The Causal Relationship Between Real Estate and Stock Markets

This paper examines the dynamic relationship that exists between the US real estate and S&P 500 stock markets between the years of 1972 to 1998. This is achieved by conducting both linear and nonlinear causality tests. The results from these tests provide a number of interesting observations which primarily show linear relationships to be spuriously affected by structural shifts which are inherent within the data. Linear test results generally show a uni-directional relationship to exist from the real estate market to the stock market. However, these results are not consistent with financial theory and for all sub-samples of the data. In contrast, the nonlinear causality test shows a strong unidirectional relationship running from the stock market to the real estate market, and is consistent in the presence of any structural breaks.     

Integration Between the Baltic and International Stock Markets

Using cointegration tests, this paper analyzes the existence of long-run relationships among Baltic stock markets and major international stock markets, including the United States, Japan, Germany, the United Kingdom, and France. Bivariate and multivariate cointegration tests indicate a common trend linking Latvia to European markets. Evidence indicates that the German market dominates this long-run relationship. In general, short-term Granger causality indicates causality running from the European markets to the Baltic markets, as well as among the Baltic states, excepting Latvian and Lithuanian short-term effects on the Estonian market. Overall, the results suggest that international investors can obtain diversification benefits given a long-term investment horizon because of the low degree of integration between the Baltic and international capital markets.     

The Lead‐Lag Relationship Between Cash and Stock Index Futures in a New Market

This paper investigates the lead‐lag relationship in daily returns and volatilities between price movements of the FTSE/ATHEX‐20 and FTSE/ATHEX Mid‐40 stock index futures and the underlying cash indices in the relatively new futures market of Greece. Empirical results show that there is a bi‐directional relationship between cash and futures prices. However, futures lead the cash index returns, by responding more rapidly to economic events than stock prices. This speed is much higher in the more liquid FTSE/ATHEX‐20 market. Moreover, results indicate that futures volatilities spill information over to the corresponding cash market volatilities in both investigated futures markets, but volatilities in the cash markets have no effect on the volatilities of futures markets. Overall, it seems that new market information is disseminated faster in the futures market compared to the stock market. This implies that the futures markets can be used as price discovery vehicles, providing further evidence that derivatives markets contribute to completing and stabilising capital markets in Greece. A further finding of this study is that futures volume and disequilibrium effects between cash and futures prices are important variables in the explanation of volatilities in cash and futures markets.     

Liquidity, Transaction Costs, and Reintermediation in Electronic Markets

Relationships between trading cost, technology, and the nature of intermediation in the trading services industry are discussed. Electronic markets are linked to reductions in trading costs. Lower explicit costs are related to system development and operating costs. Electronic order book information is identified as a means of realizing implicit cost savings. The concept of liquidity management in electronic environments is introduced, and its potential is empirically illustrated. The empirical results suggest new roles for brokerage and exchange operations, and competition between the two. Competitive advantage with respect to the provision of liquidity management services is compared across types of intermediaries.     

The Intertemporal Relationship Between the Currency Spot Market and the Currency Option Market

This study examines the lead/lag relationship between currency option and currency spot markets for the Deutsche mark and the Japanese yen. Using intraday currency option transactions data for the year 1989 and applying a European type currency option pricing model, pair data series of the implied and the observed exchange rates are compiled. Causality tests are then employed to test the causal relation between the observed and the implied exchange rate changes. The results indicate that the currency spot market leads the currency option market by about ninety minutes.     

Trade Imbalances and Inventory Effects in Long-term S&P 500 Index Options

This article investigates how trade imbalances affect prices in the S&P 500 Long‐term Equity Anticipation Securities (LEAPS) market. From 1994 to 1996, put volume was 30 times higher than call volume, and public purchases of puts vastly outnumbered sales. We find that LEAPS put quotes are revised following trade imbalances by more than can be explained by information effects, suggesting that put prices are subject to price pressure or inventory effects. The results suggest market frictions are important in the pricing of options, at least in settings in which arbitrage is particularly costly and public demand leans toward one type of order.     

Investor Sentiment,Trading Behavior and Informational Efficiency in Index Futures Markets

This paper shows that traders in index futures markets are positive feedback traders—they buy when prices increase and sell when prices decline. Positive feedback trading appears to be more active in periods of high investor sentiment. This finding is consistent with the notion that feedback trading is driven by expectations of noise traders. Consistent with the noise trading hypothesis, order flow in index futures markets is less informative when investors are optimistic. Transitory volatility measured at high frequencies also appears to decline in periods of bullish sentiment, suggesting that sentiment‐driven trading increases market liquidity.     

