Institutional Herding, Business Groups, and Economic Regimes: Evidence from Japan

To gain new and important insights into institutional herding, we study Japan for the following reasons: we can examine a market that is known for its active institutional investors, we can investigate the impacts of business grouping (i.e., the keiretsu), and we can see if herding and feedback trading behaviors differ under three distinct economic regimes (i.e., a regulated period, a bubble economy, and a bear market). We argue that the culture in Japan causes institutions to have both a long-term focus and close relationships with management. Consistent with the first view, we find that herding in Japan occurs on a lower level than it does in the U.S., and that the subsequent short-run returns to herding seem to be unimportant. Consistent with the second view, we find that when herding does occur, it has a large impact on price movements, and the use of past information (feedback trading) on herding behavior seems only marginally important. Much of these findings are more pronounced for keiretsu firms. Lastly, the effects and behavior of institutional herding is dependent on the economic environment.

Risk Aversion, Entrepreneurial Risk, and Portfolio Selection

Do entrepreneurs consider the risk of their business equity when making investment portfolio allocations? Many people compartmentalize different risks and consider them separately, called mental accounting. Alternatively, the risk substitution hypothesis suggests that entrepreneurs would offset high business income risk by selecting a more conservative investment portfolio. we examine these two hypotheses which have implications for measuring risk tolerance. We find that households with proprietary income show higher risk tolerance than non-entrepreneurs do. Further evidence suggests that a comprehensive measure of relative risk aversion that incorporates households\u27 business income is more reliable and more consistent with their reported risk preference than other measures that do not include business income. In supportive of the risk substitution hypothesis, households do appear to hedge the risk from their private business by decreasing their portion of other risky assets in their investment portfolio

Paying attention to social media stocks

Social media has reshaped business models, economies, politics, and culture around the world. In this paper, we identified social media stocks from various sectors by using a strict, academic definition and then studied their performance and return characteristics. Multivariate regression results demonstrate that being recognized as a social media firm yields extra return. The performance of social media stocks is not associated with macro-level sentiment, but rather with firm-level attention paid by potential investors. Causality tests indicate that the default risk premium and volatility have incremental power in explaining the performance of social media stocks

Mood and the Market: Can Press Reports of Investors’ Mood Predict Stock Prices?

We examined whether press reports on the collective mood of investors can predict changes in stock prices. We collected data on the use of emotion words in newspaper reports on traders’ affect, coded these emotion words according to their location on an affective circumplex in terms of pleasantness and activation level, and created indices of collective mood for each trading day. Then, by using time series analyses, we examined whether these mood indices, depicting investors’ emotion on a given trading day, could predict the next day’s opening price of the stock market. The strongest findings showed that activated pleasant mood predicted increases in NASDAQ prices, while activated unpleasant mood predicted decreases in NASDAQ prices. We conclude that both valence and activation levels of collective mood are important in predicting trend continuation in stock prices

Investments, analysis and behavior

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