Online versions of published papers are available on SSRN.
30. Trading in your Golden Years: The Effects of Early Pension Withdrawal on Individual Investments, with Sumit Agarwal, Yuanyuan Pan and Chek Ann Tan
Abstract: We examine the causal effects of a policy allowing early withdrawal of pension funds on individuals’ investment behavior. Upon turning 55, eligible individuals may withdraw a portion of their pension savings. Using detailed brokerage data, we find that this liquidity access triggers increased trading, of 9%to 33%, especially in riskier, leveraged assets, without improving investment performance. The resulting increase in trading costs and portfolio volatility, particularly among males and lower-income investors, ultimately diminishing retirement wealth.
29. Anomalies, Option Volume and Disagreement, with Byoung-Hyun Jeon, 2024.
Abstract: We document robust amplification of stock market anomaly returns associated with elevated option trading volume driven by disagreement trades. Consistent with the correction of mispricing associated with biased beliefs, anomaly returns are higher when disagreement option volume is high prior to earnings announcements. Additionally, we demonstrate that disagreement-based option volume is negatively related to future stock returns among stocks which are overpriced based on anomaly characteristics. Our findings also concentrate in stocks that are also difficult to short, emphasizing the combined impact of investor bias and shorting costs. Leveraging the staggered adoption of XBRL, we establish a plausibly identified link between investor disagreement and short-horizon mispricing in stocks.
28. Private Company Valuations by Mutual Funds, with Vikas Agarwal, Brad Barber, Si Cheng and Ayako Yasuda, Review of Finance, 2023.
Abstract: Mutual fund families set and report values of their private startup holdings, which affect the fund net asset value (NAV) at which investors buy/sell fund shares. We test three hypotheses related to the valuation practice: (i) information cost/access, (ii) litigation risk, and (iii) strategic NAV management. Consistent with (i), families with larger PE holdings and/or stronger information access update valuations more frequently in the absence of public information releases, their updates co-move less with other families, and their fund returns jump less at follow-on financings. We find no support for hypotheses (ii) or (iii). We also find that high-PE-exposure funds are subject to greater financial fragility.
27. Momentum and Individual Investor Trades: Evidence from Singapore, with Zhenghui Ni and Chek Ann Tan, Pacific-Basin Finance Journal, 2023.
Abstract: This paper examines the role of retail investor trading activity on stock price momentum. We find that there is little evidence of momentum for stocks traded on the Singapore Exchange (SGX) unconditionally and momentum is concentrated in stocks with high market capitalization and high nominal prices. While these stocks are likely to be the trading habitat of institutional investors, they exhibit substantially greater price momentum when they are accompanied by heavy trading by retail investors. Moreover, contrarian trading by retail investors on momentum stocks increases stock price underreaction to information and generates momentum of above 2% per month.
26. Investor Heterogeneity and Liquidity, with Kalok Chan and Si Cheng, Journal of Financial and Quantitative Analysis, 2022.
Abstract: Fund flows are more correlated among funds with similar investment horizon, consistent with correlated demand for liquidity. We find that stocks held by institutions with more heterogeneous investment horizon are more liquid and have lower volatility of liquidity. Identification tests confirm that the improvement in stock liquidity holds when the increase in investor heterogeneity arises from an exogenous shock due to the 2003 tax reform. In addition, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have a less heterogeneous investor base. Moreover, the premium associated with stock illiquidity is concentrated in stocks with low investor heterogeneity.
25. Implied Default Probabilities and Losses Given Default from Option Prices, with Jennifer Conrad and Robert Dittmar, Journal of Financial Econometrics, 2020.
Abstract: We propose a novel method of estimating default probabilities using equity options data. The resulting default probabilities are highly correlated with estimates of default probabilities extracted from CDS spreads, which assume constant losses given default. Additionally, the option-implied default probabilities are higher in bad economic times and for firms with poorer credit ratings and financial positions. A simple inferred measure of loss given default is related to underlying business conditions, and varies across sectors; the time series properties of this measure are similar after controlling for liquidity effects.
24. Why Do Option Prices Predict Stock Returns? The Role of Price Pressure in the Stock Market, with Luis Gonclaves-Pinto, Bruce Grundy, Thijs van der Heijden and Yichao Zhu, Management Science, 2020. Inquire Europe Research Award 2016.
