The Distribution of Investor Beliefs, Stock Ownership and Stock Returns (with G. Hardouvelis and D. Vayanos), 2024, R&R Management Science
We study theoretically and empirically the relationship between investor beliefs, ownership dispersion and stock returns. We find that high dispersion, measured by high breadth or low Herfindahl index, forecasts returns positively for large stocks, as in Chen, Hong, and Stein (2002), but negatively for small stocks. We explain that relationship in a difference-of-opinion model in which stocks differ in the size of investor disagreements and the extent of belief polarization. These differences are characterized by range and kurtosis, respectively. Proxying investor beliefs by analyst forecasts, we find that range and kurtosis affect ownership dispersion in the way that our model predicts.
Economic Policy Uncertainty and the Greek Economic Crisis (with G. Hardouvelis, D. Karanastasis, P. Samartzis), 2023, Journal of Economic Studies, Forthcoming
We use textual analysis to construct an index of economic policy uncertainty (EPU) for Greece from 1998 to 2017 as well as EPU sub-indices related to fiscal (partitioned further into debt and tax), monetary, banking, currency or Grexit, and pension policies. Positive shocks to EPU (and to the other sub-indices) are associated with a subsequent decline in real economic activity, economic sentiment and the stock market, and a subsequent rise in unemployment and interest rates. A historical decomposition suggests that in addition to the government fiscal balance, EPU was a key variable behind the Greek crisis, particularly during its second phase after 2014. We also find evidence that EPU tends to lead economic activity rather than vice versa.
Style Inattention in Ownership, Stock Price Volatility and Stock Illiquidity (with G. Hardouvelis)
We examine the relation of stock price volatility, stock liquidity and stock trading activity with fund style inattention in the ownership of stocks over the period 1997-2015. Style inattention is measured by the Herfindahl index of the shares of 31 different investment styles in the ownership of stocks. This is an innovative way to measure the exposure of a stock to the stylization of the market. Our econometric results indicate that stocks with higher style inattention (fewer styles) in ownership exhibit higher volatility, lower liquidity and lower trading activity. The results are robust to the inclusion of known determinants of stock volatility, liquidity and turnover, their own lagged values plus a set of style - related control variables. The relations are both economically and statistically significant and are also robust to the exclusion of the period of the financial crisis and to the presence of outliers.
Liquidity and Stock Returns during Large Market Declines (with G. Hardouvelis)
In this paper we empirically test the predictive role of stock illiquidity on stock returns during a large market decline. We propose a turnover factor which captures the non-fundamental demand for stocks, with which we augment a standard four-factor model. With the use of this extra factor we are able to consider an abnormal trading pressure and split the abnormal returns into two parts, namely the flight-from-liquidity and the flight-to-liquidity part. Our results indicate that stock illiquidity does not predict the abnormal returns after the event. However, it explains both partitions of the abnormal returns, predicting outcomes in both flight-from-liquidity and flight-to-liquidity. We conclude that the two effects offset each other. Illiquidity risk also exhibits the same predictive pattern.