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BH-3: Behavior and Investment
Anomalies Across the Globe: Once Public, No Longer Existent?
1University of Mannheim; 2German Graduate School of Management and Law
Motivated by McLean and Pontiff (2016), we study the pre- and post-publication return predictability of 231 cross-sectional anomalies in 39 stock markets. Based on more than two million anomaly country-months, we find that the United States is the only country with a reliable post-publication decline in long/short returns. Collectively, our insights have implications for the recent literature on arbitrage trading, anomaly data mining, market segmentation, and the meta-analysis of return predictors.
The Dividend Disconnect
1University of Chicago; 2University of Southern California
We show that many individual investors, mutual funds and institutions trade as if dividends and capital gains are in separate mental accounts, and do not fully appreciate that dividends result in price decreases. Behavioral trading patterns (e.g. the disposition effect) are driven by price changes, not total returns. Investors treat dividends as a separate stable income stream, leading them to hold dividend-paying stocks longer and respond less to price changes. Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to high valuations and lower future returns for dividend-paying stocks. Investors rarely reinvest dividends into the stocks from which they came, instead purchasing other stocks. This creates predictable marketwide price increases on days of large aggregate dividend payouts, concentrated in stocks not paying dividends.
Purging Investor Sentiment Index from Too Much Fundamental Information
1Singapore Management University; 2Southwestern University of Finance and Economics
Numerous studies treat the Baker and Wurgler (BW) investor sentiment index as a behavioral variable. However, they could all be misleading since the BW sentiment index seems dominated by fundamental information. Using a novel approach, we remove more than 60% fundamental related information out of the BW sentiment index to obtain a purged sentiment index. Empirically, the purged sentiment index outperforms the original contaminated BW sentiment index in capturing the sentiment impact on cross-sectional stock returns and also beats various survey-based sentiment indices. Therefore, to avoid the risk of producing misleading results based on the contaminated BW sentiment index, the purged sentiment index could serve as a safer choice for sentiment studies.
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Conference: EFA 2017
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