Nivine Richie

Overreaction of Exchange-Traded Funds During the Bubble of 1998-2002

This study of overreaction is motivated by the unique characteristics of exchange-traded funds (ETFs), which should contribute to market efficiency. Since ETFs represent portfolios of stocks, they may not be as susceptible to short-term overreaction as individual stocks. In addition, they can be traded throughout the day and can be sold short, which might further limit potential overreaction. Yet, the tradability of ETFs may allow unusual pressure on ETF prices that is not initiated by price movements of all the component stocks. We find substantial overreaction of ETFs during normal trading hours (9:30 a.m. to 4 p.m.) and after hours, which presents opportunities for feedback traders. Extreme price movements of ETFs occur more frequently after hours. Yet, the after-hours correction of extreme price movements that occurred that day is more pronounced than the day correction of extreme stock price movements that occurred in the previous after-hours period, even after controlling for ETF type and other potential confounding effects. The degree of overreaction is also more pronounced for international ETFs.

High-Frequency Trading: Implications for Markets, Regulators, and Efficiency

The sharp rise in high-frequency trading in recent years has caused average trade horizons to fall as traders attempt to exploit fleeting inconsistencies in prices with the aid of powerful computers and equally powerful algorithms. This practice is now poised to dominate the regular volume of order flow. More seriously, it brings into perspective issues such as induced excess volatility, whether the playing field is level for all market participants, and even the informational efficiency of security markets. In this article, the authors review what high-frequency trading is, and explore the links between such trading and market efficiency and volatility. Finally, they assess the potential for further trading practices to emerge, the likes of which most observers would not have imagined as feasible even 10 years ago.

The impact ofMad Money recommendations during bull and bear markets

Purpose - – The purpose of this paper is to examine semi-strong market efficiency by observing the behavioral finance implications of Jim Cramer’s recommendations in bull vs bear markets. The authors extend the literature by analyzing investor reaction through the lenses of prospect theory, overreaction, and herding. Design/methodology/approach - – The authors test for abnormal returns in response to Findings - – The results indicate market inefficiency at the semi-strong level. Furthermore, the findings highlight the loss aversion tendencies of investors in regards to prospect theory of Kahneman and Tversky (1979) as well as the disposition effect of Shefrin and Statman (1985). Evidence also exists consistent with the herding and overreaction hypotheses. Practical implications - – The evidence suggests contrarian behavior in which investors respond positively to good news in bad times – perhaps, in effort to stay the course and at least break even. This behavior may suggest that losers tend to hold on to losses in hopes of recouping them. Thus, positive information in bad times could further persuade market participants to hang on to or buy more of losers, while also persuading non-shareholders to buy in as well. Originality/value - – Though other studies including Kenny and Johnson (2010) have estimated abnormal returns in response to analyst recommendations, to the knowledge, none has examined behavioral implications of investor reaction to buy and sell recommendations in both bull and bear markets. Furthermore, the study captures a longer bull and bear market and covers two definitions of such markets.

Takeovers of targets lacking analyst coverage

We hypothesise that the market for targets that are uncovered (do not receive analyst coverage) is not as competitive as the market for targets that are covered (receive analyst coverage). We find that valuation effects are more favourable (or less unfavourable) for bidders that pursue uncovered targets while controlling for other factors. Furthermore, the adverse effect of relatively large deal size on bidder valuation effects is reduced when the target is not covered. Overall, the results suggest that the market for uncovered targets is less competitive. While some bidders may screen these targets out because of their limited visibility, transparency and information, bidders that pursue uncovered targets may be able to extract hidden value, and therefore offset the high premium paid for targets.

Fragmentation of Day versus Night Markets

Stock markets during the day are relatively centralized, while night markets, due to the dominance of electronic trading venues, are fragmented. Though electronic markets at night allow more competition for order flow, they may result in decreased order interaction and decreased transparency. Using transaction data for three exchange traded funds (ETFs), we find that bid–ask spreads are wider at night due to higher order processing costs, market maker rents, and inventory holding costs. Results show that night markets are informationally fragmented and are not able to impound information available in net order flow to the same degree as day markets.