Behavioral Finance Meeting
The NBER Group on Behavioral Finance held its fall meeting in Cambridge on December 9. Robert J. Shiller, NBER and Yale University, and Richard H. Thaler, NBER and University of Chicago, organized this program:
Joseph Chen and Harrison Hong, Stanford University, and Jeremy C. Stein, NBER and MIT, "Forecasting Crashes: Trading Volume, Past Returns, and Conditional Skewness in Stock Prices"
Discussant: Kent Daniel, NBER and Northwestern University
Narasimhan Jegadeesh, University of Illinois, and Sheridan Titman, NBER and University of Texas, "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations" (NBER Working Paper No. 7159)
Discussant: Werner Debondt, University of Wisconsin
Malcolm Baker, Harvard University, and Jeffrey Wurgler, Yale University, "The Equity Share in New Issues and Aggregate Stock Returns"
Discussant: Robert J. Shiller
Shlomo Benartzi, University of California; Los Angeles, "Why Do Employees Invest Their Retirement Savings in Company Stock?"
Discussant: Andrei Shleifer, NBER and Harvard University
Brad M. Barber and Terrance Odean, University of California, Davis, "Online Investors: Do the Slow Die First?"
Discussant: Kenneth R. French, NBER and MIT
Randall Morck, Harvard University; Bernard Yeung, University of Michigan; and Wayne Yu, Queens University, "The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?"
Discussant: Kenneth A Froot, NBER and Harvard University
Chen, Hong, and Stein investigate the determinants of asymmetries in stock returns. With a series of cross-sectional regression specifications, they attempt to forecast skewness in the daily returns of individual stocks. Negative skewness is most pronounced in stocks that have experienced an increase in trading volume relative to trend over the prior six months and positive returns over the prior 36 months. The first finding is consistent with a model predicting that negative asymmetries are more likely to occur when there are large differences of opinion among investors. The latter finding fits with a number of theories. Analogous results also obtain when the authors attempt to forecast the skewness of the aggregate stock market, although here their statistical power is limited.
Jegadeesh and Titman evaluate various explanations for the profitability of momentum strategies. Evidence indicates that momentum profits have continued in the 1990s, which suggests that the original results were not a product of data snooping bias. The authors also examine the predictions of recent behavioral models that propose that momentum profits are attributable to delayed overreactions that are eventually reversed. This supports the behavioral models, but this support should be taken with caution, Although the authors find no evidence of significant return reversals in the two to three years after the following formation date, there are significant return reversals four to five years after the formation date. The authors' analysis of post-holding period returns sharply rejects a claim in the literature that the observed momentum profits can be explained completely by the cross-sectional dispersion in expected returns.
The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. …