International equities listed on the New York stock exchange: does type of issue or date of issue matter?

The initial short-term (21-day) and long-term (3-year) excess returns for foreign initial public offering (IPO) and seasoned equity offering (SEO) American depository receipts (ADRs) listed on the New York stock exchange from 1990 to 2009 are tested to determine differences in performance based on type of issue and date of issue for the decades of the 1990s and the 2000s. The overall sample outperformed the S&P 500 Index by over 5?% after the first 3?years of trading; however, SEO ADRs outperformed IPO ADRs by nearly 19?% (relative to the market index). Breaking IPO and SEO ADR returns down by decade of issue shows that those listed in the 2000s for both samples drastically outperformed those listed in the 1990s in the long term. Both samples of ADRs listed in the 2000s also significantly outperformed the S&P 500 index in the first 36?months of trading. In the short-term results, for the first 21?days of trading, the SEO ADRs significantly outperformed the market by 2.1?%, while IPO ADRs outperformed by 0.97?% (though not significant).     

Do ADRs enhance portfolio performance for a domestic portfolio? Evidence from the 1990s

American depository receipts (ADRs) represent an increasingly popular and convenient mechanism for international investing. We analyze ADRs traded throughout the 1990s and find that these securities offer a diversification and portfolio performance benefit when combined with a domestic portfolio (proxied by the S&P 500). While we find that emerging market ADRs are effective instruments for reducing portfolio risk, they do not improve portfolio performance as measured by the Sharpe ratio. Developed market ADRs do improve portfolio performance as measured by the Sharpe ratio. The asset allocation which maximizes the Sharpe ratio is 84 percent domestic stocks, 16 percent developed ADRs, and 0 percent emerging ADRs. Further, due to problems in defining an appropriate market index for ADRs, the Sharpe ratio is viewed to be the preferred performance measure. Other measures such as Jensen’s alpha and the Treynor measure are susceptible to being “gamed” to distort portfolio performance.     

Nonlinear tail dependence in cryptocurrency-stock market returns: The role of Bitcoin futures

We investigate the median and tail dependence between cryptocurrency and stock market returns of BRICS and Developed countries using a newly developed nonparametric cumulative measure of dependence over the period January 4, 2016 – December 31, 2019 as well as before and after the introduction of Bitcoin futures on December 17, 2017. The new measure is model-free and permits measuring tail risk. The results highlight the leading role of S&P500, Nasdaq and DAX 30 in predicting BRICS and developed countries’ stock market returns. Among BRICS countries, BVSP shows a starring role in predicting stock market returns. BSE 30 is the most predictor of cryptocurrencies, which have a little predictability on stock market returns. Ethereum has the leading role in predicting cryptocurrencies and stock market returns followed by Bitcoin. Tail dependence shows substantial role of S&P500, Nasdaq and BVSP in predicting stock market returns. Subsample analysis show the role of Bitcoin futures in reshaping the mean and tail dependence between cryptocurrency and stock market returns. Our results have important policy implications for portfolio managers, hedge funds and investors.     

SOX and the regulated firm

We investigate the initial and long-term market reactions in three regulated industries to the debate and ultimate passage of Sarbanes–Oxley (SOX) legislation. We argue that market reactions may differ for regulated industries relative to the broad market based on perceived differences in the costs and benefits from the legislation. Our results indicate that the initial reaction to the passage was more positive for regulated firms compared with non-regulated firms. These results are generally consistent with a compliance cost based explanation, although the underlying motivation for the results differs across industries. However, over longer post-SOX holding periods, the regulated samples outperformed the S&P 500 but underperformed their matched samples. Lower longer-term accounting profits in terms of ROA argue against significantly lower compliance costs associated with SOX.     

Price Linkages Between the US,Japan and UK Stock Markets

This study presents an empirical analysis of the short- and long-term relationships among stock prices in the US, Japan and the UK. We re-examine the evidence of market linkages and cointegration between S&P 500, Nikkei 225 and FTSE-100 stock indices. The results suggest that mature markets are cointegrated, indicating a stationary long-run relationship. Furthermore, Granger causality tests show a bi-directional causality between Nikkei 225–FTSE-100, and unidirectional causalities between S&P 500–FTSE-100 and S&P 500–Nikkei 225. These findings suggest that the potential for diversifying risk by investing in mature markets is limited.     

An analysis of the importance of S&;P 500 discretionary constituent changes

The main purpose of this paper is to investigate the impact of the S&P 500 index committee’s decisions to change the constituent firms in the index on benchmark risk measures. The index is managed and changed discretionally by the index committee to make it as representative of the market condition as possible. In addition, the index constantly changes due to important corporate events such as bankruptcies, mergers and acquisitions, and spin-offs. We reconstruct market portfolios by retaining all discretionally deleted firms in a 3 and 5 year periods. We estimate betas at every deletion date in terms of reconstructed market portfolios; we found that these estimate betas are significantly different from the betas obtained from the constantly updated S&P 500 portfolio. We also found that such portfolios are less representative of the business cycle than the actual S&P 500 portfolio. Finally, we found that the portfolio returns obtained by retaining all discretionally deleted firms deviate significantly from the returns of the actual S&P 500 index over the studied period, October 1989 to December 2007.     

