New procedures for testing whether stock price processes are martingales

We propose procedures for testing whether stock price processes are martingales based on limit order type betting strategies. We first show that the null hypothesis of martingale property of a stock price process can be tested based on the capital process of a betting strategy. In particular with high frequency Markov type strategies we find that martingale null hypotheses are rejected for many stock price processes

Strategies used as spectroscopy of financial markets reveal new stylized facts

We propose a new set of stylized facts quantifying the structure of financial markets. The key idea is to study the combined structure of both investment strategies and prices in order to open a qualitatively new level of understanding of financial and economic markets. We study the detailed order flow on the Shenzhen Stock Exchange of China for the whole year of 2003. This enormous dataset allows us to compare (i) a closed national market (A-shares) with an international market (B-shares), (ii) individuals and institutions and (iii) real investors to random strategies with respect to timing that share otherwise all other characteristics. We find that more trading results in smaller net return due to trading frictions. We unveiled quantitative power laws with non-trivial exponents, that quantify the deterioration of performance with frequency and with holding period of the strategies used by investors. Random strategies are found to perform much better than real ones, both for winners and losers. Surprising large arbitrage opportunities exist, especially when using zero-intelligence strategies. This is a diagnostic of possible inefficiencies of these financial markets.Comment: 13 pages including 5 figures and 1 tabl

Cross-Sectional Dispersion and Expected Returns

This study investigates whether the cross-sectional dispersion of stock returns, which reflects the aggregate level of idiosyncratic risk in the market,represents a priced state variable. We find that stocks with high sensitivities to dispersion offer low expected returns. Furthermore, a zero-cost spread portfolio that is long (short) in stocks with low (high) dispersion betas produces a statistically and economically significant return, after accounting for its exposure to other systematic risk factors. Dispersion is associated with a significantly negative risk premium in the cross-section (-1.32% per annum) which is distinct from premia commanded by a set of alternative systematic factors. These results are robust to a wide set of stock characteristics, market conditions, and industry groupings

The Effects of Twitter Sentiment on Stock Price Returns

Social media are increasingly reflecting and influencing behavior of other complex systems. In this paper we investigate the relations between a well-know micro-blogging platform Twitter and financial markets. In particular, we consider, in a period of 15 months, the Twitter volume and sentiment about the 30 stock companies that form the Dow Jones Industrial Average (DJIA) index. We find a relatively low Pearson correlation and Granger causality between the corresponding time series over the entire time period. However, we find a significant dependence between the Twitter sentiment and abnormal returns during the peaks of Twitter volume. This is valid not only for the expected Twitter volume peaks (e.g., quarterly announcements), but also for peaks corresponding to less obvious events. We formalize the procedure by adapting the well-known "event study" from economics and finance to the analysis of Twitter data. The procedure allows to automatically identify events as Twitter volume peaks, to compute the prevailing sentiment (positive or negative) expressed in tweets at these peaks, and finally to apply the "event study" methodology to relate them to stock returns. We show that sentiment polarity of Twitter peaks implies the direction of cumulative abnormal returns. The amount of cumulative abnormal returns is relatively low (about 1-2%), but the dependence is statistically significant for several days after the events

Investor heterogeneity and the cross-section of U.K. investment trust performance

We use the upper and lower bounds derived by Ferson and Lin (2010) to examine the impact of investor heterogeneity on the performance of U.K. investment trusts relative to alternative linear factor models. We find using the upper bounds that investor heterogeneity has an important impact for nearly all investment trusts. The upper bounds are large in economic terms and significantly different from zero. We find no evidence of any trusts where all investors agree on the sign of performance beyond what we expect by chance. Using the lower bound, we find that trusts with a larger disagreement about trust performance have a weaker relation between the trust premium and past Net Asset Value (NAV) performance

