Disappearance of size effect will not be an example of self fulfilling
prophesy (it disappeared rather than become stronger).

In the stock market, possible examples are:

1. Index inclusion effect in returns
2. The tendency of traders to put in trades early in the day or later in
the day but not in the middle of the day.
3. Most dispersion in returns during the earnings month.

The second part of the email asked about R code/test which will test these
effects for self fulfilling prophecy. The null for such test is "Are there
any economic reasons why we would see self fulfilling prophecies to work."
A general test is hard (probably impossible, see the following discussion)
since different economic(or psychological) factors shape each of these
examples. But we can formulate hypotheses for each one of these examples
and write tests.

Let me take the example of index inclusion effect. It is well known that
after included in an index such as S&P 500, a stock performs well. Why? For
one, there are many funds which are pegged to S&P 500 and many more which
simply follow the index. Both these kind of funds will have demand for the
newly inducted stock. Both these kind of funds will begin to buy the stock
and
move the prices up for the newly inducted stock. Since neither of these
demands have any informational origins, we would expect the permanent
impact to be small (close to zero) and a large temporary impact. See the
survey paper http://www4.ncsu.edu/~rswarr/fm2006.pdf for further discussion.

Another channel via which the effect might play out is through new
information production. It is very possible that index inclusion actually
brings a stock to the forefront of investors and produces new research for
the stock which in turn should make the stock less volatile. A
Campbell-Schiller type decomposition might help with matters here. You
could also examine the actual production of information (number of news
articles, analyst following, analyst dispersion etc). This line of
reasoning suggests that we would see this effect most for stocks which come
from relative anonymity to being famous. We would observe less of this
effect for stocks which were famous before inclusion in an index (such as
netflix for SP500 and any stock in Dow 30). But including such
informational channels involve careful examination of multitude of data
sources and ruling out the alternates one by one. It also involves
understanding the various forces at play (or institutional knowledge).

Regards

Nitish

p.s.: I think it is borderline not appropriate discussion for this list,
but since it asked for an R code it deserves some consideration.


On Wed, May 9, 2012 at 9:04 AM, Richard Herron
<richard.c.herron@gmail.com>wrote:

> Is this an R question?
>
> Are you taking about anomalies that disappear after we discover them? If we
> discover an anomaly and it disappears, then we have to wonder if we priced
> it right before or after. See the size effect.
>
> http://schwert.ssb.rochester.edu/hbfech15.pdf
>
> Richard Herron
>
>
> On Wed, May 9, 2012 at 8:01 AM, Wei-han Liu <weihanliu2002@yahoo.com>
> wrote:
>
> > Hi R users:
> >
> > There are some possible candidates of self-fulfilling prophecies in
> > financial study.
> >
> > Could some people share some thoughts about the relevant theories,
> > econometric tests, and R packages for implementation?
> >
> > Thanks for your attention and sharing.
> >
> > Wei-han
> >        [[alternative HTML version deleted]]
> >
> >
> > _______________________________________________
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> > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
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> > -- Also note that this is not the r-help list where general R questions
> > should go.
> >
>
>        [[alternative HTML version deleted]]
>
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>



-- 
Have fun.

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