Psychological factors,

stock price paths, and

trading volume
Steven Huddart (Penn State),
Mark Lang (UNC Chapel Hill),
and Michelle Yetman (UIowa)
Discussed by Andrei Simonov
(Stockholm School of Economics)
Why should we care?
 Disposition effect: reference point is purchase price of
the stock (Shefrin & Statman (85), Odean 98)
 Note: disposition effect tends to disappear within ~ 240 trading
days (Jackson, 2002)
 Search story: small investors are net purchasers on the
days when stock is in the news (Barber& Odean 2002)
 Option exercise literature: Heath, Huddard and Lang
(99), Core & Guay (01), Potesman & Serbin (01)
 Ferris, Haugen & Makhija: trading volume is higher
when firm pass previous ”high price”
This paper...
 Builds on Ferris et. al.
 Convincingly documents the association between
extreme points in past price path and market
volume
 Suggests the association between behavioral
factors and trading volume
What is the idea?
Investors who bought in May-June 01, are more likely
to sell when the next high is hit (May-June 2002)
9000000 1.4

8000000
1.2

7000000
AMEX:ECO
1
6000000

5000000 0.8

4000000 0.6

3000000
0.4
2000000 Volume
Close 0.2
1000000

0 0
05/01/01 06/14/01 07/27/01 09/17/01 10/29/01 12/11/01 01/28/02 03/12/02 04/26/02 06/13/02
 Volume Leaders: NASDAQ | AMEX | NYSE
Price % Gainers: NASDAQ | AMEX | NYSE
Price % Losers: NASDAQ | AMEX | NYSE
Symbol Name Last Trade Change Volume

CYPB CYPRESS BIOSCI 10-Dec 2.55 1.11 77.08% 560,880

IAAC INTL ASSETS HLD 10-Dec 2.2 0.6 37.50% 7,500

MRAE MIRAE CORP 10-Dec 3.299 0.849 34.65% 700

CAMZ CAMINUS CORP 10-Dec 3.52 0.77 28.00% 153,769

EUNI EUNIVERSE INC 10-Dec 5.22 1.1 26.70% 942,125

INFT INFORTE CORP 10-Dec 6.94 1.24 21.75% 47,243

ATML ATMEL CORP 10-Dec 3.3 0.55 20.00% 21,521,940

EMMSP EMMIS COMM PR A 10-Dec 37.5 6.14 19.58% 27,225

How is it done?
 Weekly data in randomly chosen 1000
companies (why not all???? Possible biases as
firms tend to be small), NYAM &NASDAQ
 Variables of interest:
 PRIORMAX dummy
 LHIGH=PRIORMAX*MONTH SINCE PREV. HIGH
 Volume: measured as turnover or ”abnormal”
turnover.
 Control for ex-div and earning announcement
dates, price($ and relative), etc.
Model
 Essentially, the model estimated is reminiscent of
VAR with contemporaneous exogenous
variables:
ABNVOLt    PRIORMAX t  Controls t

 
5
  
tL ret 
tL  
t L ret 
tL
L 0

 is STRONGLY significant, Min(t-stat)=14

Critique(1): Logic
 Investors want to sell when the price reaches
new high
 The more sophisticated investors are, the more
prone they are to behavioral biases (Huddart &
Lang 02, Poteshman & Servin, 01)
 But... Barber & Odean 02: Unsophisticated
investors are net buyers on stock news date
 It seems that constant supply of suckers is
necessary to support the story
Critique: Econometric
 Why not full-fledged VAR
with past turnover? Example:
 Why weekly returns? Is it CYPB (CYPRESS BIOSCI)
possible that we are
Date Open Close Adj. Close*
missing real max? DAILY MAX $4.19 $4.26 $4.26
 Why raw returns? What DAILY MIN $0.96 $1.00 $1.00

would happen if returns WEEKLY MAX $4.19 $4.10 $4.10

are adjusted for market WEEKLY MIN $1.05 $1.05 $1.05

and especially for

momentum?
What are alternative explanations?
 Barber & Odean 2002: news story.
 Essentially it says that effect of 52 weeks high is self-
reinforcing.
 Investors are buying stock which was in the news
 But being in max. is equivalent in being on the news
(both in High/Low section and on Lou Dobbs’
Moneyline, CNBC Power Lunch, etc.)
Can we test for alternative
explanations?
 My small sample
4 month of daily data Feb-May 2000:
 Returns (both raw and market-adjusted), volume,
dividend payouts, etc.
 Press releases dummy (=1 if release was issued

on that date)
 Number of times the company was mentioned in

the press/in TV news, etc. (daily)

