Heterogeneous time varying transaction costs and asset pricing in international equity markets

In this paper, we examine the time variation in transaction costs relative to excess returns, in a panel consisting of 10 international equity indices over the time period 1984–2005. This is undertaken by extending the consumption CAPM (CCAPM) model proposed by Campbell and Shiller (Rev. Financ. Stud. 1:195–228, 1988) to incorporate time varying proportional transaction costs. We rigorously address both the cross-country heterogeneity in the estimated model and endogeneity. We find strong evidence that suggests transaction costs should be included as an additional explanatory variable in the CCAPM. This leads to the conclusion that transaction costs should be included in asset pricing models as their stochastic process impacts directly on private consumption expenditure.

Price reversals versus price continuations: the transitory price effects of futures trading extension on the underlying stock market

This paper examines the transitory price effects of index futures trading extension on the underlying stock market. Based on the model formulation of George and Hwang (1995) and Amihud and Mendelson (1987) and using the Hong Kong data, we find that the extension of futures trading hour helps to reduce the opening pricing errors and change the correlations between daytime and overnight stock returns. Our finding adds to the literature that the trading behavior of derivatives has a significant influence on the transitory price changes of the underlying cash products.

The Dynamic Impact of Macro Shocks on Insurance Premiums

We develop a model that investigates the relation between insurance premiums and macroeconomic variables, including oil price, interest rate, aggregate supply, and aggregate demand. We then use a multivariate structural vector error correction model to distinguish the effects arising from permanent and transitory components of insurance premiums. Changes in the transitory component indicate that our model captures key historical events. Although real shocks originating from oil price and aggregate supply explain the behavior of insurance premiums well, we show that financial market shocks are the main driving force behind the recent increasing volatility in insurance premiums in the U.S. market.

Takeover motives in a weak regulatory environment surrounding a market shock: a case study of New Zealand with a comparison of Gondhalekar and Bhagwat’s (2003) US findings

We examine the motives for takeovers in New Zealand surrounding the 1987 stock market crash and compare with the US findings of Gondhalekar and Bhagwat (2003). There are a number of structural differences between the New Zealand and US markets that could impact on merger motives. Compared with the US, New Zealand is a small capital market; with weak takeover regulation and a prolonged aftermath of the 1987 stock market crash. Consistent with US research, we find evidence of synergy and hubris motivations in New Zealand takeovers although we find the synergy motivation is stronger. Contrary to expectations we find no evidence of agency motivated takeovers.

Securities Transaction Tax and Market Efficiency: Evidence from the Japanese Experience

This study examines the effect of transaction costs on the time series behavior of stock returns over a period surrounding the April 1989 changes in tax rates on securities transactions and capital gains in Japan. We find significant decreases in estimates of the first-order autocorrelation in returns for Japanese stocks listed in Japan, but no changes for Japanese stocks dually listed in the United States as American Depository Receipts (ADRs), which were not subject to the tax law change. We also find lower price basis between the ADRs and their underlying Japanese stocks. These results are consistent with the hypothesis that a reduction in transaction costs improves the efficiency of the price discovery process.

Retail Investors and the Trading of Treasury Securities

I analyze implicit transaction costs of trading government debt securities on the Spanish stock exchanges (SE) electronic trading system. The SE’s multilateral system is used mainly as an outlet for retail investors to liquidate Treasury accounts positions before maturity. I compare identical Treasury security trades on the same day in two different markets: the SE and the interdealer market. By analyzing these yield spreads I learn more about the behavior of the markdowns included in the retail prices from the institutional prices. I find evidence that these yield premia depend on traditional features to explain wholesale market liquidity premia.

Idiosyncratic Risk and REIT Returns

The volatility of a stock returns can be decomposed into market and firm-specific volatility, with the former commonly known as systematic risk and the later as idiosyncratic risk. This study examines the relevance of idiosyncratic risk in explaining the monthly cross-sectional returns of REIT stocks. Contrary to the CAPM theory, a significant positive relationship is found between idiosyncratic volatility and the cross-sectional returns. This suggests that firm-specific risk matters in REIT pricing. The regression results further show that once idiosyncratic risk is controlled for in the asset-pricing model, the size and book-to-market equity ratio factors ceased to be significant. The explanatory power of the momentum effect remains robust in the presence of idiosyncratic risk.

