active investors passive news financial markets
219382236
Active and Passive Information Acquisition: Application to Financial Markets
Investors overreact to salient information and neglect nonsalient information. I conjecture that this is the result of cognitively effortful information processing with limited processing capacity and heterogeneous processing costs. On the one hand, the allocation of the limited information processing capacities is subject to the means and objectives of the decision maker, that is, (active) goal driven attention. On the other, the salience or visibility of news affecting the processing cost, that is, external (passive) stimulus driven attention. I model this by extending the framework of rational inattention by heterogeneous marginal costs of the information processing, which are dependent on the visibility of the piece of information. This model of information processing is applied to a simple asset pricing model. The main findings are that higher visibility of a piece of information leads to a lower risk premium, more informativeness, and a stronger reaction of the asset price to the piece of information. Furthermore, there exists a visibility threshold beyond which the investor decreases the attention capacities spent on a piece of information. Finally, investors will neglect a piece of information if it is below a threshold of visibility. Explicitly modeling the relevant aspects of information acquisition of a decision maker helps make sense of contradictory empirical results and can be useful for more structural estimations in the future.
Steve Heinke
219665491
Active Investors, Passive Investors, and Common Ownership
Recent studies have extensively examined the hypothesis that a higher degree of common ownership relaxes competition. This approach has typically conducted comparative statics analysis based on exogenously given rates of common ownership. This study constructs a simple model in which common ownership emerges as an equilibrium outcome resulting from ownership acquisition. We characterize the equilibrium incentives of institutional owners to acquire common ownership of the firms operating in a duopolistic product market. Further, we explore the effects of common ownership on passive investors, consumer welfare, and total welfare.
Oz Shy Rune Stenbacka
213686625
Compulsive gambling in the financial markets: Evidence from two investor surveys
This study shows that a group of individual investors in the financial markets displays symptoms of compulsive gambling, or an addiction to trading, based on a standard diagnostic checklist from the American Psychiatric Association. In a representative sample of Dutch retail investors, we find that 4.4% of the investors meet the criteria for compulsive gambling in the financial markets. Another 3.6% meet the criteria for problem gambling, which is a less severe form of gambling disorder. Investors with symptoms of compulsive gambling problems tend to follow a more active and speculative trading style, indicated by a higher frequency of stock trading, day trading and investing in derivatives and leveraged products.
Ruben Cox Atcha Kamolsareeratana Roy Kouwenberg
219354236
Retail Investors' Contrarian Behavior Around News and the Momentum Effect
We study the role of retail investors in the gradual diffusion of information in financial markets. We show that retail investors tend to trade as contrarians after large earnings surprises, and such contrarian trading contributes to sluggish price adjustment and to momentum. Retail traders are particularly active for small loser stocks. As a robustness check, we double sort stocks in quintiles based on momentum and the strength of retail contrarian trading, and find that the momentum phenomenon arises only in the 4th and 5th quintile of contrarian trading intensity. We further investigate the timing and the horizon of the traders, the role of segmentation in stock ownership, and the role of attention and browsing behavior in generating contrarian trading. Alternative hypotheses, such as the disposition effect, and stale limit orders, do not explain the phenomenon.
Chengxin Luo Enrichetta Ravina Marco Sammon Luis M Viceira
169803323
Active and Passive Investing: Understanding Samuelson's Dictum
We model how investors allocate between asset managers, managers choose their portfolios of multiple securities, fees are set, and security prices are determined. The optimal passive portfolio is linked to the "expected market portfolio," while the optimal active portfolio has elements of value and quality investing. We make precise Samuelson's Dictum by showing that macro inefficiency is greater than micro inefficiency under realistic conditions in fact, all inefficiency arises from systematic factors when the number of assets is large. Further, we show how the costs of active and passive investing affect macro and micro efficiency, fees, and assets managed by active and passive managers. Our findings help explain empirical facts about the rise of delegated asset management, the composition of passive indices, and the resulting changes in financial markets.
Nicolae Garleanu Lasse Heje Pedersen
53622176
Familiarity and Surprises in International Financial Markets: Bad news travels like wildfire; good news travels slow
In this paper, we decompose attention allocation in two components the familiar and the surprising with opposite implications for US purchases of foreign stocks. On one hand, familiarity induced attention leads to an increase in US holdings of foreign equities. On the other hand, surprise induced attention is associated with net selling of foreign stocks because US investors tend to pay more attention to negative than to positive economic surprises from other countries. Our .ndings suggest that information asymmetries between locals and non locals are more pronounced when it comes to good news, with information regarding bad news being relatively symmetric.
