The Trading Dynamics of Institutional Investors

The weekly performance of IBM stock presented a contestant growth. One highlight of the falling of stock price in the 6th week in the investment period was when IBM presented the 3rd quarter financial report. The investors weren’t satisfied with the profit report which they expected to be better especially when other IT companies were doing well in the 3rd quarter. One mistake I made was that I didn’t follow closely to the financial report of the company; therefore, I missed the peak of the stock price. From this experience, I learned that financial reports and current news are important indicators of the stock price. By following closely to the current event and analyzing the financial report, investors can maximize the profit and also become more familiar to the market.

This document is authorized for use only by Yen Ting Chen in FInancial Markets and Institutions taught by Nawal Ahmed Boston University from September 2014 to December 2014.

The Roman tradition of art, particularly architecture and sculpture is rooted in adopting styles of the past to convey a particular message. The combination of Greek and Etruscan styles, such as in the Temple of Portunus in Rome, ultimately culminate to reference a new meaning and style that is independently roman. Similarly to architecture, the first Roman Emperor, Augustus, chose to liken both is architecture, by using stone and the orders, and his portraiture back to the Greeks. Romans emperors ultimately tend to use style association to portray propaganda for their particular platform, as a form of associative mass media. Two emperors that exemplify this

The strong form claims that asset prices fully reflect all of the public and inside information available, therefore no one can have advantage on the market in predicting prices. The introduction of the efficient market hypothesis marked a turning point in scholarly researches on security prices and many studies have been made since to test market efficiency. Many studies of the weak form of market efficiency have been made on technical analyses and how investors use them to predict about future security prices by looking at past prices. In 1969 Fama, Fisher, Jensen and Roll were the first to test the semi-strong form of market efficiency by using event studies. Their conclusion was that stock prices adjust very rapidly to new information. Many scholars since then have studied how new information affect the market by using event studies. Many articles about the strong form have also been published and most of them study professional investor performances in the stock market (Malkiel, 2003). Many of the studies on technical analyses, event studies and the performance of professional investors in the stock market have reached the conclusion that markets are efficient and therefore that stock prices are right (Malkiel, 2003). Before studies of behavioral finance became popular, evidences began to appear that were inconsistent with the hypothesis of market efficiency.

Warren E. Buffett, the chairperson of Berkshire Hathaway (BH), is the world’s greatest investor of the current era. From 1965 to 2007, BH has compounded annual gain of 20.3% while S&P has 9.3% (Berkshire Hathaway Inc., 2009). Most investors get normal returns and believe the market is in semi strong form. However Buffett believes the market is inefficient and acts on his own investment philosophy. This report will analysis BH’s acquisition of PacifiCorp, evaluate Buffett’s performance against EMH and discuss his ethical standards.

The authors jointly examine momentum and value in eight different markets and asset classes. Asness, Moskowitz and Pederson found two main phenomena associated with returns across 8 various markets and asset classes in their research. These findings challenge previous, well-established theories, like the existence of significant premia in value and momentum return strategies across asset classes and global markets. This innovative research includes some new asset classes not previously used, such as government bonds, currencies, and commodities. The authors look to prove the

It is believed that it will be very difficult for many investors to come to terms, and that returns will be quite modest into the foreseeable future in stocks. Why? Because according to the Wall Street Journal, more than half of all stock investors began investing during the 1990s, a time of unprecedented stock market strength. From 1995 through 1999, the Dow industrials averaged a gain of 24.7% a year and the NASDAQ composite averaged a 41.9% annual gain. Most investors have wrongly come to view such enormous gains as normal. The indexes have never before been able to sustain gains like that and, we doubt, they ever will in most of our lifetimes. Many would argue that recent dramatic downfalls in markets are due to events of 9/11.

In his book, Capital Ideas: The Improbable Origins of Modern Wall Street, Peter L. Bernstein examines the innovative financial work of various academics that helped shape modern Wall Street. Bernstein sets out to show that Wall Street is in fact a fundamental and useful model to follow, rather than something to be feared. He points out that, “By combining the linkage between risk and reward with the combative nature of the free market, these academics brought new insights into what Wall Street is all about and devised new methods for investors to manage their capital.” (2) These impressive scholars have incorporated scientific measurement to the art of finance, forever

The following presents the studies examined on the momentum effect in several markets. The markets have been divided into the United States market, European market, Asian market, and emerging market.

