Abnormal trading volume,news and market efficiency: Evidence from the Jamaica Stock Exchange

This paper investigates market efficiency of the Jamaica Stock Exchange (JSE). Together, weak and semi-strong form efficiency claim that historical and newly released public information do not predict future stock price movement. We test both forms of market efficiency by analyzing stock price behavior during times of abnormal trading volume and around the release dates of earnings information. Abnormal trading volume may be driven by liquidity demand or reflect new or private information flow to the market. Using JSE data over the period 2000 to 2021, we find price dynamics consistent with price pressure as firms experience negative abnormal returns on the day of abnormal trading activity but offsetting positive abnormal stock returns on the following day. Further findings show post earnings announcement drift on the JSE. Taken as a whole, the evidence suggests violations of market efficiency and has implications for capital allocation in this emerging market.     

Networks and equity market integration: European evidence

Deregulation, globalization, and technological developments have altered the business strategies of stock exchanges around the world. We investigate whether the adoption of network strategies by stock exchanges creates additional value in the provision of trading services. Using unbalanced panel data from all major European exchanges over the period 1996-2000, we examine the consequences of network cooperation on a number of stock market performance measures. We show that adopting a network strategy is associated with higher market capitalization, lower transaction costs, higher growth, and enhanced international stock market integration.     

The October 1987 S&P 500 Stock-Futures Basis

Five-minute changes in the S&P 500 index and futures contract are examined over a ten-day period surrounding the October 1987 stock market crash. Since nonsynchronous trading problems are severe in these data, new index estimators are derived and used. The estimators use the complete transaction history of all 500 stocks. Nonsynchronous trading explains part of the large absolute futures-cash basis observed during the crash. The remainder may be due to disintegration of the two markets. Even after adjustment for nonsynchronous trading, the index displays more autocorrelation than does the futures and the futures leads the index.     

Quantifying preferential trading in the e-MID interbank market

Interbank markets allow credit institutions to exchange capital for purposes of liquidity management. These markets are among the most liquid markets in the financial system. However, liquidity of interbank markets dropped during the 2007–2008 financial crisis, and such a lack of liquidity influenced the entire economic system. In this paper, we analyse transaction data from the e-MID market which is the only electronic interbank market in the Euro Area and US, over a period of 11 years (1999–2009). We adapt a method developed to detect statistically validated links in a network, in order to reveal preferential trading in a directed network. Preferential trading between banks is detected by comparing empirically observed trading relationships with a null hypothesis that assumes random trading among banks doing a heterogeneous number of transactions. Preferential trading patterns are revealed at time windows of 3-maintenance periods. We show that preferential trading is observed throughout the whole period of analysis and that the number of preferential trading links does not show any significant trend in time, in spite of a decreasing trend in the number of pairs of banks making transactions. We observe that preferential trading connections typically involve large trading volumes. During the crisis, we also observe that transactions occurring between banks with a preferential connection occur at larger interest rates than the complement set—an effect that is not observed before the crisis.     

Information transmission and causality in the Italian Treasury bond market

We examine causality and efficiency in the Italian T-bond market, where cash trades take place on the domestic Mercato Telematico dei Titoli di Stato, while futures trading is based on the London International Financial Futures Exchange. We find evidence that causality in prices runs in both directions, and that the cash lead is almost comparable in size and extension to the futures lead. We then try to assess whether the cash market is weak-form efficient with respect to LIFFE prices. Using a simple trading rule with a variety of time and price filters, we conclude that the observed lead cannot be exploited to make a profit after transaction costs.     

Financial reforms and time-varying microstructures in emerging equity markets

This paper seeks to investigate the impact of financial reforms on time-varying microstructures in emerging equity markets. We develop annual indicators of informational efficiency, market volatility and transaction costs, using daily data for a panel of 28 emerging markets over the 1996–2007 period. We then analyze the impact of insider trading regulations, trading system automation and accounting standardization on microstructures through a set of panel regressions controlling for financial development and simultaneous reforms. Our results suggest that emerging market microstructures are affected by economic and political context, are strongly related to one another and depend on specific institutional reforms.     

The Flash Crash: High‐Frequency Trading in an Electronic Market

We study intraday market intermediation in an electronic market before and during a period of large and temporary selling pressure. On May 6, 2010, U.S. financial markets experienced a systemic intraday event—the Flash Crash—where a large automated selling program was rapidly executed in the E‐mini S&P 500 stock index futures market. Using audit trail transaction‐level data for the E‐mini on May 6 and the previous three days, we find that the trading pattern of the most active nondesignated intraday intermediaries (classified as High‐Frequency Traders) did not change when prices fell during the Flash Crash.     

