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The Disposition effect and under reaction to news

The Disposition effect and under reaction to news. Abdullah Al-Ashi Jungha Woo Muna Albasman Talha Yasin. What Disposition effect is?.

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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 Abdullah Al-Ashi Jungha Woo Muna Albasman Talha Yasin

  2. What Disposition effect is? • 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.

  3. Test Data (WRDS) CAR, G_t IF CAR > 0 Bad news Good news Perform trading strategies to test hypothesis PEAD, monthly alphas Overhang Spread and Negative Overhang Spread Monthly Alphas by Overhang Spread Alphas and Factor Loading No Yes

  4. Progress 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

  5. Cumulative Abnormal Return (CAR) • 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,his the CRSP equally weighted NYSE/AMEX/NASDAQ index.

  6. Cumulative Abnormal Return (CAR) • 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

  7. Cumulative Abnormal Return (CAR)

  8. Capital Gains OverhangGt • 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.

  9. Capital Gains OverhangGt • 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

  10. Mental Accounting and Vt • Shows aggregate holdings for a group of mutual funds of a particular stock(MSFT) over time

  11. Capital Gains OverhangGt • 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.

  12. Capital Gains OverhangGt

  13. Next Steps 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

  14. Questions ?

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