The Journal of Finance

Imperfect Information and Cross‐Autocorrelation among Stock Prices

Published: 09/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04752.x

KALOK CHAN

I develop a model to explain why stock returns are positively cross‐autocorrelated. When market makers observe noisy signals about the value of their stocks but cannot instantaneously condition prices on the signals of other stocks, which contain marketwide information, the pricing error of one stock is correlated with the other signals. As market makers adjust prices after observing true values or previous price changes of other stocks, stock returns become positively cross‐autocorrelated. If the signal quality differs among stocks, the cross‐autocorrelation pattern is asymmetric. I show that both own‐ and cross‐autocorrelations are higher when market movements are larger.

Information Asymmetry and Asset Prices: Evidence from the China Foreign Share Discount

Published: 01/10/2008   |   DOI: 10.1111/j.1540-6261.2008.01313.x

KALOK CHAN, ALBERT J. MENKVELD, ZHISHU YANG

We examine the effect of information asymmetry on equity prices in the local A‐ and foreign B‐share market in China. We construct measures of information asymmetry based on market microstructure models, and find that they explain a significant portion of cross‐sectional variation in B‐share discounts, even after controlling for other factors. On a univariate basis, the price impact measure and the adverse selection component of the bid‐ask spread in the A‐ and B‐share markets explains 44% and 46% of the variation in B‐share discounts. On a multivariate basis, both measures are far more statistically significant than any of the control variables.

Depositary Receipts, Country Funds, and the Peso Crash: The Intraday Evidence

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00303

Warren Bailey, Kalok Chan, Y. Peter Chung

We study the intraday impact of exchange rate news on emerging market American Depositary Receipts (ADRs) and closed‐end country funds during the 1994 Mexican peso crisis. Peso exchange‐rate changes affect prices and trading volumes of Latin American equities, and some closed‐end fund behavior is consistent with “noise trader” theories of small investors. However, there is no evidence that peso depreciation triggers a significant sell‐off of non‐Mexican securities or that other non‐Mexican trading patterns change at times of high peso news flow. Thus, the “Tequila Effect” is largely confined to price changes.

What if Trading Location Is Different from Business Location? Evidence from the Jardine Group

Published: 05/06/2003   |   DOI: 10.1111/1540-6261.00564

Kalok Chan, Allaudeen Hameed, Sie Ting Lau

We examine the price behavior and market activity of the Jardine Group companies after they were delisted from Hong Kong in 1994. Although the trading activity of the Jardine Group moved to Singapore, the core businesses remained in Hong Kong and Mainland China. Evidence indicates the Jardine stocks are correlated less (more) with the Hong Kong (Singapore) market after the delisting. This result cannot be explained by various hypotheses, such as relocation of core business, time‐varying betas, migration of trading activity, and currency and tax distortions. We conclude that price fluctuations are affected by country‐specific investor sentiment.

What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide

Published: 05/03/2005   |   DOI: 10.1111/j.1540-6261.2005.768_1.x

KALOK CHAN, VICENTIU COVRIG, LILIAN NG

We examine how mutual funds from 26 developed and developing countries allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide. We find robust evidence that these funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks. Results indicate that the stock market development and familiarity variables have significant, but asymmetric, effects on the domestic bias (domestic investors overweighting the local markets) and foreign bias (foreign investors under or overweighting the overseas markets), and that economic development, capital controls, and withholding tax variables have significant effects only on the foreign bias.

Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00345

Hee‐Joon Ahn, Kee‐Hong Bae, Kalok Chan

We investigate the role of limit orders in the liquidity provision in a pure order‐driven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask (bid) side, investors will submit more limit sell (buy) orders than market sell (buy) orders. This result is consistent with the existence of limit‐order traders who enter the market and place orders when liquidity is needed.

