{"title":"Market neutrality and beta crashes","authors":"Xia Xu","doi":"10.1016/j.jempfin.2024.101577","DOIUrl":"10.1016/j.jempfin.2024.101577","url":null,"abstract":"<div><div>Market neutrality is a key feature of <span><span>Frazzini and Pedersen (2014)</span></span>’s betting-against-beta (BAB) factor. However, we find that BAB fails to remain market neutral in practice, and the deviations from market neutrality often arrive in the shape of crashes. BAB resembles momentum in terms of option-like payoffs, exhibiting significant exposure to large market movements. Particularly, BAB effectuates negative market timing and negative volatility timing amid volatile markets, promoting BAB crashes. The concern of imperfect market neutrality is shared by a broad range of beta arbitrage strategies that are aimed at being market neutral. The strategy’s vulnerability to bull markets is not fundamentally explained by the liquidity and leverage rationale. Managing beta crashes significantly improves investment performance.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"80 ","pages":"Article 101577"},"PeriodicalIF":2.1,"publicationDate":"2025-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143167422","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Geographical proximity, cultural familiarity and financial information production","authors":"Han Hao , Chun Liu , Shunzhi Pang","doi":"10.1016/j.jempfin.2024.101576","DOIUrl":"10.1016/j.jempfin.2024.101576","url":null,"abstract":"<div><div>This paper examines the distinct impacts of geography and culture on financial information production. Utilizing data from LinkedIn, we categorize Chinese-concept stock analysts into two groups: those working in China and those with a Chinese cultural background. We identify two sources of local advantages: geographical proximity, stemming from the information-access channel, and cultural familiarity, originating from the information-process channel. Additionally, our findings indicate that local advantages reduce stock return synchronicity, and investors can recognize revisions made by geographically proximate analysts.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"80 ","pages":"Article 101576"},"PeriodicalIF":2.1,"publicationDate":"2025-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143167425","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"A revisit to bias-adjusted predictive regression","authors":"Ke-Li Xu","doi":"10.1016/j.jempfin.2024.101578","DOIUrl":"10.1016/j.jempfin.2024.101578","url":null,"abstract":"<div><div>We consider robust inference of predictive regression based on bias correction. We propose new variance estimators which can accommodate conditionally heteroskedastic and serially correlated errors, and predictors with unspecified dependence structure. We also present a previously overlooked robustness property of the existing variance estimator. Empirically we illustrate the methods with a classical application to stock return and dividend growth predictability.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"80 ","pages":"Article 101578"},"PeriodicalIF":2.1,"publicationDate":"2025-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143167420","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Implied local volatility models","authors":"Chen Xu Li , Chenxu Li , Chun Li","doi":"10.1016/j.jempfin.2024.101567","DOIUrl":"10.1016/j.jempfin.2024.101567","url":null,"abstract":"<div><div>This paper proposes data-driven “implied local volatility models” that are designed to fit the observed level, slope, convexity, and term-structure slope of implied volatility surface at any maturity and strike. The method of construction hinges on the Taylor structure of implied volatility under generic local volatility models and the formula of Dupire (1994). An empirical application to the S&P 500 index options data validates the stable performance of our method in and out of sample and triggers several economic interpretations before, during, and in the aftermath of COVID-19 pandemic. The flexibility of our method is further consolidated by the case study on fitting (ultra) short-maturity implied volatilities and concave implied volatility curves.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"80 ","pages":"Article 101567"},"PeriodicalIF":2.1,"publicationDate":"2024-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142748012","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"On the performance of volatility-managed equity factors — International and further evidence","authors":"Patrick Schwarz","doi":"10.1016/j.jempfin.2024.101560","DOIUrl":"10.1016/j.jempfin.2024.101560","url":null,"abstract":"<div><div>I study the performance of nine (downside) volatility-managed equity factors before and after considering transaction costs in 45 international equity markets. My results suggest that volatility management is most promising for market, value, profitability, and especially momentum portfolios. The performance of volatility-managed market and value portfolios can be further enhanced by applying downside volatility as a scaling factor. Nevertheless, only the managed market and momentum strategies are partially robust to transaction cost suggesting that the persistence of abnormal returns can largely be explained by the associated transaction costs. Cross-country analysis suggests that the slow trading hypothesis is partially able to explain cross-country performance differences of volatility-managed value and momentum portfolios. Finally, performance decomposition analysis reveals additional suggestive evidence in support of the slow trading hypothesis.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"80 ","pages":"Article 101560"},"PeriodicalIF":2.1,"publicationDate":"2024-11-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142701138","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Dien Giau Bui , Robin K. Chou , Chih-Yung Lin , Chien-Lin Lu
