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428_lecture7_Dividend_S09

428_lecture7_Dividend_S09 - TA Wei Cen Won’t hold office...

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Unformatted text preview: TA: Wei Cen Won’t hold office hours and TA sections this week due to some family issues. He will make up the missed section. Announcement Review: Short Interest What is short interest? What do we know short interest in general? Short Interest on the rise The typical firm has very little short interest Review: Short Interest What do we know market for borrowing? Most stocks are easy to borrow Majority (91%) stocks are “general collateral” 9% stocks are “special” (with 1% “very special”) Recalls are rare Review: Short Interest What do we know market for borrowing? What do we know the “special”? High investor disagreement, turnover, and dispersion in analyst forecasts, increased message board activity, and low cash flows. Review: Short Interest How smart are bears? Large short interest is bad news for a firm’s future returns (incremental to 3-factor model) Heavily shorted stocks look like late-stage glamour stocks (high V/P ratios, high turnover) But profitability of this strategy is mainly from heavily shorted stocks with high volume and volatility Desai et al. (JF 2002) Calendar abnormal returns for heavily shorted firms from month EN=1 to Ex+1 Market Risk Required Return = Risk-free return + Risk Premium Models: CAPM (Assuming market risk only) R it – R ft = α i + β imt (R mt- R ft ) + ε it R i- R f = α + β im x ( R m- R f ) + ε i Multiple Risks Required Return (i) = Risk-free return + Beta1 (i) x Risk Premium for factor 1 + Beta2 (i) x Risk Premium for factor 2 + … + Betak (i) x Risk Premium for factor k Models: Multifactor model R i- R f = α + β 1 x ( R m- R f ) + β 2 x ( Risk premium factor 2 ) + … + β k x ( Risk premium factor k ) + ε i Data Characteristics (Fama and French, 1992) Returns don’t vary across portfolios sorted on β Why when β’s are strongly correlated with size MVE decreases as β increases (but small variation) Over the whole period β doesn’t explain average returns Portfolio average returns (Fama and French, 1992)...
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428_lecture7_Dividend_S09 - TA Wei Cen Won’t hold office...

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