Abstract: Stock and options markets can disagree about a stock’s value because of informed trading in options and/or price pressure in the stock. The predictability of stock returns based on this cross-market discrepancy in values is especially strong when accompanied by stock price pressure, and it does not depend on trading in options. We argue that option-implied prices provide an anchor for fundamental stock values that helps to distinguish stock price movements resulting from pressure versus news. Overall, our results are consistent with stock price pressure being the primary driver of the option price-based stock return predictability.
23. Mutual Funds and Mispriced Stocks, with Doron Avramov and Si Cheng, Management Science, 2020. Winner of FMA European Conference Best Paper Award, June 2016.
Abstract: We propose a new measure of fund investment skill, active fund overpricing (AFO), encapsulating the fund’s active share of investments, the direction of fund active bets with regard to mispriced stocks, and the dispersion of mispriced stocks in the fund’s investment opportunity set. We find that fund activeness is not sufficient for outperformance: high (low) AFO funds taking active bets on the wrong (right) side of stock mispricing achieve inferior (superior) fund performance. However, high AFO funds receive higher flows during periods of high investor sentiment, when the performance–flow relation becomes weaker.
22. Preference for Dividends and Return Comovement, with Jing Xie, Journal of Financial Economics, 2018.
Abstract: Stocks that initiate dividends tend to comove more with other dividend-paying stocks and comove less with non-dividend payers. This is also true for: (a) dividend initiations that are motivated by the exogenous 2003 dividend tax cut; and (b) the cash dividend share class of Citizens Utilities (relative to its stock dividend class). We find that flows to dividend prone (averse) mutual funds increase the comovement among dividend-paying (non-dividend paying) stocks. Overall, the evidence supports the proposition that the trading of pro-dividend (dividend-averse) clienteles induces an extra factor in dividend payers (non-payers), beyond those associated with changes in common factors.
21. Exchange Rate Behavior with Negative Interest Rates: Some Early Negative Observations, with Andrew Rose, CEPR Discussion Paper 11,498, Pacific Economic Review, February 2018. Featured in VOX (voxeu.org) and Wall Street Journal (wsj.com).
Abstract: We examine exchange rate behavior during the recent period with negative nominal interest rates. We use a daily panel of data on 61 currencies from January 2010 through May 2016, during which five economies—Denmark, the European Economic and Monetary Union, Japan, Sweden, and Switzerland—experienced negative nominal interest rates. We examine both effective exchange rates and bilateral rates, the latter typically measured against the Swiss franc since Switzerland has had the longest period of negative nominal rates. We examine exchange rate volatility, exchange rate changes, deviations from uncovered interest parity, and profits from the carry trade. We find that negative interest rates seem to have little effect on observable exchange rate behavior.
20. Short-Term Reversals: The Effects of Past Returns and Institutional Exits, with Si Cheng, Avanidhar Subrahmanyam and Sheridan Titman, Journal of Financial and Quantitative Analysis, February 2017.
Abstract: Price declines over the previous quarter lead to stronger reversals across the subsequent 2 months. We explain this finding based on the dual notions that liquidity provision can influence reversals and that agents who act as de facto liquidity providers may be less active in past losers. Supporting these observations, we find that active institutions participate less in losing stocks and that the magnitude of monthly return reversals fluctuates with changes in the number of active institutional investors. Thus, we argue that fluctuations in liquidity provision with past return performance account for the link between return reversals and past returns.
19. Stock Liquidity and the Cost of Equity Capital in Global Markets, with Yakov Amihud, Wenjin Kang and Huiping Zhang, Journal of Applied Corporate Finance, January 2016.
Abstract: In summarizing recent evidence on the global importance of the illiquidity premium in determining the equity cost of capital, the authors show that, in all major stock markets around the world, investors require a higher rate of return as compensation for illiquidity costs when pricing stocks and, indeed, all financial assets. The illiquidity return premium also varies across markets and is typically higher in less-developed countries where the capital markets are generally less liquid. For example, although Germany’s Frankfurt Stock Exchange has developed considerably in recent years and experienced a large increase in the number of stocks that are actively traded, the authors’ research covering the period 1990-2011 suggests that the illiquidity premium experienced by German companies is higher than the premium faced by not only U.S. companies, but those whose shares are traded in the majority of European and other developed markets as well.
