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In a recently published paper, Edmans, García, and Norli (2007) reveal a strong association between results of soccer games and local stock returns. Inspired by their work, we propose a novel approach to exploit this effect on the aggregate international level with the following three unique features: i) The aggregate effect does not depend on the games' results; hence, the effect is an exploitable predictable effect. ii) The aggregate effect is based on many games; hence, it is very large and highly significant. We find that the average return on the U.S. market over the World Cup's effect period is -2.58%, compared to +1.21% for all-days average returns over the same period length. iii) Exploiting the aggregate effect is involved with trading in a single index for a relatively long period. [ABSTRACT FROM AUTHOR]

This paper investigates whether comovements between euro area equity returns at national and industry level changed after the introduction of the euro. By adopting a regression quantile-based methodology, we find that after 1999 the degree of comovements among euro area national equity markets was augmented. By explicitly controlling for the impact of global factors, we show that this result cannot be explained by recent worldwide trends. A more refined analysis based on an industry breakdown suggests that the increase in national index comovements is mainly driven by financial, industrial, and consumer services sectors. [ABSTRACT FROM AUTHOR]

We investigate the bias in CRSP's Nasdaq data due to missing returns for delisted stocks. We find that the missing returns are large and negative on average, and that delisted stocks experience a substantial decrease in liquidity. We estimate that using a corrected return of 55 percent for missing performance-related delisting returns corrects the bias. We revisit previous work which finds a size effect among Nasdaq stocks. After correcting for the delisting bias, there is no evidence that there ever was a size effect on Nasdaq. Our results are inconsistent with most risk-based explanations of the size effect. [ABSTRACT FROM AUTHOR]

In this paper, I aim to explore the effect of good governance on equity returns, and empirically investigate if governance at the country level has asset pricing implications and contributes to the idiosyncrasy of price jumps. Jumps are found to be far less systematic than the smooth (non-jump) component of country price indexes. Hence, if jumps are more idiosyncratic, governance should primarily affect the jump risk component. This is good news for international investors, because diversification provides insurance against jumps. Relying on an equilibrium asset-pricing model in an economy under jump diffusion, I decompose the moments of the returns of international stock markets into a diffusive (systematic) risk and a (idiosyncratic) jump risk part. For a balanced panel of 52 countries, my results suggest that governance is an important determinant of (idiosyncratic) jump risk. Stock markets in poorly governed countries are characterized by higher volatility and more negative return asymmetry, primarily driven by the higher jump risk. Regulatory quality, the government effectiveness and the control of corruption appear to be most important. Results are robust to the inclusion of various controls for other country- or market-specific characteristics. [ABSTRACT FROM AUTHOR]

A mean-variance risk-return tradeoff relationship is derived for the diffusion process limiting case of a state-preference model, with aggregate consumption serving as a pivotal variable. The model is compared to other recent models along the dimensions of generality and tractable implementation. The incorporation of stochastic interest rates in general equilibrium and arbitrage-based valuation models is examined, and an extension to earlier methods is discussed, in connection with the implementation of "robust" general valuation procedures. [ABSTRACT FROM AUTHOR]

The article discusses security market information announcements and what impact these may have on financial market reactions. A content analysis is provided of financial information announcements that companies must make and how this effects the adjustment of the stock market. It is noted that other researchers investigating this subject will need to consider cross-sectional differences in shared value information. The article concludes that the "precision" of earnings statements may indeed effect stock pricing.

This paper provides further evidence of the holiday effect in stock returns and additional insight into the effect. This paper reports abnormally high returns on the trading day before holidays in all three of the major stock markets in the U.S.: the NYSE, AMEX, and NASDAQ. The holiday effect is also present in the U.K. and Japanese stock markets, even though each country has different holidays and institutional arrangements. This study finds that the holiday effects in the U.K. and Japanese stock markets are independent of the holiday effect in the U.S. stock market. Unlike the other seasonal patterns in stock returns, such as January and weekend effects, this investigation of size decile portfolios shows that the size effect is not present in mean returns on preholidays. [ABSTRACT FROM AUTHOR]

