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4 Selected Articles from “The Journal of Finance” – February 2013

Posted on the 12 January 2013 by Rodrigosucupira @rodrigosucupira
4 selected articles from “The Journal of Finance” – February 2013The last edition of The Journal of Finance [link] came with good articles, related to financial engineering and capital markets that I would appreciate to list.
The Journal of Finance, one of the most prestigious finance journals, was established on 1946. Is one of the most cited journals with distinguished articles like “Portfolio Selection” [link] – Henry Markowitz. The selectedarticles are:
1 • Ex Ante Skewness and Expected Stock Returns [article]JENNIFER CONRAD, ROBERT F. DITTMAR and ERIC GHYSELSAbstractWe use option prices to estimate ex ante higher moments of the underlying individual securities’ risk-neutral returns distribution. We find that individual securities’ risk-neutral volatility, skewness, and kurtosis are strongly related to future returns. Specifically, we find a negative (positive) relation between ex ante volatility (kurtosis) and subsequent returns in the cross-section, and more ex ante negatively (positively) skewed returns yield subsequent higher (lower) returns. We analyze the extent to which these returns relations represent compensation for risk and find evidence that, even after controlling for differences in co-moments, individual securities’ skewness matters.
This articles argues that statistical properties of financial data such kurtosis and skewness infer on prices movements.The objective, as cited, is “explore the possibility that higher moments of the returns distribution are important in explaining security returns”. The author finds relation of skewness, kurtosis and returns. The finding are good evidence that this statistical information of financial data can predict prices movements and can provide good insights for trades.
2 • Analyst Forecast Consistency [article]GILLES HILARY and CHARLES HSUAbstractWe show empirically that analysts who display more consistent forecast errors have greater ability to affect prices, and that this effect is larger than that of stated accuracy. These results lead to three implications. First, consistent analysts are less likely to be demoted and are more likely to be nominated All Star analysts. Second, analysts strategically deliver downward-biased forecasts to increase their consistency (if at the expense of stated accuracy). Finally, the benefits of consistency and of “lowballing” (accuracy) are increasing (decreasing) in institutional investors’ presence.
The authors evidence one kind of market participant effect that is: forecasters analysts. As the authors finded: “on average, analysts with a lower standard deviation of forecast errors have greater ability to move prices.”“These results have implications for financial analysts’ careers: more consistent analysts are less likely to be demoted to less prestigious brokerage houses (this effect subsumes the effect of stated forecast accuracy) and are more likely to become All Stars.”
3 • Short-Selling Bans Around the World: Evidence from the 2007–09 Crisis [article]ALESSANDRO BEBER and MARCO PAGANOAbstractMost regulators around the world reacted to the 2007–09 crisis by imposing bans on short selling. These were imposed and lifted at different dates in different countries, often targeted different sets of stocks, and featured varying degrees of stringency. We exploit this variation in short-sales regimes to identify their effects on liquidity, price discovery, and stock prices. Using panel and matching techniques, we find that bans (i) were detrimental for liquidity, especially for stocks with small capitalization and no listed options; (ii) slowed price discovery, especially in bear markets, and (iii) failed to support prices, except possibly for U.S. financial stocks.
The evidence of the authors suggests that the reaction of most stock exchange regulators around the globe to the financial crisis—imposing bans or regulatory constraints on short selling—was detrimental for market liquidity, especially for stocks with small market capitalization, high volatility, and no listed options. Moreover, it reduce the speed of price discovery, and such delayed resolution of uncertainty about fundamentals tends to increase the bid-ask spread. The short-selling constraints lead also to “overpricing,” that is, to prices above the equilibrium level that would prevail absent such constraints. The short-selling ban was at best neutral in its effects on stock prices.
4 • Liquidity Cycles and Make/Take Fees in Electronic Markets [article]THIERRY FOUCAULT, OHAD KADAN and EUGENE KANDELAbstractWe develop a model in which the speed of reaction to trading opportunities is endogenous. Traders face a trade-off between the benefit of being first to seize a profit opportunity and the cost of attention required to be first to seize this opportunity. The model provides an explanation for maker/taker pricing, and has implications for the effects of algorithmic trading on liquidity, volume, and welfare. Liquidity suppliers’ and liquidity demanders’ trading intensities reinforce each other, highlighting a new form of liquidity externalities. Data on durations between trades and quotes could be used to identify these externalities.
The authors aim to address market dynamics when participants have different speeds and the effect on liquidity. The lack of liquidity is one of the concern and a varying make and take fees on real time can attract liquidity suppliers when the market momentarily lacks liquidity. The model proposed offers a starting point to analyze how make and take fees could be used to this end.

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