Financial Bubbles
19 important questions on Financial Bubbles
In Hussam, Porter and Smith(2008) they make 3 changes to the experimental design of the study. what 3 changes are these?
70 once-experienced subjects reallocated into different groups for a third session.
2 Increased variance of the dividend distribution:
Baseline: four potential outcomes (0, 8, 28, 60); E(div) = 24. Rekindle treatment: five potential outcomes (0, 1, 8, 28, 98); E(div) = 27.
3 Increased liquidity in the market:
Increased initial cash positions. Reduced number of outstanding stocks.
If we think about time series and price deviation from fundamental value.
what does amplitude mean?
what does duration mean?
what does turnover mean?
what doe market value amplitude mean?
1 Amplitude: the trough-to-peak change in market asset value relative to fundamental value.
2 Duration: the number of periods in which there is an increase in market prices relative to fundamental value.
3 Turnover: the volume of trade relative to the total outstanding stock in the experiment.
4 Market value amplitude: the normalized market value of trade (weight each period amplitude by the volume of trade).
Hussam , Porter , Smith (2008):
what is the results if we regress amplitude , duration , turnover and market value on experience. for the baseline treatment
similarly what are the effects for the rekindle treatment?
Baseline treatment: Experience significantly reduces the amplitude, duration, turnover and market value amplitude of a bubble.
Rekindle treatment: Amplitude and turnover similar to those of inexperienced subjects. Significantly reduced duration and market value amplitude, but not as large as the reductions in the twice-experienced baseline environment.
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Hussam,Porter and Smith(2008): name 3 forces that result in Forces resulting in rekindling of the bubble.
The values of the parameters chosen for the rekindle treatment may induce bubbles regardless of experience.
The outcomes of the new replication treatments support more the first cause.
Cooper, Dimitrov and Rau (2001) - firm names.
what did they research and what was the outcome.
Ofek and Richardson (2003) bubble explanation What can explain this rise, persistence, and then fall of IT stock prices?
formulate 2 reasons for bubbles.
Asset prices are a weighted average of beliefs about asset payoffs. Investor clienteles: the marginal investor differs across time and markets. Prices move a lot as either optimistic or pessimistic investors enter the market.
2 Short selling restrictions:
Limited supply of asset. Reason why well-funded, pessimistic investors do not push prices back to reasonable levels.
Evidence from IPO lockup period expiration.
what is the IPO lockup period?
describe 3 ways in which the lockup periods end loosens the binding short sale constraint.
Insiders include company founders, managers, employees and venture capitalists.
Lockup period end loosens the binding short sales constraints:
Permanent shift in the amount of available shares in the marketplace.
Shift in the class of investors who may have different beliefs than the current marginal investors.
The new investors are potential sellers (no restriction on buying shares).
Returns and volume around IPO lockup period end.
what can we say with respect to stock price around lockup period end,
the increase in the trading volume and the reduction in short sale constraints?
Ofek and Richardson (2003): Summary.
name 3 findings from Ofek and Richardson
2 Heterogeneity among investors in internet stocks (more retail investors).
3 Lockup expirations contributed to the tech bubble burst.
Griffin, Harris, Shu and Topaloglu (2011).
what are the three main question that they pose?
Examine the roles of individual and institutional investors during the tech bubble: Who bought technology stocks?
Trading patterns around the market peak: who sold stock at the peak?
Are institutional investors trading in the direction of future fundamentals?
Griffin, Harris, Shu and Topaloglu (2011)
On the dotcom bubble.
what can be said about what is being bought in the prepeak by whom
what can be said about stock being bought by institutions?
Prepeak trading and postpeak returns Analysis of the largest 25% of CRSP firms.
In the prepeak, stocks bought by institutions have higher P/S ratios and returns.
Stocks bought by institutions have more negative returns after the peak.
Bubble vs. fundamental mechanics.
in what 2 ways do institutional trading move prices away from fundamental value?
1 Overpriced equity carve-outs: Institutions trade in the direction of clear mispricing by aggressively buying overpriced carve-outs before their peak.
2 Trading and news: Institutional trades move with returns on both news and no-news days. Institutions are not simply reacting to fundamentals in the news.
Griffin, Harris, Shu and Topaloglu (2011): Summary
give 3 summarizing results.
Sophisticated investors, like hedge funds, actively purchased technology stocks during the run-up, but reversed course in March 2000, driving the collapse.
Individual investors actively bought during both the run-up and particularly the collapse of technology stocks.
Housing bubble: Cheng, Raina and Xiong (2014).
Wall Street and the housing bubble .
what are the 2 scenarios here? explain both and explain why both can be problematic?
2 If Wall Street DID NOT foresee the U.S. housing bubble crash: Raises fundamental questions regarding how Wall Street employees process information and form beliefs. Incentive problems.
Full awareness hypothesis.
Securitization agents exhibited more awareness of a housing bubble relative to equity analysts and lawyers in four possible forms:
What 4 possible forms?
2 Cautious form - securitization agents were less likely to acquire second homes or move into more expensive homes in 2004–2006.
3 Performance - securitization agents had better performance after controlling for their initial holdings of homes at the beginning of 2000.
4 Conservative consumption - relative to their current income, any purchases made by securitization agents during the boom were more conservative. 67 / 78
Cheng, Raina and Xoing(2014)
Transaction intensities: divestures per person per year.
what can be said about higher market intensity ?
a difference between equity nalysts and job losers
Securitization agent job-losers were more likely than equity analyst job-losers to divest a home.
Smaller difference in divestiture intensities between no-job-losers
Cheng, Raina and Xoing(2014)
Understanding purchases by securitization agents.
1.what is the relation between firm specific effects and securitizion agents
2. explain the no location effects
3. what can be said about securitization agent and bubbles?
4. is there a difference in between group , and what is similar?
5. what about strategic default and recourse states?
6. what about the pruchase of condominums?
2 No location effects: securitization agents purchase more aggressively than equity analysts living in New York or South California.
3 Securitization agents were even less aware of the bubble in areas where the bubble was very pronounced relative to areas where the bubble was less pronounced.
4 No differences in financing between the groups:
- Similar interest rates.
- Similar loan-to-value ratio.
- Not withdrawing more equity after purchase.
5 No strategic defaults in nonrecourse states.
6 More purchases of condominiums to rent rather than for living (consumption).
What is Net trading performance
For net trading performance.
what does are the effects and experiences for the different groups.
what is the difference in buy and hold returns
and what other difference are we looking for?
Securitization group experienced 4.5% lower returns than the equity analyst group
- Difference in buy-and-hold returns of 1.7%.
- Difference in net trading performance of 2.7%.
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