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The Disposition effect and under reaction to news

The Disposition effect and under reaction to news. March 24, 2010 Abdullah Al-Ashi Jungha Woo Muna Albasman Talha Yasin. -. Gt =. IBM MSFT. (When rolling periods is (+2) months)

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The Disposition effect and under reaction to news

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  1. The Disposition effect and under reaction to news March 24, 2010 Abdullah Al-Ashi Jungha Woo Muna Albasman Talha Yasin

  2. - Gt = • IBM • MSFT (When rolling periods is (+2) months) JAN 2003 FEB 2003 MAR 2003 APR 2003 MAY 2003 • IBM • GOOG • GOOG • DELL • GOOG • IBM Top 20% • MSFT • DELL • JAVA • YHOO • MSFT • JAVA • JAVA • COST • CIT • PM • DELL • COST • PM • CIT • EXPE • COST • PM • EXPE • EXPE • YHOO • YHOO • CIT Bottom 20% Earning report dates Sorting points

  3. Update I Applied adjusted price and adjusted volume for Reference price, Capital gain overhang (Gt) computation adjusted price = unadjusted prc/cum adjusting factor( dsf.cfacpr) adjusted volume = unadjusted vol* cum vol adj factor ( dsf.cfacshr) Used to compute correct reference price

  4. Updates II Fixed incorrect capital gain overhang values Due to incomplete CRSP mutual fund database, some mutual funds holding reports include 0 as total market value when its number of shares and stock price are both positive. Corrected: Now, only 2 missing value exist out of millions of observations

  5. Update III • Formed portfolio in terms of Gt, CAR using SAS and divided that into quintile. • Computed one month rolling portfolio • …

  6. Progress in MATLAB • Calculated holding period (1&2-months) returns with adjusted price • Calculated the 1&2-month portfolio excess return, regressed to get monthly alpha for each quintile • Running time was around 190 min for 1-month portfolio excess return calculation and around 120min for the 2-month portfolio excess return

  7. Assumption we’ve made • For delisting events, we currently assumed 100% loss incurred • Technically, holding period return value can be refined by calculating delisting returns and investing risk-free assets for the last month of the rolling period • Adopted 100% loss for simplicity • Will improve later • Table join is costly

  8. 1-month portfolio of JAN2003 2-month portfolio of JAN2003

  9. 1-month portfolio of FEB2003 2-month portfolio of FEB2003

  10. Quintiles Classification

  11. Regression Time-series averages of excess monthly returns, in excess of CRSP market index where R is the portfolio’s return rate, Rf is the risk-free return rate, and Mkt is the return of the whole stock market. Rf and Mkt downloaded from Ken French’s online data library,http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#BookEquity

  12. Table V of Disposition Effect Paper

  13. Questions ?

  14. Calculate holding period return First, need to get the first trading day of each month( called mindate) Secondly, integrate CAR and Gt over all the available data set, and compute Gt at mindates CAR values available at earning report dates Gt values meaningful at mindates. Calculate the adjusted price difference, return for each stocks in quintile Calculation of returns and alphas

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