Journal of International Money and Finance
Jordi Mondria Thomas Wu
92979720
The New Titans of Wall Street: A Theoretical Framework for Passive Investors
Passive investors ETFs and index funds are the most important development in modern day capital markets, dictating trillions of dollars in capital flows and increasingly owning much of corporate America. Neither the business model of passive funds, nor the way that they engage with their portfolio companies, however, is well understood, and misperceptions of both have led some commentators to call for passive investors to be subject to increased regulation and even disenfranchisement. Specifically, this literature takes a narrow view both of the market in which passive investors compete to manage customer funds and of passive investors' participation in the capital markets. We respond to this failure by providing the first comprehensive theoretical framework for passive investment and its implications for corporate governance. To start, we explain that, to understand passive funds, it is necessary to understand the institutional context in which they operate. Two key insights follow. First, because passive funds are simply a pool of assets their incentives are a product of the overall business operations of fund sponsors. Second, although passive funds are locked into their investments, their shareholders are not. Like all mutual fund investors, shareholders in index funds can exit at any time by selling their shares and receiving the net asset value of their ownership interest. Consequently, the sponsors of passive funds must compete on both price and performance with other investment options including both other passive funds and actively managed funds for investor dollars. As we explain, this competition provides passive fund sponsors with a variety of incentives to engage. Furthermore, the size of the major fund sponsors and the breadth of their holdings affords them economies of scale enabling them to engage effectively. An examination of passive investor engagement in corporate governance demonstrates that passive investors behave in accordance with this theory. Passive investors are devoting greater sophistication and resources to engagement with their portfolio companies and are exploiting their comparative advantages their size, breadth of portfolio and resulting economies of scale to focus on issues with a broad market impact, such as potential corporate governance reforms, that have the potential to reduce the underperformance and mispricing of portfolio companies. Passive investors use these tools, as opposed to analyzing firm specific operational issues, to reduce the relative advantage that active funds gain through their ability to trade. We conclude by exploring the overall implications of the rise of passive investment for corporate law and financial regulation. We argue that, although existing critiques of passive investors are unfounded, the rise of passive investing raises new concerns about ownership concentration, conflicts of interest and common ownership. We evaluate these concerns and the extent to which they warrant changes to existing regulation and practice.
Jill E Fisch Assaf Hamdani Steven Davidoff Solomon
13814793
Can the Market Multiply and Divide? Non Proportional Thinking in Financial Markets
Nominal stock prices are arbitrary. Therefore, when evaluating how a piece of news should affect the price of a stock, rational investors should think in percentage rather than dollar terms. However, dollar price changes are ubiquitously reported and discussed. This may both cause and reflect a tendency of investors to think about the impact of news in dollar terms, leading to more extreme return responses to news for lower priced stocks. We find a number of results consistent with such non proportional thinking. First, lower priced stocks have higher total volatility, idiosyncratic volatility, and market betas, after controlling flexibly for size. To identify a causal effect of price, we show that volatility increases sharply following pre announced stock splits and drops following reverse stock splits. The returns of lower priced stocks also respond more strongly to firm specific news events, all else equal. The economic magnitudes are large: a doubling in a stock's nominal price is associated with a 20 30% decline in its volatility, beta, and return response to firm specific news. These patterns are not exclusive to small, illiquid stocks; they hold even among the largest stocks. Non proportional thinking can explain a variety of asset pricing anomalies such as long run and short run reversals, as well as the negative relation between past returns and volatility (i.e. the leverage effect) Our analysis also shows that the well documented negative relation between risk (volatility or beta) and size is actually driven by nominal prices rather than fundamentals.
Kelly Shue Richard R Townsend
155108047
Predicting Financial Markets Using The Wisdom of Crowds
In the world of finance, one key lesson is the importance of psychology in the behavior of financial markets. Many investors are irrationally exuberant when making financial decisions, but predictive analytics can generate insights that are free of investors' emotions, and hence human irrational exuberance in decision making can be mitigated. Data sources that investors adopt in their investment decision making are, in most cases, traditional including quarterly earnings reports and financial statements. In this work, we propose a predictive analytics framework that aims at mining insights from two alternative data sources: news articles and micro blogs. We investigate the predictive correlation and causation between (1) collective opinion mining in news articles fused with Twitter mood and (2) movements in financial markets. Experimental results indicate a relationship between stock market prices and collective opinion mining variations on news articles combined with Twitter's sentiment variations. The framework introduced in this work could potentially be adopted as a supplement to the conventional analyses being used in major investment banks. This research was partially funded by the Australian government under the Awards Endeavour research grant.
2019 IEEE 4th International Conference on Big Data Analytics (ICBDA)
Anasse Bari Pantea Peidaee Aniruddh Khera Jianghao Zhu Hongting Chen
1155688
Fake News: Evidence from Financial Markets
We examine fake news in financial markets, a laboratory that offers an opportunity to quantify its direct and indirect impact. We study three experimental settings. The first is a unique dataset of unambiguous fake articles on financial news platforms prosecuted by the Securities and Exchange Commission. The second applies a linguistic algorithm to detect deception in expression on the universe of articles on these platforms, using the first sample to validate and calibrate the algorithm. The third is an event study exploiting the SEC investigation as a public shock to investor awareness of fake news. We find that trading activity and price volatility rise with fake news about the firms mentioned in the articles. Following public revelation of the existence of fake news, we find an immediate decrease in reaction to all news, including legitimate news, on these platforms, consistent with indirect spillover effects of fake news conjectured by theory. These findings are predominant among small firms with high retail ownership, and are stronger for more circulated articles. Our results are consistent with economic theory on media bias and its application to fake news.
Shimon Kogan Tobias J Moskowitz Marina Niessner