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We use a sample of option prices to estimate the ex ante higher moments of the underlying individual securities' risk-neutral returns distribution. We find that individual securities' risk neutral volatility, skewness, and kurtosis are strongly related to future returns. Specifically, we find a negative relation between past volatility and subsequent returns in the cross-section. We also find that ex ante more negatively (positively) skewed returns are associated with subsequent higher (lower) returns, while ex ante kurtosis is positively related to subsequent returns. We analyze the extent to which these returns relations represent compensation for risk and find evidence that, even after controlling for differences in co-moments, individual securities' skewness matters.

We examine whether the price response to bad and good earnings shocks changes as the relative level of the market changes. The study is based on a complete sample of annual earnings announcements during the period 1988 to 1998. The relative level of the market is based on the difference between the current market P0E and the average market P0E over the prior 12 months. We find that the stock price response to negative earnings surprises increases as the relative level of the market rises. Furthermore, the difference between bad news and good news earnings response coefficients rises with the market. ONE OF THE LONGEST RUNNING empirical debates in finance regards the relative pricing of "value" and "glamour " stocks. Beginning with early work by Basũ 1983! and Stattman~1980!, evidence has accumulated that excess returns on value stocks-that is, the issues of companies for which the ratio of earnings, cash f low, or book value per share is large relative to stock price-are greater than returns on glamour stocks, for which these ratios are small. On one side, Fama and French~1992, 1993, 1995, 1996! argue that the observed differential between the returns on value and glamour stocks represents a risk premium. The alternative view, articulated by Lakonishok, Shleifer, and Vishny~1994!, is that the market fails to efficiently price value and glamour stocks.Extending Lakonishok et al.~1994!, recent work in behavioral finance by, for example, Barberis, Shleifer, and Vishny~BSV, 1998! and Daniel, Hirshleifer, and Subrahmanyam~1998! argues that the value0glamour effect is the result of investor psychology. In particular, the model in BSV allows for investor underreaction~in the intermediate term! to single shocks and investor overreaction~in the longer term! to a series of shocks. This model also implies an asymmetry in the returns to value and glamour stocks following a news shock. Following a string of positive shocks observed in, say, glamour stocks, the investor in this model expects another positive shock, that is, he expects the earnings to trend. If good news is announced, the market re-2507 sponse is relatively small since the positive shock was anticipated. A negative shock, on the other hand, generates a large negative return, since it is more of a surprise.The primary empirical tests of the competing explanations for the value0 glamour differential have been conducted on earnings announcements~La Porta,~1996!, Dechow and Sloan~1997!!. La Porta et al.~1997! and Bernard, Thomas, and Wahlen~1997! find that earnings announcement returns explain almost half of the return differential between value and glamour stocks. More recently, Skinner and Sloan~1999! use a sample of earnings announcements and find that when pre-announcement effects are included, the differential reaction to earnings announcements completely explains the differential returns to value and glamour stocks. In addition, Skinner and Sloan also find evidence consistent with the BSV hypothesis. In particular, they find that the response to news is asym...

We show that the returns to the typical long‐term contrarian strategy implemented in previous studies are upwardly biased because they are calculated by cumulating single‐period (monthly) returns over long intervals. The cumulation process not only cumulates “true” returns but also the upward bias in single‐period returns induced by measurement errors. We also show that the remaining “true” returns to loser or winner firms have no relation to overreaction. This study has important implications for event studies that use cumulative returns to assess the impact of information events.

This paper examines the price effect of

Using a large sample of nonfinancial firms from 47 countries, we examine the effect of derivative use on firm risk and value. We control for endogeneity by matching users and nonusers on the basis of their propensity to use derivatives. We also use a new technique to estimate the effect of omitted variable bias on our inferences. We find strong evidence that the use of financial derivatives reduces both total risk and systematic risk. The effect of derivative use on firm value is positive but more sensitive to endogeneity and omitted variable concerns. However, using derivatives is associated with significantly higher value, abnormal returns, and larger profits during the economic downturn in 2001-2002, suggesting that firms are hedging downside risk.

This article tests for the relations between trading volume and subsequent returns patterns in individual securities' short-horizon returns that are suggested by such articles as Blume, Easley, and O'Hara (1994) and Campbell, Grossman, and Wang (1993). Using a variant of Lehmann's (1990) contrarian trading strategy, we find strong evidence of a relation between trading activity and subsequent autocovariances in weekly returns. Specifically, high-transaction securities experience price reversals, while the returns of low-transactions securities are positively autocovarying. Overall, information on trading activity appears to be an important predictor of the returns of individual securities. IN RECENT YEARS, MANY researchers have presented evidence that shorthorizon returns are predictable. Due to the scarcity of short-horizon economic data, the evidence on predictability in short-horizon returns has largely been based on past returns data. For example, Lo and MacKinlay (1988) find that weekly portfolio returns have large positive autocorrelations; Conrad, Kaul, and Nimalendran (1991) and Lehmann (1990) find significant autocorrelations in the returns of individual securities. The evidence suggests that past prices and returns contain important information for forecasting future returns. Typically, these studies also find that the returns of small firms are more predictable. More recent articles have examined the relation between trading volume and predictable patterns in returns. Blume, Easley, and O'Hara (1994) present a model in which traders can learn valuable information about a security by observing both past price and past volume information. In their model, volume provides data on the quality or precision of information in past price movements; this model suggests that there is a significant relation between lagged volume and the current returns on individual securities. and University of Texas-Dallas for their comments. Any remaining errors are ours alone. Niden acknowledges financial support from the University of Notre Dame Center for Research in Business. 1305 1306The Journal of Finance Traders who include volume measures in their technical analysis perform better in the market than those who do not. Blume, Easley, and O'Hara (1994) also conjecture that the relation between past volume and prices may be more pronounced for smaller, less widely followed firms.Campbell, Grossman, and Wang (1993) also explore the relations between volume and returns by modeling the interactions between liquidity investors and risk-averse expected utility maximizers, who effectively act as "market makers." In their model, market makers must be compensated for offsetting the fluctuating demands of liquidity traders; thus, if liquidity traders sell on average, the price drops to enable the market makers to earn a higher return. Because the variations in the aggregate demand of the liquidity traders also generate large levels of trade, volume information can help distinguish between price movements that are due to public infor...

We use a sample of option prices to estimate the ex ante higher moments of the underlying individual securities' risk-neutral returns distribution. We find that individual securities' risk neutral volatility, skewness, and kurtosis are strongly related to future returns. Specifically, we find a negative relation between past volatility and subsequent returns in the cross-section. We also find that ex ante more negatively (positively) skewed returns are associated with subsequent higher (lower) returns, while ex ante kurtosis is positively related to subsequent returns. We analyze the extent to which these returns relations represent compensation for risk and find evidence that, even after controlling for differences in co-moments, individual securities' skewness matters.