 59 Swedish companies
Measures of press exposure
 I am using abnormal exposure measured as
residual of regression of number of hits on
 Log10(MktCap), press releases dummy (same day
and lagged), industry dummies, day of week dummies,
market index return, in different combinations (does
not affect results)
 Similar to the measure of abnormal analyst’ coverage.
 Full fledged VAR model
T
 t

t

Yt  TOt , ret , ret , PRIORMAX t , PRIORMINt , Exposuret 
XTt   Pr ess Re lt , IndustryDummy, FirmDummy 
L M
Yt      lYt l    m X t  m
l 1 m 0

Number of lags (L, M) determined via AICC criteria

Results
RAW RETURN CAPM Adj RET
2 2
c DF p-val c DF p-val

CONTROL= PRESS RELEASES, firm fixed effects

Exposure → Turnover 14.16 3 0.0027 19.83 5 0.0013
← 35.47 3 <.0001 34.59 5 <.0001
PRIORMIN, PRIORMAX → Turnover 2.33 6 0.8867 2.78 10 0.9862
← 3.57 6 0.7343 3.39 10 0.9708
PRIORMIN → Turnover 1.39 3 0.708 1.05 5 0.9583
← 1.38 3 0.7106 1.27 5 0.9382
PRIORMAX → Turnover 0.88 3 0.8304 1.67 5 0.893
← 1.86 3 0.6028 1.82 5 0.8728
Exposure → Pos(Ret), Neg(Ret) 11.01 6 0.0882 22.33 10 0.0135
← 63.63 6 <.0001 72.42 10 <.0001
Exposure → Pos(Ret) 8.13 3 0.0435 10.44 5 0.0638
← 48.61 3 <.0001 37.75 5 <.0001
Exposure → Neg(Ret) 6.65 3 0.084 12.13 5 0.0331
← 6.46 3 0.0914 13.87 5 0.0165
Pos(Ret), Neg(Ret) → Turnover 16.53 6 0.0112 21.22 10 0.0196
← 11.44 6 0.0757 13.15 10 0.2153
PRIORMIN, PRIORMAX → Exposure 13.59 6 0.0346 14.35 10 0.1577
← 5.83 6 0.4424 8.17 10 0.6119
PRIORMIN → Exposure 0.75 3 0.8608 1.24 5 0.9409
← 0.72 3 0.869 0.8 5 0.9771
PRIORMAX → Exposure 12.86 3 0.005 13.11 5 0.0224
← 5.06 3 0.1675 7.25 5 0.2029
PRIORMIN, PRIORMAX → Pos(Ret), Neg(Ret) 11.77 12 0.464 14.83 20 0.7863
← 11.92 12 0.4525 27.75 20 0.1153
PRIORMAX → Pos(Ret) 1.00 3 0.8012 1.36 5 0.9281
← 2.33 3 0.507 2.44 5 0.7849
Results(2)
 No causality between PRIORMIN, PRIORMAX
and either TO or returns
 Causality from PRIORMAX to EXPOSURE
 Stronger for raw returns (p=0.005), weaker for market
adjusted returns
 Strong bi-directional causality between exposure
and turnover
 Strong causality from returns to exposure,
weaker one from exposure to returns (but still
stat. signif. on 5% level, stronger for market-
adjusted returns)
Results(3)
 PRIORMAX is important, PRIORMIN is not. May
be, disposition effect?
 How to understand Huddart-Lang-Yetman? As
chain
PRIORMAXExposure Turnover
 Exposure effect is stronger and on short time
horizon can even drive returns.
 So, it is still behavioral, but… Not on sellers’ but
on buyers’ side.
Net picking: AMEX:ECO
Average analyst’ ranking ~4/5 (run away!), worst CAN Au firm
”Au prices rising…Money is
flowing into gold stocks.” 3-way merger announced,
Reuters, May 17 Fidelity increases stake
9000000 1.4

Credit Crunch,
8000000 fire sale,
1.2
S&P downgrade to B-
7000000

6000000

0.8
5000000

4000000
0.6

First merger rumors

3000000

0.4

2000000 Volume on Reuters

Close
0.2
1000000

0 0
05/01/01 06/14/01 07/27/01 09/17/01 10/29/01 12/11/01 01/28/02 03/12/02 04/26/02 06/13/02
Gold and Echo Mines
450 340

400 330

350 320

300 310

250 300

200 290

150 280

GOLD PM
100 270
Close *300

50 260

0 250

06/15/01 07/30/01 09/18/01 10/30/01 12/12/01 01/29/02 03/13/02 04/29/02 06/14/02 07/29/02 09/11/02 10/23/02 12/05/02