Dynamic linkages between the center and periphery in international stock markets

This paper examines the dynamic linkages between the equity market of US representing the center and emerging markets using the Granger-causality test. The findings show that causality runs from the S&P500 to the stock prices of the 15 emerging markets but not vice versa.     

What do we know about the price spillover between green bonds and Islamic stocks and stock market indices?

This paper investigates the risk transmission, linkages, and directional predictability between green bonds, Islamic stocks, and other asset classes. Using daily data from November 2008 to August 2020, we use the Standard & Poor's (S&P) Green Bond Index to represent the green bond market and the Dow Jones Islamic World Index and the S&P Global Shariah Indices to represent Islamic stocks. The other asset classes considered include the S&P 500 Stock Composite, S&P 500 Bond, and S&P 500 Energy indices. This paper uses the novel quantile cross-spectral (coherency), the windowed scalogram difference (WSD), and the cross-quantilogram (CQ) correlation approaches. The results from the quantile coherency analysis reveal a negative spillover effect from green bond price returns to Islamic stocks in the long run, which indicates that the green bond market poses a long-run systemic risk to Islamic stocks. From the WSD analysis, the results show that the integration between green bonds and Islamic stocks, the S&P 500 Stock Composite, and the S&P 500 Bond index is weaker during volatile market conditions. The CQ correlation suggests that the dependency between green bonds and other asset returns is concentrated in the lower quantiles and that this dependency is weaker at longer lags. Our results underscore the significance of green bonds in investor portfolios as a new investment asset class.     

ADR holdings of US-based emerging market funds

What motivates investors to hold American Depositary Receipts (ADRs) rather than the underlying stock of US listed foreign firms? We analyze the investment allocation decision of actively-managed emerging market mutual fund managers. Although legal provisions are typically assumed to affect ADR and its underlying domestic shares equally, investors holding ADRs may have a higher level of legal protection as these securities are issued and traded in the US. We find that ADRs are the preferred mode of holdings if the local market of the issuer has weak investor protection, low liquidity and high transaction costs.     

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.

Pinning in the S&P 500 futures

We show that Standard & Poor's (S&P) 500 futures are pulled toward the at-the-money strike price on days when serial options on the S&P 500 futures expire (pinning) and are pushed away from the cost-of-carry adjusted at-the-money strike price right before the expiration of options on the S&P 500 index (anti-cross-pinning). These effects are driven by the interplay of market makers' rebalancing of delta hedges due to the time decay of those hedges as well as in response to reselling (and early exercise) of in-the-money options by individual investors. The associated shift in notional futures value is at least $115 million per expiration day.     

Does social network sentiment influence the relationship between the S&P 500 and gold returns?

This study explored the relationship between investor sentiment (extracted from the StockTwits social network), the S&P 500 Index and gold returns. We investigated bilateral causality between gold prices and S&P 500 prices, the power of investor sentiment and gold returns to predict S&P 500 returns, and the influence of gold returns on S&P 500 volatility. We also considered whether the influence of sentiment varies according to the user's degree of experience. We considered the sentiment of messages that mentioned the S&P 500 Index and that users posted between 2012 and 2016. Granger causality analysis, ARIMA models and GARCH models were used for predicting S&P 500 Index returns and S&P 500 volatility. We observed a causal relationship between gold price and the S&P 500 Index. Our results also suggest that sentiment and gold returns predict S&P 500 Index returns. Finally, we observed that gold returns influence S&P 500 volatility and that the sentiment of experienced users affects S&P 500 returns.     

The geometry of crashes. A measure of the dynamics of stock market crises

This paper investigates the dynamics of stocks in the S&P 500 index for the last 30 years. Using a stochastic geometry technique, we investigate the evolution of the market space and define a new measure for that purpose that is a robust index of the dynamics of the market structure and provides information on the intensity and the sectoral impact of crises. With this measure, we analyse the effects of extreme phenomena on the geometry of the market. Nine crashes between 1987 and 2001 are compared by looking at the way they modify the shape of the manifold that describes the S&P 500 market space.     

Hedge fund returns under crisis scenarios: A holistic approach

The assets of the hedge fund industry are nearly equivalent to the GDP of the UK. The industry, which claims returns independent of markets conditions and has been blamed for economic crises, has attracted the interest of a wide range of financial and political players and academics. This paper, using monthly series performance data since January 1995, at a fund strategy level and S&P500, and a holistic and a developed dynamic correlation quantitative approach, aims to challenge the allegations and the claims, which have been made on rather incomplete research grounds. Statistically, the results strongly reject the claims of the vast majority of fund strategies, excluding the case of the macro and short strategies, over the crisis periods, suggesting that they cannot protect their investors like S&P500. Regarding the allegations, it is inferred that Hedge Funds are used in most cases as a scapegoat rather than actually being the cause of the crises.     

