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Psychological factors,stock price paths, and
trading volumeSteven Huddart (Penn State),
Mark Lang (UNC Chapel Hill),and Michelle Yetman (UIowa)
Discussed by Andrei Simonov
(Stockholm School of Economics)
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Why should we care?
Disposition effect: reference point is purchase price of
the stock (Shefrin & Statman (85), Odean 98) Note: disposition effect tends to disappear within ~ 240 trading
days (Jackson, 2002)
Search story: small investors are net purchasers on thedays when stock is in the news (Barber& Odean 2002)
Option exercise literature: Heath, Huddard and Lang(99), Core & Guay (01), Potesman & Serbin (01)
Ferris, Haugen & Makhija: trading volume is higher when firm pass previous ´high price´
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This paper...
Builds on Ferris et. al. Convincingly documents the association
between extreme points in past price path and
market volume Suggests the association between behavioral
factors and trading volume
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What is the idea?
3
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Investors who bought in May-June 01, are more likely
to sell when the next high is hit (May-June 2002)
AMEX:ECO
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Volume Leaders: NASDAQ | AMEX | NYSEPrice % Gainers: NASDAQ | AMEX | NYSEPrice % Losers: NASDAQ | AMEX | NYSE
Symbol Name Last Trade Change Volume
CYPB CYPRESS BIOSCI 10-Dec 2.55 1.11 .08% 5 0,880
IAAC INTL ASSETS HLD 10-Dec 2.2 0. .50% ,500
MRAE MIRAE CORP 10-Dec 3.299 0.849 4. 5% 00
CAMZ CAMINUS CORP 10-Dec 3.52 0. 28.00% 15 , 9
EUNI EUNI ERSE INC 10-Dec 5.22 1.1 2 . 0% 942,125
INFT INFORTE CORP 10-Dec 6.94 1.24 21. 5% 4 ,24
ATML ATMEL CORP 10-Dec 3.3 0.55 20.00% 21,521,940
EMMSP EMMIS COMM PR A 10-Dec 37.5 .14 19.58% 2 ,225
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How is it done?
Weekly data in randomly chosen 1000
companies (why not all???? Possible biases asfirms tend to be small), NYAM &NASDAQ
ariables of interest:
PRIORMAX dummy LHIGH=PRIORMAX*MONTH SINCE PRE . HIGH
olume: measured as turnover or ´abnormal´
turnover. Control for ex-div and earning announcement
dates, price($ and relative), etc.
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Model
Essentially, the model estimated is reminiscent of AR with contemporaneous exogenousvariables:
F is STRONGLY significant, Min(t-stat)=14
? A§!
!5
0 L
Lt Lt Lt Lt
t t t
ret ret
Controls PRIORMAX BNVOL
K K
FE
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Critique(1): Logic
Investors want to sell when the price reachesnew high
The more sophisticated investors are, the moreprone they are to behavioral biases (Huddart &Lang 02, Poteshman & Servin, 01)
But... Barber & Odean 02: Unsophisticatedinvestors are net buyers on stock news date
It seems that constant supply of suckers isnecessary to support the story
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Critique: Econometric
Why not full-fledged ARwith past turnover?
Why weekly returns? Is itpossible that we are
missing real max?
Why raw returns? Whatwould happen if returns
are adjusted for marketand especially for momentum?
Date Open Close Adj. Close*
DAILY MAX $4.19 $4.2 $4.2
DAILY MIN $0.9 $1.00 $1.00
WEEKLY MAX $4.19 $4.10 $4.10
WEEKLY MIN $1.05 $1.05 $1.05
Example:
CYPB (CYPRESS BIOSCI)
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What are alternative explanations?
Barber & Odean 2002: news story. Essentially it says that effect of 52 weeks high is self-
reinforcing.
Investors are buying stock which was in the news But being in max. is equivalent in being on the news
(both in High Low section and on Lou Dobbs¶Moneyline, CNBC Power Lunch, etc.)
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Can we test for alternativeexplanations?
My small sample 4 month of daily data Feb-May 2000:
Returns (both raw and market-adjusted), volume,dividend payouts, etc.
Press releases dummy (=1 if release was issuedon that date)
Number of times the company was mentioned inthe press in TV news, etc. (daily)
59 Swedish companies
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Measures of press exposure
I am using abnormal exposure measured asresidual of regression of number of hits on
Log10(MktCap), press releases dummy (same day
and lagged), industry dummies, day of week dummies,market index return, in different combinations (doesnot affect results)
Similar to the measure of abnormal analyst¶ coverage.
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Full fledged V AR model
criteriaIviadetermined)(L,lagsof Number
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ml t
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X Y Y
Fir mDummymmy Ind u str yDul ess
Exposure PRIORMIN PRIORMAX ret ret TO
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H
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Results( ) PRIORMAX is important, PRIORMIN is not. May
be, disposition effect? How to understand Huddart-Lang-Yetman? As
chain
PRIORMAXExposureTurnover
Exposure effect is stronger and on short timehorizon can even drive returns.
So, it is still behavioral, but« Not on sellers¶ buton buyers¶ side.
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Net picking: AMEX:ECO Average analyst¶ ranking ~4 5 (run away!), worst CAN Au firm
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