Abstracts of Volume 43, Number 2, May 2008
Click to jump to abstracts
Price Momentum and
Idiosyncratic Volatility
Matteo P. Arena, K. Stephen
Haggard, Xuemin (Sterling) Yan
Expected Time Value Decay of
Options: Implications for Put Rolling Strategies
George F. Tannous, Clifton
Lee-Sing
Price discovery and liquidity
in basket securities
Thomas Henker, Martin Martens
Information Asymmetry
and Corporate Investment Decisions: A Dynamic Approach
Shih-Chuan Tsai
Tactical Industry
Allocation and Model Uncertainty
Manuel Ammann and Michael Verhofen
Isolating the
Information Content of Equity Analysts’ Recommendation
Changes, Post Reg FD
Delbert Goff, Heather Hulburt,
Terrill Keasler, Joe Walsh
Price Momentum and Idiosyncratic Volatility
Matteo P. Arena, K.
Stephen Haggard, Xuemin (Sterling) Yan
We find that returns to momentum
investing are higher among high idiosyncratic volatility
stocks, especially high idiosyncratic volatility losers.
Higher idiosyncratic volatility stocks also experience
quicker and larger reversals. The findings are
consistent with momentum profits being attributable to
underreaction to firm-specific information and with
idiosyncratic volatility limiting arbitrage of the
momentum effect. We also find a positive time-series
relation between momentum returns and aggregate
idiosyncratic volatility. Given the long-term rise in
idiosyncratic volatility, this result helps explain the
persistence of momentum profits since Jegadeesh and
Titman’s (1993) study.
Keywords: price
momentum, idiosyncratic volatility, limits of arbitrage
Full text (subscription or article
purchase required)
Expected Time Value Decay of Options: Implications for Put
Rolling Strategies
George F. Tannous, Clifton
Lee-Sing
Assuming the underlying asset
price remains constant, previous studies show that the
time value of an option decays gradually at a rate that
accelerates over time and peaks at the expiry date.
Thus, a significant portion of time value is lost in the
four weeks leading up to expiry. This paper shows the
time value of options that are currently at- or
near-the-money should be expected to decay at a rate
that decreases rather than increases over time. The time
values of options that are currently deep-in- or
deepout- of-the-money are expected to initially rise and
then resume the normal decay pattern.
Keywords: Options,
Time Value Decay, Portfolio Insurance
Full text (subscription or article
purchase required)
Price discovery and liquidity in basket securities
Thomas Henker,
Martin Martens
Basket securities enable investors
to purchase a broad portfolio of securities in a single
transaction. We examine the link between HOLDRS, a
basket security comprising stocks from an industry or
sector, and the underlying stocks. We find that the
price of the portfolio of underlying securities leads
and is more informative than the basket price. Our
results are contrary to the findings of empirical
studies that use futures, which are basket securities
with features less like those of the underlying
equities. Our findings suggest uninformed investors can
minimize adverse selection costs by trading basket
securities rather than the underlying stocks.
Keywords: Price
discovery, basket securities, HOLDRS, information share
Full text (subscription or article
purchase required)
Information Asymmetry and Corporate Investment Decisions: A
Dynamic Approach
Shih-Chuan Tsai
This paper develops a dynamic
model of the financing and operating decisions of firms
in the presence of information asymmetry. When the value
of growth opportunities is not fully recognized,
securities are undervalued, thus influencing the
financing and investment decisions. The agency-based
underinvestment problem is re-examined under information
asymmetry. For firms with greater growth opportunities,
the investment distortion resulting from information
asymmetry is especially significant. Information
asymmetry also increases the expected bankruptcy cost.
The cost of information asymmetry in terms of both the
firm value and the information spread under the optimal
capital structure could be substantial.
Keywords: growth
option, investment distortion, information asymmetry,
endogenous default
Full text (subscription or article
purchase required)
Tactical Industry Allocation and Model Uncertainty
Manuel Ammann and Michael Verhofen
We use Bayesian model averaging to
analyze industry return predictability in the presence
of model uncertainty. The posterior analysis shows the
importance of inflation and earnings yield in predicting
industry returns. The out-of-sample performance of the
Bayesian approach is, in general, superior to that of
other statistical model selection criteria. However, the
out-of-sample forecasting power of a naive iid forecast
is similar to the Bayesian forecast. A variance
decomposition into model risk, estimation risk, and
forecast error shows that model risk is less important
than estimation risk.
Keywords: Bayesian
model averaging, tactical asset allocation
Full text (subscription or article
purchase required)
Isolating the Information Content of Equity Analysts’
Recommendation Changes, Post Reg FD
Delbert Goff,
Heather Hulburt, Terrill Keasler, Joe Walsh
We investigate the information
content of equity analysts’ recommendation changes
subsequent to the passage of Reg FD. We find that
analyst upgrades (downgrades) are associated with
positive (negative) abnormal returns. Overall, stock
prices tend to react significantly more strongly to
recommendation changes accompanied by news events than
to those that are not. Even so, returns around
recommendation changes not accompanied by news are
significantly different from zero. This result holds
after controlling for firm-specific variables and the
incidence of multiple simultaneous recommendation
changes. We conclude that analyst recommendation
changes, in and of themselves, are informative.
Keywords: analyst
recommendation changes, analyst upgrades, analyst
downgrades, Regulation Fair Disclosure, Reg FD,
disclosure, fair disclosure
Full text (subscription or article
purchase required)
Full text articles are available on this site until
publication. Eastern Finance Association members have
free access to the full text of articles published in
The Financial Review (now starting from the first
quarterly issue in 1969) at Wiley InterScience.
Join the EFA now at
http://www.blackwellpublishing.com/memb.asp?ref=0732-8516).
You can also purchase individual articles online at
Wiley Interscience, but an EFA membership is a better
value for individual academics.