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Three Essays on the Interplay between Trading and Business Conditions

  • Author / Creator
    Kayacetin, Nuri Volkan
  • The first essay provides evidence on the origins of the size and value premiums by examining how order flow in the SMB and HML portfolios relates to economic conditions and investor sentiment. We find that buying pressure for SMB and HML is lower (increases) when economic conditions are expected to deteriorate (improve), while it is unrelated to proxies for investor sentiment and sales growth. These findings are consistent with big stock and value stocks being regarded as hedges against adverse shifts in economic conditions, and support a rational state variable interpretation of the size and value premiums. The second essay finds that the marketwide average of individual stock order flows and the difference between the average order flow for big stocks and the average order flow for small stocks (order flow differential) predict growth rates in real GDP, industrial production, and corporate earnings. The predictive significance of these two measures is robust to controls for return factors, suggesting a role for order flow in forecasting stock returns. Consistently, we show that an increase in the order flow differential forecasts higher returns for ten size-sorted portfolios and significantly greater market and size premiums in the subsequent quarter, even after accounting for a large host of variables. These findings are consistent with a world where aggregate order flow brings together dispersed information from heterogeneously informed investors. The third essay shows that stocks that are harder to value (stocks with less valuable growth options and more dispersed analyst forecasts) and stocks that attract less uninformed trading activity (small stocks, illiquid stocks, stocks not covered by analysts) have higher price impacts, greater probabilities of informed trading, and more private information in returns. In the time-series, reductions in trading activity and consumer sentiment increase the average price impact of trading and reduce the share of firm-specific information in returns. Recessions see high price impacts, low trading activity, and a smaller share of private signals in price movements. This reduction in private information seems to have an impact on the informativeness of prices for corporate managers: the sensitivity of corporate investment to the prices is significantly lower during recessions.

  • Subjects / Keywords
  • Graduation date
    2010-06
  • Type of Item
    Thesis
  • Degree
    Doctor of Philosophy
  • DOI
    https://doi.org/10.7939/R3SS9B
  • License
    This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.
  • Language
    English
  • Institution
    University of Alberta
  • Degree level
    Doctoral
  • Department
    • Faculty of Business
  • Supervisor / co-supervisor and their department(s)
    • Kaul, Aditya (University of Alberta, School of Business)
  • Examining committee members and their departments
    • Watanabe, Akiko (University of Alberta, School of Business)
    • Jamal, Karim (University of Alberta, School of Business)
    • Chordia, Tarun (Emory University, Goizueta Business School)
    • Mehrotra, Vikas (University of Alberta, School of Business)
    • Galvani, Valentina (University of Alberta, Department of Economics)