Recent research finds that the prior period's worst stock return performers (losers) outperform the prior period's best return performers (winners) in the subsequent period. This potential violation of the efficient markets hypothesis is labeled the "overreaction" phenomenon. This paper shows that the tendency for losers to outperform winners is not due to investor overreaction, but to the tendency for losers to be smaller-sized firms than winners. When losers are compared to winners of equal size, there is little evidence of any return discrepancy, and in periods when winners are smaller than losers, winners outperform losers. [ABSTRACT FROM AUTHOR]

The average returns on low-capitalization stocks are unusually high relative to those on large-capitalization stocks in early January, a phenomenon known as the turn-of-the-year effect. This paper finds that the ratio of stock purchases to sales by individual investors displays a seasonal pattern, with individuals having a below-normal buy/sell ratio in late December and an above-normal ratio in early January. Year-to-year variation in the early January buy/sell ratio explains forty-six percent of the year-to-year variation in the turn-of-the-year effect during 1971-1985. [ABSTRACT FROM AUTHOR]

This study investigates the seasonal pattern of aggregate insider trading to help distinguish between two competing explanations for the seasonal pattern of security returns. The first potential explanation examined is that the January effect arises from predictable changes in turn-of-the-year demand for securities. The second potential explanation examined is that the January effect represents compensation for the higher risk of trading against informed traders at the turn of the year. [ABSTRACT FROM AUTHOR]

This paper shows that the empirical tests of the Arbitrage Pricing Theory (APT) model are very sensitive to the anomalies observed in January in the stock returns data. There is a strong seasonal pattern in the estimates of the risk premia from the APT model. The most important implication of the findings in this paper is that the APT model can explain the risk-return relation mostly for January. Once the January returns are excluded from the data, there is no significant relation between the expected stock returns and the risk measures predicted by the APT model. [ABSTRACT FROM AUTHOR]

This study explores the role of the method of payment in explaining common stock returns of bidding firms at the announcement of takeover bids. The results reveal significant differences in the abnormal returns between common stock exchanges and cash offers. The results are independent of the type of takeover bid, i.e., merger or tender offer, and of bid outcomes. These findings, supported by analysis of nonconvertible bonds, are attributed mainly to signalling effects and imply that the inconclusive evidence of earlier studies on takeovers may be due to their failure to control for the method of payment. [ABSTRACT FROM AUTHOR]

Using 5-minute high frequency data from the Chinese stock market, we employ a non-parametric method to estimate Fama-French portfolio realized jumps and investigate whether the estimated positive, negative and sign realized jumps could forecast or explain the cross-sectional stock returns. The Fama-MacBeth regression results show that not only have the realized jump components and the continuous volatility been compensated with risk premium, but also that the negative jump risk, the positive jump risk and the sign jump risk, to some extent, could explain the return of the stock portfolios. Therefore, we should pay high attention to the downside tail risk and the upside tail risk. [ABSTRACT FROM AUTHOR]

Using an agent-based model we examine the dynamics of stock price fluctuations and their rates of return in an artificial financial market composed of fundamentalist and chartist agents with and without confidence. We find that chartist agents who are confident generate higher price and rate of return volatilities than those who are not. We also find that kurtosis and skewness are lower in our simulation study of agents who are not confident. We show that the stock price and confidence index—both generated by our model—are cointegrated and that stock price affects confidence index but confidence index does not affect stock price. We next compare the results of our model with the S&P 500 index and its respective stock market confidence index using cointegration and Granger tests. As in our model, we find that stock prices drive their respective confidence indices, but that the opposite relationship, i.e., the assumption that confidence indices drive stock prices, is not significant. [ABSTRACT FROM AUTHOR]

The article presents comments on an article by Josef Lakonishok and Maurice Levi regarding weekend effects on stock returns. Their article offers partial explanation for the intraweek pattern of daily stock market returns. The authors note that their hypothesis that the weekend effect can be explained by settlement procedures and check clearing delays is interesting. Lakonishok and Levi observe that payment for common stock purchased on a Friday will actually occur ten calendar days after the trade whereas payment for common stock purchased on any other day of the week will occur eight calendar days after the day of purchase. They suggest that buyers are willing to pay more for common stock on a Friday than on other days of the week by the amount of two days' interest.

