nep-fmk New Economics Papers
on Financial Markets
Issue of 2015‒04‒19
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Biased Shorts: Stock Market Implications of Short Sellers’ Disposition Effect By Massa, Massimo; von Beschwitz, Bastian
  2. US stock market interaction network as learned by the Boltzmann Machine By Stanislav S. Borysov; Yasser Roudi; Alexander V. Balatsky
  3. Volatility of Stock Market and Exchange Rate Returns in Peru: Long Memory or Short Memory with Level Shifts? By Andres Herrera; Gabriel Rodríguez

  1. By: Massa, Massimo; von Beschwitz, Bastian
    Abstract: We investigate whether short sellers are subject to the disposition effect using a novel dataset that allows to identify the weekly closing of short positions. Consistent with the disposition effect, the closing of short sale positions is strongly related to a proxy of Shortsale Capital Gains Overhang (SCGO). Furthermore, while short sellers in general exhibit skill in closing their positions – i.e. closing is followed by positive stock returns – the closing explained by SCGO is followed by negative returns. This suggests that the trades are irrational and caused by the disposition effect. Next, we study the implications of short sellers’ disposition effect on stock prices. We provide evidence that SCGO is negatively related to future stock returns. This effect exists after controlling for the standard effect of capital gains overhang of other market participants. A trading strategy based on SCGO achieves yearly three-factor alphas of up to 26%. Overall, our results suggest that short sellers, instead of arbitraging away the mispricing caused by the disposition effect of the other market participants, add to this mispricing due to their own behavioral biases.
    Keywords: Behavioral Finance; Disposition effect; Short selling
    JEL: G10 G12 G14
    Date: 2015–04
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:10535&r=fmk
  2. By: Stanislav S. Borysov; Yasser Roudi; Alexander V. Balatsky
    Abstract: We study historical dynamics of joint equilibrium distribution of stock returns in the US stock market using the Boltzmann distribution model being parametrized by external fields and pairwise couplings. Within Boltzmann learning framework for statistical inference, we analyze historical behavior of the parameters inferred using exact and approximate learning algorithms. Since the model and inference methods require use of binary variables, effect of this mapping of continuous returns to the discrete domain is studied. Properties of distributions of external fields and couplings as well as industry sector clustering structure are studied for different historical dates and moving window sizes. We show that discrepancies between them might be used as a precursor of financial instabilities.
    Date: 2015–04
    URL: http://d.repec.org/n?u=RePEc:arx:papers:1504.02280&r=fmk
  3. By: Andres Herrera (Departamento de Economía - Pontificia Universidad Católica del Perú); Gabriel Rodríguez (Departamento de Economía - Pontificia Universidad Católica del Perú)
    Abstract: Though the econometrics literature on this area is extensive, in Peru few studies have been dedicated to the analysis of Önancial returns in general and volatility in particular. As part of an empirical research agenda suggested by Humala and RodrÌguez (2013), this paper represents one of the Örst attempts to distinguish between long- and short-memory (with level shifts) in volatility of Peruís stock market and exchange rate returns. We utilize the statistical approach put forward by Perron and Qu (2010). The data is end-of-day and span the period January 3, 1990 to June 13, 2013 (5,831 observations) for the stock market returns, and January, 3 1997 until June 24, 2013 (4,110 observations) for exchange rate returns. The analysis of the ACF, the periodogram and the fractional parameter estimation for the two volatilities suggest that the theoretical predictions of Perron and Quís simple mixture model (2010) are correct. The results are more conclusive for stock market volatility in comparison with those of the exchange rate. The application of one of the statistics employed by Perron and Qu (2010) suggest the rejection of a long-memory hypothesis for both volatilities. Nonetheless, the other statistics provide weak evidence against the null hypothesis, above all for the exchange rate market. To reinforce the Öndings, some results associated with other investigations are presented. JEL Classification-JEL: C22
    Keywords: Structural Change, Jumps, Long Memory Processes, Fractional Integration, Frequency Domain Estimates, Random Level Shifts, Stock Market and Forex Rate Volatilities in Peru.
    Date: 2014
    URL: http://d.repec.org/n?u=RePEc:pcp:pucwps:wp00393&r=fmk

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