Commodity market financialization,herding and signals: An asymmetric GARCH R-vine copula approach

Institutional investors have significantly increased their exposure to commodity futures after 2004 in the process of commodity market financialization, raising questions about the risk-sharing and price-discovery functions of the market. We identify some symptoms of financialization through examining S&P500, JPM bond index, and 18 S&P GSCI excess return indices, employing ARMA-GARCH R-vine copula approach that can flexibly model high-dimensional multivariate asymmetric tail dependence. We discover three trends: an increased resemblance between the news impact curve of stocks and those of commodities; an increased bi-variate stock-commodity tail dependence; and an increased multivariate tail-dependence across all commodities. We also explore the market structural change underlying these symptoms using an augmented news impact curve. We suggest and provide evidence that herding, in addiction to leverage effect, explains the observed symptoms. The findings have profound implications for commercial hedgers and financial traders, and for regulators who are concerned about the functionalities of commodity futures market.     

Market co-movement between credit default swap curves and option volatility surfaces

We analyze the co-movement between the Credit Default Index (CDX) curve and the S&P 500 index's option volatility surface. We connect the reduced-form no-arbitrage model with the Nelson-Siegel (N-S) model on hazard rate implied from the CDX curve, and identify the levels, slopes, and curvatures from these two markets via the Unscented Kalman Filter (UKF). We find that the changes in the level, slope, and curvature in the CDX curve and those in the volatility surface are correlated due to the bridge of the S&P 500 index return. Finally, the co-movement between the CDX curve and S&P 500 index's volatility surface become stronger after the late 2000s global financial crisis.     

Mean reversion in stock market prices: New evidence based on bull and bear markets

In this paper we test whether mean reversion in stock market prices presents a different behavior in bull and bear markets. We date the US bull and bear periods using Bry and Boschan (1971) algorithm. We examine the order of integration in the S&P 500 stock market index covering a daily period from August 1929 to December 2006 in bull and bear phases. Our results indicate the existence of different episodes of mean reversion, which mainly correspond to bull market periods.     

Overreaction of country ETFs to US market returns: Intraday vs. daily horizons and the role of synchronized trading

In this paper we study the intraday price formation process of country Exchange Traded Funds (ETFs). We identify specific parts of the US trading day during which Net Asset Values (NAVs), currency rates, premiums and discounts, and the S&P 500 index have special effects on ETF prices, and characterize a special intraday and overnight updating structure between these variables and country ETF prices. Our findings suggest a structural difference between synchronized and non-synchronized trading hours. While during synchronized trading hours ETF prices are mostly driven by their NAV returns, during non-synchronized trading hours the S&P 500 index has a dominant effect. This effect also exceeds the one that the S&P 500 index has on the underlying foreign indices and suggests an overreaction to US market returns when foreign markets are closed.     

Are stock markets really efficient? Evidence of the adaptive market hypothesis

This study examines the adaptive market hypothesis in the S&P500, FTSE100, NIKKEI225 and EURO STOXX 50 by testing for stock return predictability using daily data from January 1990 to May 2014. We apply three bootstrapped versions of the variance ratio test to the raw stock returns and also whiten the returns through an AR-GARCH process to study the nonlinear predictability after accounting for conditional heteroscedasticity through the BDS test. We evaluate the time-varying return predictability by applying these tests to fixed-length moving subsample windows and also examine whether there is a relationship between the level of predictability in stock returns and market conditions. The results show that there are periods of statistically significant return predictability, but also episodes of no statistically significant predictability in stock returns. We also find that certain market conditions are statistically significantly related to predictability in certain markets but each market interacts differently with the different market conditions. Therefore our findings suggest that return predictability in stock markets does vary over time in a manner consistent with the adaptive market hypothesis and that each market adapts differently to certain market conditions. Consequently our findings suggest that investors should view each market independently since different markets experience contrasting levels of predictability, which are related to market conditions.     

S&P 500 trading strategies and stock betas

This paper shows that S&P 500 stock betas are overstatedand the non-S&P 500 stock betas are understated becauseof liquidity price effects caused by the S&P 500 tradingstrategies. The daily and weekly betas of stocks added to theS&P 500 index during 1985-1989 increase, on average, by0.211 and 0.130. The difference between monthly betas of otherwisesimilar S&P 500 and non-S&P 500 stocks also equals 0.125during this period. Some of these increases can be explainedby the reduced nonsynchroneity of S&P 500 stock prices,but the remaining increases are explained by the price pressureor excess volatility caused by the S&P 500 trading strategies.I estimate that the price pressures account for 8.5 percentof the total variance of daily returns of a value-weighted portfolioof NYSE/AMEX stocks. The negative own autocorrelations in S&P500 index returns and the negative cross autocorrelations betweenS&P 500 stock returns provide further evidence consistentwith the price pressure hypothesis.