Bid-ask Spreads, Trading Volume and Volatility: Intra-day Evidence from the London Stock Exchange

This paper examines intra-day variations in the bid-ask spread, volatility and volume for stocks traded on the London Stock Exchange. The data set used consists of quote and transactions data for a large sample of 835 stocks traded during the first quarter of 1991. The focus of the study is twofold; first, is to document a number of stylized facts regarding the intra-day behaviour of spread, trading volume, volatility etc. Second, the paper tests some predictions of two theoretical models of intra-day behaviour: the Admati and Pfleiderer and the Brock and Kleidon models. In addition, the paper also studies qualitatively the intra-day behaviour of several variables of interest including volume per transaction, transactions per fifteen-minute interval and spreads/trading volume for stocks of differing liquidity. The results suggest that the bid-ask spread is wide at the open, constant through the day and rises slightly at the close. Trading volume, in contrast is not highest at the open and the close. Volatility, based on the mid-point of the inside spread, shows a U-shaped pattern. Volume per transaction, in contrast, is fairly constant throughout the day. Further, the intra-day trading volume pattern differs for liquid and illiquid stocks. The results provide mixed support for current theoretical models of intra-day behaviour of spread, volume and volatility on the London Stock Exchange     

Technical Trading Rules in Emerging Markets and the 1997 Asian Currency Crises

The ability of simple technical trading rules to forecast future stock market movements is considered for seventeen emerging markets, sampled from January 1986 to September 2003. Some of the trading rules considered generated significant returns; this information could be exploited profitably on occasion. Market conditions and trading volume are found to be important to determining the usefulness of technical trading rules.     

The Lead–Lag Relationship Between Stock Indices and Stock Index Futures Contracts: Further Australian Evidence

This article examines the lead-lag relationship in returns on stock index futures and the underlying stock index for the Australian market between 1992 and 1997. On average across the sample period, futures returns lead index returns by twenty to twenty-five minutes and there is some evidence of feedback from the equities market to the futures market. Analysis conducted on a year-by-year basis suggests that the extent to which the futures market leads the equities market has decreased over time and the relationship between the two markets has generally strengthened. This is consistent with an increase in the level of integration between the markets. The results suggest that prior research that compares lead-lag relationships across international markets and time periods in drawing inferences on the effects of market structure needs to be interpreted with caution.     

Permanent and Transitory Driving Forces in the Asian-Pacific Stock Markets

This paper uses weekly data from November 1987 through May 1999 to examine whether U.S. or the Japan stock market (or both) is the main driving force behind major movements in eleven emerging Asian-Pacific stock markets. We find a robust cointegrating relation linking each of the emerging market with the two matured markets of the U.S. and Japan. The results also show that the U.S., rather than Japan, is the main permanent force driving the equilibrium relations across all Asian-Pacific markets. In contrast, the effect of the Japanese market on the Asian-Pacific region is only transitory. Therefore, strategic asset portfolios in the Asian-Pacific region should include Japanese stocks to diversify any country specific risks. As to U.S. investors, the persistent influence of the U.S. market may limit long-run diversification gains from Asian-Pacific stocks.     

Market Efficiency and Returns to Simple Technical Trading Rules: Further Evidence from U.S., U.K., Asian and Chinese Stock Markets

Tian, Wan and Guo (2002) explored the predictability and profitability of technical trading rules in markets with different efficiency levels; namely, the U.S. and China. In the case of the U.S. they found rules to have no predictability after 1975, whereas their results give support to technical trading rules having both predictability and profitability for the Chinese markets across the 1990's. The purpose of this paper is to extend the analysis of Tian et al. in two ways. First, to see if the conclusions extend to other markets – namely, the U.K., Hong Kong and Japan. Second, in the case of China, to examine whether the predictability and profitability of technical trading rules changed across the 1990's. On the basis of daily data Tian et al's results for the U.S. market are supported by the results for a number of the main developed markets where the technical trading rules had predictive ability during the 1970's that disappeared by the 1990's. Furthermore, the results suggest that while technical trading rules had short term predictive ability and profitability in the Chinese stock markets during the 1990's, this lessened as the decade progressed. JEL Classification: G14, G15     

Efficient Markets Hypothesis and the Emerging Capital Market in Sri Lanka: Evidence from the Colombo Stock Exchange – A Note

The behaviour of stock prices on the Colombo Stock Exchange (CSE) is examined with a view to determine its consistency with the weak form of the Efficient Markets Hypothesis (EMH). Runs, Autocorrelation and Cointegration tests are applied to daily, weekly and monthly CSE index data for the period of January 1991–November 1996. Results of Runs, Correlation and Cointegration tests overwhelmingly reject the serial independence hypothesis, leading to the conclusion that the behaviour of stock prices in the Colombo Stock Exchange is not consistent with the weak form of the Efficient Markets Hypothesis. Tests of the-day-of-the-week-effect, however, show that there is no evidence of such a phenomenon on the Colombo Stock Exchange stock prices. Results of the tests of the-month-of-the-year-effect lead to the conclusion that CSE prices do not display any month-specific behaviour.     

