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SUMMARY:Can the Market Multiply and Divide? Non-Proportional Thinking in F
 inancial Markets
DTSTART:20180921T103000
DTEND:20180921T120000
DTSTAMP:20260916T123735Z
UID:e4addfc847736a02e8c7b0b47c8a724bbea571b3a7c225a0d1abbb98
CATEGORIES:Conferences - Seminars
DESCRIPTION:Kelly SHUE\, Yale School of Management\nWhen pricing financial
  assets\, rational agents should think in terms of proportional price chan
 ges\, i.e.\, returns. However\, stock price movements are often reported i
 n dollar rather than percentage units\, which may cause investors to think
  that news should correspond to a dollar change in price rather than a per
 centage change in price. Non-proportional thinking in financial markets ca
 n lead to return underreaction for high-priced stocks and overreaction for
  low-priced stocks. Consistent with a simple model of non-proportional thi
 nking\, we find that total volatility\, idiosyncratic volatility\, and abs
 olute market beta are significantly higher for stocks with low share price
 s\, controlling for size. To identify a causal effect of price\, we show t
 hat volatility increases sharply following stock splits and drops followin
 g reverse stock splits. The economic magnitudes are large: non-proportiona
 l thinking can explain a significant portion of the “leverage effect” 
 puzzle\, in which volatility is negatively related to past returns\, as we
 ll as the volatility-size and beta-size relations in the data. We also sho
 w that non-proportional thinking biases reactions to news that is itself r
 eported in nominal rather than scaled units. Investors react to nominal ea
 rnings per share surprises\, after controlling for the earnings surprise s
 caled by share price. The reaction to the nominal earnings surprise revers
 es in the long run\, consistent with correction of mispricing.
LOCATION:UNIL\, Extranef\, room 126 https://planete.unil.ch/plan/?local=EX
 T-126
STATUS:CONFIRMED
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