Aneel Keswani

The relationships between sentiment, returns and volatility

Previous papers that test whether sentiment is useful for predicting volatility ignore whether lagged returns information might also be useful for this purpose. By doing so, these papers potentially overestimate the role of sentiment in predicting volatility. In this paper we test whether sentiment is useful for volatility forecasting purposes. We find that most of our sentiment measures are caused by returns and volatility rather than vice versa. In addition, we find that lagged returns cause volatility. All sentiment variables have extremely limited forecasting power once returns are included as a forecasting variable.

How Real Option Disinvestment Flexibility Augments Project Npv

In this article by drawing together existing option pricing models we demonstrate how different degrees of managerial flexability can affect the value of a project. In particular we also include new option pricing results that allow us to properly take into account a firms exit option. Our paper illustrates that these disinvestment options can be valuable suggesting that managerial pessimism (i.e. consideration of outcomes if the project does not perform) can add value.

Surprise vs. Anticipated Information Announcements: Are Prices Affected Differently? An Investigation in the Context of Stock Splits

We compare the long run reaction to anticipated and surprise information announcements using stock splits. Although there is underreaction in both cases, anticipated splits are treated differently to those that are unforeseen. After anticipated splits, cumulative abnormal returns peak at one-and-a-half times the level observed after unanticipated splits although the time taken for the announcement to be absorbed into prices is the same. We explain the difference in underreaction by the degree to which split announcements are believed and hence invested in. The favorable signal conveyed in forecast splits is more credible owing to their better pre-split performance, resulting in a far more pronounced underreaction effect.

Frenemies: How Do Financial Firms Vote on Their Own Kind?

The financial sector is unique in being largely self-governed: the majority of financial firms’ shares are held by other financial institutions. This raises the possibility that monitoring of financial firms is especially undermined by conflicts of interest due to personal and professional links between these firms and their shareholders. To investigate this possibility, we scrutinize the aspect of the financial sector’s self-governance that is directly observable: mutual fund companies’ voting of their peers’ stock. We find that considerations specific to investee firms’ membership in the same industry as their investors do indeed impact voting. This impact is in the direction of supporting the investee’s management. We show that the own-industry effect reduces director efficacy and lowers firm value as a result. We extend our analysis to other financial companies and show that they also tend to vote more favorably when it comes to their peers. Our results suggest that peer support is a corrupting factor in the financial sector’s governance.

Downside Risk, Liquidity and the Size of Credit Spreads

We use a panel of investment-grade bonds to investigate why credit spreads are so much larger than expected losses from default. We find that systematic factors contribute little to spreads, even if higher moments or downside effects are incorporated. Instead, two idiosyncratic risk factors, bond volatility and bond value-at-risk (BVaR), have surprisingly strong explanatory power, even after controlling for equity volatility (as used by Campbell and Taksler, 2003). Bond volatility helps explain spreads because it proxies for liquidity risk. BVaR’s explanatory power is due to the risk-neutral left-skewness of firm value, which makes a large contribution to spreads, particularly for the highest-rated bonds. Overall, credit spreads are large mainly because investors are averse to extreme losses on the downside.