Psychological Factors Stock Price Paths And

8/14/2019 Psychological Factors Stock Price Paths And

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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)



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´



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



What is the idea?

3

6

7

/ / 6/ / 7/ 7/ / 7/ / / / / / / 3/ / / 6/ 6/ 3/

6

V e

se

Investors who bought in May-June 01, are more likely

to sell when the next high is hit (May-June 2002)

AMEX:ECO



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



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.



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



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



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)



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.)



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



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.



Full fledged V AR model

criteriaIviadetermined)(L,lagsof Number

,,er

,,,,,

01

T

t

mt

M

m

ml t

L

l

l t

t

T

t

t t t t t t

X Y Y

Fir mDummymmy Ind u str yDul ess

Exposure PRIORMIN PRIORMAX ret ret TO

!

!

§§ 5*!

!

!

H



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.



Net picking: AMEX:ECO Average analyst¶ ranking ~4 5 (run away!), worst CAN Au firm

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