Return Predictability and the Disposition Effect: A Case of Financial Institution Stocks

-- Souhir Masmoudi, Mouna Boujelbène Abbes and Amel Zenaidi

This paper studies the impact of the disposition effect on the return predictability before and during the global financial crisis periods. It uses data of 104 French financial institutions’ stocks over the period January 2001-December 2009. To construct behavioral factor, the capital gain-related proxy of Grinblatt and Han (2005) is estimated. The study of the cross-sectional determinants of this factor indicates a significantly positive impact of past return at short and intermediate horizons on the unrealized capital gains. The empirical analysis of the link between disposition effect and excepted return, after controlling for market anomalies, particularly size, momentum and reversals, shows a significantly positive cross-sectional relation between a stock’s unrealized capital gains and its expected returns during the tranquil period. Moreover, momentum and reversal effects, mainly documented in French market, disappear when the disposition effect is controlled for. Further, during global financial crisis period, the presence of disposition investors does not influence the expected return.

© 2011 IUP. All Rights Reserved.

Analysis of Solvency in Italian Local Governments: The Impact of Basel II

-- Francesca Manes Rossi

This paper proposes a classification model of the financial reporting of Italian Local Governments (ILGs) and a grid of indicators supporting financial analysts in their solvency ratings. Due to their increased financial autonomy, ILGs increasingly need to resort to various forms of borrowing. However, the Basel II agreement requires financial institutions to carry out a thorough assessment of the creditworthiness of all potential borrowers, including ILGs. After reviewing the main criteria adopted by rating agencies for their analyses, this paper focuses on the assessment of the financial situation and debt position of ILGs. Such entities use a ‘financial’ accounting system based on commitment and ascertainment, to which the cash flow analysis model provided by IPSAS cannot be applied. The proposed classification model and the relevant grid of indicators were applied to the ILGs, differing in size but located in the same area, in order to test whether these tools could provide a thorough assessment of the financial situation of any LG. Finally, the study proposes an equation to define the maximum degree of indebtedness for an LG, in compliance with the limits set by the current regulations in Italy.

© 2011 IUP. All Rights Reserved.

Information, Sentiment, and Price in a Fast Order-Driven Market

-- Alexis Derviz

This paper studies the impact of the disposition effect on the return predictability before and during the global financial crisis periods. It uses data of 104 French financial institutions’ stocks over the period January 2001-December 2009. To construct behavioral factor, the capital gain-related proxy of Grinblatt and Han (2005) is estimated. The study of the cross-sectional determinants of this factor indicates a significantly positive impact of past return at short and intermediate horizons on the unrealized capital gains. The empirical analysis of the link between disposition effect and excepted return, after controlling for market anomalies, particularly size, momentum and reversals, shows a significantly positive cross-sectional relation between a stock’s unrealized capital gains and its expected returns during the tranquil period. Moreover, momentum and reversal effects, mainly documented in French market, disappear when the disposition effect is controlled for. Further, during global financial crisis period, the presence of disposition investors does not influence the expected return.

© 2011 IUP. All Rights Reserved.