Why Option Prices Lag Stock Prices: A Trading‐based Explanation

Published: 12/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb05136.x

KALOK CHAN, Y. PETER CHUNG, HERB JOHNSON

While many studies find that option prices lead stock prices, Stephan and Whaley (1990) find that stocks lead options. We find no evidence that options, even deep out‐of‐the‐money options, lead stocks. After confirming Stephan and Whaley's results, we show their results can be explained as spurious leads induced by infrequent trading of options. We show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, we find no evidence of arbitrage opportunities associated with the stock lead.

Do Dividend Clienteles Exist? Evidence on Dividend Preferences of Retail Investors

Published: 05/16/2006   |   DOI: 10.1111/j.1540-6261.2006.00873.x

JOHN R. GRAHAM, ALOK KUMAR

We study stock holdings and trading behavior of more than 60,000 households and find evidence consistent with dividend clienteles. Retail investor stock holdings indicate a preference for dividend yield that increases with age and decreases with income, consistent with age and tax clienteles, respectively. Trading patterns reinforce this evidence: Older, low‐income investors disproportionally purchase stocks before the ex‐dividend day. Furthermore, among small stocks, the ex‐day price drop decreases with age and increases with income, consistent with clientele effects. Finally, consistent with the behavioral “attention” hypothesis, we document that older and low‐income investors purchase stocks following dividend announcements.

Who Gambles in the Stock Market?

Published: 07/16/2009   |   DOI: 10.1111/j.1540-6261.2009.01483.x

ALOK KUMAR

This study shows that the propensity to gamble and investment decisions are correlated. At the aggregate level, individual investors prefer stocks with lottery features, and like lottery demand, the demand for lottery‐type stocks increases during economic downturns. In the cross‐section, socioeconomic factors that induce greater expenditure in lotteries are associated with greater investment in lottery‐type stocks. Further, lottery investment levels are higher in regions with favorable lottery environments. Because lottery‐type stocks underperform, gambling‐related underperformance is greater among low‐income investors who excessively overweight lottery‐type stocks. These results indicate that state lotteries and lottery‐type stocks attract very similar socioeconomic clienteles.

The Dow Theory: William Peter Hamilton's Track Record Reconsidered

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00054

Stephen J. Brown, William N. Goetzmann, Alok Kumar

Alfred Cowles' test of the Dow Theory apparently provides strong evidence against the ability of Wall Street's most famous chartist to forecast the stock market. Cowles (1934) analyzes editorials published by the chief exponent of the Dow Theory, William Peter Hamilton. We review Cowles' evidence and find that it supports the contrary conclusion. Hamilton's timing strategies actually yield high Sharpe ratios and positive alphas for the period 1902 to 1929. Neural net modeling to replicate Hamilton's market calls provides interesting insight into the Dow Theory and allows us to examine the properties of the theory itself out of sample.

State‐Level Business Cycles and Local Return Predictability

Published: 01/30/2013   |   DOI: 10.1111/jofi.12017

GEORGE M. KORNIOTIS, ALOK KUMAR

This study examines whether local stock returns vary with local business cycles in a predictable manner. We find that U.S. state portfolios earn higher future returns when state‐level unemployment rates are higher and housing collateral ratios are lower. During the 1978 to 2009 period, geography‐based trading strategies earn annualized risk‐adjusted returns of 5%. This abnormal performance reflects time‐varying systematic risks and local‐trading induced mispricing. Consistent with the mispricing explanation, the evidence of predictability is stronger among firms with low visibility and high local ownership. Nonlocal domestic and foreign investors arbitrage away the predictable patterns in local returns in 1 year.

Retail Investor Sentiment and Return Comovements

Published: 09/19/2006   |   DOI: 10.1111/j.1540-6261.2006.01063.x

ALOK KUMAR, CHARLES M.C. LEE

Using a database of more than 1.85 million retail investor transactions over 1991–1996, we show that these trades are systematically correlated—that is, individuals buy (or sell) stocks in concert. Moreover, consistent with noise trader models, we find that systematic retail trading explains return comovements for stocks with high retail concentration (i.e., small‐cap, value, lower institutional ownership, and lower‐priced stocks), especially if these stocks are also costly to arbitrage. Macroeconomic news and analyst earnings forecast revisions do not explain these results. Collectively, our findings support a role for investor sentiment in the formation of returns.

