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

Corporate PACs and the Stock Market: The Case of the 2004 Presidential Election

The 2004 U.S. presidential election was very close. Rumors from exit polls on Election Day showed that John Kerry would likely win, but the actual vote counts revealed on Tuesday night and early Wednesday morning showed that George Bush had been re-elected. This sets up a natural experiment for studying the shareholder-wealth impact of rumor and eventual outcome of election on firms which made an investment in public policy through PAC donations. The authors find that the stock of companies whose PAC contributions favored Democrats performed better on Tuesday and those that favored Republicans performed better on Wednesday. In general, most S&P 500 companies appear to have favored the Republican victory with both their PAC donations and by the reaction of their stock price to election results

Hedge Funds In Portfolios of Risk-Averse Investors

We find that adding a hedge fund to an optimally weighted portfolio of stocks and T-bills generally increases the utility of an investor. From a sample of hedge funds with returns from 1996 to 2005, the certainty equivalent was an average of five basis points (monthly) higher with a ten percent allocation into a hedge fund. Funds from different style categories require different allocations into the stock market, but nearly all funds improved performance. Contrary to popular opinion, we find that highly risk-averse investors gain even more than less risk-averse investors by adding a hedge fund into their portfolio