Weekly Top 5 Papers – December 4th, 2017

1. Death by Pokémon GO by Mara Faccio (Purdue University – Krannert School of Management) and John J. McConnell (Purdue University)

2. Left-Tail Momentum: Limited Attention of Individual Investors and Expected Equity Returns by Yigit Atilgan (Sabanci University), Turan G. Bali (Georgetown University – Robert Emmett McDonough School of Business), K. Ozgur Demirtas (Sabanci University) and A. Doruk Gunaydin (Sabanci University)

This study investigates the cross-sectional relation between left-tail risk and future equity returns. Risk-averse investors would be expected to demand higher returns to hold securities with higher left-tail risk; however, our results suggest a significantly negative relation between future stock returns and left-tail risk, measured by value-at-risk and expected shortfall. This anomalous relation survives after controlling for various firm characteristics and a multitude of asset pricing factors in bivariate portfolio-level analyses and firm-level cross-sectional regressions. More importantly, the anomaly is not just restricted to U.S. equities and is observed in a large sample of international stocks that covers 23 countries.
We put forward a behavioral explanation for the finding that equities with high left-tail risk have lower expected returns. After establishing that left-tail risk is a persistent equity characteristic, we show that individual investors are more likely to be active in equities with higher left-tail risk than institutional investors. Next, we conjecture that the elusive nature of left-tail risk makes the investors’ attention constraints more likely to be binding, especially for individual investors. We think that large negative price shocks that generate left-tail risk are harder to interpret by retail investors compared to the direct and well-defined systematic shocks. As a result, the stock market can underreact to persistence in left-tail risk. Consistent with this hypothesis, we find that the left-tail risk anomaly is more pronounced for stocks that receive less investor attention and that are more likely to be held by individual investors, indicating the importance of investor clientele and inattention mechanisms.
We also provide an alternative explanation by showing that left-tail risk is highly persistent (cross-sectionally), i.e., stocks that are most susceptible to experience a large loss in the subsequent month are those that have experienced a large loss in the current month due to the high level of persistence in left-tail risk. Individual investors underestimate this persistence (or overestimate the degree of mean-reversion in left-tail risk) and hence they overprice those securities with high left-tail risk and recent large losses. When this persistence materializes and stocks that have crashed in month t continue to crash in month t+1, the negative relation between left-tail risk measures in month t and one-month-ahead stock returns becomes visible and the left-tail momentum effect emerges. In other words, as stocks with large recent losses continue to experience further losses, low returns in the left-tail of the empirical distribution persist into the future causing left-tail return momentum. – Turan Bali

3. Some Simple Economics of the Blockchain by Christian Catalini (Massachusetts Institute of Technology (MIT) – Sloan School of Management) and Joshua S. Gans (University of Toronto – Rotman School of Management)

The paper relies on economic theory to surface two key costs affected by blockchain technology: the cost of verification of transaction attributes, and the cost of bootstrapping and operating a digital marketplace without the need for a traditional intermediary. When combined with a native token (as in Bitcoin and Ethereum), a blockchain allows a decentralized network of economic agents to agree, at regular intervals, about the true state of shared data.
This shared data can represent exchanges of currency, intellectual property, equity, information or other types of contracts and digital assets – making blockchain a general purpose technology that can be used to trade scarce, digital property rights and create novel types of digital platforms. The resulting marketplaces are characterized by increased competition, lower barriers to entry and innovation, lower privacy and censorship risk, and allow participants within the same ecosystem to make investments to support and operate shared infrastructure without assigning market power to a platform operator. – Christian Catalini

4. Blockchain Technology: Principles and Applications by Marc Pilkington (Université Bourgogne Franche Comté)

5. What is Program Evaluation? A Beginners Guide (Presentation Slides) by Gene Shackman (The Global Social Change Research Project)

I wrote this as a very brief introduction to program evaluation. Many people want evaluations, or may read about evaluations, but may not have a clear idea about what exactly evaluation is. I was hoping this could be useful for beginners, or might be something that could be given to clients, potential clients, or funders, to explain what evaluation can do, and what it cannot do. One area that I might add is statistics, some very basic ideas. I am also always looking for suggestions and feedback. – Gene Shackman