Are idiosyncratic volatility and MAX priced in the Canadian market?

The negative relationship between realized idiosyncratic volatility (RIvol) and future returns uncovered by Ang et al. (2006) for the U.S. market has been attributed to return reversals. For the Canadian market where return reversals are considerably less important, we find that RIvol is positively related to future returns, even after controlling for risk loadings, illiquidity and reversals. Unlike the findings of Bali et al. (2001) for the U.S. market, we find that the relationship between extreme positive returns (MAX) and future returns for the Canadian market is positive and that idiosyncratic volatility continues to be consistently positively related to future returns after controlling for MAX. We find evidence that suggests that reversals for stocks with extreme daily returns are confined to (typically small) stocks with low institutional holdings.     

JUMPS,NEWS, AND SUBSEQUENT RETURN DYNAMICS: AN INTRADAY STUDY

We detect jumps in a high-frequency price series of exchange-traded funds (ETFs) that track the broad indexes of U.S. equity markets. Although many jumps (43%) are related to macroeconomic news, more jumps (57%) are not. No-news jumps are followed by significant return reversals for at least 60 minutes. The return dynamics after news-related jumps vary with the news characteristics. Scheduled-news jumps are followed by reversals, whereas unscheduled-news jumps are followed by momentum. Whether related to news or not, negative jumps are followed by stronger return reversals than are positive jumps.     

Foreign investment with inflation-linked securities: A natural hedge under Fisher theory?

All foreign holders of U.S. dollars currencies face significant risk of unfavorable currency exchange movements, proportional to the amounts they hold. Some of these risks can be hedged to an extent, but the costs of doing so can be significant, and errors in execution or maintenance of the hedges can cause serious capital losses. Today the vast holdings of China and others creates currency risk on an unprecedented scale. China alone now has a total in excess of a trillion (1 × 10¹²) U.S. dollars, which makes traditional approaches to hedging problematic at best.¹ This paper analyzes the potential hedging effectiveness of investing foreign dollar holdings in U.S. inflation-indexed securities under Fisher's Identity. To the extent that Fisher's Identity and its derivative theories hold, foreign investors can effectively protect the purchasing power of their dollar balances, and earn an assured rate of return. Investment in inflation-indexed securities does not incur the additional expenses that swaps and currency hedges do.     

The time-varying diversifiability of corporate foreign exchange exposure

Estimating comovement measures for a large set of bilateral foreign exchange (FX) rates, I explore the relation between firm-level FX exposure and its time-varying diversifiability. For a sample of U.S. firms, the magnitude of FX exposure appears to increase during periods of low currency risk diversifiability. Additional results suggest that the introduction of the euro exacerbated the effect of diversifiability on developed market currency exposure. Moreover, the low diversifiability of emerging market currencies seems to have a stronger effect on FX exposure than the low diversifiability of developed market currencies.     

The Global CAPM and a Firm's Cost of Capital in Different Currencies

In an integrated global market, a firm's cost of capital expressed in one currency should be consistent with its cost of capital expressed in another currency. This article presents and illustrates a process for estimating consistent costs of capital in different currencies for a U.K. based multinational. In so doing, it uses a simple, easy-to-use version of the global CAPM that attempts to incorporate the effect of uncertain exchange rates by calculating exchange rate "betas." As argued in the previous article, at least part of a company's currency exposure is systematically related to the global market and thus should be treated as a component of the firm's systematic equity risk.
For example, the U.K. firm featured in this article is shown to have an exchange rate beta of 0.20 from the perspective of a U.S. investor. This implies that a 10% return on the global market in U.S. dollars tends to be associated with a 2% change in the U.S. dollar value of the British pound. One interesting consequence of incorporating exchange risk in this fashion is that two firms with identical U.S. global betas and costs of equity will have different expected returns expressed in another currency if they have different exposures to that currency.     

U.S. domestic money, inflation and output

Recent empirical research documents that the strong short-term relationship between U.S. monetary aggregates on one side and inflation and real output on the other has mostly disappeared since the early 1980s. Using the direct estimate of flows of U.S. dollars abroad we find that domestic money (currency corrected for the foreign holdings of dollars) contains valuable information about future movements of U.S. inflation and real output. Statistical evidence suggests that the Friedman-Schwartz stylized facts can be reestablished once the focus of analysis is back on the correct measure of domestic monetary aggregates.     

