Complex networks are constructed to study correlations between the closing prices for all US stocks that were traded over two periods of time (from July 2005 to August 2007; and from June 2007 to May ...2009). The nodes are the stocks, and the connections are determined by cross correlations of the variations of the stock prices, price returns and trading volumes within a chosen period of time. Specifically, a winner-take-all approach is used to determine if two nodes are connected by an edge. So far, no previous work has attempted to construct a full network of US stock prices that gives full information about their interdependence. We report that all networks based on connecting stocks of highly correlated stock prices, price returns and trading volumes, display a scalefree degree distribution. The results from this work clearly suggest that the variation of stock prices are strongly influenced by a relatively small number of stocks. We propose a new approach for selecting stocks for inclusion in a stock index and compare it with existing indexes. From the composition of the highly connected stocks, it can be concluded that the market is heavily dominated by stocks in the financial sector.
How does competition in firms' product markets influence their behavior in equity markets? Do product market imperfections spread to equity markets? We examine these questions in a noisy rational ...expectations model in which firms operate under monopolistic competition while their shares trade in perfectly competitive markets. Firms use their monopoly power to pass on shocks to customers, thereby insulating their profits. This encourages stock trading, expedites the capitalization of private information into stock prices and improves the allocation of capital. Several implications are derived and tested.
We provide evidence for the effects of social norms on markets by studying “sin” stocks—publicly traded companies involved in producing alcohol, tobacco, and gaming. We hypothesize that there is a ...societal norm against funding operations that promote vice and that some investors, particularly institutions subject to norms, pay a financial cost in abstaining from these stocks. Consistent with this hypothesis, we find that sin stocks are less held by norm-constrained institutions such as pension plans as compared to mutual or hedge funds that are natural arbitrageurs, and they receive less coverage from analysts than do stocks of otherwise comparable characteristics. Sin stocks also have higher expected returns than otherwise comparable stocks, consistent with them being neglected by norm-constrained investors and facing greater litigation risk heightened by social norms. Evidence from corporate financing decisions and the performance of sin stocks outside the US also suggest that norms affect stock prices and returns.
We analyze time series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each ...other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. The evidence is not consistent with rational expectations representative investor models of returns.
In 2010, Google unexpectedly withdrew its searching business from China, reducing investors’ ability to find information online. The stock price crash risk for firms searched for more via Google ...before its withdrawal subsequently increases by 19%, suggesting that Internet searching facilitates investors’ information processing. The sensitivity of stock returns to negative Internet posts also rises by 36%. The increase in crash risk is more pronounced when firms are more likely to hide adverse information and when information intermediaries are less effective in assisting investors’ information processing. In addition, liquidity (price delay) decreases (increases) after Google's withdrawal.
We propose a latent variables approach within a present-value model to estimate the expected returns and expected dividend growth rates of the aggregate stock market. This approach aggregates ...information contained in the history of price-dividend ratios and dividend growth rates to predict future returns and dividend growth rates. We find that returns and dividend growth rates are predictable with R² values ranging from 8.2% to 8.9% for returns and 13.9% to 31.6% for dividend growth rates. Both expected returns and expected dividend growth rates have a persistent component, but expected returns are more persistent than expected dividend growth rates.
We investigate whether short-termism distorts the investment decisions of stock market-listed firms. To do so, we compare the investment behavior of observably similar public and private firms, using ...a new data source on private U.S. firms and assuming for identification that closely held private firms are subject to fewer short-termist pressures. Our results show that compared with private firms, public firms invest substantially less and are less responsive to changes in investment opportunities, especially in industries in which stock prices are most sensitive to earnings news. These findings are consistent with the notion that short-termist pressures distort investment decisions.
The real value of China’s stock market Carpenter, Jennifer N.; Lu, Fangzhou; Whitelaw, Robert F.
Journal of financial economics,
03/2021, Volume:
139, Issue:
3
Journal Article
Peer reviewed
Open access
What capital allocation role can China's stock market play? Counter to perception, stock prices in China have become as informative about future profits as they ate in the US. This rise in stock ...price informativeness has coincided with an increase in investment efficiency among privately owned firms, suggesting the market is aggregating information and providing useful signals to managers. However, price informativeness and investment efficiency for state-owned enterprises fell below that of privately owned firms after the postcrisis stimulus, perhaps reflecting unpredictable subsidies and state-directed investment policy. Finally, evidence from realized returns suggests Chinese firms face a higher cost of equity capital than US firms.
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