Publications

Check out my published papers.

Volatility Spread and Stock Market Response to Earnings Announcements, Journal of Banking and Finance, 2017, forthcoming. (Co-authored with Xuewu Wang and Zhipeng Yan)

Using a broad sample of earnings announcements, we find a monotonic increase in the spread between call and put implied volatilities as it gets closer to the earnings announcement date. The steady build-up of volatility spread in the days leading up to the announcement date, coupled with the predictive power of cumulative abnormal implied volatility spread on subsequent announcement returns, suggests that informed traders are the driving force behind the option market activities prior to earnings announcements. Such informed trading, as proxied by the abnormal implied volatility spread, increases rather than decreases the stock market response to earnings announcements after controlling for an array of firm and announcement characteristics. This effect is most pronounced when the pre-earnings option trading volume is heightened. Overall, our findings lend strong support to the notion that informed options trading immediately before earnings announcements helps alleviate the stock market under-reaction to earnings announcements and make it closer to a complete response.

Can Traders Beat the Market? Evidence from Insider Trades, China Finance Review International, 2014, 4(3), 243-270. (Co-authored with Murli Rajan and Xuewu Wang)

Using the comprehensive trading data for the U.S. corporate insiders between 1993 and 2008, we document robust evidence that insiders as a whole achieve transaction prices superior to the volume-weighted average prices. This outperformance, expressed as a positive trading alpha, remains after we control for trade difficulty, insider reputation and the corporate role ranks of insiders. Upon analyzing the time series patterns of portfolio returns to strategies of mimicking corporate insiders with abnormal trading alphas in the extreme quartiles, we conclude that the outperforming insiders at the aggregate level resemble value investors who act on long-term fundamental information, trade patiently and earn rents from providing liquidity. Moreover, outside investors benefit from mimicking the acts of outperforming insiders in real time. The sizeable profit from this mimicking strategy withstands the erosion from adjustments for standard factors in the asset pricing literature and the adjustment for stock characteristics.

Time-Varying Liquidity Trading, Private Information and Insider Trading, European Financial Management, 2014, 20(2), 321-351. (Co-authored with Xuewu Wang)

This paper investigates the insider trading before scheduled versus unscheduled corporate announcements to explore how corporate insiders utilize their private information when the amount of liquidity trading is time varying. Using a comprehensive insider trading database, we show that the insider's propensity to trade before corporate announcements increases in the amount of liquidity trading before both the scheduled and unscheduled announcements. This pattern is more pronounced among unscheduled announcements than scheduled ones. We also find insiders buy (sell) more before announcements with positive (negative) announcement returns. This association is much stronger before unscheduled announcements than before scheduled ones. Consistent with the informativeness of insider purchases, we find insider purchases are more profitable before unscheduled announcements than before scheduled ones. Taken together, our empirical results provide direct evidence that insiders time their trades around scheduled and unscheduled announcements to exploit the varying extent of liquidity trading. This trade timing is manifested in the insider's propensity to trade, the insider's direction of trade and the profitability of their trades before such announcements.

Flight to Liquidity due to Heterogeneity in Investment Horizon, China Finance Review International, 2012, 2(4), 316-350. (Co-authored with Xuewu Wang)

This paper provides some rational perspective for the flight-to-liquidity event. My model highlights the inherent difference in investors' investment horizon, and thus their sensitivity to changes in transaction costs in the stock and bond markets. When stock market deterioration results in higher trading costs, the existing marginal investor shifts wealth to bonds instead of remaining indifferent between stocks and bonds. At the new equilibrium, there is a higher fraction of bond ownership and a longer average investment horizon among stock holders. I demonstrate empirical evidence in strong support of the theoretical predictions and make the case for the flight-to-liquidity event as a result of investor heterogeneity in investment horizon.

