuals treat realized losses differently from paper losses.
When Paper Losses Get Physical: Domestic Violence and Stock Returns
AbstractWe study a negative externality of the stock market on families. We find a significant negative relationship between the local stock market return at the state level during the week and the reported incidence of domestic violence during the weekend. This relationship is robust to controlling for local economic conditions at the police agency-month level and only exists for the concurrent week stock returns. These findings suggest that wealth shocks caused by the stock market can affect stress levels within families, escalate arguments, and trigger violent behavior. We also find evidence that changes in expectations, as proxied by past stock returns, affect the magnitude of the effect of current stock returns. Using Google search volumes as an alternative proxy for the incidence of domestic violence yields similar results, albeit larger in magnitude. The negative relationship between stock returns and reported domestic violence is attributable to the middle part of the regional income distribution, where both the stock market participation of households and the prevalence of domestic violence are likely to be adequately high to generate substantial aggregate effects.
Detecting Opportunistic Behavior in Public Short Campaigns
AbstractHigh legal hurdles to fighting against illegal manipulative short campaigns, as well as the possibility of the transgressor claiming “honest errors,” leave constant room for opportunistic campaign behavior. Motivated by the theory of Benabou and Laroque (1992), this paper proposes a framework to detect such behavior. Using comprehensive data on short campaigns and linking them to daily short-sale metrics and post-campaign stock market performance, this paper identifies clustered campaigns, or multiple campaigns published on the same target and same date, as one opportunistic campaign strategy. Further analyses indicate that clustered campaigns appear to be opportunistic only in the subsamples where firms are more likely to be the targets of manipulation (i.e., smaller firms), campaign authors are better connected, and the incentive to benefit pre-opened short interest is higher
- G1 - General Financial Markets