The Journal of Finance

The Price Effect of Option Introduction

Published: 06/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb05068.x

JENNIFER CONRAD

This paper examines the price effect of option introduction from 1974 to 1980. The introduction of individual options causes a permanent price increase in the underlying security, beginning approximately three days before introduction. The price effect appears to be associated with introduction, and not announcement, throughout the sample period. Excess returns volatility declines with option introduction. Systematic risk is unchanged. There is a positive relation between the price increase and a measure of activity in the options market.

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.

Market Microstructure and the Ex‐Date Return

Published: 09/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb02464.x

JENNIFER S. CONRAD, ROBERT CONROY

This article examines the role of measurement biases, due to order flow effects, in abnormal split ex‐day returns. We conjecture that postsplit orders consist of numerous small buyers and fewer larger sellers. This change in order flow causes closing prices to occur more frequently at the ask price, consistent with Maloney and Mulherin (1992) and Grinblatt and Keim (1991). In addition, this change causes specialists' spreads to increase, perhaps to offset larger average inventories. We examine both NYSE and NASDAQ samples and find that order flow biases can explain approximately 80 percent (48 percent) of the NYSE (NASDAQ) ex‐day return.

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.

Ex Ante Skewness and Expected Stock Returns

Published: 12/27/2012   |   DOI: 10.1111/j.1540-6261.2012.01795.x

JENNIFER CONRAD, ROBERT F. DITTMAR, ERIC GHYSELS

We use option prices to estimate ex ante higher moments of the underlying individual securities’ risk‐neutral returns distribution. We find that individual securities’ risk‐neutral volatility, skewness, and kurtosis are strongly related to future returns. Specifically, we find a negative (positive) relation between ex ante volatility (kurtosis) and subsequent returns in the cross‐section, and more ex ante negatively (positively) skewed returns yield subsequent higher (lower) returns. We analyze the extent to which these returns relations represent compensation for risk and find evidence that, even after controlling for differences in co‐moments, individual securities’ skewness matters.

When Is Bad News Really Bad News?

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00504

Jennifer Conrad, Bradford Cornell, Wayne R. Landsman

We examine whether the price response to bad and good earnings shocks changes as the relative level of the market changes. The study is based on a complete sample of annual earnings announcements during the period 1988 to 1998. The relative level of the market is based on the difference between the current market P/E and the average market P/E over the prior 12 months. We find that the stock price response to negative earnings surprises increases as the relative level of the market rises. Furthermore, the difference between bad news and good news earnings response coefficients rises with the market.

Volume and Autocovariances in Short‐Horizon Individual Security Returns

Published: 09/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb02455.x

JENNIFER S. CONRAD, ALLAUDEEN HAMEED, CATHY NIDEN

This article tests for the relations between trading volume and subsequent returns patterns in individual securities' short‐horizon returns that are suggested by such articles as Blume, Easley, and O'Hara (1994) and Campbell, Grossman, and Wang (1993). Using a variant of Lehmann's (1990) contrarian trading strategy, we find strong evidence of a relation between trading activity and subsequent autocovariances in weekly returns. Specifically, high‐transaction securities experience price reversals, while the returns of low‐transactions securities are positively autocovarying. Overall, information on trading activity appears to be an important predictor of the returns of individual securities.

Institutional Trading and Soft Dollars

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00331

Jennifer S. Conrad, Kevin M. Johnson, Sunil Wahal

Proprietary data allow us to distinguish between institutional investors' orders directed to soft‐dollar brokers and those directed to other types of brokers. We find that soft‐dollar brokers execute smaller orders in larger market value stocks. Allowing for differences in order characteristics, we estimate the incremental implicit cost of soft‐dollar execution at 29 (24) basis points for buyer‐ (seller‐) initiated orders. For large orders, incremental implicit costs are 41 (30) basis points for buys (sells). However, we document substantial variability in these estimates, and research services provided by soft‐dollar brokers may at least partially offset these costs.