An Empirical Analysis of Corporate Insiders' Trading Performance, China Finance Review International, 2012, 2(3), 246-264. (Co-authored with Murli Rajan and Xuewu Wang)

This paper conducts an empirical analysis of the trading performance of US corporate insiders. Based on the Volume Weighted Average Price, we propose a metric to measure the trading performance of US corporate insiders: trading alpha. This metric is clean of the contamination effect from insiders' own trades. We apply this metric to examine whether insiders can beat the market when they trade. We find that corporate insiders achieve positive trading alpha on both purchases and sales of stocks on average. The existence of a positive trading alpha is robust to controlling for firm, trading and insider characteristics. More importantly, we find evidence for the persistence in corporate insiders' trading performance. Those insiders who traded well in the past continue to trade well over time. Those who well execute in purchases of stocks also perform well in sales.

Financial Value of Reputation: Evidence from the eBay Auctions of Gmail Invitations, Journal of Industrial Economics, 2011, 59(3), 422-456.

In a marketplace of repeated transactions with asymmetric information, theory predicts that sellers with a good reputation have a higher probability of sale and receive a higher transaction price. In this article, I test this theory using more than 55,000 auctions of "Gmail invitations" on eBay, essentially a market of homogeneous goods with non-enforceable contracts. This is an ideal environment to test the theory because it allows a clean separation of the reputation effects from other controlling factors. This study provides evidence in favor of the theoretical predictions because sellers who improve their reputation from the lowest to the next quintile experience a 6.2% higher probability of sale and a 6.1% hike in the implied buyer valuation after adjusting for truncation bias from failed auctions and explicitly controlling for seller heterogeneity such as skill. This study also shows that in addition to a dimension of reputation universal across different product markets, the product-specific dimension of reputation significantly affects the auction outcomes.

Time-Varying Informed and Uninformed Trading Activities, Journal of Financial Markets, 2005, 8(2), 153-181. (Co-authored with Guojun Wu)

We develop a framework to investigate time-varying interactions between informed and uninformed trading activities. By estimating the model for 40 NYSE stocks, we demonstrate that the buy and sell arrival rates of the uninformed traders are different and time-varying. Informed traders strategically match the level of the uninformed arrival rate with a certain probability. Uninformed traders tend to adopt contrarian strategy in reaction to high prior stock returns, but employ momentum strategy in reaction to high prior market returns. The estimated time-varying probability of informed trading is a good predictor for various measures of bid-ask spreads, and is a better measure of information asymmetry than several existing measures.


Manuscripts

Here are some of my working papers.

Unveiling the Identity of PIN from the Flash Crash: Illiquidity or Information Asymmetry?, Manuscript, 2011.

This paper extends the original PIN framework to explicitly allow for the coexistence of liquidity shocks and fundamental news, both of which can lead to order imbalances. The pseudo market makers submit contrarian orders in the event of liquidity shocks and thus move the stock prices back to the fundamental level. Consequently, the conventional PIN measure consists of one component driven by the informed traders who receive the fundamental news and another component due to pseudo market makers who arrive upon liquidity shocks. During the flash crash on May 6, 2010, there is a nearly ten-fold market-wide increase in the illiquidity component of PIN but there is a lack of uniform increase in the information asymmetry component, based on the estimation of the extended PIN model for common stocks listed on NYSE and AMEX. In contrast, the original PIN model disallows liquidity shocks and thus overestimates the extent of asymmetric information. In addition to introducing a conceptually more pure measure of asymmetric information than that is previously available, this paper also contributes to the literature through methodological improvements to the PIN estimation and provides the recipe to eradicate the numerical overflow and underflow problems and impute the daily PIN series from repeated estimations of quarterly PINs.

AIMing at PIN: Order Flow, Information, and Liquidity, Manuscript, 2008. (Co-authored with Gautam Kaul and Noah Stoffman)

In this study, we model and measure the existence of informed trading. Specifically, we investigate the properties of the widely used measure of informed trading, PIN, developed by Easley and O'Hara, and establish three important features of informed trading. First, the existence of informed trading, and therefore PIN, should be estimated over different trading intervals for stocks of different characteristics. Second, we establish a direct relationship between PIN and the absolute (percentage) order imbalance (AIM). The latter is not only easier to measure, but can also be readily calculated over short horizons. Most importantly, we show that conditions for the theoretical equivalence between estimated PIN and AIM of a stock serve as a guide for the optimal estimation interval that should be used for that particular stock. Finally, and significantly, an investigation around exogenous national security events reveals strong evidence against interpreting PIN and order imbalance as a liquidity measure.

Momentum is Not an Anomaly, Manuscript, 2007. (Co-authored with Bob Dittmar and Gautam Kaul)

In this paper, we develop a new approach to test whether momentum is indeed an anomaly in that it reflects delayed reactions, or continued overreactions, to firm specific news. Our methodology does not depend on a specific model of expected returns and, more importantly, does not require a decomposition of momentum profits. Yet we provide distinct testable predictions that can discriminate between the two diametrically opposed causes for the profitability of momentum strategies: time-series continuation in the firm-specific component of returns, and cross-sectional differences in expected returns and systematic risks of individual securities. Our results show that, contrary to the common belief in the profession, momentum is not an anomaly; we find no evidence of continuation in the idiosyncratic component of individual-security returns. The evidence is instead consistent with momentum being driven entirely by cross-sectional differences in expected returns and risks of individual securities.

Cash Distributions and Returns, Manuscript, 2006.

Discounted cash flow analysis suggests that high cash-flow-to-price ratios should predict high future stock return, low future cash flow growth, or both. Existing studies on the predictive power of the dividend-price ratio, however, produce evidence largely inconsistent with this prediction. In this paper, we address this issue by focusing on the total cash distributions that include both dividends and share repurchases net of seasoned equity offerings. Utilizing a long time series of the total-cash-distributions-to-price (tp) ratio constructed from CRSP data since 1927, we establish strong and persistent evidence of stock return predictability at the annual horizon. Based on a wide variety of evaluation methods, the tp ratio is both statistically and economically significant in predicting future stock market returns, and serves as a pervasive state proxy.


Notes

Here are a stack of my class notes. I took Information Economics from Professor Anjan V. Thakor. It contains some very interesting expositions on game theory applications in Finance. I highly recommend you to check it out. I also took Stochastic Process from Professor Shane Henderson, International Finance from Professor Susan M. Collins, and Computational Macroeconomics from Professor Jinill Kim.

I have also accumulated some notes on econometrics from taking numerous econometric classes over the course of a few years. The back bone of it, though, was my notes from reading Econometric Analysis by William H Greene as well as A Guide to Econometrics by Peter Kennedy. It is being updated from time to time, but it may still contain typographical errors. You assume the sole risk of using it.


Codes

Here are some computer programs that I wrote for academic research. Feel free to check them out but do not re-distribute them without notifying me first. Note that you are using these codes at your own risk.

  • Compustat XPF: the code helps processing the Compustat Xpressfeed
  • CUSIP Check Digit: the code computes the check digit for CUSIPs
  • Dividend Yield: the code computes the dividend-price ratio and dividend yield
  • Download FF Factors: the code downloads and parses the Fama-French factors
  • Download FRED II: the code downloads and parses the data from FRED II
  • Download Articles: the code helps you download journal articles for private use
  • Extracting Insider Data: the code helps you extract insider trading data
  • Fiscal Year Conversion: the code helps you to convert the accounting fiscal year into calendar dates
  • Interacting SAS with Perl: the code provides a perl script to interact with SAS
  • Matching by Names: the code provides a perl script to aid the name matching process
  • Momentum Factors: the code helps you to generate the momentum factors
  • Parsing N-SAR: the code helps you to parse the SEC N-SAR form
  • Parsing Compact D: the code helps you to parse the Compact D database
  • Rolling Returns: the code helps you to compute the rolling stock returns
  • SAS Procedures: the code describes a few commonly used SAS procedures
  • Stock Splits: the code helps you to handle stock splits using CRSP database
  • WRDS Remote: the code provides a basic template for submitting remote SAS jobs to WRDS

Resources

Here are some web resources that are related to academic research.

  • Academic Journals: here are some journals related to the Finance field
  • Econometric Books: here are some books related to Econometrics
  • Financial Data: here are some unique databases related to Finance research
  • Journal References: here is some useful information related to academic journal citations
  • Michigan Web: here are some resources available from the University of Michigan
  • SMU Web: here are some resources available from SMU
  • Parsing FEN: here is some information on how to parse FEN
  • Google Books: here is the basic information about Google books project

© Qin Lei. All Rights Reserved.