Description
TitleEssays on financial markets and information
Date Created2023
Other Date2023-05 (degree)
Extent208 pages : illustrations
DescriptionThis dissertation consists of three essays, each focusing on a critical aspect of the financial market, including 1) the interplay between financial analysts and market investors, 2) the impact of biased beliefs of market participants on asset prices, and 3) the diffusion of information between different asset classes. The first essay, "Investor (Mis)Reaction, Biased Beliefs, and the Mispricing Cycle", co-authored with Azi-Ben-Rephael and Steffen Hitzemann, constructs a new measure that captures the disparity between the market reaction to earnings information and the earnings surprise ("Return-Earnings Gap'', “REG”). High REG positively predicts analyst forecast errors and firm mispricing (overvaluation). Analyst forecast errors are particularly increased when REG provides confirming information. In turn, REG is positively predicted by analyst forecast errors and higher mispricing, leading to a continuation of firm overvaluation over several quarters. Overall, our results reveal how the market’s (mis)reaction feeds back into the belief formation of analysts and investors, leading to a slow correction of firm mispricing. A simple structural model explains the predictive power of REG for analyst forecast errors and the build-up of mispricing by incorporating the dynamic expectation formation between different agents. The second essay, "Analysts’ Revision Ratio", co-authored with Azi Ben-Rephael, proposes a measure that captures changes in analysts' expectations based on their earnings forecast revisions at different horizons. Our measure RevRatio is higher when analysts revise their annual forecast more than the quarterly forecast. For positive revisions, higher RevRatio results in significant subsequent reversals consistent with analysts' excessive optimism. For negative revisions, higher RevRatio results in modest price continuation. This asymmetry is consistent with recent market-level evidence on motivated beliefs and suggests that negative information incorporation is consistent with firm fundamentals. Our findings are robust to the inclusion of analyst revisions and consensus biases across multiple horizons. The third essay, "Do Stocks Lead Bonds? New Evidence from Corporate Bond ETFs", co-authored with Hao Jiang and Sophia Zhengzi Li, studies the dynamic information flows between stock and corporate bond markets. Using accurately measured returns on corporate bond exchange-traded funds (ETFs), we find that returns on a portfolio of stocks of firms issuing the bonds in the ETFs positively predict corporate bond ETF returns, but not vice versa. The return predictability is stronger for ETFs tracking the indices of corporate bonds with lower credit ratings and higher yields. By contrast, a randomly formed stock portfolio does not predict ETF returns. These results are consistent with the notion of gradual information diffusion across asset markets.
NotePh.D.
NoteIncludes bibliographical references
Genretheses
LanguageEnglish
CollectionGraduate School - Newark Electronic Theses and Dissertations
Organization NameRutgers, The State University of New Jersey
RightsThe author owns the copyright to this work.
Statistical Profile