Risk,illiquidity or marketability: What matters for the discounts on private equity placements?

Using a clean sample of private equity placements over the period of 1999 to 2012, we examine the determinants of the discounts on private placements. Classifying various determinants into three categories, namely risk, illiquidity, and marketability, we show that risk and marketability are significant determinants of the discount on private placements over the entire sample period. However, we identify a structural break in the relation between the discount on private placements with illiquidity and, to a lesser degree, marketability. Specifically, we find that liquidity is a more important determinant during the pre-2003 period, but marketability becomes a more important determinant during the post-2003 period. We attribute the structural break to substantial changes in market microstructure during our sample period. Lower transaction costs make illiquidity less of a concern for investors, whereas more active trading by investors calls for a higher discount for the lack of marketability.     

An analysis of trading strategies in eleven European stock markets

Abstract

In recent years, the validity of the weak form efficient market hypothesis (EMH) has been called into question as several studies have uncovered evidence that technical trading rules have predictive ability with respect to both developed and emerging stock market indices. This study analyses the forecasting power of 2 of the most popular trading rules using index data for a selection of 11 European stock markets over the January 1991 to December 2000 period. The findings indicate that the emerging markets included in this paper are informationally inefficient; these markets displayed some degree of predictability in their share returns, although the developed markets did not. Furthermore, the results point to large differences in the performance of the rules examined; while small size filters consistently outperformed the buy-and-hold strategy in the emerging markets examined even after the consideration of transaction costs, the performance of the moving average rules was erratic and varied dramatically from market to market.     

Options Trading Based on the Forecasting of Volatility Direction with the Incorporation of Investor Sentiment

Using options price data on the Taiwanese stock market, we propose an options trading strategy based on the forecasting of volatility direction. The forecasting models are constructed with the incorporation of absolute returns, heterogeneous autoregressive-realized volatility (HAR-RV), and proxy of investor sentiment. After we take into consideration the margin-based transaction costs, the results of our simulated trading indicate that a straddle trading strategy that considers the forecasting of volatility direction with the incorporation of market turnover achieves the best Sharpe ratios. Our trading algorithm bridges the gap between options trading, market volatility, and the information content of investor overreaction.     

Discount rate changes,stock market returns,volatility, and trading volume: Evidence from intraday data and implications for market efficiency

We examine the effect of discount rate changes on stock market returns, volatility, and trading volume using intraday data. Equity returns generally respond negatively and significantly to the unexpected announcements; however, the effect of expected changes on equity returns is insignificant. Furthermore, our results indicate that equity prices respond to announcements within the trading period/hour after the information release. An indication of a return reversal is too small to cover the full transaction costs. Unexpected discount rate changes also contribute to higher market volatility although the volatility is short-lived. Similarly, unexpected changes in discount rates induce larger trading volume while expected changes do not. Abnormal trading volume occurs only in period t. Our results also support the notion that unexpected changes in the discount rates impact market returns irrespective of the Federal Reserve operating procedures.     

Put-call parity and the informational efficiency of the German DAX-index options market

Using transaction data for options on the German stock index (DAX), we examine the informational efficiency of this relatively new options market. Because DAX options are European style and the underlying index is a performance index, we avoid problems due to dividend estimation and the assessment of the early-exercise effect, which are encountered in existing studies. Ex-post and ex-ante tests are carried out to simulate trading strategies for exploiting put-call parity violations. We find that ex-post profits diminish dramatically when the implementation of the arbitrage strategies is delayed and/or after transaction costs are accounted for. In general, however, arbitrage restrictions, which rely on short selling of the component stocks of the index, tend to be violated more severely than those relying on long positions in these stocks. Given the short-selling restrictions in Germany, these apparent arbitrage opportunities cannot be easily exploited in practice. Furthermore, the results for different subsamples suggest that traders were subject to a learning process in pricing these relatively new instruments.     

Performance of technical analysis in growth and small cap segments of the US equity market

A large universe of technical trading rules applied to a set of technology industry and small cap sector portfolios over the 1995-2010 period yields superior predictability after adjusting for data snooping bias in the first half of the sample period and delivers statistically significant profits for a number of portfolios when the transaction cost is assumed to be of small to moderate size. Technical analysis is not able to outperform the buy-and-hold approach for any portfolio in the set in the second half of the sample period. The finding that the short-term return predictability becomes much weaker in the more recent period suggests that the underlying segments of the equity market have become more efficient over time. The fact that mechanical trading strategies have been futile after adjusting for data snooping bias for two samples of portfolios where technical analysis is most anticipated to succeed suggests that it is unlikely to have delivered abnormal returns in any other segment of the domestic equity market in the last decade.     

