A nesting framework for Markov-switching GARCH modelling with an application to the German stock market

In this paper, we establish a generalized two-regime Markov-switching GARCH model which enables us to specify complex (symmetric and asymmetric) GARCH equations that may differ considerably in their functional forms across the two Markov regimes. We show how previously proposed collapsing procedures for the Markov-switching GARCH model can be extended to estimate our general specification by means of classical maximum-likelihood methods. We estimate several variants of the generalized Markov-switching GARCH model using daily excess returns of the German stock market index DAX sampled during the last decade. Our empirical study has two major findings. First, our generalized model outperforms all nested specifications in terms of (a) statistical fit (when model selection is based on likelihood ratio tests) and (b) out-of-sample volatility forecasting performance. Second, we find significant Markov-switching structures in German stock market data, with substantially differing volatility equations across the regimes.     

Rhetoric, argument and impression management in hostile takeover defence documents

This exploratory study extends the analysis of narrative disclosures from routine reporting contexts such as annual reports and press releases to non-routine takeover documents where the financial consequences of narrative disclosures can be substantial. Rhetoric and argument in the form of impression management techniques in narrative disclosures are examined. Prior thematic content analysis methods for analysing good and bad news disclosures are adapted to the attacking and defensive themes in the defence documents of target companies subject to hostile takeover bids. The paper examines the incidence, extent and implications of impression management in ten hostile takeover defence documents issued by target companies listed on the London Stock Exchange between 1 January 2006 and 30 June 2008. Three impression management strategies – thematic, visual and rhetorical manipulation – are investigated using content analysis methodologies. The findings of the research indicate that thematic, visual and rhetorical manipulation is evident in hostile takeover defence documents. Attacking and defensive sentences were found to comprise the majority of the defence documents analysed. Such sentences exhibited varying degrees of visual and rhetorical emphasis, which served to award greater or lesser degrees of prominence to the information conveyed by target company management.While exploratory in nature, this paper concludes with suggestions for future more systematic research allowing for greater generalisations from the findings.     

Market reaction to takeover rumour in Internet Discussion Sites

We examine the market reaction to takeover rumour postings in the Hotcopper Internet Discussion Site (IDS). Results from the interday analysis show abnormal returns and trading volumes on the day before and the day of the posting. Results of the intraday analysis show abnormal returns and trading volumes during the 10 min posting interval and abnormal trading volume during the 10 min interval immediately preceding it. Sensitivity analyses indicate that the results are robust to concerns regarding potential confounds, credibility and bid–ask spread bias. Taken together, these findings are consistent with the market reacting to the posting of takeover rumours in IDS.     

The role of defensive strategies and ownership structure of target firms: Evidence from UK hostile takeover bids

The outcome of a hostile takeover bid hinges on an interplay of the defensive strategies of targets and the offensive strategies of bidders. This study examines the determinants of outcome for a sample of 205 hostile bids for UK public company targets over the period 1983–1989. the impact of a number of defensive strategies adopted by the targets, their ownership structure which could aid or hinder the deployment of those strategies, and the method of payment selected by bidders is investigated using multivariate logit methodology. the City Code on Takeovers and Mergers in the UK and its influence on the choice of defensive and offensive strategies is described. the study finds outcome in hostile bids in the UK is significantly influenced by the use of certain defensive strategies, the presence of large institutional shareholders in targets, the size of targets and the method of payment chosen by the bidder. the results of this study are useful in devising effective strategies to frustrate or prosecute hostile bids.     

On the necessity of solving the free rider problem in takeover bids

Previous analysis of the free rider problem in takeover bids has concluded that complex takeover strategies, nonprice taking behavior, taxes, or exogenous exclusion of minority shareholders are necessary for the bidder to profit from a takeover bid. In contrast, in this study, costs of disclosure and the fungible nature of the bidder's information mitigates the detrimental consequences of the free rider problem. The absence of the free rider problem in takeover bids has important implications for optimal bidding strategies, the interpretation of mechanisms posed as solutions to the free rider problem, and the analysis of regulation of takeover activity.     

Profitability of technical stock trading: Has it moved from daily to intraday data?

