Does investor sentiment really matter?

We examine the role sentiment plays and its manifestation in the trading behavior of investors in the U.S. stock market. Our findings support the notion that sentiment-induced buying and selling is an important determinant of stock price variation. While ‘classical’ asset pricing categorizes investors who trade in ways not consistent with mean-variance optimization as ‘irrational,’ we show that this traditional view should not hastily be evoked to characterize sentiment-driven investing. We instead show that sentiment-driven investors can trade against the herd and sell when prices are overinflated as a result of over-bullishness and vice versa. The asset pricing implications of this paper are that sentiment is linked to shifts in risk tolerance and this triggers contrarian-type behavior. In sum, we uncover the following regarding the behavior of sentiment-driven investors; firstly, they are more apt to trade on survey-based indicators rather than market-based indicators. Secondly, they trade on the basis of information extracted from individual, rather than institutional, investor surveys. Thirdly, they respond asymmetrically to shifts in sentiment and trade more aggressively during periods of declining sentiment. Finally, there is asymmetry in the role of sentiment with respect to business conditions whereby such buying and selling is more pronounced during bear markets

CSR and Firm Risk: Is Shareholder Activism a Double-Edged Sword?

Few can argue with the notion that corporations should at least consider corporate social responsibility (CSR) to better understand the impact of their operations on society. However, recent empirical tests suggest CSR has an ambiguous impact on firm performance. To shed new light on this debate, we examine the extent to which voting support for nonbinding shareholder-initiated CSR proposals is empirically linked to changes in firms’ underlying systematic risks. Using a rich dataset of proposals in the US from 1998 to 2011, we contribute several novel findings. First, we show that shareholder voting support is nonlinearly linked to changes in systematic risk. Specifically, proposals with low voting support increase risk while those with high support decrease risk. This nonlinearity is particularly pronounced for consumer-sensitive firms that cater primarily to individual consumers rather than for firms in non-consumer-sensitive industries that produce goods or services meant for industrial or governmental use. Second, the 2007–2009 financial crisis exacerbated increases in firms’ systematic risks for proposals with low voting support. Our results, which highlight asymmetry regarding firms’ CSR initiatives, remain robust when controlling for firm-specific factors as well as shifts in investor sentiment. From a risk management perspective, our findings suggest that CSR initiatives need strong shareholder support to realize benefits from the so-called ‘risk-reduction hypothesis’

Domain Organization, Catalysis and Regulation of Eukaryotic Cystathionine Beta-Synthases

Cystathionine beta-synthase (CBS) is a key regulator of sulfur amino acid metabolism diverting homocysteine, a toxic intermediate of the methionine cycle, via the transsulfuration pathway to the biosynthesis of cysteine. Although the pathway itself is well conserved among eukaryotes, properties of eukaryotic CBS enzymes vary greatly. Here we present a side-by-side biochemical and biophysical comparison of human (hCBS), fruit fly (dCBS) and yeast (yCBS) enzymes. Preparation and characterization of the full-length and truncated enzymes, lacking the regulatory domains, suggested that eukaryotic CBS exists in one of at least two significantly different conformations impacting the enzyme’s catalytic activity, oligomeric status and regulation. Truncation of hCBS and yCBS, but not dCBS, resulted in enzyme activation and formation of dimers compared to native tetramers. The dCBS and yCBS are not regulated by the allosteric activator of hCBS, S-adenosylmethionine (AdoMet); however, they have significantly higher specific activities in the canonical as well as alternative reactions compared to hCBS. Unlike yCBS, the heme-containing dCBS and hCBS showed increased thermal stability and retention of the enzyme’s catalytic activity. The mass-spectrometry analysis and isothermal titration calorimetry showed clear presence and binding of AdoMet to yCBS and hCBS, but not dCBS. However, the role of AdoMet binding to yCBS remains unclear, unlike its role in hCBS. This study provides valuable information for understanding the complexity of the domain organization, catalytic specificity and regulation among eukaryotic CBS enzymes.This work was supported by Postdoctoral Fellowship 0920079G from the American Heart Association (to TM), by National Institutes of Health Grant HL065217, by American Heart Association Grant In-Aid 09GRNT2110159, by a grant from the Jerome Lejeune Foundation (all to JPK) and by a research contract RYC2009-04147 (to ALP). In addition, grant support (P11-CTS-07187, CSD2009-00088 and BIO2012-34937) to Dr. Jose M. Sanchez-Ruiz (University of Granada) and SGIker technical and human support (UPV/EHU, MICINN, GV/EJ, ESF) are gratefully acknowledged

