Maik Schmeling

Dividend Predictability around the World

We show that dividend-growth predictability by the dividend yield is the rule rather than the exception in global equity markets. Dividend predictability is weaker, however, in large and developed markets where dividends are smoothed more, the typical firm is large, and volatility is lower. Our findings suggest that the apparent lack of dividend predictability in the United States does not uniformly extend to other countries. Rather, cross-country patterns in dividend predictability are driven by differences in firm characteristics and the extent to which dividends are smoothed.

Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades

We study the information content of order flow for future exchange rate movements based on a unique dataset covering a broad cross-section of currency pairs and distinguishing key customer types in currency markets. We sort currencies into portfolios based on lagged order flows, and find economically and statistically significant excess returns of up to 15% per annum for a strategy going long in currencies with recent buying pressure and going short in currencies with recent selling pressure. However, there is substantial heterogeneity across customer types: trading by corporate and private clients is generally not informative and tends to generate negative payoffs. Order flow by asset managers generates the largest portfolio return and forecasts permanent exchange rate changes. Flows by hedge funds also generate a positive portfolio return but only forecast transitory exchange rate movements. Furthermore, currency trading by hedge funds is significantly exposed to default, liquidity, and global volatility risk, which explains part of the forecast power of hedge fund flows for future currency returns. JEL Classification: F31, G12, G15.We study the information in order flows in the worlds largest over-the-counter market, the foreign exchange market. The analysis draws on a data set covering a broad cross-section of currencies and different customer segments of foreign exchange end-users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.

Trader see, trader do: How do (small) FX traders react to large counterparties’ trades?

We show that information about the counterparty of a trade affects the future trading decisions of individual traders. The effect is such that traders tend to reverse their order flow in line with the better-informed counterparties. Informed traders primarily incorporate their own private as well as publicly available information into prices, whereas uninformed traders mainly magnify the effect of the informed. This pattern of interaction among traders extends to different order types: traders treat their own and others’ market orders as more informative than limit orders.

Are All Professional Investors Sophisticated

Abstract Existing empirical evidence is inconclusive as to whether professional investors show more sophisticated behavior than individual investors. Therefore, we study two important groups of professional investors and compare them with laymen by means of a survey covering about 500 investors.We find that some professionals, i.e. institutional investors, behave in a more sophisticated manner than laymen, whereas the less researched investment advisors seem to do even worse. Our survey approach complements available evidence due to its design: it compares professionals with (qualified) interested laymen, it covers six measures of sophisticated behavior, uses several control variables and strictly compares investment decisions in the private domain.

Exchange Rates and Sovereign Risk

We empirically investigate the relation between currency excess returns and sovereign risk, as measured by credit default swap (CDS) spreads. An increase in a country’s CDS spread is accompanied by a contemporaneous depreciation of its exchange rate as well as an increase of its currency volatility and crash risk. The link between currency excess returns and sovereign risk is mainly driven by exposure to global sovereign risk shocks and also emerges in a predictive setting for currency risk premia. Sovereign risk forecasts excess returns to trading exchange rates, volatility and skewness, and is strongly priced in the cross-section of currencies. Moreover, we find that sovereign risk accounts for a large share of carry trade returns, and that carry and momentum strategies generate high (low) returns across countries with high (low) sovereign risk.

Does Central Bank Tone Move Asset Prices

We explore whether the tone of central bank communication matters for asset prices and find that tone changes have a significant effect on equity returns. Stock prices increase when tone becomes more positive and vice versa. Moreover, we find that positive tone changes are associated with increasing bond yields, lower implied equity volatility, lower variance risk premia, and lower credit spreads. Since we also show that tone changes are largely unrelated to current and future economic fundamentals, our results suggest that central bank tone matters for asset prices through a risk-based channel.

Expected Inflation, Expected Stock Returns, and Money Illusion

We show empirically that survey-based measures of expected inflation are significant and strong predictors of future aggregate stock returns in several industrialized countries both in-sample and out-of-sample. By empirically discriminating between competing sources of this return predictability by virtue of a comprehensive set of expectations data, we find that money illusion seems to be the driving force behind our results. Another popular hypothesis inflation as a proxy for aggregate risk aversion is not supported by the data. JEL-Classification: G10, G12, E44

Global Asset Allocation Shifts

We show that global asset reallocations of U.S. fund investors obey a strong factor structure, with two factors accounting for more than 90% of the overall variation. The first factor captures switches between U.S. bonds and equities. The second reflects reallocations from U.S. to international assets. Portfolio allocations respond to U.S. monetary policy, most prominently around FOMC events when institutional investors reallocate from basically all other asset classes to U.S. equities. Reallocations of both retail and institutional investors show return-chasing behavior. Institutional investors tend to reallocate toward riskier, high-yield fixed income segments, consistent with a search for yield.

Short-term Momentum

We document a striking pattern in U.S.and international stock returns: Double sorting on last month’s return and share turnover reveals significant short-term reversal among low-turnover stocks whereas high-turnover stocks exhibit short-term momentum. Short-term momentum is as profitable and as persistent as conventional momentum, but is only weakly correlated with conventional price- and earnings momentum strategies. It also survives transaction costs and is strongest among the largest, most liquid, and most extensively covered stocks. Our results are difficult to reconcile with purely rational models but are suggestive of an explanation based on some traders underappreciating the information conveyed by prices.

Dissecting Announcement Returns

We develop a model with informationally heterogeneous investors to explain return predictability on and after earnings announcements. We find evidence for the model’s key predictions: (1) Announcement returns are on average positive even though earnings surprises are mean-zero; (2) Firms with more uncertain fundamentals earn higher announcement returns; (3) Announcement returns predict fundamentals and price drifts but (4) most of the predictive power comes from announcement returns unrelated to earnings surprises; (5) A factor based on announcement returns unrelated to earnings surprises is highly profitable and subsumes momentum. Our results provide strong evidence that investors disagree about the information conveyed by announcements.