18. Information, Analysts and Stock Returns Comovement, with Randall Morck, Jianfeng Shen and Bernard Yeung, Review of Financial Studies, November 2015. Featured in Harvard Law School Forum on Corporate Governance and Financial Regulation, December 2015.
Abstract: Analysts follow disproportionally firms whose fundamentals correlate more with those of their industry peers. This coverage pattern supports models of profit-maximizing information intermediaries producing preferentially information valuable in pricing more stocks. We designate highly followed firms whose fundamentals best predict those of peer firms as bellwether firms. When analysts revise a bellwether firm's earning forecast, it changes the prices of other firms significantly; however, revisions for firms that are less intensely followed do not change the prices of heavily followed firms. Unidirectional information spillovers explain how the more accurately priced stocks might exhibit more co-movement.
17. Time-Varying Liquidity and Momentum Profits, with Doron Avramov and Si Cheng, Journal of Financial and Quantitative Analysis, December 2016. Winner of the 2014 SGF Conference Six Swiss Exchange Best Paper Award.
Abstract: A basic intuition is that arbitrage is easier when markets are most liquid. Surprisingly, we find that momentum profits are markedly larger in liquid market states. This finding is not explained by variation in liquidity risk, time-varying exposure to risk factors, or changes in macroeconomic condition, cross-sectional return dispersion, and investor sentiment. The predictive performance of aggregate market illiquidity for momentum profits uniformly exceeds that of market return and market volatility states. While momentum strategies have been unconditionally unprofitable in the United States, in Japan, and in the Eurozone countries in the last decade, they are substantial following liquid market states.
16.The Illiquidity Premium: International Evidence, with Yakov Amihud, Wenjin Kang and Huiping Zhang, Journal of Financial Economics, August 2015.
Abstract: We examine the illiquidity premium in stock markets across 45 countries and present two findings. First, the average illiquidity return premium across countries is positive and significant, after controlling for other pricing factors. The premium is measured by monthly return series on illiquid-minus-liquid stocks or by the coefficient of stock illiquidity estimated from cross section Fama-MacBeth regressions. Second, a commonality exists across countries in the illiquidity return premium, controlling for common global return factors and variation in global illiquidity. This commonality is different from commonality in illiquidity itself and is greater in globally integrated markets.
15. Industries and Stock Return Reversals, with Mujtaba Mian, Journal of Financial and Quantitative Analysis, April 2015.
Abstract: This paper documents pervasive evidence of intra-industry reversals in monthly returns. Unlike the conventional reversal strategy based on stock returns relative to the market portfolio, we document intra-industry return reversals that are larger in magnitude, consistently present over time, and prevalent across subgroups of stocks, including large and liquid stocks. These return reversals are driven by order imbalances and noninformational shocks. Consistent with reversals representing compensation for supplying liquidity, intra-industry reversals are stronger following aggregate market declines and volatile times, reflecting binding capital constraints and limited risk-bearing capacity of liquidity providers.
14. Stock Price Synchronicity and Liquidity, with Kalok Chan and Kang Wenjin, Journal of Financial Markets, August 2013. Winner of the 2008 China International Conference in Finance Best Paper Award.
Abstract: We argue and provide evidence that stock price synchronicity affects stock liquidity. Under the relative synchronicity hypothesis, higher return co-movement (i.e., higher systematic volatility relative to total volatility) improves liquidity. Under the absolute synchronicity hypothesis, stocks with higher systematic volatility or beta are more liquid. Our results support both hypotheses. We find all three illiquidity measures (effective proportional bid-ask spread, price impact measure, and Amihud's illiquidity measure) are negatively related to stock return co-movement and systematic volatility. Our analysis also shows that larger industry-wide component in returns improves liquidity. We find that improvement in liquidity following additions to the S&P 500 Index is related to the stock's increase in return co-movement.
13. Stock Market Declines and Liquidity, with Kang Wenjin and S Viswanathan, Journal of Finance, February 2010.
Abstract: Consistent with recent theoretical models where binding capital constraints lead to sudden liquidity dry-ups, we find that negative market returns decrease stock liquidity, especially during times of tightness in the funding market. The asymmetric effect of changes in aggregate asset values on liquidity and commonality in liquidity cannot be fully explained by changes in demand for liquidity or volatility effects. We document interindustry spillover effects in liquidity, which are likely to arise from capital constraints in the market making sector. We also find economically significant returns to supplying liquidity following periods of large drops in market valuations.
