Research:
My research focuses on the effects of investor behavior on stock return characteristics.
Selected Publications:
“Index Changes and Losses to Index Fund Investors", with Gregory Noronha, and Vijay Singal, Financial Analysts Journal 62 (4), July/August 2006, 31-47.
Abstract:
Because of arbitrage around the time of index changes, investors in funds linked to the S&P 500 Index and the Russell 2000 Index lose between $1.0 billion and $2.1 billion a year for the two indices combined. The losses can be higher if benchmarked assets are considered, the pre-reconstitution period is lengthened, or involuntary deletions are taken into account. The losses are an unexpected consequence of the evaluation of index fund managers on the basis of tracking error. Minimization of tracking error, coupled with the predictability and/or pre-announcement of index changes, creates the opportunity for a wealth transfer from index fund investors to arbitrageurs.
“All Things Considered, Taxes Drive the January Effect”, with Vijay Singal, Journal of Financial Research 27 (3), Fall 2004, 351-372. (JFR 2004 Best Paper Award)
Abstract:
The multitude of explanations for the January effect leaves the reader confused about its primary cause(s): is it tax-loss selling, window dressing, information, bid-ask bounce, or a combination of these causes? The confusion arises, in part, because evidence has generally been presented in support of a particular hypothesis though the same evidence may be consistent with another hypothesis. Furthermore, prior work does not adequately control for the bid-ask bounce. In this paper, we try to disentangle different explanations of the January effect and identify its primary cause. We find that tax-related selling is the most important cause, overshadowing other explanations.
This paper has been quoted in MSN Money - The Speculator.
"The Price Response to S&P 500 Index Additions and Deletions: Evidence of Asymmetry and a New Explanation", with Gregory Noronha, and Vijay Singal, Journal of Finance 59 (4), 2004, 1901-1929.
Abstract:
We study the price effects of firms added to and deleted from the S&P 500 index and document an asymmetric price response: there is a permanent increase in the price of added firms but no similar decline for deleted firms. These results are at odds with extant explanations of the effects of S&P 500 index changes such as the downward-sloping-demand curve, liquidity, and information hypotheses, which imply a symmetric price response to additions and deletions. A possible explanation for asymmetric price effects arises from changes in investor awareness. Investors become more aware of a stock upon its addition to the index but do not become similarly unaware of a stock following its deletion. Greater scrutiny by investors, and/or improved access to capital markets, stemming from increased awareness could improve an added firm’s future cash flows. Increased awareness may also lower an added stock’s discount rate via portfolio diversification effects. Since awareness is not easily undone, a firm’s deletion from the index generates a weaker response. Results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of S&P 500 index additions and deletions.
“A December Effect with Tax-Gain Selling?”, with Vijay Singal; Financial Analysts Journal 59 (4), July/August 2003, 78-90.
Abstract:
We find evidence of a December effect where investors do not sell winner stocks in December but postpone their sale to January so that capital gains are not realized in the current fiscal year. This causes the winner stocks to appreciate in December. The December effect is relatively easy to arbitrage. We also present evidence regarding the persistence of the January effect and note that the January effect continues because it is difficult to trade profitably.
"Role of Speculative Short Sales in Price Formation: Case of the Weekend Effect”, with Vijay Singal, Journal of Finance 58, April 2003, 685-705.
Abstract:
We argue that short sellers affect prices in a significant and systematic manner. In particular, we contend that speculative short sales contribute to the weekend effect: the inability to trade over the weekend is likely to cause these short sellers to close many of their speculative positions on Fridays and reestablish new short positions on Mondays causing stock prices to rise on Fridays and fall on Mondays. We find evidence in support of this hypothesis: the weekend effect is significantly larger for high short-interest stocks than for low short-interest stocks. Further, we find that the likely substitution of speculative short sales by put options results in the weekend effect to diminish for stocks with actively traded options, but to continue for other stocks. Further analysis of several special types of stocks, such as IPOs, zero short-interest stocks, and highly volatile stocks, reveals additional support for the hypothesis.
This paper has been quoted in a Yahoo!Finance Quiz.