Revisit Closed-End Fund Puzzles via Dynamic Capital Mobility

Song, Garrison Hongyu; Jain, Ajeet

doi:10.32479/ijefi.11373

Cited by 2 publications

(2 citation statements)

References 25 publications

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“…Once the numbers of four types of investors in stationary equilibrium are determined from Propositions 1 and 2, we can combine them with the DCMM originally proposed by Song and Jain (2021) to draw a formula for the market equilibrium stock price. First, the four value functions corresponding to four types of investors are defined:…”

Section: Determination Of Stock Price In Market Equilibriummentioning

confidence: 99%

“…One distinctive feature of our model is that we explicitly introduce the dynamics of investors' type transformation, which may better characterize the actual stock trading process. A similar approach is also applied to explore the closed-end fund puzzles by Song and Jain (2021) and the commercial real estate market by Song and Mussa (2021).…”

Section: Introductionmentioning

confidence: 99%

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Size premium or size discount? – A dynamic capital mobility based interpretation

Song

2022

SEF

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Purpose The size effect that there exist return differences between small market-cap firms and large market-cap counterparts in the stock market has become one of the most controversial capital market anomalies. This paper aims to interpret this effect, including both the size premium and the size discount. Design/methodology/approach A dynamic capital mobility model (DCMM) is proposed, and the model’s explanatory ability is validated via simulation. Findings This study’s simulation results indicate that the observed size effect can be originated from the combination of the pure size effect and the investors’ herding behavior. Although the size premium, that average returns of small firms are higher than those of large firms, is more prevalent in the stock market, this study’s model implies that the size discount is also possible, which is largely an empirical issue. The pure size effect per se cannot reproduce the size premium. Only if the herding effect dominates the pure size effect would there exist the size premium. Originality/value Although the literature provides miscellaneous explanations for the size effect, they are still inconclusive. So far there has been no theory to directly investigate the size effect and to explicitly explore the impact of investors’ trading behavior on the size effect. To the best of the author’s knowledge, this paper fills in this gap and proposes a DCMM to interpret the size effect for the first time. In addition, while the literature focuses on the size premium only, this study covers not only the size premium but also the size discount.

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Section: Determination Of Stock Price In Market Equilibriummentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Size premium or size discount? – A dynamic capital mobility based interpretation

Song

2022

SEF

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Unraveling stock market crashes: insights from behavioral psychology

Song

2024

RBF

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PurposeA novel psychology-based framework is proposed to investigate the causes of stock market crashes.Design/methodology/approachOur approach builds upon the dynamic capital mobility model, expanding it by incorporating bidirectional relationships between investor sentiment and the average stock market price level. Investor sentiment is measured in terms of jumping rates of investors’ attitudes to the stock market in our model. The role and impact of investor sentiment on the average stock market price level are further clarified across various scenarios through simulations.FindingsOur model provides a direct quantification of the influence of investor sentiment on stock market price dynamics, shedding light on an alternative mechanism contributing to stock market crashes alongside fundamental changes. Our simulation results confirm that optimistic investor sentiment can mitigate the magnitude of negative stock market price movements triggered by adverse fundamental changes. Our model also indicates that the stock market price level may exhibit higher volatility than can be attributed to fundamental changes.Research limitations/implicationsOur study only briefly touches on the origins of shifts in investor sentiment by introducing a self-fulfilling feedback loop from the average stock market price level to investor sentiment. In future research, we will identify other key factors contributing to shifts in investor sentiment and subsequently analyze their influence on investor sentiment.Practical implicationsOur findings carry practical implications for recent and future movements in the US stock market. For instance, despite the Federal Reserve’s continuous interest rate hikes since March 2022, the overall optimistic investor sentiment has helped mitigate a severe downward movement in the stock market. However, in the absence of clear indications of a loose monetary policy, a rapid shift of investor sentiment from optimism to pessimism in the US stock market could potentially lead to a historic stock market crash.Originality/valueWhile the significance of investor sentiment in shaping stock market price dynamics, particularly regarding cross-sectional variations of stock returns, is widely recognized, quantifying directly its impact on the average stock market price level has remained a persistent challenge. Only very limited literature has delved into this subject, often hindered by a lack of theoretical support or yielding inconsistent results.

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Revisit Closed-End Fund Puzzles via Dynamic Capital Mobility

Cited by 2 publications

References 25 publications

Size premium or size discount? – A dynamic capital mobility based interpretation

Size premium or size discount? – A dynamic capital mobility based interpretation

Unraveling stock market crashes: insights from behavioral psychology

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