Showing papers by "Maik Schmeling published in 2010"

Limit-Order Submission Strategies under Asymmetric Information

Abstract: This paper provides evidence that informed traders dominate the response of limit-order submissions to shocks in a pure limit-order market. In the market we study, informed traders are highly sensitive to spreads, volatility, momentum and depth. By contrast, uninformed traders are relatively insensitive to all these market conditions. The dominance of the informed over limit-order submissions is magnified by contrasts between them and the uninformed in the use of aggressively-priced limit orders.

Expected Inflation, Expected Stock Returns, and Money Illusion: What Can We Learn from Survey Expectations?

Abstract: We show empirically that survey-based measures of expected inflation are significant and strong predictors of future aggregate stock returns in several industrialized countries both in-sample and out-of-sample. Empirically discriminating between competing sources of this return predictability by virtue of a comprehensive set of expectations data, we find that money illusion seems to be the driving force behind our results. Another popular hypothesis - inflation as a proxy for aggregate risk aversion - is not supported by the data.

Limit-Order Submission Strategies under Asymmetric Information

Abstract: This paper provides evidence that informed traders dominate the response of limit-order submissions to shocks in a pure limit-order market. In the market we study, informed traders are highly sensitive to spreads, volatility, momentum and depth. By contrast, uninformed traders are relatively insensitive to all these market conditions. The dominance of the informed over limit-order submissions is magnified by contrasts between them and the uninformed in the use of aggressively-priced limit orders.

Macro expectations, aggregate uncertainty, and expected term premia

Abstract: Based on individual expectations from the Survey of Professional Forecasters, we construct a real-time proxy for expected term premium changes on long-term bonds. We empirically investigate the relation of these bond term premium expectations with expectations about key macroeconomic variables as well as aggregate macroeconomic uncertainty at the level of individual forecasters. We find that expected term premia are (i) time-varying and reasonably persistent, (ii) strongly related to expectations about future output growth, and (iii) positively affected by uncertainty about future output growth and inflation rates. Expectations about real macroeconomic variables seem to matter more than expectations about nominal factors. Additional findings on term structure factors suggest that the level and slope factor capture information related to uncertainty about real and nominal macroeconomic prospects, and that curvature is related to subjective term premium expectations themselves. Finally, an aggregate measure of forecasters' term premium expectations has predictive power for bond excess returns over horizons of up to one year.

Trader See, Trader Do: How Do (Small) FX Traders React to Large Counterparties’ Trades?

Abstract: We show that information about the counterparty of a trade affects the future trading decisions of individual traders. The effect is such that traders tend to reverse their order flow in line with the better-informed counterparties. Informed traders primarily incorporate their own private as well as publicly available information into prices, whereas uninformed traders mainly magnify the effect of the informed. This pattern of interaction among traders extends to different order types: traders treat their own and others’ market orders as more informative than limit orders.

Are All Professional Investors Sophisticated

Abstract: Existing empirical evidence is inconclusive on whether professional investors show sophisticated behavior or not, a question which is at the heart of market efficiency. This ambiguous evidence is mostly based on trading data or laboratory evidence, which each has its limitations. We complement these approaches by conducting a survey of 500 investors, including several measures of sophistication, three relevant groups of investors and essential control variables. We find that both professional investors and laymen do indeed show unsophisticated investment behavior on aggregate. Furthermore, while some professional investors – institutional investors – behave at least more sophisticated than laymen, other professionals – investment advisors – seem to do even worse.

Dividend predictability around the world

Abstract: The common perception in the literature, mainly based on U.S. data, is that current dividend yields are uninformative about future dividends. We show that this finding changes substantially when looking at a broad international panel of countries, as aggregate dividend growth rates are found to be highly predictable by the dividend yield in medium-sized and smaller countries, but generally not in larger countries. We also show that dividend predictability is weaker in countries where the typical firm is larger and idiosyncratic dividend growth and return volatilities are lower. We find that the reason why dividends in countries with large and more stable firms are more difficult to predict is that these types of firms smooth their dividend more, and dividend smoothing disconnects movements in future dividends from dividend yield fluctuations making dividends difficult to predict. We finally show that in countries where the quality of institutions is high, dividend predictability is weaker. These findings indicate that the apparent lack of dividend predictability in the U.S. does not, in general, extend to other countries. Rather, dividend predictability is driven by cross-country differences in firm characteristics, dividend smoothing, and institutions.

Overconfidence, Experience, and Professionalism: An Experimental Study

Abstract: This paper presents an online-experiment on overconfidence in the context of financial markets Our subject pool consists of institutional investors, investment advisors and individual investors, all of them being registered users of a large online platform for market sentiment data Due to their registration, several socioeconomic characteristics of participants can be controlled for in our analysis It turns out that there are stable differences in overconfidence between the three investor groups Moreover, investment experience and age have a significant impact on the degree of overconfidence which goes surprisingly in opposite direction We argue that these results have important implications for studies analyzing the impact of experience on behavior in (financial) markets

Long-run Consumption Risk and International Stock Returns: A Century of Evidence

Abstract: We estimate consumption based asset pricing models using consumption and equity market data for fifteen countries from 1900 to 2008 in a setting where investors have recursive utility. We find strong evidence that a long-run risk consumption CAPM that prices international stock returns via their exposures to multi-period consumption growth in world consumption performs considerably better in explaining the international cross-section of returns than the canonical consumption CAPM. By virtue of the long-run data set, we are also able to relate the importance of world consumption risk for the cross-section of international stock returns to periods of high and low capital market integration. It turns out that the extent to which returns are exposed to world consumption growth indeed di ffers across periods: During the early part of our sample period, when international capital mobility was high, stock returns' exposure to world consumption growth is important. Local consumption growth, however, is more important for the post-WWII period when international capital mobility was generally low except for the last two decades.