Market Mispricing: Extrapolation, Speculation, and Disclosure
Friday, Jan. 4, 2019 10:15 AM - 12:15 PM
- Chair: Samuel Hartzmark, University of Chicago
Can Disclosure Decrease Price Efficiency?
AbstractWe propose a novel measure of window dressing by fund managers—reduced price efficiency—and document returns reverse 28% more in the 30 days after funds record their holdings for required portfolio disclosures, consistent with an overall drop in price efficiency. Asset pricing anomalies also earn negative returns on disclosure dates, consistent with window dressing leading prices to diverge from fundamental value. We further link our findings to fund-level trades by showing that mutual fund managers are more likely to reverse trades initiated on disclosure days and less likely to pay commissions for information on those days. We also show that volume increases on disclosure days and that return reversals are largest among stocks with larger increases in volume, consistent with increases in demand for securities driving the observed distortions. Combined, these findings suggest that mandated fund disclosures have the unintended consequence of decreasing price efficiency in equity markets.
AbstractI provide a novel and direct test that shows speculative demand shocks push asset prices away from fundamentals. I form the Speculation Sentiment Index using observable arbitrage trades in leveraged exchange-traded funds (ETFs). Arbitrage activity originates from unobservable speculative demand shocks that create relative mispricing between a leveraged ETF and its underlying derivative securities. The index proxies for the direction and magnitude of market-wide speculative demand shocks. The Speculation Sentiment Index predicts aggregate asset return reversals and it is associated with market-wide mispricing and arbitrage activity.
Learning Fast or Slow
We analyze the performance of and learning by individual investors who engage in day trading in Taiwan from 1992 to 2006 and test the proposition that individual investors rationally speculate as day traders in order to learn whether they possess superior trading ability. Consistent with models of both rational and biased learning, we document that unprofitable day traders are more likely to quit than profitable traders. Inconsistent with models of rational speculation and learning, we document that the aggregate performance of day traders is negative, the vast majority of day traders are unprofitable, and many persist despite an extensive experience of losses.
- G1 - General Financial Markets