Going All In
Asset Demand of U.S. Households
Xavier Gabaix et al.
NBER Working Paper, December 2023
Abstract:
We use novel monthly security-level data on U.S. household portfolio holdings, flows, and returns to analyze asset demand across an extensive range of asset classes, including both public and private assets. Our dataset covers a broad range of households across the wealth distribution, notably including 439 billionaires. This ensures representation of ultra-high-net-worth (UHNW) households that are typically not well covered in survey data. With these data, we study the portfolio rebalancing behavior of households and ask whether (and, if so, which) households play an important stabilizing role in financial markets. Our findings reveal a stark contrast: less affluent households sell U.S. equities amid market downturns, while UHNW households buy and contribute to stabilizing markets. This behavior is more pronounced among households who rebalance their portfolios more frequently. However, the sensitivity of flows to returns is generally quite small and as the trades of different wealth groups partly offset each other, the aggregate household sector plays a limited role to absorb financial fluctuations. To understand the contrasting trading behavior across households, we show that a household's flows to U.S. equities are negatively correlated with its "active returns" (the difference between an investor's return and the market return). However, the flows to U.S. equities of less affluent households are also positively correlated with broad market returns -- perhaps due to shifts in risk aversion, sentiment, or perceived macroeconomic risk -- leading this group of households to act pro-cyclically. Across all asset classes, three factors with intuitive economic interpretations explain 81% of all variation in portfolio rebalancing. Those factors bet on the long-term equity premium, the credit premium, and the premium on municipal bonds. In sum, our framework paints a quantitative picture of U.S. households' assets and rebalancing marked by a great deal of insensitivity and inertia throughout the distribution, even for UHNW households. These new facts are useful for the calibration of macro-finance models with heterogeneous households and multiple risky asset classes.
(Almost) 200 Years of News-Based Economic Sentiment
Jules van Binsbergen et al.
NBER Working Paper, January 2024
Abstract:
Using text from 200 million pages of 13,000 US local newspapers and machine learning methods, we construct a 170-year-long measure of economic sentiment at the country and state levels, that expands existing measures in both the time series (by more than a century) and the cross-section. Our measure predicts GDP (both nationally and locally), consumption, and employment growth, even after controlling for commonly-used predictors, as well as monetary policy decisions. Our measure is distinct from the information in expert forecasts and leads its consensus value. Interestingly, news coverage has become increasingly negative across all states in the past half-century.
Place Your Bets? The Value of Investment Research on Reddit's Wallstreetbets
Daniel Bradley et a;.
Review of Financial Studies, forthcoming
Abstract:
We examine the value of due diligence recommendations on Reddit's Wallstreetbets (WSB) platform. Before the Gamestop (GME) short squeeze, recommendations are significant predictors of returns and cash-flow news. This predictability is eliminated post-GME. Post-GME, the fraction of reports emphasizing price-pressure or attention-grabbing stocks dramatically increases, and the decline in informativeness is concentrated in these reports. Similarly, retail trade informativeness is particularly strong following DD reports in the pre-GME period, but not post-GME. Our findings are consistent with the view that the Gamestop event altered the culture of WSB, leading to a deterioration in investment quality that adversely affected smaller investors.
Fund Flows and Income Risk of Fund Managers
Xiao Cen et al.
NBER Working Paper, December 2023
Abstract:
Investment fund managers make asset allocation decisions on behalf of a significant segment of US households. To elucidate the incentives they operate under, as well as the income and career risks they face, we construct a unique and novel dataset, which encompasses detailed information on the compensation and career trajectories of managers within US active equity mutual funds. The dataset is the first-ever to contain such information, having been compiled based on the US Census Bureau's LEHD program and leveraging various "big" textual data sources. Our causal evidence indicates that, contrary to fund disclosures, managers' pay is primarily driven by Assets Under Management (AUM), with performance influencing compensation only via AUM. Fund flows, although they do not align with client interests, have a significant 6% positive impact on compensation for every one-standard-deviation increase. Systematic flow components impact base salaries, while idiosyncratic elements alter bonuses. Crucially, fund flows, as opposed to fund performance, exert a strong impact on the career outcomes of fund managers, especially concerning their downside career risk. Specifically, large fund outflows elevate a manager's likelihood of job turnover (with a substantial decline in income) by 4 percentage points.
Indexing and the Incorporation of Exogenous Information Shocks to Stock Prices
Randall Morck & Deniz Yavuz
NBER Working Paper, December 2023
Abstract:
Savings increasingly flow to low-cost index funds, which simply buy and hold the stocks in a major index, such as the S&P 500. Increased indexing impedes incorporation of idiosyncratic information into stock prices. We limit endogeneity bias by showing that exogenous idiosyncratic currency shocks induce smaller idiosyncratic moves in the stock prices of currency-sensitive firms in proximate time windows when in the index than when not in it. Increased indexing thus appears to be undermining the efficient markets hypothesis that supports its viability.