Re-examining the small-cap myth: problems in portfolio formation and liquidation

This study investigates the realizable returns on portfolios at the turn-of-the-year. Using an intraday simulation that accounts for the volumes offered or wanted at market bid-ask prices, large-capitalization securities significantly outperform small-capitalization securities by 2.4% and 6.5%, depending on whether the portfolios were formed on the last day of the taxation year or were formed over the last month of the trading year. In no one year could the small-capitalization portfolio be completely divested by the end of the holding period, suggesting that investors are not remunerated for the illiquidity in this portfolio. Results based on returns calculated by using the mean of the bid-ask spread show that the results are not derived solely from transaction costs.     

Brokered versus dealer markets: Impact of proprietary trading with transaction fees

In this study, we consider a one-period financial market with a dealer/broker and an infinite number of investors. While the dealer who trades on his own account (with proprietary trading) simultaneously sets both the transaction fee and the asset price, the broker who brings investors' orders to the market (with no proprietary trading) sets only the transaction fee, given that the price is determined according to the market-clearing condition among investors. We analyze the impact of proprietary trading on the asset price, transaction fee, trading volume, and the welfare of investors. We find that the bid and ask prices set by the dealer who can engage in proprietary trading are more favorable to average investors. As a result, both the trading volume and the transaction fee increase, and social welfare improves.     

Social media and price discovery: The case of cross-listed firms

In this article, we examine whether social media information affects the price-discovery process for cross-listed companies. Using over 29 million overnight tweets mentioning cross-listed companies, we examine the role of social media for a link between the last periods of trading in the US markets and the first periods in the UK market. Our estimates suggest that the size and content of information flows on social networks support the price-discovery process. The interactions between lagged US stock features and overnight tweets significantly affect stock returns and volatility of cross-listed stocks when the UK market opens. These effects weaken and disappear 1 to 3 hr after the opening of the UK market. We also develop a profitable trading strategy based on overnight social media, and the profits remain economically significant after considering transaction costs.     

Trading frequency and asset pricing on the London Stock Exchange: Evidence from a new price impact ratio

This study proposes a new price impact ratio as an alternative to the widely used Amihud’s (2002) Return-to-Volume ratio. We demonstrate that the new price impact ratio, which is deemed Return-to-Turnover ratio, has a number of appealing features. Using daily data from all stocks listed on the London Stock Exchange over the period 1991–2008, we provide overwhelming evidence that this ratio, while being unequivocal to construct and interpret, is also free of a size bias. More importantly, it encapsulates the stocks’ cross-sectional variability in trading frequency, a relatively neglected but possibly important determinant of stock returns given the recently observed trends in financial markets. Overall, our findings argue against the conventional wisdom that there is a simple direct link between trading costs and stock returns by strongly suggesting that it is the compound effect of trading frequency and transaction costs that matters for asset pricing, not each aspect in isolation.     

Secondary Trading Costs in the Municipal Bond Market

Using new econometric methods, we separately estimate average transaction costs for over 167,000 bonds from a 1‐year sample of all U.S. municipal bond trades. Municipal bond transaction costs decrease with trade size and do not depend significantly on trade frequency. Also, municipal bond trades are substantially more expensive than similar‐sized equity trades. We attribute these results to the lack of bond market price transparency. Additional cross‐sectional analyses show that bond trading costs increase with credit risk, instrument complexity, time to maturity, and time since issuance. Investors, and perhaps ultimately issuers, might benefit if issuers issued simpler bonds.     

FX technical trading rules can be profitable sometimes!

This paper investigates the profitability of technical trading rules in the foreign exchange market taking into account data snooping bias and transaction costs. A universe of 7650 trading rules is applied to six currencies quoted in U.S. dollars over the 1994:3–2014:12 period. The Barras, Scaillet, and Wermers (2010) false discovery rate method is employed to deal with data snooping and it detects almost all outperforming trading rules while keeping the proportion of false discoveries to a pre-specified level. The out-of-sample results reveal a large number of outperforming rules that are profitable over short periods based on the Sharpe ratio. However, they are not consistently profitable and so the overall results are more consistent with the adaptive markets hypothesis.     

融资融券和股指期货对中国股市的影响：国别经验和初步评估

通过比较部分国家和地区推出融资融券和股指期货对股票市场的影响,并就中国融资融券和股指期货相关政策法规设计对股票市场的影响以及股票市场可能出现的问题和风险进行初步评估,结果表明融资融券和股指期货能够在一定程度上提高市场流动性,且在推出初期可能会加大市场波动;但长期而言必将有利于市场的稳定;也会带来市场结构调整的进一步深化以及交易策略、产品等的创新;同时还将对风险监管、指数权重股的交易监管带来新的挑战,