Feng and Seasholes (2004) wrote a paper concerning the geographical delimitations of herding behaviour. They found that there is a significant correlation of trading behaviour made by investors on stock markets and that this correlation increases exponentially when investors are selling and buying within a specific geographical area. Indeed, the study showed that trades, which can be either sales or purchases, are deeply correlated when we split investors geographically. That correlates with the findings of Zhou & Lai (2009) who state that herding measures may differ in stocks according to geographic regions and classification of industries. Stavroyiannis & Babalos (2013) conducted an extremely relevant research project by investigating the existence of herding behaviour on the major European Stock Exchange Indexes. Indeed they gathered daily data during a period from the 15th of April 2005 to the 31st of December 2012, and the results indicated that herding behaviour can be strongly identified in the South-European countries during the 2008 crisis period. When times are considered as ‘normal periods’, models, mainly the rational asset pricing one, show that the distribution in cross-sectional returns is going to increase in the same trend as the absolute value of the returns on the markets, because investors are usually trading with their diverse private information. Nonetheless, they also found that during

Since the late 1980’s the United States has observed several housing market bubbles and subsequent collapses (Calabria 2011, p. 552). Also, the country has also observed a profound increase in the trading of technologies stock (Sabherwal, Sarkar, and Zhang, 2011, p. 1210). In addition, the development of day-trading has taken control of nearly half of the stock trading industry (Chou, Wang, and Wang, 2014, p. 403). As a result, the traditional methods of company-share value evaluation no longer provide an accurate estimate of company value (Rosenblatt and Gawronski, 2004, p. 118). The introduction of twenty-first century technologies and stock trading opportunities have created an increasingly volatile stock market due to the usage of the internet for day-trading.

He also investigated determinates of insider trades’ abnormal return. And he also found that (1) the abnormal return of firm officers’ trade (both buy and sale) was higher than shareholders’ trade; hence he concluded that an insider who is more close to the firm’s operation activity has greater information content in his trades than other group of insiders (2) there is negative relationship between the firm size and the abnormal return; hence, he concluded that large firms have more exposure of regulatory scrutiny and analysts than small firms. Therefore, large firms’ stock is efficiently priced than small firms’ stock. Finally, he found that the abnormal returns around the reporting days are also statistically significant for both buy and sale trades.

This chapter gives a brief introduction to hedge funds and hedge fund data. Hedge funds are generally considered as private investment vehicles for wealthy individual and institutional investors. According to the National Securities Markets Improvement Act of 1996, participators are limited to at most 500 ‘qualified investors’, individuals who have at least $5 Million to invest in hedge funds and institutional investors with capital of at least $25 Million (Brown and Goetzmann, 2001). Normally, hedge funds are organized as limited partnerships, in which individual and institutional investors are limited partners and the hedge fund managers are general partners (Fung and Hsieh, 1999). To ensure the common economic benefit for investors and managers, hedge fund managers usually take a portion of their own wealth to invest in the funds. The fees charged by the investors consist of the fixed management fee and performance-based fee. The performance-based fee, which is significantly higher than fixed management fee, is paid to successful hedge fund managers. Although hedge funds influence the market dramatically, little about what they really do is understood publicly. Brown and Goetzmann (2001) state that the term ‘hedge fund’ seems to imply market neutral and low risk trading strategies, whereas hedge funds appear to have a high level of risk because of the extensive use of leverage.

Short Term Hypothesis: Prices in financial markets react quickly to information that has affect on future expectations. Information like corporate earnings, new contracts or FDA approvals falls in this category. This in turn leads to greater short-term volatility and possible losses and appeal to short-term speculators. Because of this corporate managers listed on stock exchanges could put more importance to short-term goals instead of long-run profitability. Long-term investments are undervalued by managers since they are undervalued by participants in financial markets harming the longer profitability and economic growth in the end.

Behavioral theories. Price momentum is an investment strategy, not a theory in itself. Jegadeesh and Titman (1993) introduced the investment strategy into formal literature. However, no theory was introduced to explain this investment strategy until a few years later. The theory of price momentum matured over time. Its origins date back to the early 1990’s. The theory has been increasingly attracting attention from researchers, money managers, and institutional investors. Literature reviews show that the popular asset pricing models, such as the CAPM, are unable to identify the determinants of momentum returns. Therefore researchers have turned to the psychological and behavioral aspects of investors that could result in excess returns on investments. These theories were based on the under reaction and overreaction of investors’ behaviors. The investors’ underreacting and overreacting