There is not general support to explain the correlation among the macroeconomic variables and share returns in different countries and time. The unique characteristics of the Brazilian economy have changed deeply over the last years, thus the purpose of this study is to explore the correlation among the macroeconomic variables and share returns in Brazil from 2000 to 2010. The study investigates the causality relationships among real stock returns, basic interest rates, GDP, inflation and the market expectation of future behavior of these macroeconomic variables. The method used to find the correlation among the variables studied was the Stepwise Multiple Regression. The results show that basic interest rates and GDP affect the stock returns, however inflation and market expectation of future behavior of these macroeconomic variables affect stock returns insignificantly. [ABSTRACT FROM AUTHOR]

This paper examines how major earthquakes affected the returns and volatility of aggregate stock market indices in thirty-five financial markets over the last twenty years. Results show that global financial markets are resilient to shocks caused by earthquakes even if these are domestic. Our analysis reveals that, in a few instances, some macroeconomic variables and earthquake characteristics (gross domestic product per capita, trade openness, bilateral trade flows, earthquake magnitude, a tsunami indicator, distance to the epicenter, and number of fatalities) mediate the impact of earthquakes on stock market returns, resulting in a zero net effect. However, the influence of these variables is market-specific, indicating no systematic pattern across global capital markets. Results also demonstrate that stock market volatility is unaffected by earthquakes, except for Japan. [ABSTRACT FROM AUTHOR]

ABSTRACT Using unique data from 12 lenders, we examine how equity lending fees respond to demand shocks. We find that, when demand is moderate, fees are largely insensitive to demand shocks. However, at high demand levels, further increases in demand lead to significantly higher fees and the extent to which demand shocks impact fees is also related to search frictions in the loan market. Moreover, consistent with search models, we find significant dispersion in loan fees, with this dispersion increasing in loan scarcity and search frictions. Our findings imply that search frictions significantly impact short selling costs. [ABSTRACT FROM AUTHOR]

This article comments on a study which attempts to reconcile the observed high return on equities with reasonable levels of risk aversion on the part of individuals. The paper also calculates the risk aversion of consumers who invest in the stock market. It exploits the first-order conditions of the individual utility maximization problem, which relate expected asset returns and the covariance of marginal utility of consumption with asset returns. It innovates on the existing literature by measuring that covariance as the covariance of consumption with lagged asset returns, rather than with contemporaneous asset returns as previous researchers have done. It finds that consumers who invest nonzero amounts in the stock market have risk aversion coefficients in the range that most researchers would consider reasonable. Thus one might be tempted to argue that the equity premium puzzle has been solved. In conclusion, the failure of large sections of the population to hold stock is a puzzle for economic theory. Although many things could explain this nonparticipation, researchers have yet to find a reasonable model that matches the observed distribution of participation.

This paper proposes a lower bound on the level of fixed transaction costs that is required for observations on consumption choices to be consistent with data on asset returns and a given set of preferences. The bound is derived from necessary conditions for the optimality of consumption choices in the presence of fixed transaction costs. These conditions reduce to standard Euler equations when transaction costs are zero. Conservative point estimates suggest that a consumer with log utility who consumes U.S. per capita consumption and who can trade in U.S. Treasury bills and an index of New York Stock Exchange stocks must face a fixed transaction cost of at least 3 percent of monthly per capita consumption. This lower bound declines rapidly with increases in risk aversion or when certain restrictions on short selling are included. [ABSTRACT FROM AUTHOR]

We present a consumption-based model that explains a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long-horizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. The model captures much of the history of stock prices from consumption data. It explains the short- and long-run equity premium puzzles despite a low and constant risk-free rate. The results are essentially the same whether we model stocks as a claim to the consumption stream or as a claim to volatile dividends poorly correlated with consumption. The model is driven by an independently and identically distributed consumption growth process and adds a slow-moving external habit to the standard power utility function. These features generate slow countercyclical variation in risk premia. The model posits a fundamentally novel description of risk premia: Investors fear stocks primarily because they do poorly in recessions unrelated to the risks of long-run average consumption growth. [ABSTRACT FROM AUTHOR]

Higher relative risk aversion (RRA) is associated with higher risk premiums only if the riskiness of output is exogenous. When consumers can affect the variability of output, the market risk premium may well decrease as the RRA increases. With constant relative risk aversion and linear production functions, the ration of the market risk premium to the standard deviation of the market is constant and independent of the RRA. [ABSTRACT FROM AUTHOR]