{"title":"CEO neuroticism and corporate cash holdings: Evidence from CEOs’ tweets","authors":"Dien Giau Bui , Robin K. Chou , Chih-Yung Lin , Chien-Lin Lu","doi":"10.1016/j.jempfin.2024.101566","DOIUrl":"10.1016/j.jempfin.2024.101566","url":null,"abstract":"<div><div>We examine the effects of CEO neuroticism on corporate policies for cash holdings. After hand collecting tweets by CEOs to measure their neuroticism, we find that firms with relatively neurotic CEOs hold more cash than other firms. This positive effect is more pronounced when the firm has a higher precautionary motive to hold cash. The cash held by firms with neurotic CEOs leads to higher firm values and lower credit risks. Overall, neurotic CEOs maintain more conservative corporate policies on holding cash, resulting in a lower cost of financial distress and an improvement in the value of firms.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"80 ","pages":"Article 101566"},"PeriodicalIF":2.1,"publicationDate":"2024-11-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142701139","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Jump tail risk exposure and the cross-section of stock returns","authors":"Lykourgos Alexiou , Leonidas S. Rompolis","doi":"10.1016/j.jempfin.2024.101565","DOIUrl":"10.1016/j.jempfin.2024.101565","url":null,"abstract":"<div><div>We introduce a new jump tail risk measure retrieved from option prices. We examine the cross-sectional pricing of stocks according to their sensitivities to jump tail risk. We find a negative market price of jump tail risk. A high-low portfolio sorted by jump tail risk betas delivers a statistically and economically significant negative premium of -9.95% per year. Risk-adjusted returns are also negative and highly significant. We document that the negative jump tail risk premium is mainly driven by its downside jump tail risk component. On the contrary, the premium of the high-low portfolio sorted by upside jump tail risk betas is insignificant. The negative premium of downside jump tail risk is significant when controlling for various risk factor loadings and firm characteristics, and remains strong for large firms. Our results carry over to a predictive setting, in which we compare subsequent realized returns of the quintile portfolios sorted by downside jump tail risk betas estimated over the previous period.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"79 ","pages":"Article 101565"},"PeriodicalIF":2.1,"publicationDate":"2024-11-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142653871","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"High-frequency realized stochastic volatility model","authors":"Toshiaki Watanabe , Jouchi Nakajima","doi":"10.1016/j.jempfin.2024.101559","DOIUrl":"10.1016/j.jempfin.2024.101559","url":null,"abstract":"<div><div>A new high-frequency realized stochastic volatility model is proposed. Apart from the standard daily-frequency stochastic volatility model, the high-frequency stochastic volatility model is fit to intraday returns by extensively incorporating intraday volatility patterns. The daily realized volatility calculated using intraday returns is incorporated into the high-frequency stochastic volatility model by considering the bias in the daily realized volatility caused by microstructure noise. The volatility of intraday returns is assumed to consist of the autoregressive process, the seasonal component of the intraday volatility pattern, and the announcement component responding to macroeconomic announcements. A Bayesian method via Markov chain Monte Carlo is developed for the analysis of the proposed model. The empirical analysis using the 5-minute returns of E-mini S&P 500 futures provides evidence that our high-frequency realized stochastic volatility model improves in-sample model fit and volatility forecasting over the high-frequency stochastic volatility model.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"79 ","pages":"Article 101559"},"PeriodicalIF":2.1,"publicationDate":"2024-11-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142653723","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pankaj K. Jain , Suchismita Mishra , Shawn M. O'Donoghue , Le Zhao
{"title":"Trading volume shares and market quality: Pre- and post- zero commissions","authors":"Pankaj K. Jain , Suchismita Mishra , Shawn M. O'Donoghue , Le Zhao","doi":"10.1016/j.jempfin.2024.101564","DOIUrl":"10.1016/j.jempfin.2024.101564","url":null,"abstract":"<div><div>After the adoption of zero-commissions by major brokers, they increasingly route orders to wholesale market makers to possibly earn payment for order flow given the loss of commissions. Retail investors assets held by zero-commission and commission-charging brokers increase 7 % and decrease 9 %, respectively. Retail investors earn less price improvement per share and submit more orders and smaller orders. Effective spreads decline because retail limit prices are increasingly posted within the bid-ask spread. Intraday volatility increases and price impact falls, as orders become more uninformed, while realized spreads remain unchanged.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"79 ","pages":"Article 101564"},"PeriodicalIF":2.1,"publicationDate":"2024-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142705149","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Time-varying variance decomposition of macro-finance term structure models","authors":"Anne Lundgaard Hansen","doi":"10.1016/j.jempfin.2024.101563","DOIUrl":"10.1016/j.jempfin.2024.101563","url":null,"abstract":"<div><div>This paper studies time-series patterns in the contribution of macroeconomic shocks to the variation in U.S. Treasury bond yields. I consider a term structure model with time-varying conditional volatility, which implies time variation in the decomposition of forecast error variances. Based on the model, I show that the macroeconomic contribution to the variation in short-term yields has increased since the 1970s. A similar pattern characterizes the variation in the expectations on future interest rates. This trend is not reflected in long-term yields because macroeconomic shocks drive negative correlations between short-rate expectations and term premia. Finally, I show that accounting for time-varying volatility is important even for estimating the average macroeconomic contribution to yield curve volatility over a fixed sample.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"79 ","pages":"Article 101563"},"PeriodicalIF":2.1,"publicationDate":"2024-10-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142586497","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}