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Abstract:
This paper asks whether momentum and post-event drift are manifestations of the same underlying mechanism or whether they are separate phenomena. We find that both effects can be attributed to persistence in returns following news which affects expected earnings or earnings growth. Holding these quantities fixed, there is no momentum effect, nor is there post-event drift for our sample of events.

momentum, underreaction, post-event drift

Abstract:
Improvements in technology and increasing emphasis on performance have led many investors to monitor the performance of fund managers on a high frequency basis: quarterly, monthly, or more often. We examine the impact that frequency of performance measurement has on the probability distribution of observed outcomes. With more frequent monitoring of rolling returns, there is a greatly increased probability of observing seemingly extreme results. We show that if performance is appraised by focusing on returns to date, then it is important to adjust the definition of extreme performance for the frequency with which returns are monitored. Failure to do so may lead to costly actions such as strategy revisions or manager terminations, which increase transaction costs and have detrimental effects on manager incentives.

Performance measurement, Investment management, High frequency monitoring

Abstract:
Improvements in technology and increasing emphasis on performance have led many investors to monitor the performance of fund managers on a high frequency basis: quarterly, monthly, or more often. We examine the impact that frequency of performance measurement has on the probability distribution of observed outcomes. With more frequent monitoring of rolling returns, there is a greatly increased probability of observing seemingly extreme results. We show that if performance is appraised by focussing on returns to date, then it is important to adjust the definition of extreme performance for the frequency with which returns are monitored. Failure to do so may lead to costly actions such as strategy revisions or manager terminations, which increase transaction costs and have detrimental effects on manager incentives.

Performance measurement; Investment management; High frequency monitoring

Abstract:
Behavioural models generally require that the investment decisions of irrational investors aggregate in a systematic way. Using a unique Australian dataset of individual investor trades I investigate the plausibility of this assumption. I find that aggregate individual investor trades do indeed exhibit strong systematic patterns, including negative feedback trading and substantial persistence. In addition the weekly cross-sectional net trades of a large number of independent retail brokerage firms are contemporaneously correlated to a remarkable extent. Thus the aggregation assumption appears plausible.

However I do not find that the net trades of retail investors consistently predict future returns in a negative fashion. In fact over the period 1991-2002, the net trades of full-service brokerage clients actually positively forecast future short-term market and cross-sectional returns. While small investors do act in a highly systematic fashion, their actions may not, at least in the short run, be classed as irrational.

Individual Investors, Small Investors

Abstract:
This paper examines the trade-generation and reputation-building incentives facing sell-side analysts. I demonstrate empirically that optimistic analysts generate more trade for their brokerage firms, as do high reputation analysts. Thus the analyst faces a conflict between telling the truth to build her reputation, and misleading investors via optimistic forecasts to generate short-term increases in commission. When the investor is unsure of the analyst's type, and when short sales constraints are present, I show using a simple model that equilibrium forecast optimism can exist, even when investment-banking affiliations are removed. Further tests support the model's analysis of the information game. The conclusions may have important policy implications for the recently proposed changes to the institutional structure of the broking industry.

trade generation, sell-side analysts, reputation

Abstract:
Using a unique dataset of individual investor trades, this paper examines whether there is evidence of noise trader risk in a broad equity market context. The paper finds evidence of excess volatility and excess correlations between stocks. Additionally factor-pricing tests reveal strong evidence of a significant priced noise trader factor in returns. The paper concludes that there is evidence of noise trader risk, however this risk is not associated with individual investors, but instead with institutional investors. Institutional frictions such as common investment strategies, performance related mutual fund flows and career concerns are a much more plausible source of noise trader risk than is individual investor sentiment.

Noise trader risk, individual investors, institutional frictions, sentiment, excess volatility, co-movement