Haim Kedar-Levy

The speed of stock price discovery

We develop closed-form expressions for the path and speed of stock price discovery in a utility-based CAPM with wealth effects. Two investors with uniquely bounded risk-preferences always apply opposite portfolio rebalancing trades. These trades determine the intra-period path and speed of price discovery in a Walrasian, tâtonnement setup. While conditions for maximum speed exist, convergence is rapid over a wide range of endowments and preferences. Convergence to equilibrium is exponential, and its speed depends on endowments, risk-preferences, firm size, and market price for risk. Convergence is not guaranteed, and the conditions for divergence are specified.

Are Individual or Institutional Investors the Agents of Bubbles

Behavioral bubble models typically assume that uninformed trend-chasers, presumably individual investors, cause bubbles, while informed contrarian investors such as institutions, trade against bubbles. DeLong et al. (1990a) highlight that to be considered a “bubble”, the mis-pricing must prevail in a large, diversified portfolio. To meet this criterion, we use a unique dataset of all transactions by investor type for all non-financial Korean firms, and find evidence at odds with such assumptions. Domestic individual investors systematically apply aggressive contrarian trades, while foreign and some domestic institutions are mostly trend-chasers. These findings suggest that institutional investors rather than individuals are agents of bubbles.

A Rational Foundation for Trend-Chasing and Contrarian Trades with Implications for Momentum Anomalies

Trend-chasing and Contrarian are well-documented empirical trading patterns that the literature generally attributes to behavioral biases. In contrast, we argue that both are rational portfolio rebalancing strategies in a dynamic asset allocation framework. Analyzing the interactions between strategies implemented in stocks and bonds, we find that a key parameter is the investors level of relative-risk-aversion versus the market price of risk. Our mapping of preferences to trades fits remarkably well recent empirical findings of time-series momentum and reversal. Specifically, speculators trade like Trend-chasers throughout the momentum phase closing positions once the trend reverses, while hedgers trade like Contrarians. These trades seem to explain time-series momentum.

Price Discovery During Parallel Stock Preopening and Option Trading: A Playground for Manipulators?

Many stock exchanges implement advanced procedures toward preventing manipulative orders from distorting informative price discovery during preopening sessions. Often, such sessions involve both the stock and options markets, with book-based indicative stock prices and traded index options, whose underlying is the indicative index. Significant differences between the options-implied and the indicative indexes may point at either differences in informational efficiencies, or that one of the markets is manipulated. Using a unique dataset, we explore informational (prices) and transactional (liquidity) efficiencies. We find significant price and illiquidity patterns similar to those predicted by theoretical models of manipulation, but also informational inefficiencies.

A Dynamic Equilibrium Model of Bubbles

A discrete-time dynamic asset-pricing model specifies the economic rationale for a rich array of price dynamics. Two boundedly-rational investors with different risk preferences trade periodically, where excess supply is cleared by a tâtonnement. Cast at the core of asset-pricing modelling, this structure allows us to explore price discovery intra-periodically, and over time. If dividends are observable the price converges to Merton’s ICAPM, but if investors rely on past realizations, momentum and reversal patterns emerge, which might escalate to bubbles and crashes. The model features increasing volume but declining liquidity during positive bubbles, and lowest liquidity after negative bubbles.

Herding, Heterogeneity, and Momentum Trading of Institutional Investors Across Asset Classes

This paper examines herding, heterogeneity, and momentum trading of institutional investors in Israel across a broad variety of financial assets. While previous studies typically focus on stocks only, we examine herding patterns, heterogeneity, and momentum trading of institutional investors in five asset classes. We find that during the sample period (1/2002 – 12/2011) large investors tended to herd more than medium and small-size investors. In contrast, small investors used momentum trading patterns more than medium and large-size investors. Homogeneity was found among large investors, especially pension funds, and during the first half of the 2000s, when investors purchased corporate bonds at the expense of government bonds. This phenomenon ended upon the beginning of the subprime crisis and against the backdrop of the financial difficulties of the bond issuers. In those years, panicked investors withdrew funds from the most liquid institutions (study funds), while infusing funds to pension and provident funds due to legally binding arrangements. We attribute some of the heterogeneous trading of the institutional investors, to those factors

Long-Term Predictability in Stock Returns: Past and Future Us Baby-Boom Effects, 1950-2050

Empirical studies demonstrated that US baby boomers consumption and savings ‎patterns have affected economic aggregates over the past decades, among them ‎equity returns. Boomers’ retirement is expected to generate an excess supply of ‎equities until 2050, but its impact varies with the specific population age structure ‎along decades. This paper estimates aging effects on S&P500 returns between ‎‎1950-2050. Calibration for demographic and economic data between 1950-2005 ‎yields model estimates that significantly explain the moving average of S&P500 ‎returns. The present value of expected demographic effects until 2050 suggests ‎that the S&P500 was rationally priced in early 2009, but its subsequent ‎appreciation represents overpricing.‎