VOLATILITY SPILLOVERS BETWEEN THE BLACK MARKET AND OFFICIAL MARKET FOR FOREIGN CURRENCY IN GREECE

The issue of volatility spillovers between the black and official exchange markets for U.S. dollars in Greece for 1975–89 is examined. A vector error correction‐bivariate EGARCH model is developed and estimated to capture potential asymmetric effects of innovations and volatility. During the period under investigation, reciprocal spillovers are found between the black and official exchange markets for dollars. Furthermore, spillovers are asymmetric in that bad news in one market has a greater effect on the volatility of the other market than good news. Additionally, the size of spillover effects is greater from the official market to the black market. Finally, the removal of the foreign exchange controls in January 1986 made the volatility of the official exchange rate higher and changed the nature of volatility spillovers between the two markets. JEL Classification: F31, F32     

Price reversal,transaction costs,and arbitrage profits in the real estate securities market

This paper studies the return reversals of exchange traded real estate securities using an arbitrage portfolio approach. Using the approach, we find that there exist significant return reversals in such securities. These return reversals could be exploited by arbitrage traders if trading costs can be ignored. However, the arbitrage profits disappear after deducting trading costs and taking into account the implicit cost of bid-ask spread. Thus, the real estate securities market is efficient at weekly intervals in the sense that one could not exploit the price reversals via some simple trading rules.     

Long‐Term Return Reversals: Overreaction or Taxes?

Long‐term reversals in U.S. stock returns are better explained as the rational reactions of investors to locked‐in capital gains than an irrational overreaction to news. Predictors of returns based on the overreaction hypothesis have no power, while those that measure locked‐in capital gains do, completely subsuming past returns measures that are traditionally used to predict long‐term returns. In data from Hong Kong, where investment income is not taxed, reversals are nonexistent, and returns are not forecastable either by traditional measures or by measures based on the capital gains lock‐in hypothesis that successfully predict U.S. returns.     

Foreign Exchange Risk,Hedging, and Tax-Motivated Outbound Income Shifting

Although outbound income shifting to low-tax jurisdictions provides tax savings, it is often accompanied by nontax costs. In this study, I examine whether foreign exchange (FX) risk constrains tax-motivated outbound income shifting by U.S. multinational corporations. My findings indicate that exposure to greater currency volatility is associated with less outbound income shifting, and this effect is stronger for firms with foreign affiliates using foreign functional currencies. I also investigate whether hedging facilitates outbound income shifting. Consistent with hedging lowering costs associated with exchange rate volatility, I find that U.S. firms that use more currency derivatives tend to shift more income to low-tax foreign jurisdictions. Overall, these findings suggest that FX risk is an important cost of outbound income shifting.     

The Moving Average Ratio and Momentum

I show the ratio of the short‐term moving average to the long‐term moving average (moving average ratio, MAR) has significant predictive power for future returns. The MAR combined with nearness to the 52‐week high explains most of the intermediate‐term momentum profits. This suggests that an anchoring bias, in which investors use moving averages or the 52‐week high as reference points for estimating fundamental values, is the primary source of momentum effects. Momentum caused by the anchoring bias do not disappear in the long‐run even when there are return reversals, confirming that intermediate‐term momentum and long‐term reversals are separate phenomena.     

DO U.S. STOCK MARKET INDEXES OVER‐ OR UNDERREACT?