Are the Fama–French factors proxying news related to GDP growth? The Australian evidence

Inspired by Vassalou (J Financ Econ 68:47–73, 2003), we investigate the contention that the Fama and French (J Financ Econ 33:3–56, 1993) model’s ability to explain the cross sectional variation in equity returns is because the Fama–French factors are proxying for risk associated with future GDP growth in the Australian equities market. To assess the validity of Vassalou’s findings, we augment the CAPM and the Fama–French model with a GDP growth factor and run system regressions of the GDP-enhanced models using the GMM approach. Our results suggest that news about future GDP growth is not priced in equity returns and that any ability that SMB and HML exhibit in explaining equity returns is not because they contain information about future GDP growth.

Density estimation through quasi-analytic Monte-Carlo simulation: Options arbitrage with transactions costs

Discretely rebalanced options arbitrage strategies in the presence of transaction costs have path dependent returns that are difficult to model analytically. I instead use a quasi-analytic procedure that combines the computational efficiency of analytical solutions with the flexibility of simulations. The central feature is the estimation of the distribution of returns of the arbitrage strategy by mapping simulated returns percentiles and the input parameter set. Using the estimated density, I evaluate the tradeoff between transaction costs and risk exposure under generalized transaction costs structures that includes bid-ask spread and brokerage commission. I show that the optimal strategy depends on transaction costs, volatility, and option moneyness. Strategies such as rebalancing when the hedge ratio changes by 0.25, balances transaction costs and risk exposure, and can be optimal.

The relationship between implied and realized volatility: evidence from the Australian stock index option market

This paper examines the relationship between the volatility implied in option prices and the subsequently realized volatility by using the S&P/ASX 200 index options (XJO) traded on the Australian Stock Exchange (ASX) during a period of 5 years. Unlike stock index options such as the S&P 100 index options in the US market, the S&P/ASX 200 index options are traded infrequently and in low volumes, and have a long maturity cycle. Thus an errors-in-variables problem for measurement of implied volatility is more likely to exist. After accounting for this problem by instrumental variable method, it is found that both call and put implied volatilities are superior to historical volatility in forecasting future realized volatility. Moreover, implied call volatility is nearly an unbiased forecast of future volatility.

Evidence of Information Asymmetries in the Market for Residential Condominiums

Previous research (Rutherford et al. 2005; Levitt and Syverson 2005) identify and quantify agency problems in the brokerage of single-family houses. Real estate agents are found to receive a premium when selling their own houses in comparison to similar client-owned houses. Given the homogeneity of the condominium market in comparison to the single-family house market, we use a large sample of condominium transactions to examine if agency problems exist in the condominium market. Controlling for sample selection and endogeneity bias of the data, we find evidence for a similar price premium for agent-owned condominiums. In contrast to the results for single-family houses in the same geographic market, we find that agent-owned condominiums must stay on the market longer to receive a higher price.

The impact of H-share derivatives on the underlying equity market

We conjecture that an introduction of the Hong Kong Hang Seng Chinese Enterprise Stock Index (H-share Index) futures induces additional speculating activities in the underlying equities, leading to an increase in volatility and volume of the underlying stocks. Whereas, a subsequent introduction of H-share index options increases the level of informed trading and opens up opportunities for speculative and arbitrage activities using futures directly against options. These futures and options trading activities are much cheaper and more efficient than using the underlying stocks, leading to a significant decline in spot market volatility and volume. Our results are consistent with these arguments. We also find that derivative trading does not change the liquidity of H-share constituent stocks. Further tests based on the difference-in-difference approach confirm that the above findings are robust.

The ex-dividend day stock price anomaly: evidence from the Greek stock market

This paper examines the ex-dividend stock price and trading volume behavior in the Greek stock market for the period 2000–2004. We use both standard event-study methodology and cross-sectional regression analysis in assessing the ex-dividend stock price anomaly. We find that stock prices drop less than the dividend amount. By examining abnormal returns as well as abnormal trading volume around the ex-dividend day, we find strong evidence of short-term trading, which is consistent with the presence of dividend-capturing activities around the ex-dividend day. The results from the cross-sectional regression analysis confirm that the short-term trading hypothesis explains the ex-dividend day stock price anomaly in Greece.

Exploring the Conditional Performance of U.K. Unit Trusts

We evaluate the conditional performance of U.K. equity unit trusts using the approach of Lynch and Wachter (2007, 2008) relative to three conditional linear factor models. We find significant time variation in the conditional performance of some trust portfolios and individual trusts using the lag term spread as the information variable. The conditional performance of the trusts is countercyclical and larger trusts have more countercyclical performance than smaller trusts within certain investment sectors. These patterns in conditional trust performance cannot be fully explained by the underlying securities that the trusts hold.

