Monday, April 16, 2007

Stock Market Psychology: Perspectives From Dr. Harrison Hong

There is much traders can gain from an understanding of the best academic research into markets. I recently posted links to four insightful articles from Dr. Andrew Lo at MIT. Here are some gems from Dr. Harrison Hong and colleagues at Stanford:

* Where Stock Market Psychology and Pricing Intersect - This overview article quotes a number of researchers regarding how investor/trader beliefs affect the pricing of assets, with varying degrees of rationality among participants.

* Do Industries Lead Stock Markets? - This article finds that specific industries lead price movements in the broader movement over an intermediate time frame. This appears to be due to the ability of industry movements to forecast economic developments that are slow to impact stocks overall.

* Disagreement and the Stock Market - This is a very thoughtful review article that investigates the roles of trading volume and investor disagreement in generating market returns.

* Thy Neighbor's Portfolio: Word-of-Mouth Effects in the Holdings and Trades of Money Managers - This article shows how trading and investment decisions are like epidemics: they spread from one money manager to another.

* Gone Fishin': Seasonality in Trading Activity and Asset Prices - Here the authors find a seasonal pattern over the summers due to reduced short-term trading.

5 comments:

AnaTrader said...

Brett

* Gone Fishin': Seasonality in Trading Activity and Asset Prices - Here the authors find a seasonal pattern over the summers due to reduced short-term trading. Unquote

Apart from Summer in N Hemisphere, seasonal pattern is also affecting some countries at or near the Equator. Eg in Singapore, we always chant: Sell in May and go away.

Another seasonal pattern which is seen worldwide, almost, is towards end of the year for X'mas and bringing in the New Year.

Brett Steenbarger, Ph.D. said...

Hi AnaTrader,

Yes, indeed; many seasonal patterns, including those around the end of a month and beginning of the new month. Stock Trader's Almanac, edited by the Hirsch Organization, does a great job of tracking this seasonality--

Brett

Bri said...

Don't know if you have read this article.

http://www.nytimes.com/2007/04/15/magazine/15wwlnidealab.t.html?pagewanted=1&ei=5124&en=79be2f770fc76c6d&ex=1334203200

while not directly about stocks it is along the lines of group behavior, word of mouth, etc.

May explain certain momo stocks.

Bri

Thomas said...

"Covet thy nieghbors portolio" seems to explain why some stock groups suddenly expode in price and volume. I believe health care stocks are up about 6% over several years and suddenly shot up around 12% in one month. Fundamentals certainly didnt suddenly change. Looks like piling in by big money. Your volume flow work might identify these types of moves early enough to participate in a piece of these types of moves.

Brett Steenbarger, Ph.D. said...

Hi Thomas,

That's a great point; thanks. I do hope to see if the dollar volume flow data can anticipate sector moves.

Brett