This dissertation includes two essays. The first essay investigates whether money illusion misleads investors in the stock market. To the extent that anomalies reflect mispricing, I examine whether money illusion plays a role in the anomaly-based strategies. I find that, following high inflation, anomalies are stronger and the returns on the short-leg portfolios are lower. These findings indicate investors are overly optimistic on the past performance of stocks and overestimate the upside potential of stock returns following high inflation periods. I extend the effect of money illusion by examining sentiment and other commonly used measure for predicting stock returns. I find that money illusion-driven mispricing remains largely unchanged after controlling for many additional variables. These results suggest that money illusion provides a complementary power for cross-sectional stock returns beyond commonly used variables. In summary, this essay contributes to the literatures on money illusion and mispricing by providing evidence that money illusion can lead to mispricing in the stock market. The second essay identifies a new risk factor for bank stock returns. First, I document that standard factor models do not explain bank stock returns well. I investigate the linkage between Loan Loss Provision (LLP) and bank stock returns. I find that low-LLP bank stocks have significantly higher risk-adjusted returns than medium- and high-LLP bank stocks. These findings indicates that low-LLP banks are more likely distressed when economic conditions are bad, as a result, investors require higher returns on low-LLP bank stocks. Most importantly, the new factor model including the LLP return factor adds a new dimension of explanatory power for bank stock returns, reducing the magnitude of alphas mostly to insignificance. Combined with its economic intuition, this essay suggests that loan loss provisions play an important role in evaluating bank stock returns.
Subject (authority = RUETD)
Topic
Management
RelatedItem (type = host)
TitleInfo
Title
Rutgers University Electronic Theses and Dissertations
Identifier (type = RULIB)
ETD
Identifier
ETD_6477
PhysicalDescription
Form (authority = gmd)
electronic resource
InternetMediaType
application/pdf
InternetMediaType
text/xml
Extent
1 online resource (xi, 96 p. : ill.)
Note (type = degree)
Ph.D.
Note (type = bibliography)
Includes bibliographical references
Note (type = vita)
Includes vita
Subject (authority = ETD-LCSH)
Topic
Stock exchanges
Subject (authority = ETD-LCSH)
Topic
Stocks
Subject (authority = ETD-LCSH)
Topic
Banks and banking
Note (type = statement of responsibility)
by Yuna Heo
RelatedItem (type = host)
TitleInfo
Title
Graduate School - Newark Electronic Theses and Dissertations
Identifier (type = local)
rucore10002600001
Location
PhysicalLocation (authority = marcorg); (displayLabel = Rutgers, The State University of New Jersey)
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