Our objective is to investigate the short‐term over‐ or underreaction of six U.S. stock market indexes. We find evidence of a one‐day underreaction for winners (days on which an index experiences abnormally high returns) and losers (days on which an index experiences abnormally poor performance). We also find strong evidence of a sixty‐day underreaction for winners. For losers, abnormal returns turn from negative to positive as the period is extended, resulting in significant reversals over the sixty‐day period. Results are generally consistent for each of the six indexes. Overall, these results provide strong support for the uncertain information hypothesis. JEL classification: G14     

From dusk till dawn (and vice versa): Overnight-versus-daytime reversals and feedback trading

Although overnight-versus-daytime return reversals have often been ascribed to the heterogeneous clienteles of the overnight and daytime sessions, there exists no evidence to date on how those clienteles' trading behaviour motivates these reversals. We empirically investigate this issue for the first time by assessing whether these reversals are the result of feedback trading during overnight/daytime hours. Drawing on the S&P 500 ETF for the 1993–2021 period, we find that overnight (daytime) feedback trading largely motivates the expected positive (negative) overnight (daytime) returns; in line with this, days entailing the expected negative overnight-versus-daytime return reversals accommodate stronger feedback trading at the daily (i.e., close-to-close) frequency. Daytime feedback trading is present when the immediately preceding overnight session's returns are positive, while overnight feedback trading reveals a strong Monday-effect. We also show that overnight-versus-daytime variations of feedback trading hold across other large US ETFs.     

谁在补贴美国?——美国对外资产负债规模及收益率差异分析

美国在对外净负债的情况下,其海外资产的收入仍超过其因对外债务支付的利息,这也就是不少学者所说的超级特权。通过对比美国与主要投资对象的资产负债头寸和收益率数据,我们发现亚洲出口大国和地区性金融中心为美国提供了资本补贴——既给美国提供大量廉价资本,又为美国在本地的投资提供高额回报。     

Is asymmetric mean-reverting pattern in stock returns systematic? Evidence from Pacific-basin markets in the short-horizon

This paper applies asymmetric nonlinear smooth transition generalized autoregressive conditional heteroskedasticity (ANST-GARCH) models to the analysis of mean-reversion and time-varying volatility in weekly index returns of the stock markets of nine countries in the Pacific-basin. It finds that the returns exhibit an asymmetric pattern of return reversals, viz., on average, a negative return reverts more quickly, with a greater magnitude, to a positive return than a positive return reverting to a negative one. The asymmetric pattern of return reversals is directly associated with the unequal pricing behavior on the part of investors. Following a negative return shock, investors do not appear to require any additional premium to the leverage effect; instead they actually neutralize the risk in the form of a reduced premium! The reduction in risk premium causes not only the current stock price to rise but also the realized negative return to revert faster with a greater magnitude.     

Do Americans consume too little natural gas? An empirical test of marginal cost pricing

This article measures the extent to which prices exceed marginal costs in the U.S. natural gas distribution market during the period 1991–2007. We find large departures from marginal cost pricing in all 50 states, with residential and commercial customers facing average markups of over 40%. Based on conservative estimates of the price elasticity of demand, these distortions impose hundreds of millions of dollars of annual welfare loss. Moreover, current price schedules are an important preexisting distortion which should be taken into account when evaluating carbon taxes and other policies aimed at addressing external costs.     

Should Shareholders Have a Say on Acquisitions?

Shareholders of U.S. corporations have lost billions of dollars in acquisitions they never approved. In the United Kingdom, the listing rules give shareholders a binding say when targets are large relative to their acquirers. A transatlantic comparison of M&A activity suggests that if U.S. shareholders had a say on acquisitions, U.S. acquirers would do fewer value‐destroying acquisitions and their own shareholders would experience smaller losses. The authors also report finding a significant difference in the performance of the large U.K. deals that are subject to a mandatory vote and those that are not. The United States has given shareholders a mandatory say on pay. Is it time for U.S. shareholders to have a binding say on corporate acquisitions?     

Speculator activity and the cross-asset predictability of FX returns

This paper tests the gradual information diffusion hypothesis, which suggests that information spreads gradually across asset markets, to explain the role of speculator activity in the cross-asset return predictability of foreign exchange (FX) market strategies. We argue that the activity of speculators increase the rate of information diffusion across asset markets. Hence, we expect the predictive effect from the equity and commodity markets on FX market strategies to be weaker when speculators are active in the FX market. Our results show that, when speculator activity is high, the equity market's ability to predict the FX market dissipates, but not to the same extent as for the commodity market. Our findings suggest that speculators play a vital role in enhancing informational efficiency in the FX market.