The influence of media slant on short sellers
April Knill et al.
Journal of Corporate Finance, February 2024
Abstract:
Using the positive shift in tone of Fox News coverage of macroeconomic news after the Republican Bush election in 2000, we investigate whether media slant influences the investment decisions of short sellers. We find that firms headquartered in Republican-leaning townships with Fox News availability experienced a relative decrease in short interest post the 2000 election. We further find that the relative decrease is more pronounced for firms that are more subject to investors' home bias. We interpret our findings to mean that short sellers, as sophisticated as they may be, are not immune to the slant in media coverage.
Media Attention and Event-Based Grouping of Stocks: An Examination of Stocks Hyped by Media Outlets as Benefiting from the Olympics
Patricia Dechow et al.
Management Science, forthcoming
Abstract:
We examine five summer Olympics and identify stocks that media outlets hype as benefiting from the Olympics (Olympic stocks). There is a seven-year period from the time that a country first learns it has won the Olympic bid to the start of the games (Olympic time period). We predict that the excitement of the Olympics along with the greater media attention impacts the valuation and risk of Olympic stocks. Consistent with this prediction, we show that Olympic stocks earn higher returns than their matched counterparts and comove more strongly with each other over the Olympic time period. Olympic stocks also exhibit increases in trading volume and stock volatility on days when media outlets have stories linking the firm to the Olympic Games. However, we find no evidence that the Olympic Games translate into stronger fundamentals for Olympic firms or stronger fundamental comovements. These findings suggest that investors are not purchasing the stocks based on an analysis of fundamentals, but are purchasing them based on their Olympic attribute. To confirm that event-based groupings occur in other settings, we show that comovement increases for stocks classified by the media as "stay-at-home" stocks at the start of the COVID-19 pandemic.
Are Analyst "Top Picks" Informative?
Justin Birru et al.
Review of Financial Studies, forthcoming
Abstract:
Following the Global Settlement, analysts extensively use a top pick designation allowing for greater granularity of information among buy recommended stocks, but conflicts of interest can potentially influence this designation. Examining a novel sample of top picks, we find that a calendar-time portfolio of top picks generates an abnormal performance of 17.6% per year. Top picks have greater investment value than do buy recommendations and alternative analyst investment strategies. Both institutional and retail investors trade in response to top picks. However, only institutional investors appear to identify top picks that have greater investment value when they are announced.
Investor Regret and Stock Returns
Eser Arisoy, Turan Bali & Yi Tang
Management Science, forthcoming
Abstract:
We introduce a measure of regret for stock market investors and investigate its cross-sectional asset pricing implications. According to our regret-based framework, investors experience regret due to not achieving the highest possible return from a similar set of stock investments, and equity portfolios with high regret generate 6.84% more annualized alpha than portfolios with low regret. Using investor-trading activity of 78,000 households at a large U.S.-based brokerage firm, we develop an investor-based regret index and show that this household-level regret measure predicts stock returns in a similar way to our proposed regret measure. We also show that regret is not spanned by established risk or behavioral factors that have been documented to be robust predictors of equity returns.
Disclosure paternalism
Jeremy Bertomeu
Journal of Accounting and Economics, forthcoming
Abstract:
This study presents a model in which behavioral investors shape their current expectations based on statistical analysis of historical non-disclosure events. Investors may hold overly optimistic expectations following a non-disclosure event, thereby disrupting unravelling toward forthcoming disclosures. While a regulator can mandate disclosure, this protective intervention has its drawbacks. Overprotection prevents investors from learning from losses and leads to cycles of high compliance followed by high mispricing when innovations in transactions render current regulations ineffective. An unregulated market, on the other hand, tends toward high transparency over time. The model further explains negative market reactions to regulation, an association between price drift and transparency, reversals in market confidence, and that regulators should favor laissez-faire in times of investor pessimism. Further implications are explored for regulations that facilitate learning and prevent cycles.
Noise in Expectations: Evidence from Analyst Forecasts
Tim de Silva & David Thesmar
Review of Financial Studies, forthcoming
Abstract:
Analyst forecasts outperform econometric forecasts in the short run but underperform in the long run. We decompose these differences in forecasting accuracy into analysts' information advantage, forecast bias, and forecast noise. We find that noise and bias strongly increase with forecast horizon, while analysts' information advantage decays rapidly. A noise increase with horizon generates a mechanical reversal in the sign of the error-revision (Coibion-Gorodnichenko) regression coefficient at longer horizons, independently of over-/underreaction. A parsimonious model with bounded rationality and a noisy cognitive default matches the term structures of noise and bias jointly.