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Volume 65: Issue 4 (August 2010)

Presidential Address: Asset Price Dynamics with Slow‐Moving Capital

Pages: 1237-1267  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01569.x  |  Cited by: 571


I describe asset price dynamics caused by the slow movement of investment capital to trading opportunities. The pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal. The amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade, such as search costs for trading counterparties or time to raise capital by intermediaries. I discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions, which subsided afterward. After presenting examples of price reactions to supply shocks in normal market settings, I offer a simple illustrative model of price dynamics associated with slow‐moving capital due to the presence of inattentive investors.

Disagreement and Learning: Dynamic Patterns of Trade

Pages: 1269-1302  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01570.x  |  Cited by: 229


The empirical evidence on investor disagreement and trading volume is difficult to reconcile in standard rational expectations models. We develop a dynamic model in which investors disagree about the interpretation of public information. We obtain a closed‐form linear equilibrium that allows us to study which restrictions on the disagreement process yield empirically observed volume and return dynamics. We show that when investors have infrequent but major disagreements, there is positive autocorrelation in volume and positive correlation between volume and volatility. We also derive novel empirical predictions that relate the degree and frequency of disagreement to volume and volatility dynamics.

Generalized Disappointment Aversion and Asset Prices

Pages: 1303-1332  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01571.x  |  Cited by: 185


We characterize generalized disappointment aversion (GDA) risk preferences that can overweight lower‐tail outcomes relative to expected utility. We show in an endowment economy that recursive utility with GDA risk preferences generates effective risk aversion that is countercyclical. This feature comes from endogenous variation in the probability of disappointment in the representative agent's intertemporal consumption‐saving problem that underlies the asset pricing model. The variation in effective risk aversion produces a large equity premium and a risk‐free rate that is procyclical and has low volatility in an economy with a simple autoregressive endowment‐growth process.

Information Quality and Long‐Run Risk: Asset Pricing Implications

Pages: 1333-1367  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01572.x  |  Cited by: 119


I study the asset pricing implications of the quality of public information about persistent productivity shocks in a general equilibrium model with Kreps–Porteus preferences. Low information quality is associated with a high equity premium, a low volatility of consumption growth, and a low volatility of the risk‐free interest rate. The relationship between information quality and the equity premium differs from that in endowment economies. My calibration improves substantially upon the Bansal–Yaron model in terms of the moments of the wealth–consumption ratio and the return on aggregate wealth.

Intraday Patterns in the Cross‐section of Stock Returns

Pages: 1369-1407  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01573.x  |  Cited by: 136


Motivated by the literature on investment flows and optimal trading, we examine intraday predictability in the cross‐section of stock returns. We find a striking pattern of return continuation at half‐hour intervals that are exact multiples of a trading day, and this effect lasts for at least 40 trading days. Volume, order imbalance, volatility, and bid‐ask spreads exhibit similar patterns, but do not explain the return patterns. We also show that short‐term return reversal is driven by temporary liquidity imbalances lasting less than an hour and bid‐ask bounce. Timing trades can reduce execution costs by the equivalent of the effective spread.

Sell‐Side School Ties

Pages: 1409-1437  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01574.x  |  Cited by: 542


We study the impact of social networks on agents’ ability to gather superior information about firms. Exploiting novel data on the educational background of sell‐side analysts and senior corporate officers, we find that analysts outperform by up to 6.60% per year on their stock recommendations when they have an educational link to the company. Pre‐Reg FD, this school‐tie return premium is 9.36% per year, while post‐Reg FD it is nearly zero. In contrast, in an environment that did not change selective disclosure regulation (the U.K.), the school‐tie premium is large and significant over the entire sample period.

Predictive Regressions: A Present‐Value Approach

Pages: 1439-1471  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01575.x  |  Cited by: 348


We propose a latent variables approach within a present‐value model to estimate the expected returns and expected dividend growth rates of the aggregate stock market. This approach aggregates information contained in the history of price‐dividend ratios and dividend growth rates to predict future returns and dividend growth rates. We find that returns and dividend growth rates are predictable with R2 values ranging from 8.2% to 8.9% for returns and 13.9% to 31.6% for dividend growth rates. Both expected returns and expected dividend growth rates have a persistent component, but expected returns are more persistent than expected dividend growth rates.

Do Limit Orders Alter Inferences about Investor Performance and Behavior?

Pages: 1473-1506  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01576.x  |  Cited by: 144


Individual investors lose money around earnings announcements, experience poor posttrade returns, exhibit the disposition effect, and make contrarian trades. Using simulations and trading records of all individual investors in Finland, I find that these trading patterns can be explained in large part by investors' use of limit orders. These patterns arise mechanically because limit orders are price‐contingent and suffer from adverse selection. Reverse causality from behavioral biases to order choices does not appear to explain my findings. I propose a simple method for measuring a data set's susceptibility to this limit order effect.

Why Do Foreign Firms Leave U.S. Equity Markets?

Pages: 1507-1553  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01577.x  |  Cited by: 114


Foreign firms terminate their Securities and Exchange Commission registration in the aftermath of the Sarbanes–Oxley Act (SOX) because they no longer require outside funds to finance growth opportunities. Deregistering firms’ insiders benefit from greater discretion to consume private benefits without having to raise higher cost funds. Foreign firms with more agency problems have worse stock‐price reactions to the adoption of Rule 12h‐6 in 2007, which made deregistration easier, than those firms more adversely affected by the compliance costs of SOX. Stock‐price reactions to deregistration announcements are negative, but less so under Rule 12h‐6, and more so for firms that raise fewer funds externally.

Market Segmentation and Cross‐predictability of Returns

Pages: 1555-1580  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01578.x  |  Cited by: 388


We present evidence supporting the hypothesis that due to investor specialization and market segmentation, value‐relevant information diffuses gradually in financial markets. Using the stock market as our setting, we find that (i) stocks that are in economically related supplier and customer industries cross‐predict each other's returns, (ii) the magnitude of return cross‐predictability declines with the number of informed investors in the market as proxied by the level of analyst coverage and institutional ownership, and (iii) changes in the stock holdings of institutional investors mirror the model trading behavior of informed investors.

Mutual Fund Incubation

Pages: 1581-1611  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01579.x  |  Cited by: 452


Incubation is a strategy for initiating new funds, where multiple funds are started privately, and, at the end of an evaluation period, some are opened to the public. Consistent with incubation being used by fund families to increase performance and attract flows, funds in incubation outperform nonincubated funds by 3.5% risk‐adjusted, and when they are opened to the public they attract higher flows. Postincubation, however, this outperformance disappears. This performance reversal imparts an upward bias to returns that is not removed by a fund size filter. Fund age and ticker creation date filters, however, eliminate the bias.

Report of the Editor of The Journal of Finance for the Year 2009

Pages: 1613-1627  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01580.x  |  Cited by: 0


Minutes of the Annual Membership Meeting
January 4, 2010

Pages: 1629-1630  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01581.x  |  Cited by: 0

Report of the Executive Secretary and Treasurer
for the Year Ending September 30, 2009

Pages: 1631-1633  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01582.x  |  Cited by: 1


Pages: 1635-1636  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01583.x  |  Cited by: 0

Back Matter

Pages: 1637-1640  |  Published: 7/2010  |  DOI: 10.1111/j.1540-6261.2010.01584.x  |  Cited by: 0