Essays in empirical finance

This thesis consists of three essays on various topics in empirical financial studies. In Chapter 1, I study the profitability of momentum trading from evidence in mutual fund performance. I find that mutual funds that exhibit a strong momentum trading pattern earn significant risk-adjusted returns relative to Fama-French 3-Factor model, and tend to outperform other funds that do not momentum trade as much. The superior performance of these funds persists across different investment objectives as well as after controlling for fund size or fund flow. The robustness of my results suggests that momentum profits are real and momentum trading has the potential to improve a funds return. However, I also find relatively weak evidence of persistence in mutual funds trading styles. In particular, most funds do not seem to maintain their aggressiveness in momentum trading from one year to another. The findings indicate that momentum trading patterns observed in these mutual funds are more likely to be caused by random chances than the managers intention to capture momentum profits. Results in this paper also favor the under-reaction hypothesis as explanation for momentum in stock returns. Chapter 2 is a joint work with Charles Chang and Albert Wang. We explore how financial firms trade on in-house, US equity recommendations. We match the quarterly trades of financial firms with their own recommendations and document their trading patterns before, in the same quarter as, and after issuing recommendations. We find that net trade is more positive around upgrades than downgrades for all periods, and these relations are particularly significant in the quarter of and quarter immediately after the recommendation change. These empirical relations suggest that

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2004

Author dc:creator

• Chan, Kin Wai, 1975-

Advisor dc:contributor.advisor

• Jiang Wang.

• Sloan School of Management.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/17801

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/17801