Domino Effects Within a Housing Market: The Transmission of House Price Changes Across Quality Tiers

We argue that shocks to a housing market are transmitted through the hierarchy of quality tiers within a housing market. The result is the prediction of waves of house price changes accompanied by changes in transaction volume. Our study is related to existing models of spatial ripple effects across housing markets. The data are from the Hong Kong housing market. The findings from Granger causality tests strongly support the argument that domino effects within a single housing market occur in response to external shocks.

Market Segmentation Effects in Corporate Credit Rating Changes: The Case of Emerging Markets

We examine stock market reactions to corporate credit rating changes in 26 emerging market countries included in the Morgan Stanley Capital International (MSCI) Emerging Market Index. We hypothesize and test the notion that emerging market firms in the American Depository Receipts (ADRs) markets are more likely to purchase ratings from the Big Two (Moody’s and S&P), and that they react more strongly to the announcements of corporate rating changes by Moody’s or S&P than to those of raters in local markets. We compare the effect of credit rating changes of the Big Two in two emerging stock markets: local markets (local currencies) and ADR markets (U.S. dollars). We find significant price reactions in the ADR markets, and insignificant reactions in local markets, and conclude that there is capital market segmentation in ADR markets for credit rating changes of emerging market firms. We find evidence that investors react more strongly in the ADR markets than local markets because they require higher costs of capital for firms cross-listed both in the ADR markets and local markets due to greater expected bankruptcy costs and foreign exchange risks of those firms. We also report that stock markets react significantly, not only to rating downgrades, but also to upgrades in the ADR markets.

NYSE execution quality subsequent to migration to hybrid

In October 2006, the NYSE began rolling-out phase three of a four-phase plan initiate its new Hybrid trading mechanism. The results show that this new trading platform introduced a much larger proportion of electronic transactions relative to floor auction transactions. This migration to electronic transactions is further evidenced by a mirror shift in price discovery from floor trades to trades marked for automatic electronic execution. In addition, the move to Hybrid trading introduced a significant decrease in inventory control costs, as well as a noticeable increase in trade persistence. Finally, the new trading platform has increased the speed with which orders are met, and has also decreased the proportion of executed shares which receive price improvement.

Pricing volatility of stock returns with volatile and persistent components

This paper introduces a two-component volatility model based on first moments of both components to describe the dynamics of speculative return volatility. The two components capture the volatile and the persistent part of volatility, respectively. The model is applied to 10 Asia-Pacific stock markets. Their in-mean effects on returns are tested. The empirical results show that the persistent component is much more important for the volatility dynamic process than is the volatile component. However, the volatile component is found to be a significant pricing factor of asset returns for most markets. A positive or risk-premium effect exists between the return and the volatile component, yet the persistent component is not significantly priced for the return dynamic process.

Regional Housing Prices in the USA: An Empirical Investigation of Nonlinearity

Existing literature on housing prices is predominantly in a linear framework, and an important question that has not been addressed is whether housing prices exhibit nonlinearity. We examine Smooth Transition Autoregressive (STAR) model based nonlinear properties of housing prices over the 1969–2004 period for the entire US and the four regions. Our main findings are (1) housing price for the entire US and all regions except for the Midwest show non-linearity, (2) the dynamic properties implied by the nonlinear estimation explain the typical patterns that have characterized each housing market, and (3) results of Granger causality tests look more plausible in the nonlinear framework where we find stronger evidence of Granger causality from housing price to employment and also from mortgage rates to housing price.

A note on portfolio choice for sovereign wealth funds

The current vast account surpluses of commodity-rich nations, combined with record account deficits in developed markets (the United States, Britain) have created a new type of investor. Sovereign wealth funds (SWF) are instrumental in deciding how these surpluses will be invested. We need to better understand the investment problem for an SWF in order to project future investment flows. Extending Gintschel and Scherer (J. Asset Manag. 9(3):215–238, 2008), we apply the portfolio choice problem for a sovereign wealth fund in a Campbell and Viceira (Strategic Asset Allocation, 2002) strategic asset allocation framework. Changing the analysis from a one to a multi-period framework allows us to establish a three-fund separation. We split the optimal portfolio for an SWF into speculative demand as well as hedge demand against oil price shocks and shocks to the short-term risk-free rate. In addition, all terms now depend on the investor’s time horizon. We show that oil-rich countries should hold bonds and that the optimal investment policy for an SWF as a long-term investor is determined by long-run covariance matrices that differ from the correlation inputs that one-period (myopic) investors use.