12. Stock Price Synchronicity and Analyst Following in Emerging Markets, with Kalok Chan, Journal of Financial Economics, April 2006.
Abstract: This paper examines the relation between the stock price synchronicity and analyst activity in emerging markets. Contrary to the conventional wisdom that security analysts specialize in the production of firm-specific information, we find that securities which are covered by more analysts incorporate greater (lesser) market-wide (firm-specific) information. Using the R2 statistics of the market model as a measure of synchronicity of stock price movement, we find that greater analyst coverage increases stock price synchronicity. Furthermore, after controlling for the influence of firm size on the lead–lag relation, we find that the returns of high analyst-following portfolio lead returns of low analyst-following portfolio more than vice versa. We also find that the aggregate change in the earnings forecasts in a high analyst-following portfolio affects the aggregate returns of the portfolio itself as well as those of the low analyst-following portfolio, whereas the aggregate change in the earnings forecasts of the low analyst-following portfolio have no predictive ability. Finally, when the forecast dispersion is high, the effect of analyst coverage on stock price synchronicity is reduced.
11. Stock Return Autocorrelations, Cross-Autocorrelations and Market Conditions in Japan, with Yuanto Kusnadi, Journal of Business, November 2006.
Abstract: We show that changes in market conditions significantly affect cross-autocorrelations and speed of adjustment in weekly stock returns. We find significant positive cross autocorrelations between weekly returns on a portfolio of small firms and lagged large-firm portfolio returns only when the lagged aggregate market has experienced a decline in value. These positive return cross-autocorrelations are also associated with lower abnormal portfolio trading volume and greater delays in the adjustment of individual stock prices to (negative) market-wide information, particularly for small firms. The effect of lagged market states cannot be explained by market microstructure biases such as nonsynchronous trading or thin trading.
10. Market States and Momentum, with Michael Cooper and Roberto Gutierrez, Journal of Finance, June 2004.
Abstract: We test overreaction theories of short-run momentum and long-run reversal in the cross section of stock returns. Momentum profits depend on the state of the market, as predicted. From 1929 to 1995, the mean monthly momentum profit following positive market returns is 0.93%, whereas the mean profit following negative market returns is −0.37%. The up-market momentum reverses in the long-run. Our results are robust to the conditioning information in macroeconomic factors. Moreover, we find that macroeconomic factors are unable to explain momentum profits after simple methodological adjustments to take account of microstructure concerns.
9. What if Trading Location is Different from Business Location? Evidence from the Jardine Group, with Kalok Chan and Sie Ting Lau, Journal of Finance, June 2003. Summarized in The CFA Digest, November 2003.
Abstract: We examine the price behavior and market activity of the Jardine Group companies after they were delisted from Hong Kong in 1994. Although the trading activity of the Jardine Group moved to Singapore, the core businesses remained in Hong Kong and Mainland China. Evidence indicates the Jardine stocks are correlated less (more) with the Hong Kong (Singapore) market after the delisting. This result cannot be explained by various hypotheses, such as relocation of core business, time-varying betas, migration of trading activity, and currency and tax distortions. We conclude that price fluctuations are affected by country-specific investor sentiment.
8.Momentum Strategies: Evidence from the Pacific Basin Stock Markets, with Yuanto Kusnadi, Journal of Financial Research, Fall 2002. Summarized in The CFA Digest, May 2003 and winner of NUS Best Master of Science Thesis Award 2000.
Abstract: We investigate the profitability of momentum investment strategy in six Asian stock markets. Unrestricted momentum investment strategies do not yield significant momentum profits. Although we find that a diversified country-neutral strategy generates small but statistically significant returns during 1981–1994, when we control for size and turnover effects we find that the country-neutral profits dissipate. Our evidence suggests that the factors that contribute to the momentum phenomenon in the United States are not prevalent in the Asian markets.
7. Profitability of Momentum Strategies in International Equity Markets, with Kalok Chan and Wilson Tong, Journal of Financial and Quantitative Analysis, June 2000. Summarized in The CFA Digest, February 2001 and winner of NUS Best Paper Award 2000.
