Department of Finance
London School of Economics
London WC2A 2AE
Phone: +44 (0)20 7849 4634
Heterogeneous Beliefs and Momentum Profits, 2009,
Journal of Financial and Quantitative Analysis 44, 795-822.
Abstract: Recent theoretical models derive return continuation in a setting where investors have heterogeneous beliefs or receive heterogeneous information. This paper tests the link between heterogeneity of beliefs and return continuation in the cross-section of US stock returns. Heterogeneity of beliefs about a firm's fundamentals is measured by the dispersion in analyst forecasts of earnings. The results show that momentum profits are significantly larger for portfolios characterized by higher heterogeneity of beliefs. Predictive cross-sectional regressions show that heterogeneity of beliefs has a positive effect on return continuation after controlling for a stock's visibility, the speed of information diffusion, uncertainty about fundamentals, information precision, and volatility. The results in this paper are robust to the potential presence of short-sale constraints and are not explained by arbitrage risk.
Persistence and Long-term Equity Returns (with Amil Dasgupta and
Andrea Prat), 2011, Journal of Finance 66, 635-653.
Abstract: Recent studies show that single-quarter institutional herding positively predicts short-term returns. Motivated by the theoretical herding literature, which emphasizes endogenous persistence in decisions over time, we estimate the effect of multi-quarter institutional buying and selling on stock returns. Using both regression and portfolio tests, we find that persistent institutional trading negatively predicts long-term returns: persistently sold stocks outperform persistently bought stocks at long horizons. The negative association between returns and institutional trade persistence is not subsumed by past returns or other stock characteristics, is concentrated among smaller stocks, and is stronger for stocks with higher institutional ownership.
The Price Impact of
Institutional Herding (with Amil Dasgupta and Andrea Prat), 2011, Review of Financial
Studies 24, 892-925.
Abstract: In this paper we develop a simple theoretical model to analyze the impact of institutional herding on asset prices. A growing empirical literature has come to the intriguing conclusion that institutional herding positively predicts short-term returns but negatively predicts long-term returns. We offer a theoretical resolution to this dichotomy. In our model, career-concerned money managers interact with profit-motivated proprietary traders and security dealers endowed with market power. The reputational concerns of fund managers imply an endogenous tendency to imitate past trades, which impacts the prices of the assets they trade. We show that institutional herding positively predicts short-term returns but negatively predicts long-term returns. In addition, our paper generates several new testable predictions linking institutional herding, trade volume, and the time-series properties of stock returns.
Does Beta Move with News?
Firm-Specific Information Flows and Learning about Profitability (with Andrew Patton), 2012, Review of Financial
Studies 25, 2789-2839.
Abstract: We investigate whether the betas of individual stocks vary with the release of firm-specific news. Using daily firm-level betas estimated from intra-day prices for all constituents of the S&P 500 index, we find that the betas of individual stocks increase by an economically and statistically significant amount on days of quarterly earnings announcements, and revert to their average levels two to five days later. The increase in betas is greater for earnings announcements with larger positive or negative earnings surprises, for announcements that convey more information about other firms in the market, and for announcements that resolve greater ex-ante uncertainty. Our empirical results are all consistent with a simple learning model in which investors use information on announcing firms to revise their expectations about the profitability of the aggregate economy.
Behavior Reveal Skill? An Analysis of Mutual Fund Performance (with Hao
Jiang), Journal of Finance, forthcoming
Abstract: We uncover a negative relation between herding behavior and skill in the mutual fund industry. Our new, dynamic measure of fund-level herding captures the tendency of fund managers to follow the trades of the institutional crowd. We find that herding funds underperform their antiherding peers by over 2% per year. Differences in skill drive this performance gap: antiherding funds make superior investment decisions even on stocks not heavily traded by institutions, and can anticipate the trades of the crowd; furthermore, the herding-antiherding performance gap is persistent, wider when skill is more valuable, and larger among managers with stronger career concerns.