https://w4.stern.nyu.edu/finance/docs/WP/2000/pdf/wpa00041.pdf

Illiquidity and stock returns: cross-section and time-series effects $

New tests are presented on the effects of stock illiquidity on stock return. Over time, expected market illiquidity positively affects ex ante stock excess return (usually called â¬Srisk premiumâ¬?). This complements the positive cross-sectional return-illiquidity relationship. The illiquidity measure here is the average daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firms stocks, suggesting an explanation for the changes â¬Ssmall firm effectâ¬? over time. The impact of market illiquidity on stock excess return suggests the existence of illiquidity premium and helps explain the equity premium puzzle.

Illiquidity and Stock Returns: Cross-Section and Time-Series Effects

We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors’ confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations ~“momentum”!, short-run earnings “drift,” but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy. IN RECENT YEARS A BODY OF evidence on security returns has presented a sharp challenge to the traditional view that securities are rationally priced to ref lect all publicly available information. Some of the more pervasive anomalies can be classified as follows ~Appendix A cites the relevant literature!: 1. Event-based return predictability ~public-event-date average stock returns of the same sign as average subsequent long-run abnormal performance! 2. Short-term momentum ~positive short-term autocorrelation of stock returns, for individual stocks and the market as a whole!

/pdf/investor-psychology-and-security-market-under-and-108faczcym.pdf

Investor Psychology and Security Market Under- and Overreactions

https://scholar.harvard.edu/files/shleifer/files/model_invest_sent.pdf

A model of investor sentiment

We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations (momentum), short-run earnings drift, but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy. 
Prepublication version available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2017

Presentation Slides for 'Investor Psychology and Security Market Under and Overreactions'

International equity markets exhibit mediumn-term return continuation. Between 1980 and 1995 an internationally diversified portfolio of past medium-term Winners outperforms a portfolio of medium-term Losers after correcting for risk by more than 1 percent per month. Return continuation is present in al:l twelve sample countries and lasts on average for about one year. Return continuation is negatively related to firm size, but is not limited to small firms. The international momentum returns are correlated with those of the United States which suggests that exposure to a common factor may drive the profitability of momentum strategies. MANY PAPERS HAVIE DOCUMENTED that average stock returns are related to past performance. Jegadeesh and Titman (1993) document that over mediumterm horizons performance persists: firms with high returns over the past three months to one year continue to outperform firms with low past returns over the same period. By contrast, DeBondt and Thaler (1985, 1987) document return reversals over longer horizons. Firms with poor three- to fiveyear past performance earn higher average returns than firms that performed well in the past. There has been an extensive literature on whether these return patterns reflect an improper response by markets to information, or whether they can be explained by market microstructure biases or by properly accounting for risk.' Fama and French (1996) show that long-term reversals can be consistent with a multifactor model of returns, but their model fails to explain medium-term performance continuation. Chan, Jegadeesh, and Lakonishok (1996) find that medium-term return continuation can be explained in part by underreaction to earnings information, but price momentum is not subsumed by earnings momentum. Return reversal and continuation are only two of many pat;terns that empirical researchers have uncovered using substantially the same database of U.S. stocks. It can therefore not be ruled out that these apparent anomalies are simply the outcome of an elaborate data snooping process. This paper is

International Momentum Strategies

For this study of the simple properties of commodity futures as an asset class, an equally weighted index of monthly returns of commodity futures was constructed for the July 1959 through December 2004 period. Fully collateralized commodity futures historically have offered the same return and Sharpe ratio as U.S. equities. Although the risk premium on commodity futures is essentially the same as that on equities for the study period, commodity futures returns are negatively correlated with equity returns and bond returns. The negative correlation is the result, primarily, of commodity futures' different behavior over a business cycle. Commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation.

/pdf/facts-and-fantasies-about-commodity-futures-3r5zh8s95x.pdf

Facts and Fantasies about Commodity Futures

International equity markets exhibit short-term return continuation. Between 1980 and 1995 an internationally diversified portfolio of past short-term winners outperformed a portfolio of short-term losers by more than one percent per month, after correcting for risk. Return continuation is present in all twelve sample countries and lasts for about one year. Return continuation is negatively related to firm size but is not limited to small firms. The international evidence is remarkably similar to findings for the U.S. by Jegadeesh and Titman (1993) and makes it unlikely that the U.S. experience was simply due to chance. Because momentum strategies are relatively easy to implement, the results pose a challenge to our understanding of how information is incorporated into prices or, alternatively, how markets set expected returns.

We construct an equally-weighted index of commodity futures monthly returns over the period between July of 1959 and December of 2004 in order to study simple properties of commodity futures as an asset class. Fully-collateralized commodity futures have historically offered the same return and Sharpe ratio as equities. While the risk premium on commodity futures is essentially the same as equities, commodity futures returns are negatively correlated with equity returns and bond returns. The negative correlation between commodity futures and the other asset classes is due, in significant part, to different behavior over the business cycle. In addition, commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID677512_code223089.pdf?abstractid=560042&rulid=60281&mirid=3

K. Geert Rouwenhorst

Papers

International Momentum Strategies

Facts and Fantasies about Commodity Futures

International Momentum Strategies

Facts and Fantasies About Commodity Futures

Does industrial structure explain the benefits of international diversification