Income Hedging, Dynamic Style Preferences, and Return Predictability

Published: 04/18/2019   |   DOI: 10.1111/jofi.12775

JAWAD M. ADDOUM, STEFANOS DELIKOURAS, GEORGE M. KORNIOTIS, ALOK KUMAR

We propose a theoretical measure of income hedging demand and show that it affects asset prices. We focus on the value factor and first demonstrate that our demand estimates are correlated with the actual demands of retail and mutual fund investors. We then show that the aggregate high‐minus‐low (HML) demand predicts HML returns. Exploiting the state‐level variation in income risk, we demonstrate that state‐level hedging demands predict state‐level HML returns. A long‐short portfolio that exploits this hedging‐induced predictability earns an annualized risk‐adjusted return of 6%.

Nonstandard Errors

Published: 04/17/2024   |   DOI: 10.1111/jofi.13337

ALBERT J. MENKVELD, ANNA DREBER, FELIX HOLZMEISTER, JUERGEN HUBER, MAGNUS JOHANNESSON, MICHAEL KIRCHLER, SEBASTIAN NEUSÜß, MICHAEL RAZEN, UTZ WEITZEL, DAVID ABAD‐DÍAZ, MENACHEM (MENI) ABUDY, TOBIAS ADRIAN, YACINE AIT‐SAHALIA, OLIVIER AKMANSOY, JAMIE T. ALCOCK, VITALI ALEXEEV, ARASH ALOOSH, LIVIA AMATO, DIEGO AMAYA, JAMES J. ANGEL, ALEJANDRO T. AVETIKIAN, AMADEUS BACH, EDWIN BAIDOO, GAETAN BAKALLI, LI BAO, ANDREA BARBON, OKSANA BASHCHENKO, PARAMPREET C. BINDRA, GEIR H. BJØNNES, JEFFREY R. BLACK, BERNARD S. BLACK, DIMITAR BOGOEV, SANTIAGO BOHORQUEZ CORREA, OLEG BONDARENKO, CHARLES S. BOS, CIRIL BOSCH‐ROSA, ELIE BOURI, CHRISTIAN BROWNLEES, ANNA CALAMIA, VIET NGA CAO, GUNTHER CAPELLE‐BLANCARD, LAURA M. CAPERA ROMERO, MASSIMILIANO CAPORIN, ALLEN CARRION, TOLGA CASKURLU, BIDISHA CHAKRABARTY, JIAN CHEN, MIKHAIL CHERNOV, WILLIAM CHEUNG, LUDWIG B. CHINCARINI, TARUN CHORDIA, SHEUNG‐CHI CHOW, BENJAMIN CLAPHAM, JEAN‐EDOUARD COLLIARD, CAROLE COMERTON‐FORDE, EDWARD CURRAN, THONG DAO, WALE DARE, RYAN J. DAVIES, RICCARDO DE BLASIS, GIANLUCA F. DE NARD, FANY DECLERCK, OLEG DEEV, HANS DEGRYSE, SOLOMON Y. DEKU, CHRISTOPHE DESAGRE, MATHIJS A. VAN DIJK, CHUKWUMA DIM, THOMAS DIMPFL, YUN JIANG DONG, PHILIP A. DRUMMOND, TOM DUDDA, TEODOR DUEVSKI, ARIADNA DUMITRESCU, TEODOR DYAKOV, ANNE HAUBO DYHRBERG, MICHAŁ DZIELIŃSKI, ASLI EKSI, IZIDIN EL KALAK, SASKIA TER ELLEN, NICOLAS EUGSTER, MARTIN D. D. EVANS, MICHAEL FARRELL, ESTER FELEZ‐VINAS, GERARDO