Abstract: This paper examines the profitability of momentum strategies implemented on international stock market indices. Our results indicate statistically significant evidence of momentum profits. The momentum profits arise mainly from time-series predictability in stock market indices—very little profit comes from predictability in the currency markets. We also find higher profits for momentum portfolios implemented on markets with higher volume in the previous period, indicating that return continuation is stronger following an increase in trading volume. This result confirms the informational role of volume and its applicability in technical analysis.
6. Trading Volume and Short Horizon Contrarian Profits: Evidence from the Malaysian Market, with S Ting, Pacific Basin Finance Journal, 2000.
Abstract: We provide evidence on short-term predictability of stock returns on the Malaysian stock market. We examine the relation between return predictability and the level of trading activity. This is particularly relevant in emerging stock markets, where thin trading is more pervasive. We find that the returns from a contrarian portfolio strategy are positively related to the level of trading activity in the securities. Specifically, the contrarian profits on actively and frequently traded securities are significantly higher than that generated from the low trading activity securities. We find that the differential behavior of high- and low-volume securities is not subsumed by the size effect, although for the small firms, the volume–predictability relation is most pronounced. We also suggest that the price patterns may be related to the institutional arrangement in the Malaysian stock market.
5. The Effect of Tick Size on Price Clustering and Trading Volume, with Eric Terry, Journal of Business, Finance and Accounting, 1998.
Abstract: Proposals have been made for some stock exchanges to reduce the size of their trading tick in order to lower transactions costs and, as a result, attract more trading volume and firm listings. We investigate the impact of tick size on price clustering and trading volume when the minimum price change varies with price level. Controlling the firm specific variables, we find that a smaller trading tick tends to exacerbate price clustering. Furthermore, a reduction in tick size is more likely to increase trading volume if the shares are heavily traded. These results suggest that previous studies on other stock markets may have overstated the benefits of a smaller trading tick to traders.
4. Underpricing and Firm Quality in Initial Public Offerings – Evidence from Singapore, with G H Lim, Journal of Business, Finance and Accounting, 1998.
Abstract: Firms seeking initial public listings on the Stock Exchange of Singapore can choose between offering their shares at a fixed price or selling them in two tranches: the first tranche is offered at a fixed price while the issue price of the second tranche is determined via a tender system. Consistent with the existing signaling literature, tendering IPO firms underprice their fixed price tranche more than non-tendering IPO firms. The underpricing in the fixed tranche is recouped through higher proceeds from the tender tranche. Our evidence suggests that IPO firms use the tender option to signal superior firm quality.
3. Asset pricing, time-varying risk premia and interest rate risk, with Mark Flannery and Richard Harjes, Journal of Banking and Finance, 1997.
Abstract: Firms seeking initial public listings on the Stock Exchange of Singapore can choose between offering their shares at a fixed price or selling them in two tranches: the first tranche is offered at a fixed price while the issue price of the second tranche is determined via a tender system. Consistent with the existing signaling literature, tendering IPO firms underprice their fixed price tranche more than non-tendering IPO firms. The underpricing in the fixed tranche is recouped through higher proceeds from the tender tranche. Our evidence suggests that IPO firms use the tender option to signal superior firm quality.
2. Time-Varying Factors and Cross-Autocorrelations in Short-Horizon Stock Returns, Journal of Financial Research, Winter 1997.
Abstract: This paper investigates the role of interest rate risk in explaining security price changes. We develop and test a two-factor linear beta pricing model of security returns in which the factors are the excess returns on the long-term, riskless bond and the equal-weighted equity market index. We find that time-variation in the interest rate and market risk premia influence expected security returns. Furthermore, conditional interest rate volatility affects security returns, particularly during periods of substantial interest rate movements.
Volume and Autocorrelations in Short Horizon Individual Security Returns, with Jennifer Conrad and Cathy Niden, Journal of Finance, September 1994. This paper was nominated for the 1995 Smith-Breeden Outstanding Paper Award.
Abstract: This article tests for the relations between trading volume and subsequent returns patterns in individual securities' short-horizon returns that are suggested by such articles as Blume, Easley, and O'Hara (1994) and Campbell, Grossman, and Wang (1993). Using a variant of Lehmann's (1990) contrarian trading strategy, we find strong evidence of a relation between trading activity and subsequent autocovariances in weekly returns. Specifically, high-transaction securities experience price reversals, while the returns of low-transactions securities are positively auto covarying. Overall, information on trading activity appears to be an important predictor of the returns of individual securities.