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Academic information and financial markets : an empirical investigation of market learning from the size anomaly Mittoo, Usha Rani


This dissertation examines the impact of academic information on the capital markets. A test of market learning from academic information is performed by examining the impact of published research about the size anomaly on the underlying asset pricing process. A theoretical framework to examine the effect of events that affect the equilibrium pricing process is first developed in a simple economy with one single risky asset. A learning model based on Bayesian updating is proposed and its empirical implications are derived. The model predicts a change in the asset prices in the case of market learning. The predictions about the learning path depend on the assumed information structure. The key hypotheses are motivated through an illustrative case in a multi-asset economy where there is more information available concerning large firms than about small firms. The econometric model of switching regimes is used to analyze the hypothesized structural change in the mean returns associated with the size variable. We postulate two regimes, one prior to and another after the incorporation of research information on the size anomaly. We find evidence of a switch in regimes with estimated mean switch located in 1983. The estimated average size premium has declined from approximately 13.6% per annum in the first regime to about -2.8% per annum in the second regime. More importantly, the switch in 1983 is not explained by any of the hypothesized economic factors that explain a large part of the stochastic variation in the size effect in the periods prior to 1983. We also find evidence of a switch in regimes when the seasonal January size effect is excluded. The evidence also suggests an increase in the trading volume associated with the information arrival. Our evidence strongly suggests that the market has undergone a change in its underlying equilibrium pricing process after the discovery of the size anomaly. The evidence supports the hypothesis that academic research relating to the size anomaly has provided useful information to the investors and the market has learnt from this information.

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