FERRARA, EL MEHDI FERROUHI, ANDREA FLORI, JONATHAN T. FLUHARTY‐JAIDEE, SEAN D. V. FOLEY, KINGSLEY Y. L. FONG, THIERRY FOUCAULT, TATIANA FRANUS, FRANCESCO FRANZONI, BART FRIJNS, MICHAEL FRÖMMEL, SERVANNA M. FU, SASCHA C. FÜLLBRUNN, BAOQING GAN, GE GAO, THOMAS P. GEHRIG, ROLAND GEMAYEL, DIRK GERRITSEN, JAVIER GIL‐BAZO, DUDLEY GILDER, LAWRENCE R. GLOSTEN, THOMAS GOMEZ, ARSENY GORBENKO, JOACHIM GRAMMIG, VINCENT GRÉGOIRE, UFUK GÜÇBILMEZ, BJÖRN HAGSTRÖMER, JULIEN HAMBUCKERS, ERIK HAPNES, JEFFREY H. HARRIS, LAWRENCE HARRIS, SIMON HARTMANN, JEAN‐BAPTISTE HASSE, NIKOLAUS HAUTSCH, XUE‐ZHONG (TONY) HE, DAVIDSON HEATH, SIMON HEDIGER, TERRENCE HENDERSHOTT, ANN MARIE HIBBERT, ERIK HJALMARSSON, SETH A. HOELSCHER, PETER HOFFMANN, CRAIG W. HOLDEN, ALEX R. HORENSTEIN, WENQIAN HUANG, DA HUANG, CHRISTOPHE HURLIN, KONRAD ILCZUK, ALEXEY IVASHCHENKO, SUBRAMANIAN R. IYER, HOSSEIN JAHANSHAHLOO, NAJI JALKH, CHARLES M. JONES, SIMON JURKATIS, PETRI JYLHÄ, ANDREAS T. KAECK, GABRIEL KAISER, ARZÉ KARAM, EGLE KARMAZIENE, BERNHARD KASSNER, MARKKU KAUSTIA, EKATERINA KAZAK, FEARGHAL KEARNEY, VINCENT VAN KERVEL, SAAD A. KHAN, MARTA K. KHOMYN, TONY KLEIN, OLGA KLEIN, ALEXANDER KLOS, MICHAEL KOETTER, ALEKSEY KOLOKOLOV, ROBERT A. KORAJCZYK, ROMAN KOZHAN, JAN P. KRAHNEN, PAUL KUHLE, AMY KWAN, QUENTIN LAJAUNIE, F. Y. ERIC C. LAM, MARIE LAMBERT, HUGUES LANGLOIS, JENS LAUSEN, TOBIAS LAUTER, MARKUS LEIPPOLD, VLADIMIR LEVIN, YIJIE LI, HUI LI, CHEE YOONG LIEW, THOMAS LINDNER, OLIVER LINTON, JIACHENG LIU, ANQI LIU, GUILLERMO LLORENTE, MATTHIJS LOF, ARIEL LOHR, FRANCIS LONGSTAFF, ALEJANDRO LOPEZ‐LIRA, SHAWN MANKAD, NICOLA MANO, ALEXIS MARCHAL, CHARLES MARTINEAU, FRANCESCO MAZZOLA, DEBRAH MELOSO, MICHAEL G. MI, ROXANA MIHET, VIJAY MOHAN, SOPHIE MOINAS, DAVID MOORE, LIANGYI MU, DMITRIY MURAVYEV, DERMOT MURPHY, GABOR NESZVEDA, CHRISTIAN NEUMEIER, ULF NIELSSON, MAHENDRARAJAH NIMALENDRAN, SVEN NOLTE, LARS L. NORDEN, PETER O'NEILL, KHALED OBAID, BERNT A. ØDEGAARD, PER ÖSTBERG, EMILIANO PAGNOTTA, MARCUS PAINTER, STEFAN PALAN, IMON J. PALIT, ANDREAS PARK, ROBERTO PASCUAL, PAOLO PASQUARIELLO, LUBOS PASTOR, VINAY PATEL, ANDREW J. PATTON, NEIL D. PEARSON, LORIANA PELIZZON, MICHELE PELLI, MATTHIAS PELSTER, CHRISTOPHE PÉRIGNON, CAMERON PFIFFER, RICHARD PHILIP, TOMÁŠ PLÍHAL, PUNEET PRAKASH, OLIVER‐ALEXANDER PRESS, TINA