This paper reexamines the apparent success of two prominent stock trading strategies: long-term contrarian and intermediate-term momentum. The paper demonstrates that long-term contrarian is entirely attributable to the classic January size effect, rather than to investor overreaction, as argued by De Bondt and Thaler (1985). Further, the paper also resolves the Novy-Marx (2011) concern about whether return autocorrelation “is really momentum” by demonstrating that the superior performance of intermediate-term momentum is due to strong January seasonality in the cross-section of returns. The implications are that long-term contrarian must be considered largely illusory, and intermediate-term momentum must take account of annual seasonalities in returns.

This study analyzes four distinct types of mutual fund sentiment timing skills using a multifactor framework. Our results indicate a diminished significance of market sentiment timing, in contrast to the results of prior studies. Additionally, we reveal that size and value sentiment timing can substantially enhance fund performance. Managers strategically reduce their exposure to small stocks using size sentiment timing and increase exposure to value stocks through value sentiment timing during high sentiment periods. We find no evidence that mutual fund managers engage in momentum sentiment timing.

Reference dependence, loss aversion, and risk seeking for losses together comprise the preference-based component of prospect theory that sets its value function apart from the standard risk-aversion model. Using an elasticity analysis, we show that this distinctive preference component serves to underpin negative-feedback trading propensities, but cannot manifest itself in behavior directly or holistically at the individual-choice level. We then propose and demonstrate that the market interaction between prospect-theory investors and regular CRRA investors allows this preference component to dominate in equilibrium behavior and hence helps to reestablish the intuitive link between prospect-theory preferences and negative-feedback trading patterns. In the model, the interaction also reconciles the contrarian behavior of prospect-theory investors with asymmetric volatility and short-term return reversal. The results suggest that prospect-theory preferences can lead investors to behave endogenously as contrarian noise traders in the market interaction process.

This paper shows how main bank rent extraction affects corporate decisions about investment and financing during financial regulatory reform. Our model predicts that limited loanable funds can initially contain main bank controlled overinvestment, even when new equity is available to the firm. Abundant funds facilitate overinvestment to the detriment of firm profitability. A shift of control rights back to the firm due to financial deregulation produces an “equity for upside potential and bank debt for downside risk” bias against the banks. A stock market and real estate boom in Japan made it harder than ever for the banks to diversify risk. The insights from this analysis help explain why Japan’s main bank system was beneficial in the (capital constrained) postwar period but became harmful during the (capital abundant and even bubbly) 1980s, and why the adverse shocks of the post-deregulation 1990s had such severe effects on the banking system.

This study explores how Chinese mutual fund managers’ degrees of disagreement (DOD) on stock market returns affect investor capital allocation decisions using a novel text-based measure of expectations in fund disclosures. In the time series, the DOD negatively predicts market returns. Cross-sectional results show that investors correctly perceive the DOD as an overpricing signal and discount fund performance accordingly. Flow-performance sensitivity (FPS) is diminished during high dispersion periods. The effect is stronger for outperforming funds and funds with substantial investments in bubble and high-beta stocks, but weaker for skilled funds. We also discuss the financial sophistication of investors and provide evidence that our results are not contingent upon such sophistication.

This paper builds a novel database on the effects of macroprudential policy drawing from 58 empirical studies, comprising over 6000 results on a wide range of instruments and outcome variables. It encompasses information on statistical significance, standardized magnitudes, and other characteristics of the estimates. Using meta-analysis techniques, the paper estimates average effects to find (i) statistically significant effects on credit, but with considerable heterogeneity across instruments; (ii) weaker and more imprecise effects on house prices; (iii) quantitatively stronger effects in emerging markets and among studies using micro-level data; and (iv) statistically significant evidence of leakages and spillovers. Other findings include relatively stronger impacts for tightening than loosening actions and negative effects on economic activity in the near term.

We document the heterogeneous effects of turnover on mutual fund performance, which help explain the weak cross-sectional turnover-performance relations reported in existing studies. For funds skilled in exploiting short-term investment opportunities, there is a positive empirical relation between turnover and performance. For unskilled funds, the relation turns negative. As a result, performance persistence is stronger among funds with higher turnover. Further, we find that the heterogeneous effects of turnover on performance are not driven by liquidity premium or trade execution skills, but rather due to substantial dispersion in short-term stock selection information.

We investigate a new facet of hedging ability among hedge fund managers. Using a sentiment exposure model, we find evidence that fund managers adjust the market exposure of their portfolios to changes in market sentiment. Out-of-sample evidence indicates that hedge funds having the highest negative sentiment exposure outperform funds having the highest positive sentiment exposure by 1.7%–2.4% per year. The results remain persistent for both the sub-period analysis and the analysis excluding crisis periods. We also find that a hedge fund's willingness to take on sentiment exposure decreases with fund age and fund size and increases with incentive fees. Our findings remain robust even after controlling for hedge fund data biases, as well as using alternative sentiment measures.

This study empirically explores the dynamic relation between the environmental and social (ES) performance of a firm and its stock market returns. We find robust evidence that worse stock market performance increases firms’ efforts on ES activities. Specifically, firms are more likely to improve their product and diversity performance and enhance their ES strengths rather than reduce ES concerns after poor stock market performance. This finding that poor stock market performance precedes enhanced ES performance is present (i) in firms with more financial slack, (ii) in firms with higher customer awareness, (iii) during the post-financial crisis period, and (iv) when a firm's shareholder activism on ES issues is intense. Our results underscore the importance of stock market performance in corporate ES decisions.