This paper investigates how technical trading systems exploit the momentum and reversal effects in the S&P 500 spot and futures market. When based on daily data, the profitability of 2580 technical models has steadily declined since 1960, and has been unprofitable since the early 1990s. However, when based on 30-minutes-data the same models produce an average gross return of 7.2% per year between 1983 and 2007. These results do not change substantially when trading is tested over eight subperiods. In particular, there is no clear trend of a declining profitability of technical stock trading based on 30-minutes-data. Those 25 models which performed best over the most recent subperiod produce a significantly higher gross return over the subsequent subperiod than all models. Between 2001 and 2007 the 2580 models perform worse than over the 1980s and 1990s. This result could be due to stock markets becoming recently more efficient or to stock price trends shifting from 30-minutes-prices to prices of higher frequencies.     

An information-based model of target stock price runup in the market for corporate control

The stock price runup of target firms in the market for corporate control has been anecdotally attributed to inside trading. Moreover, the empirical merger and acquisitions literature documents a time-varying level and duration of the stock price runup of target firms. Using a market microstructure approach, we model stock price runup as a stochastic process that shifts between a random walk without drift and a predictable process dependent on a parsimonious set of state variables. Consistent with the market microstructure literature, predictability in prices can be exploited only by the informed trader. The model is capable of explaining the complex stylized facts observed in stock price runup. It is also consistent with the merger wave literature, as we find that capital liquidity, economic growth, and market valuations drive the complex dynamics of stock price runup.     

股票价格、房地产价格和我国货币需求的实证分析

本文通过引入股票价格和房地产价格,实证分析了资产价格对我国货币需求关系的影响。协整分析表明,房地产价格对长期货币需求有显著的替代效应,股票价格因素不显著。可变参数误差修正模型分析表明,我国的转轨经济特性使得各经济变量对短期货币需求的影响呈现动态变化的特征,同时金融深化和创新也加快了公众对长期货币需求偏离的修正速度。     

Which financial stocks did short sellers target in the subprime crisis?

Tracing the SEC ban on the short selling of financial stocks in September 2008, this paper investigates whether such selling activity before the 2008 short ban reflected financial companies’ risk exposure in the subprime crisis. Evidence suggests that short sellers sold short stocks that had the greatest asset and insolvency risk exposures, and that the short selling of financial firms’ stocks was not significantly greater than that of non-financial firms after we match them on firm size and insolvency risk. When the short ban was in effect, the market quality of financial stocks without subprime assets exposure had deteriorated to a larger degree than that of financial companies with subprime assets exposure. The findings imply that such a regulation may mute the market disciplining effects of investors and may also be seen as a counterweight to any perceived macro or systemic risk reduction benefits resulting from such a ban.     

Option pricing for GARCH-type models with generalized hyperbolic innovations

In this paper, we provide a new dynamic asset pricing model for plain vanilla options and we discuss its ability to produce minimum mispricing errors on equity option books. Given the historical measure, the dynamics of assets being modeled by Garch-type models with generalized hyperbolic innovations and the pricing kernel is an exponential affine function of the state variables, we show that the risk-neutral distribution is unique and again implies a generalized hyperbolic dynamics with changed parameters. We provide an empirical test for our pricing methodology on two data sets of options, respectively written on the French CAC 40 and the American SP 500. Then, using our theoretical result associated with Monte Carlo simulations, we compare this approach with natural competitors in order to test its efficiency. More generally, our empirical investigations analyse the ability of specific parametric innovations to reproduce market prices in the context of an exponential affine specification of the stochastic discount factor.     

Volatility Forecasting in the Hang Seng Index using the GARCH Approach

The aim of this paper is to add to the literature on volatility forecasting using data from the Hong Kong stock market to determine if forecasts from GARCH based models can outperform simple historical averaging models. Overall, unlike previous studies we find that the GARCH models with non-Normal distributions show a robust volatility forecasting performance in comparison to the historical models. The results indicate that although not all models outperform simple historical averaging, the EGARCH based models, with non-normal conditional volatility, tend to produce more accurate out-of-sample forecasts using both standard measures of forecast accuracy and financial loss functions. In addition we test for asymmetric adjustment in the Hang Seng, finding strong evidence of asymmetries due to the domination of financial and property firms in this market.     