PRODROMOU, MARCEL PROKOPCZUK, TALIS PUTNINS, YA QIAN, GAURAV RAIZADA, DAVID RAKOWSKI, ANGELO RANALDO, LUCA REGIS, STEFAN REITZ, THOMAS RENAULT, REX W. RENJIE, ROBERTO RENO, STEVEN J. RIDDIOUGH, KALLE RINNE, PAUL RINTAMÄKI, RYAN RIORDAN, THOMAS RITTMANNSBERGER, IÑAKI RODRÍGUEZ LONGARELA, DOMINIK ROESCH, LAVINIA ROGNONE, BRIAN ROSEMAN, IOANID ROŞU, SAURABH ROY, NICOLAS RUDOLF, STEPHEN R. RUSH, KHALADDIN RZAYEV, ALEKSANDRA A. RZEŹNIK, ANTHONY SANFORD, HARIKUMAR SANKARAN, ASANI SARKAR, LUCIO SARNO, OLIVIER SCAILLET, STEFAN SCHARNOWSKI, KLAUS R. SCHENK‐HOPPÉ, ANDREA SCHERTLER, MICHAEL SCHNEIDER, FLORIAN SCHROEDER, NORMAN SCHÜRHOFF, PHILIPP SCHUSTER, MARCO A. SCHWARZ, MARK S. SEASHOLES, NORMAN J. SEEGER, OR SHACHAR, ANDRIY SHKILKO, JESSICA SHUI, MARIO SIKIC, GIORGIA SIMION, LEE A. SMALES, PAUL SÖDERLIND, ELVIRA SOJLI, KONSTANTIN SOKOLOV, JANTJE SÖNKSEN, LAIMA SPOKEVICIUTE, DENITSA STEFANOVA, MARTI G. SUBRAHMANYAM, BARNABAS SZASZI, OLEKSANDR TALAVERA, YUEHUA TANG, NICK TAYLOR, WING WAH THAM, ERIK THEISSEN, JULIAN THIMME, IAN TONKS, HAI TRAN, LUCA TRAPIN, ANDERS B. TROLLE, M. ANDREEA VADUVA, GIORGIO VALENTE, ROBERT A. VAN NESS, AURELIO VASQUEZ, THANOS VEROUSIS, PATRICK VERWIJMEREN, ANDERS VILHELMSSON, GRIGORY VILKOV, VLADIMIR VLADIMIROV, SEBASTIAN VOGEL, STEFAN VOIGT, WOLF WAGNER, THOMAS WALTHER, PATRICK WEISS, MICHEL VAN DER WEL, INGRID M. WERNER, P. JOAKIM WESTERHOLM, CHRISTIAN WESTHEIDE, HANS C. WIKA, EVERT WIPPLINGER, MICHAEL WOLF, CHRISTIAN C. P. WOLFF, LEONARD WOLK, WING‐KEUNG WONG, JAN WRAMPELMEYER, ZHEN‐XING WU, SHUO XIA, DACHENG XIU, KE XU, CAIHONG XU, PRADEEP K. YADAV, JOSÉ YAGÜE, CHENG YAN, ANTTI YANG, WOONGSUN YOO, WENJIA YU, YIHE YU, SHIHAO YU, BART Z. YUESHEN, DARYA YUFEROVA, MARCIN ZAMOJSKI, ABALFAZL ZAREEI, STEFAN M. ZEISBERGER, LU ZHANG, S. SARAH ZHANG, XIAOYU ZHANG, LU ZHAO, ZHUO ZHONG, Z. IVY ZHOU, CHEN ZHOU, XINGYU S. ZHU, MARIUS ZOICAN, REMCO ZWINKELS

In statistics, samples are drawn from a population in a data‐generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence‐generating process (EGP). We claim that EGP variation across researchers adds uncertainty—nonstandard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for more reproducible or higher rated research. Adding peer‐review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants.