Three Essays on Financial Markets

Abstract

This thesis studies anomalies and information dissemination in financial markets. The first essay examines seasonality and momentum jointly across national equity markets at the index level. We find that seasonality and momentum are almost uncorrelated and appear to arise from different global or local risk factors, rather than from different loadings on the same risk factor. We confirm our conclusion with a combination trading strategy: while the pure seasonality and momentum strategies individually generate sizable and significant returns, the combination strategy significantly outperforms the pure strategies in a way that is quantitatively consistent with their lack of correlation. The second essay predicts corporate earnings with composite peer return information. We find that explicitly utilizing interim focal firm returns and an optimal aggregate of peer firm returns improves the earnings forecast for the focal firm. A combination forecast with aggregate peer returns is significantly better than without. With aggregate peer returns the forecast moreover improves significantly on a pure consensus analyst forecast. A trading strategy of holding (shorting) stocks of firms for which combination forecasts of earnings exceed (fall short of) consensus analyst forecasts during the days leading up to and including the earnings announcement produce annualized abnormal returns of 11.5%. The third essay examines the insider’s role as an active information producer during major corporate events. Using the distinctive setting of trading suspension during mergers and acquisitions (M&As) in China, we show that insiders actively engage in private effort during trading suspensions to facilitate successful deal closure for higher equity trading profits. When regulatory tightening inhibits such efforts, insider profits fall by 0.39% over a 3-day window and the probability of successful deal closure drops by 1.88% for each one percentage point increase in insider trading. However, insider private effort in information production does not predict firm long-term performance, suggesting that information produced by insiders is non-fundamental and transitory.