The Journal of Finance

Long‐Term Market Overreaction or Biases in Computed Returns?

Published: 03/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04701.x

JENNIFER CONRAD, GAUTAM KAUL

We show that the returns to the typical long‐term contrarian strategy implemented in previous studies are upwardly biased because they are calculated by cumulating single‐period (monthly) returns over long intervals. The cumulation process not only cumulates “true” returns but also the upward bias in single‐period returns induced by measurement errors. We also show that the remaining “true” returns to loser or winner firms have no relation to overreaction. This study has important implications for event studies that use cumulative returns to assess the impact of information events.

Relative Price Variability, Real Shocks, and the Stock Market

Published: 06/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb03699.x

GAUTAM KAUL, H. NEJAT SEYHUN

In this paper, we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return‐inflation regressions. The evidence shows that the negative stock return‐inflation relations proxy for the adverse effects of relative price variability on economic activity, particularly during the seventies, when the U.S. experienced oil supply shocks. Hence, it appears that inflation spuriously affects the stock market in two ways: the aggregate output link of Fama (1981) and the supply shocks reflected in relative price variability.

Oil and the Stock Markets

Published: 06/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02691.x

CHARLES M. JONES, GAUTAM KAUL

We test whether the reaction of international stock markets to oil shocks can be justified by current and future changes in real cash flows and/or changes in expected returns. We find that in the postwar period, the reaction of United States and Canadian stock prices to oil shocks can be completely accounted for by the impact of these shocks on real cash flows alone. In contrast, in both the United Kingdom and Japan, innovations in oil prices appear to cause larger changes in stock prices than can be justified by subsequent changes in real cash flows or by changing expected returns.

Value versus Glamour

Published: 09/11/2003   |   DOI: 10.1111/1540-6261.00594

Jennifer Conrad, Michael Cooper, Gautam Kaul

The fragility of the CAPM has led to a resurgence of research that frequently uses trading strategies based on sorting procedures to uncover relations between firm characteristics (such as “value” or “glamour”) and equity returns. We examine the propensity of these strategies to generate statistically and economically significant profits due to our familiarity with the data. Under plausible assumptions, data snooping can account for up to 50 percent of the in‐sample relations between firm characteristics and returns uncovered using single (one‐way) sorts. The biases can be much larger if we simultaneously condition returns on two (or more) characteristics.

Trading Volume and Transaction Costs in Specialist Markets

Published: 09/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb02463.x

THOMAS J. GEORGE, GAUTAM KAUL, M. NIMALENDRAN

Prior work with competitive rational expectations equilibrium models indicates that there should be a positive relation between trading volume and differences in beliefs or information among traders. We show that this result is sensitive to whether and how transaction costs are modeled. In a specialist market with endogenous transaction costs we show that trading volume can be negatively related to the degree of informational asymmetry in the market. Our analysis highlights the dependence of volume on market structure, and our results suggest that the “volume effects” of corporate or macroeconomic events reflect a decrease, rather than an increase, in heterogeneity of beliefs or asymmetry of information.