Investigating the potentially contradictory microfoundations of financialization

The existing academic literature on financialization points to multiple instances in which firms attempt to demonstrate the vitality of their stock-market position in ways which ultimately prove to be self-harming. I demonstrate, in the first instance as a matt er of immanent logic, that these actions are linked to the interplay of contradictory tendencies in the microfoundations of financialization. Under conditions of financialization, firms create additional sources of credit to capitalize their productive activities by driving their stock price into greater increases than the market average, thereby generating capital gains. Yet, the more it becomes public knowledge that the financing tricks used to inflate the stock price provide no productive benefit to the firm, the more it would seem to create incentives for fund managers to hold portfolios that replicate the stock market as a whole. In this way, they will minimize their exposure to financial misrepresentation. Such a stance undermines financialized business models, but it does in any case conform to fund managers' basic theoretical training, which revolves around the logical demonstration that an individual stock cannot systematically out-perform the market average. I review the available empirical studies of fund manager decision-making to show that they find against the existence of a simple performativity loop operating between finance theory and fund manager behaviour. However, on many points the empirical evidence does confirm the theoretically derived conclusion concerning the potentially contradictory microfoundations of financialization. Fund managers often do act in a way which is consistent with finance theory's core claim that an index-tracking strategy represents the only equilibrium portfolio, even if this is only rarely as a result of the direct performativity of the theory

A Novel Animal Model of Borrelia recurrentis Louse-Borne Relapsing Fever Borreliosis Using Immunodeficient Mice

Louse-borne relapsing fever (LBRF) borreliosis is caused by Borrelia recurrentis, and it is a deadly although treatable disease that is endemic in the Horn of Africa but has epidemic potential. Research on LBRF has been severely hampered because successful infection with B. recurrentis has been achieved only in primates (i.e., not in other laboratory or domestic animals). Here, we present the first non-primate animal model of LBRF, using SCID (-B, -T cells) and SCID BEIGE (-B, -T, -NK cells) immunocompromised mice. These animals were infected with B. recurrentis A11 or A17, or with B. duttonii 1120K3 as controls. B. recurrentis caused a relatively mild but persistent infection in SCID and SCID BEIGE mice, but did not proliferate in NUDE (-T) and BALB/c (wild-type) mice. B. duttonii was infectious but not lethal in all animals. These findings demonstrate that the immune response can limit relapsing fever even in the absence of humoral defense mechanisms. To study the significance of phagocytic cells in this context, we induced systemic depletion of such cells in the experimental mice by injecting them with clodronate liposomes, which resulted in uncontrolled B. duttonii growth and a one-hundred-fold increase in B. recurrentis titers in blood. This observation highlights the role of macrophages and other phagocytes in controlling relapsing fever infection. B. recurrentis evolved from B. duttonii to become a primate-specific pathogen that has lost the ability to infect immunocompetent rodents, probably through genetic degeneration. Here, we describe a novel animal model of B. recurrentis based on B- and T-cell-deficient mice, which we believe will be very valuable in future research on LBRF. Our study also reveals the importance of B-cells and phagocytes in controlling relapsing fever infection

Algal Toxins Alter Copepod Feeding Behavior

Using digital holographic cinematography, we quantify and compare the feeding behavior of free-swimming copepods, Acartia tonsa, on nutritional prey (Storeatula major) to that occurring during exposure to toxic and non-toxic strains of Karenia brevis and Karlodinium veneficum. These two harmful algal species produce polyketide toxins with different modes of action and potency. We distinguish between two different beating modes of the copepod’s feeding appendages–a “sampling beating” that has short durations (<100 ms) and involves little fluid entrainment and a longer duration “grazing beating” that persists up to 1200 ms and generates feeding currents. The durations of both beating modes have log-normal distributions. Without prey, A. tonsa only samples the environment at low frequency. Upon introduction of non-toxic food, it increases its sampling time moderately and the grazing period substantially. On mono algal diets for either of the toxic dinoflagellates, sampling time fraction is high but the grazing is very limited. A. tonsa demonstrates aversion to both toxic algal species. In mixtures of S. major and the neurotoxin producing K. brevis, sampling and grazing diminish rapidly, presumably due to neurological effects of consuming brevetoxins while trying to feed on S. major. In contrast, on mixtures of cytotoxin producing K. veneficum, both behavioral modes persist, indicating that intake of karlotoxins does not immediately inhibit the copepod’s grazing behavior. These findings add critical insight into how these algal toxins may influence the copepod’s feeding behavior, and suggest how some harmful algal species may alter top-down control exerted by grazers like copepods