Systematic risk, and oil price and exchange rate sensitivities in Asia-Pacific stock markets

This paper examines the relationship between beta risk and realized stock index return in the presence of oil and exchange rate sensitivities for 15 countries in the Asia-Pacific region using the international factor model. Thirteen of the 15 countries have the expected beta signs and show significant sensitivity to domestic risk when the world stock market is in both up and down modes. In terms of oil sensitivity, only the Philippines and South Korea are oil-sensitive to changes in the oil price in the short run, when the price is expressed in local currency only. Basically no country shows sensitivity to oil price measured in US dollar regardless whether the oil market is up or down. Nine countries are affected by changes in the exchange rate. In terms of relative factor sensitivity distribution, one is willing to conclude that these stock markets are more conditionally sensitive to local currency oil price changes than to beta risk wherever the relationships are significant.     

Stock price firm‐specific information on the choice of stock payment in mergers and acquisitions

Previous studies on the choice of stock payment in M&A mainly focus on managerial private information. This study shows that managers also learn new firm‐specific information from financial markets in making this decision. The acquirer's stock price firm‐specific information increases the stock‐payment‐to‐Q sensitivity. The target's stock price firm‐specific information decreases the stock payment probability. Further analyses on deal and firm characteristics as well as shareholder wealth in stock mergers support the managerial learning argument. Overall, this study highlights a new set of information that affects the form of merger payment in mergers and acquisitions.     

Choice of acquisition form in Australia and the post‐takeover employment of target firm directors on the acquiring firm board

In Australia, a corporate acquisition can be structured as either a scheme of arrangement or a takeover. We investigate the association between deal structure and the retention of target directors on the merged entity board. We find that the odds of a target director subsequently sitting on the merged entity's board are significantly higher in schemes. The results also show that premiums are lower in schemes of arrangement when additional target directors are appointed to the board of the acquiring firm. The findings indicate that target director appointment is unrelated to the merged entity's post‐acquisition performance.     

IFRS Adoption and Stock Prices of Japanese Firms in Governance System Transition

This study examines firms' decision to voluntarily adopt IFRS in a setting where there are changes to the governance system in a traditionally code law country, as well as how the market responds to such decisions. We find the probability of voluntary IFRS adoption to be higher among firms that have a high proportion of foreign shareholders, undertake quality audits, have low levels of leverage, feature a nominating committee, and are included in the new market index. In addition, the stock prices of IFRS adopters tend to increase around the announcement date of IFRS adoption, compared to those of non-adopters. Finally, market reactions are smaller for firms that feature a nominating committee, and are included in the new market index—perhaps because IFRS adoption by these firms is less surprising to market participants, and because IFRS adoption is not expected to add large incremental value to these firms.     

Controlling for Quality in House Price Indices

Given the importance of house prices it is not surprising that house price indices are used for many purposes. One of the factors that differentiates these indices is the house price determinants (such as structural characteristics and neighborhood quality) that are accounted for—that is, held constant. Indices are usually generated from house price regressions. It is shown that, regardless of the desired level of accounting, it is necessary to control for all significant determinants of house prices in these regressions to obtain unbiased estimates of the growth in house prices. An empirical example shows that not controlling for neighborhood quality can lead to substantial biases in estimates of house price appreciation rates even if the index does not account for this factor.     

Stock prices and the flow of information in the Athens Stock Exchange

The paper investigates the dynamics of price changes and information flow to the market in the Athens Stock Exchange in Greece using daily data over the period 1988 to 1993. A generalised autoregressive conditional heteroskedastic (GARCH) model in stock returns is shown to reflect time dependence in the process generating information flow to the market. Using daily trading volume or value as proxies for information flow, we find them to be significant in explaining the variance of daily returns and to reduce GARCH effects substantially. This has implications for the informational efficiency of the market.     

Industry and time specific deviations from fundamental values in a random coefficient model

The paper analyzes the relationship between stock prices and fundamentals for a large sample of US stocks in the last 10 years using a random coefficient model. Heterogeneity and omitted variable bias are properly taken into account with model coefficients being allowed to vary across time and industries. The random coefficient model allows to track waves of reliance on analysts’ forecasts and nonfundamental stock price components across time and clearly identifies the growth of the nonfundamental component in the long 1991–2000 swing.