Tid: 17 mars 2011 kl 11.15-12.00.

Plats : Seminarierummet 3721, Institutionen för matematik, KTH, Lindstedts väg 25. (observera dagen och lokalen), Karta!

Föredragshållare: Johan Dellner

Titel: Can a simple model for the interaction between value and momentum traders explain how equity futures react to earnings announcements? (Examensarbete – Master thesis)

Abstract

Hong and Stein (1999) explained the initial underreaction and the subsequent overreaction of prices to news as the outcome of the interaction between two groups of traders: news watchers and momentum traders. The news watchers have proprietary ways of interpreting public news and trade based on their interpretation. The true meaning of the news becomes gradually known to the crowd of news watchers and this creates the market underreaction. Underreaction makes momentum strategies protable. Eventually, the momentum traders push the price too far and the market corrects. We test how well the model explains index and individual stock price behavior around earnings announcements. To remove ambiguity in the interpretation of the earnings news we proxy the news by the price change on the day of the announcement. Plots of the autocorrelation and the partial autocorrelation function suggest that the market reaction differs from that predicted by the model. There is an overreaction on the day of the announcement, a correction that lasts for 5-10 days and overshoots the price in the opposite direction and eventually a long trend with the same sign as the initial overreaction. To test the statistical significance of this observation we devise a trading strategy. Out-of-sample tests show some support for this observation. To explain the initial overreaction, presumably caused by very active momentum traders that trade during the announcement day, the model of Hong and Stein needs to include this group of traders and be applied on high frequency data during the announcement day.

The full report (pdf)

Till seminarielistan
To the list of seminars