Sophie Shive

An Epidemic Model of Investor Behavior

I test whether social influence affects individual investors’ trading and stock returns. In each of the 20 most active stocks in Finland over 9 years, the number of owners in a municipality multiplied by the number of investors who do not own a stock, a measure of the rate of transmission of diseases and rumors through social contact, predicts individual investor trading. I control for known determinants of trade, including daily news, and show that competing explanations for the relation are unlikely. Socially motivated trades predict stock returns, and the effects are not reversed, suggesting that individuals share useful information. Individuals’ susceptibility to social influence has declined during the period, but the opportunities for social influence have increased.

When the Bellwether Dances to Noise: Evidence from Exchange-Traded Funds

We provide novel empirical evidence that arbitrageurs transmit non-fundamental shocks from exchange-traded funds (ETFs) to the broad cross-section of stocks they hold, thus making these shocks systematic. Using a large sample of US equity ETFs from 2006 to 2012, we find a strong relation between measures of ETF activity and return comovement at both the fund level and the stock level, after controlling for time and stock fixed effects and a host of other controls including institutional trading. ETF trading activity increases a stock’s exposure to sentiment risk and makes its loading on lagged market return more negative, suggesting that at least some return comovement is excessive. The effect of ETF activity is stronger among small and illiquid stocks and during periods of turbulent markets. The link between ETF activity and return comovement weakens immediately following the recent flash crash as many high frequency traders who are natural ETF arbitrageurs chose to stay on the sidelines. ∗Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556. Tel. 574-631-8301. Fax. 574631-5544. Email zda@nd.edu or sshive1@nd.edu. Thanks to participants in the State of Indiana Finance Conference and seminar at University of Notre Dame, Malcom Baker, Robert Battalio, Martijn Cremers, Ben Golez, Robin Greenwood, Paul Schultz, Mao Ye, and Xiaoyan Zhang. Errors are ours.We provide novel evidence supporting the notion that arbitrageurs can contribute to return comovement via exchange trade funds (ETF) arbitrage. Using a large sample of US equity ETF holdings, we document the link between measures of ETF activity and return comovement at both the fund and the stock levels, after controlling for a host of variables and fixed effects and by exploiting the ‘discontinuity’ between stock indices. The effect is also stronger among small and illiquid stocks. An examination of ETF return autocorrelations and stock lagged beta provides evidence for price reversal, suggesting that some ETF†driven return comovement may be excessive.

Pricing Kernel Monotonicity and Conditional Information

A large literature finds evidence that pricing kernels nonparametrically estimated from option prices and historical returns are not monotonically decreasing in market index returns. We argue that existing estimation methods are inconsistent and propose a new nonparametric estimator of the pricing kernel that reflects the information available to investors who set asset prices. In simulations, the estimator outperforms existing techniques. Our empirical estimates using SP editorial decision April 15, 2017 by Editor Andrew Karolyi.

Exchange Traded Funds and Asset Return Correlations

We provide novel evidence supporting the notion that arbitrageurs can contribute to return comovement via exchange trade funds (ETF) arbitrage. Using a large sample of US equity ETF holdings, we document the link between measures of ETF activity and return comovement at both the fund and the stock levels, after controlling for a host of variables and fixed effects and by exploiting the ‘discontinuity’ between stock indices. The effect is also stronger among small and illiquid stocks. An examination of ETF return autocorrelations and stock lagged beta provides evidence for price reversal, suggesting that some ETF‐driven return comovement may be excessive.

The Impact of Venture Capital Investments on Public Firm Stock Performance

The aggregate amount of venture capital investments in non-publicly traded firms since 1980 is more than

Patriotism in your portfolio

390 billion. We test two economic hypotheses on the connection between venture capital investment and subsequent firm performance. We find that lagged VC investments scaled by industry assets are negatively related to subsequent firm stock returns after adjusting for other factors. However, not all firms are equally impacted. We find that financially constrained firms suffer the most when new VC money pours into an industry. Firms receiving VC money are active in patent creation which appears to increase innovation pressures on established companies. It appears that the market is slow to incorporate the information contained in the venture capital investments.