The profitability of contrarian strategies and the overreaction hypothesis : empirical evidence

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Category-based Tail Comovement

Traditional …financial theory predicts that comovement in asset returns is due to fundamentals. An alternative view is that of Barberis and Shleifer (2003) and Bar- beris, Shleifer and Wurgler (2005) who propose a sentiment based theory of comovement, delinking it from fundamentals. In their paper they view comovement under the prism of the standard Pearson's correlation measure, implicitly excluding extreme market events, such as the latest …financial crisis. Poon, Rockinger and Tawn (2004) have shown that under such events different types of comovement or dependence may co-exist, and make a clear distinction between the four types of dependence: perfect dependent, independent, asymptotically dependent and asymptotically independent. In this paper we extend the sentiment based theory of comovement so as to cover the whole spectrum of dependence, including extreme comovement such as the one that can be observed in …financial crises. One of the key contributions of this paper is that it formally proves that assets belonging to the same category comove too much in the tail and reclassifying an asset into a new category raises its tail dependence with that category.Interest rates ; Yield curve ; ICA ; PCA

The relevance of information and trading costs in explaining momentum profits: evidence from optioned and non-optioned stocks

Considerable evidence from many countries suggests momentum strategies generate profits. These have been difficult to rationalise and evidence on the sources of such profitability is inconclusive. We utilise a sample of optioned stocks, characterised by high liquidity, high market capitalisation and fewer short sales constraints and compare results with control samples of non optioned stocks chosen on the basis of market value, turnover and bid-ask spread. The sample characteristics, and the fact that derivatives improve the impounding of information into prices, enable us to draw conclusions about the causes of momentum profits. While we find that short sales constraints are not the major driver of profitability and that most momentum profits disappear using two transactions costs measures of the bid-ask spread, one not previously used, the persistence of some momentum profits indicates that the market underreacts even to the most publicly available information

Category-based Tail Comovement

Traditional financial theory predicts that comovement in asset returns is due to fundamentals. An alternative view is that of Barberis and Shleifer (2003) and Bar- beris, Shleifer and Wurgler (2005) who propose a sentiment based theory of comovement, delinking it from fundamentals. In their paper they view comovement under the prism of the standard Pearson's correlation measure, implicitly excluding extreme market events, such as the latest financial crisis. Poon, Rockinger and Tawn (2004) have shown that under such events different types of comovement or dependence may co-exist, and make a clear distinction between the four types of dependence: perfect dependent, independent, asymptotically dependent and asymptotically independent. In this paper we extend the sentiment based theory of comovement so as to cover the whole spectrum of dependence, including extreme comovement such as the one that can be observed in financial crises. One of the key contributions of this paper is that it formally proves that assets belonging to the same category comove too much in the tail and reclassifying an asset into a new category raises its tail dependence with that category

Ambiguity aversion, company size and the pricing of earnings forecasts

Working paper dated November 2011. Final version published by Wiley; available online at http://onlinelibrary.wiley.com/Several authors have reported an unconditional size effect in returns around earnings announcements. In this study we show how this finding can be understood as resulting from ambiguity aversion. We hypothesize that analyst forecasts for smaller companies are relatively more ambiguous; hence they are priced pessimistically by ambiguity-averse investors. As the quarter comes to a close and ambiguity gradually subsides, the stock prices of smaller companies rise to correct this pessimism, creating the size effect. Our results support these hypotheses

Recent advances in lending to the poor with asymmetric information

International audienceMicrofinance institutions have successfully extended unsecured small loans to poor and opaque borrowers at the bottom of the economic pyramid. This success is largely due to innovative financial contracts that impose joint liability and create dynamic incentives to mitigate the effects of asymmetric information. Given recent advances in microfinance contracts, there is a need to map the theoretical developments. This paper aims to accomplish that, by performing a critical literature survey of microlending contracts, focusing on joint liability and dynamic incentives, bringing out some of the deficiencies of contract-theoretic propositions that cannot effectively account for the social mission of microfinance

The EU and the world : tuning to be heard

On 28 June 2016, the High Representative of the Union for Foreign Affairs and Security Policy Federica Mogherini presented the “The Global Strategy for the European Union’s Foreign and Security Policy” (EUGS) to the European Council. The EUGS’ main objective is to articulate and sustain a coherent vision for the external action of the EU. As such, it sheds some light on the matter of the EU’s strategy in world affairs, its effectiveness, the variables affecting it, and Europe’s reaction to them, particularly as regards the emergence of a “strategic autonomy” as the means to pursue Europe’s goals. This chapter attempts to provide an assessment of the first three years of the EUGS by examining the EU’s relations with its major partners. We discuss the concept of strategic autonomy and how the EU’s relations with its partners contribute to this debate. In doing so, we first provide a brief overview of the EUGS and discuss what “strategic autonomy” entails. We then examine the relationship between the EU and the United States (US) in the context of NATO. We continue our analysis with EU-Russian relations, current EU-Turkish relationship, EU-China cooperation and the outlook of the Western Balkans in joining the EU. We conclude by examining Italy’s foreign policy agenda towards the EU security and defence policy and the development of a European strategic autonom

Revisiting the effect of income on health in Europe : evidence from the 8th round of the European social survey

First published online: February 2020This study provides new evidence about the effects of income on population health. To do so, our first research question controls for the absolute income hypothesis : Has the recent deterioration of individual income had as a result a lower health status in population across European countries? : We assume, as the bulk of the associated studies have found, that the lower the income of an individual, the lower his/her health status. Our second research objective is to examine the validity of the relative income hypothesis. To shed light on this issue, we test two different questions : What is the relationship between an individual's health status and a country's wealth and how self-rated health is associated with the degree of income inequality in a society? : We expect that the population in wealthier countries report higher health status and individuals who live in countries with higher income inequalities report lower health status. By employing a multilevel binomial model and treating data from the latest European Social Survey Round 8 (2016/2017) from 23 countries in Europe, we have found strong evidence in favor of the above-mentioned hypotheses

Financial vulnerability and seeking expert advice: Evidence from a survey experiment

The role of a bank advisor is especially important for guiding and counseling financially distressed individuals. Using a randomized controlled survey experiment conducted on a representative sample of French individuals and priming the financial vulnerability of half the respondents, we examine attitudes toward bank advisors. We find that priming deters low-income individuals from showing an extremely negative attitude toward seeking banking advice (positive effect); it also deters them from showing an extremely positive attitude (negative effect). We also find that acute financial distress partially drives the positive effect, and a lack of financial literacy partially drives the negative effect

Corporate Taxes and Economic Inequality: A Credit Channel

Corporate taxation can have redistributive effects on income and wealth. We hypothesize and empirically establish such an effect working via bank credit. Using a unique sample of majority-owned firms that apply for credit, we show that after a decrease in corporate tax rates the relative-ly poor get easier access to credit. However, this policy also considerably increases loan amounts and decreases loan spreads for the relatively rich. Ultimately, reducing the corporate tax rate pre-dominantly increases the future income and wealth of relatively rich business owners