The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Search results: 3.
Analyst Disagreement, Mispricing, and Liquidity*
Published: 09/04/2007 | DOI: 10.1111/j.1540-6261.2007.01278.x
RONNIE SADKA, ANNA SCHERBINA
This paper documents a close link between mispricing and liquidity by investigating stocks with high analyst disagreement. Previous research finds that these stocks tend to be overpriced, but that prices correct downwards as uncertainty about earnings is resolved. Our analysis suggests that one reason mispricing has persisted through the years is that analyst disagreement coincides with high trading costs. We also show that in the cross‐section, the less liquid stocks tend to be more severely overpriced. Additionally, increases in aggregate market liquidity accelerate the convergence of prices to fundamentals. As a result, returns of the initially overpriced stocks are negatively correlated with the time series of innovations in aggregate market liquidity.
Are Momentum Profits Robust to Trading Costs?
Published: 11/27/2005 | DOI: 10.1111/j.1540-6261.2004.00656.x
Robert A. Korajczyk, Ronnie Sadka
We test whether momentum strategies remain profitable after considering market frictions induced by trading. Intraday data are used to estimate alternative measures of proportional and non‐proportional (price impact) trading costs. The price impact models imply that abnormal returns to portfolio strategies decline with portfolio size. We calculate break‐even fund sizes that lead to zero abnormal returns. In addition to equal‐ and value‐weighted momentum strategies, we derive a liquidity‐weighted strategy designed to reduce the cost of trades. Equal‐weighted strategies perform the best before trading costs and the worst after trading costs. Liquidity‐weighted and hybrid liquidity/value‐weighted strategies have the largest break‐even fund sizes: $5 billion or more (relative to December 1999 market capitalization) may be invested in these momentum strategies before the apparent profit opportunities vanish.
Intraday Patterns in the Cross‐section of Stock Returns
Published: 07/15/2010 | DOI: 10.1111/j.1540-6261.2010.01573.x
STEVEN L. HESTON, ROBERT A. KORAJCZYK, RONNIE SADKA
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.