Disagreement, Tastes, and Asset Prices

Confused about the differing assumptions of pricing models? More than likely you know that the assumptions don’t hold very well and you probably know much research has looked at how the assumptions matter. Fama and French now provide a framework to hopefully make sense of some of this confusion. In a working paper they show that investor tastes and expectations matter. For … [ Read more ]

IPO Pricing in “Hot” Market Conditions: Who Leaves Money on the Table?

Two concerns IPO researchers have are the apparent short-run underpricing (the stock trades up in the secondary market) and the longer run underperformance (stock falls during long event window). Previous research has been only partially successful in explaining the continued existence of these two conflicting and seemingly contradictory anomalies. Some of these previous attempts include Chowdry and Nanda 1996 who show that … [ Read more ]

Moral Hazard: A Novel

This short, self-assured novel by Australian-born Jennings (Snake) brilliantly depicts the complicated life of a working woman on Wall Street during the dot-com boom. Cath, a freelance writer in her 40s, is married to Bailey, who’s 25 years her senior. When he develops Alzheimer’s, she takes a speech-writing job at an investment bank to pay for his expensive medical care. Wry but realistic, and realizing … [ Read more ]

Ruben Vardanian at the Helm of Troika Dialog

Ruben Vardanian, CEO of Troika, is a “Golden Boy of Russian capitalism”. Unlike his fellow members of the Russian oligarchs’ club, Vardanian started from scratch and climbed upwards. This case, Ruben Vardanian at the Helm of Troika Dialog by Stanislav Shekshnia, Adjunct Professor of Entrepreneurship at INSEAD with Manfred Kets de Vries, Raoul de Vitry d’Avaucourt Professor of Human Resource Management at INSEAD scrutinizes Vardanian’s … [ Read more ]

Confidence in the Familiar: An International Perspective

Investors have long exhibited a “home country bias” whereby they hold more shares of firms from their own country than would seem warranted based off of typical diversification theory. This seeming anomaly has been partially explained in many ways (my favorite is Butler’s view that when markets fall, the correlation is actually greater than the long run correlation, hence overstating the value of diversification). … [ Read more ]

Analyzing the Analysts: When do Recommendations Add Value? (.pdf)

This one is a must for any investment class! Jegadeesh, Kim, Krische, and Lee provide a fascinating look at investment analysts. They study stock analyst recommendations. Some of their findings are that analysts tend to prefer glamour stocks (higher growth and with momentum), and firms with whom the analyst’s firm has an investment banking relationship. Additionally, changes in analyst recommendations tend … [ Read more ]

Modeling the bid/ask spread: Measuring the inventory-holding premium (.pdf)

This article models (and tests!) the bid/ask spread of stock trades and models it as a function of “minimum tick size, order-processing costs, inventory holding costs, adverse selection costs, and competition.” VERY cool. And the model even seems to work empirically! [FinanceProfessor.com Annotation]

Stock Prices and IPO Waves (.pdf)

Pastor and Veronsi explain IPO waves by creating a model of “optimal IPO timing.” Their model predicts that firms will be more willing to issue shares when the required returns are lower, when the firm’s expected cash flows are higher (which could be interpreted at there being more positive investment opportunities-and therefore likely a greater need for cash), and “when the uncertainty surrounding … [ Read more ]

The Impact of Market Design and Institutional Features on World Equity Market Performance: The Relation Between Market Design

Westerholm, Swan, and Liu look at how market design impacts how the market operates. That is, there is a tradeoff between transaction costs and volatility. Having dealers available to trade continually increases expenses, which in turn lead to larger spreads (transaction costs) for these so-called continuous dealer markets. On the other hand in return for these larger spreads, the dealers do help … [ Read more ]

The Impact of Clientele Changes: Evidence from Stock Splits

A stock split occurs when a company changes the number of shares it has outstanding. For example, suppose the firm had 1 million shares outstanding and then announced a 2:1 split. The firm would now have 2 million shares outstanding. It is not surprising that the stock price drops after the split, but what continues to leave researchers puzzled is why there … [ Read more ]

The Greening of American Capitalism

Could Wall Street become the vanguard of environmental activism?

Risks For the Long Run: A Potential Resolution of Asset Pricing Puzzles

That the volatility of the equity risk premium and the risk-free rate are larger than most models predict has long been known and discussed (for example the seminal Mehra and Prescott 1985 paper). Bansal and Yahon try their hands at explaining why this puzzle exists (their paper will appear in an upcoming Journal of Finance (JF)). They model the “consumption and dividend … [ Read more ]

Can the Market Add and Subtract? Mispriced Stocks Break the Rules of Efficient Markets

According to the law of one price, identical assets should have identical prices. Driving this law is arbitrage, in which an investor buys and sells the same security for two different prices to make a profit. In a well functioning capital market, arbitrage prevents the law of one price from being broken, and in fact, violations of the law are rarely seen.