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The Disposition effect and Underreaction to news

The Disposition effect and Underreaction to news. Abdullah Al-Ashi Jungha Woo Muna Albasman Talha Yasin. Progress. We are currently focusing on correctin g/producing results from the following tables in the paper,

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The Disposition effect and Underreaction to news

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  1. The Disposition effect and Underreaction to news Abdullah Al-Ashi Jungha Woo Muna Albasman Talha Yasin

  2. Progress • We are currently focusing on correcting/producing results from the following tables in the paper, • Table IV: Post-Earning announcement drift, monthly alphas (2003-2009) – sorted using CAR only • Table V: Overhang Spread and Negative Overhang Spread Alphas (2003-2009) – sorted using CAR and Gt • Completed portfolio sorting, returns calculation and regression of results in SAS • The results come out to be the same as done in MATLAB. • Analysis of the data for trends as to why we are performing below market. • Found some problems in the data which might be leading to poor performance. • Calculation of CAR based returns from 1980-2002, not completed but data gathered and code is running.

  3. Table IV • Sorting by CAR to make portfolios and do regression. • SAS results match MATLAB, and are still far from the paper results. • Results using unadjusted prices though, are similar to the paper. • Sorting by CAR seems to have the desire effect when using unadjusted prices. • Could be due to the fact that higher returns around earnings report indicative of higher dividend and not stock price.

  4. In monthly percent Unadjusted Prices Used

  5. In monthly percent

  6. Hypothesis • HYPOTHESIS UR (UNDERREACTION):When most of the current holders are facing a capital loss, stock prices underreact to negative news and in turn generate a negative post-announcement price drift. When most of the current holders are facing a capital gain, stock prices underreact to positive news and in turn generate a positive post-announcement price drift. Moreover, holding the news constant, the capital gains overhang forecasts post-event returns. • A long–short strategy, in which a long position in good news stocks is offset by a short position in negative news stocks, should yield higher returns. • Overhang Spread:A portfolio that is long good news stocks with the largest paper gains, and short bad news stocks with the largest paper losses should yield the best returns.

  7. Table V In monthly percent Using adjusted prices does not confirm Hypothesis whereas adjusted does!

  8. Issues Identified • Holding information:Some companies do not have price or holding information. Whether or not to eliminate them from consideration. No of permnos for each mindate with holdings data:9163 No of permnos for each mindate with a calculated CAR:8252, No of permnos for which prices also exist:7907 • Prices Adjustment:Whether to use adjusted prices or not! Unadjusted prices yield results close to the paper and sorting by CAR has a positive effect. • Older CAR Values:Thefinal table has ~450,000 entries. Out of them 306,000 have ‘latest’ CAR older than 1 month, 171,00 having CAR older than 2 months. Similarly for Gt, the latest RPt for 208,000 is >1 month old,  and 107,000 >2 months old. If you want to take advantage of post-earnings announcement drift anomaly(PEAD),then taking the position one  month later means if PEAD exists, you might be hurting yourself rather than taking advantage of the drift. • Case by Case Analysis: We have started working on this, following are some cases.

  9. Peaked at Nov 2006, Then dropped. PERMNO 91435

  10. Permno 89962: Luminent Mortgage Capital INC (LUM)

  11. Permno 86290 CVD Equipment Corporation (CVV)

  12. PERMNO 88330

  13. Further Work • Calculation of CAR based returns from 1980-2002, not completed but data gathered and code is running. • More case by case analysis on the data is needed to figure out exactly why we are performing below market. • If we can eliminate the issues pointed out we might be able to improve the results. • All rolling period returns calculation.

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