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The Disposition effect and under reaction to news. Abdullah Al-Ashi Jungha Woo Muna Albasman Talha Yasin. What Disposition effect is?. - PowerPoint PPT Presentation
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Abdullah Al-Ashi Jungha Woo
Muna AlbasmanTalha Yasin
The disposition effect implies that stock prices under-react to bad news when more current holders are facing a capital loss, and under-react to good news when more current holders are facing a capital gain.
Leads to return predictability.
Data (WRDS)
CAR, G_t
IFCAR > 0Bad news Good news
Perform trading strategies to test hypothesis
PEAD, monthly alphas
Overhang Spread
andNegative Overhang
Spread
MonthlyAlphas
byOverhang
Spread
Alphasand
FactorLoading
YesNo
SAS Learning and getting comfortable with the SAS command line
interface as web interface not adequate for merging/linking tables and calculations etc.
Major data processing done in SAS using different procedures like SQL, SAS Interactive Matrix Language (IML)
Computing Cumulative Abnormal Returns (CAR) Get the relevant data and compute the values for some famous
stocks
Computing Capital Gains Overhand (Gt) Computed using the mutual fund holdings for some subset of
stocks/MFs
Details follow
A measure of the earning news surprises, calculated around the most recent earnings announcement date
where rh is the stock return on day h, with the earnings announcement date being at h= 0,
and‾ri,h is the CRSP equally weighted NYSE/AMEX/NASDAQ index.
1
2,,
hhihii rrCAR
Extracting the following from WRDS: Earning released dates under COMPUSTAT-
Fundamental Quarterly dataset for every company identified by GVKEY
Daily return values under CRSP-dsf (daily stock file) for every company identified by PERMNO
PERMNO-GVKEY merged link table under CCM dataset
S&P 500 index daily returns
A means of quantifying the FIFO ‘mental accounting’ at anchor points
Defined as the percentage deviation of the aggregate cost basis from the current price.
t
ttt P
RPPg
where Vt,t−n is the number of shares purchased at date t −n that are still held by the original purchaser at date t
Pt is the stock price at the end of the month t φ is a normalizing constant
n
tnttnttt PVRP
1,,
1
n
tnttV
1,
Shows aggregate holdings for a group of mutual funds of a particular stock(MSFT) over time
If positive, investor is in gains If negative, investor has unrealized loss Thus, efficient way to guess his mental account Need to know the mutual fund holdings of stocks
at particular dates(quarterly data available) We are getting the data from the CRSP mutual
fund database which is from 2003 onwards.
Sanity checks on CAR and Gt Integration of code and calculation of CAR and Gt
over all the available data set Implementing the rolling portfolios in SAS Calculation of returns and alphas to test the
hypothesis