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Essays on communication and trading in financial markets

Chen, Jane Jingxuan (2023) Essays on communication and trading in financial markets. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004583


This thesis studies information transmission via communication and trading in financial markets. In the first chapter, to understand strategic interaction among short sellers, I develop a model to explain how size affects a short seller’s incentive and behaviour in trading and disclosing. The model rationalizes the strategic complementarity between small and large funds in short-selling campaigns. Namely, the delayed entry of the large fund helps the small fund avoid margin calls, while the large fund free-rides on the small fund’s disclosed information. I discuss the ambiguous effect of announcements on market efficiency and provide further predictions. In the second chapter, I empirically study how hedge funds strategically disclose their private information during short-selling campaigns. Using data on hedge funds’ voluntary announcements and daily short positions in the EU market, I document the existence of two groups of funds: Announcers and Followers. Announcers, typically small and young, (1) establish short positions, (2) publish research reports about short targets, and (3) realise profits from the falling price within a short time frame. Followers, usually large, enter at the release of reports and increase their short positions even after announcers exit. I also test two unique predictions. Stocks with lower borrowing costs and wider mispricing are more likely to be publicly attacked by hedge funds. In the third chapter, my co-authors and I uncover a significant relationship between the persistence of marketing and investment skills among U.S. mutual fund companies. Using regulatory filings, we calculate the share of marketing-oriented employees to total employment and reveal a large heterogeneity in its level and persistence. A framework based on costly signaling and learning helps explain the observed marketing decision. The model features a separating equilibrium in which fund companies’ optimal marketing employment share responds to their past performance differently, conditional on the skill level. We confirm the model prediction that the volatility of the marketing employment share negatively predicts the fund companies’ long-term performance.

Item Type: Thesis (PhD)
Additional Information: © 2023 Jane Jingxuan Chen
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Finance
Supervisor: Kondor, Peter

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