Stock Market Anomalies And Baseball Cards
University of California, San Diego (UCSD) – Rady School of Management
University of South Florida
University of South Florida
June 21, 2016
We show that the market for baseball cards exhibits anomalies that are analogous to those that have been documented in financial markets, namely, momentum, price drift in the direction of past fundamental performance, and IPO under performance. Momentum profits are higher among active players than retired players, and among newer sets than older sets. Regarding IPO under performance, we find that newly issued rookie cards under perform newly issued cards of veteran players, and that newly issued sets under perform older sets. Our evidence is consistent with the predictions of Hong and Stein (1999) and Miller (1977).
Stock Market Anomalies And Baseball Cards – Introduction
Basic financial theory predicts that stock returns should be unpredictable after adjusting for risks. That is, any abnormal returns earned by trading strategies are either expectational errors or compensation for risks that investors care about that are not captured by the asset pricing model.
Financial economists have documented the existence of simple strategies that earn unusually high or low returns despite the fact that the strategies do not load heavily on common risk factors. For example, Jegadeesh and Titman (1993) document that during holding periods of 3-12 months, stocks that have performed well in the past 3-12 months continue to outperform stocks that have performed poorly in the past 3-12 months. In addition, Ritter (1991) documents that firms that have recently gone public underperform their peers over their first three years of public trading.
In the case of momentum, the field has produced a plethora of possible explanations for the phenomenon. Several of these theories are consistent with optimal investor behavior. Such theories rely on features that are unique to financial markets such as time-varying expected dividend growth rates (Johnson, 2002), firms’ growth options (Berk, Green, and Naik, 1999; Sagi and Seasholes, 2007), and mutual fund flow inertia (Vayanos and Woolley, 2013). In addition to these, there are behavioral theories based on suboptimal investor behavior (Barberis, Shleifer, and Vishny, 1998; Daniel, Hirshleifer, and Subrahmanyam, 1998). Restricting oneself to financial data, it is difficult to test whether any one of these theories are actually a source of momentum, because all of the theories apply to financial data. It is thus difficult to say that momentum is explained by one of the theories but not the others. The point of this study is to use a non-financial laboratory in which some, but not all, of these theories should apply. If we find momentum, this would be evidence that momentum can exist naturally in markets without the bells and whistles of dynamic growth rates, dividends or mutual funds.
Our laboratory is the market for baseball cards. Baseball cards have a long history, dating all the way back to the late 1860’s (Jamieson, 2011). By 1991, sales of baseball cards reached $1.2 billion annually (Jamieson, 2011). Although baseball cards produce no cash flows, their market values can be substantial. For example, the T206 Honus Wagner, which was produced from 1909-1911, has been sold for as much as $2.8 million.1 Because there have been long periods of time over which their values have appreciated, baseball cards have often been perceived as investment vehicles. This perception has been fueled in part by the popular press: in 1988 the New York Times published an article on baseball cards noting that over the previous decade, cards’ values had risen 32% per year.
Most theories of momentum do not apply to this market. There are no growth options, dividends, or mutual funds. Even within the class of behavioral theories, not all of the models apply to our setting. For example, Daniel, Hirshleifer and Subrahmanyam (1998) develop a model in which investors correctly interpret public information but overreact to private information. Since the vast majority of relevant information about baseball player performance and popularity is public, our setting is not naturally suited to testing their theory.
Among the behavioral theories, Hong and Stein (1999) is the one that should most apply to the market for baseball cards. In their model, momentum arises because information gradually diffuses across the investor population. That is, at each time t there is information that is released, but different portions of the population observe different pieces of the information at different times—it is only at a later date s (where s>t) that everyone has observed the information that was released at time t. In the market for baseball cards, player performance is one of the primary determinants of card value, since performance has a strong effect on player popularity. Among active players, performance information is released almost daily since baseball teams play 162 games per year (plus playoffs). To the extent that collectors cannot immediately process all the performance information about all players in real-time (due to constraints such as limited attention), this information should diffuse through the population of collectors in a manner similar to Hong and Stein (1999).
If Hong and Stein (1999) is valid, then we should find momentum not only in financial markets, but in any market with gradual information diffusion such as the market for baseball cards. Obviously, there are many significant differences between the market for baseball cards and the stock market. One difference is the level of investor sophistication. In the stock market, there are many hedge funds that can arbitrage away inefficiencies and keep prices in line with fundamentals. In the baseball card market, there are dealers who are relatively sophisticated, but much of the activity in this market is driven by children. Moreover, whereas it is common to short stocks, there is little (if any) short selling of baseball cards. Hence, the opportunity for arbitrage is severely limited in the baseball card market. Because of these differences, if gradual information diffusion is truly a source of momentum profits, we should expect momentum to be significantly stronger in the market for baseball cards because the participants are generally less sophisticated and there are fewer opportunities for arbitrage. Consistent with this prediction, we find that short run (3 month) momentum strategies earn 5.6% per month, whereas momentum strategies in the stock market earn less than 1% per month.
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