Being on the field when the game is still under way. The financial press and stock markets in times of crisis

This paper looks at the relationship between negative news and stock markets in times of global crisis, such as the 2008/2009 period. We analysed one year of front page banner headlines of three financial newspapers, the Wall Street Journal, Financial Times, and Il Sole24ore to examine the influence of bad news both on stock market volatility and dynamic correlation. Our results show that the press and markets influenced each other in generating market volatility and in particular, that the Wall Street Journal had a crucial effect both on the volatility and correlation between the US and foreign markets. We also found significant differences between newspapers in their interpretation of the crisis, with the Financial Times being significantly pessimistic even in phases of low market volatility. Our results confirm the reflexive nature of stock markets. When the situation is uncertain and unpredictable, market behaviour may even reflect qualitative, big picture, and subjective information such as streamers in a newspaper, whose economic and informative value is questionable

Exploiting Spillovers to Forecast Crashes

We develop Hawkes models in which events are triggered through self as well as cross-excitation. We examine whether incorporating cross-excitation improves the forecasts of extremes in asset returns compared to only self-excitation. The models are applied to US stocks, bonds and dollar exchange rates. In-sample, a Lagrange Multiplier test indicates the existence of cross-excitation for these series. Out-of-sample, we find that the models that include spillover effects forecast crashes and the Value-at-Risk significantly more accurately than the models without

In Search of Winning Mutual Funds in the Chinese Stock Market

This paper provides a methodological approach, based on the false discovery rate (FDR) of Barras et al. (J Finance 65(1):179–216, 2010. https://doi.org/10.1111/j.1540-6261.2009.01527.x), by which investors can successfully select winning mutual funds and fund managers in China. Our approach allows investors to distinguish between skilled and lucky mutual funds and fund managers and, using this information, to calibrate the proportion of their portfolio funds that are invested in the market index versus funds invested in skilled mutual funds. This feature in our approach can accommodate unique risk appetites and diversification requirements. When accounting for actual transaction costs which individual and institutional investors face in China, we show that our FDR approach can yield positive and economically significant risk-adjusted returns across various rebalancing frequencies. Our approach fares well when compared with naive historical return-based approaches for ranking mutual funds

Shareholder Activism and Equity Price Reactions

Using a large dataset of 8,870 shareholder corporate social responsibility (CSR) proposals for US firms, we employ a novel methodological approach that allows for the estimation of dynamic share price and risk reactions. We show that formal activist shareholder recommendations can affect stock returns and risk. However, the direction and magnitude of these effects are conditional upon the nature of the proposal and the identity of the sponsor

Currency bid-ask spread dynamics and the Asian crisis: Evidence across currency regimes

Using a sample of 21 emerging and developed country currencies, we evaluate the impact of the Asian crisis on bid-ask spreads. While the crisis had widespread and uniform volatility effects, the spread effects were not uniform across emerging and developed country currencies. For Asian emerging markets, spreads widened and spread volatility increased significantly during the crisis, while developed markets spreads narrowed and spread volatility decreased significantly. We investigate the impact of more flexible and less flexible exchange rate regimes on bid-ask spreads using panel data. In general, countries with tightly-managed regimes have significantly lower spreads than countries with more freely-floating regimes, while controlling for the influence of other factors such as volatility. Asian developing market spreads are higher than spreads of the other countries, again, after controlling for the influence of other factors.Currency spreads Bid-ask spreads Asian crisis Exchange rate regimes Spread volatility Panel data analysis