汇率制度改革后中国股市与汇市关系——人民币名义汇率与上证综合指数的实证研究

本文利用协整检验和Granger因果检验的计量方法研究了汇率制度改革后中国股市与汇市的关系。实证结果表明,汇率制度改革后中国股市与汇市存在长期稳定的协整关系,人民币升值是中国股市上扬的单向Granger原因。最后,本文利用国际收支和资本流动理论对这些实证结果作了进一步解释,并提出了相应的政策建议。     

Liquidity Provision of Limit Order Trading in the Futures Market Under Bull and Bear Markets

Abstract:  This study investigates how limit orders affect liquidity in a purely order-driven futures market. Additionally, the possible asymmetric relationship between market depth and transitory volatility in bull and bear markets and the effect of institutional trading on liquidity provision behavior are examined as well. The empirical results demonstrate that subsequent market depth increases as transient volatility increases in bull markets. Market depth exhibits significantly positive relationship to subsequent transient volatility in bull markets. Additionally, although trading volume positively influences transient volatility in bull markets, no such relationship exists in bear markets. Liquidity provision decreases when institutional trading activity intensifies during bear markets. Thus, liquidity provision for limit orders differs between bull and bear markets.     

Modelling International Price Relationships and Interdependencies Between the Stock Index and Stock Index Futures Markets of Three EU Countries: A Multivariate Analysis

This paper addresses the important relationship between stock index and stock index futures markets in an international context. By simply examining the spot‐futures relationship within a single country as most of the extant literature does and thus ignoring possible market interdependencies between countries, the dynamics of price adjustments may be misspecified and thus findings misleading. The main contribution of the paper is to improve our understanding of the pricing relationship between spot and futures markets in the light of international market interdependencies. Using a multivariate VAR‐EGARCH methodology, the paper investigates stock index and stock index futures market interdependence, that is lead‐lag relationships and volatility interactions between the stock and futures markets of three main European countries, namely France, Germany and the UK. In addition, the paper explicitly accounts for potential asymmetries that may exist in the volatility transmission mechanism between these markets. The main conclusions of the paper imply that investors need to account for market interactions across countries to fully and correctly exploit the potential for hedging and diversification.     

The Determinants of Execution Costs in Short‐Term Money Markets

Prior research attributes the observed negative relation between execution costs and trade size in opaque markets to two factors—information asymmetry and broker‐client relationships. We provide evidence that a trader's ex ante transaction price information and the relationship traders have with their brokers are both significant determinants of a trader's execution costs in an opaque market; however, traders who establish strong relationships with their brokers will achieve a greater reduction in execution costs than traders with ex ante transaction price information. We also find evidence that trade size has little explanatory power after controlling for a trader's ex ante transaction price information and broker‐client relationships.     

Examining the Equilibrium Relationship Between the Shanghai 50 Stock Index Futures and the Shanghai 50 ETF Options Markets

Based on the put-call-futures parity model, this article studies the equilibrium relationship between the Shanghai 50 stock index futures and the Shanghai 50 Exchange-Traded Fund (ETF) options markets by analyzing the arbitrage opportunities and profits between these two derivative markets. This article reveals that the cost spread, option volatility, days from the expiration date, moneyness of options, trading strategy, and policy factors all have a great impact on the arbitrage profits and opportunities. In addition, significant arbitrage profits and opportunities indicate violations of put-call-futures parity. Although no equilibrium relationship exists between the Shanghai 50 stock index futures and the Shanghai 50 ETF options markets, efficiency in these markets has gradually improved.     

The Empirical Relationship Between Earnings Information and Stock Returns

Abstract:

The objective of this study was to examine, using a vector autoregressive model, whether the difference in earnings growth rates caused different reaction speeds in stock prices. Monthly returns of stocks listed in the Taiwan stock market from May 2003 to April 2013 were used as empirical data in this study. The analytical results showed that the returns of portfolios with higher earnings growth rates significantly led those portfolios with lower earnings growth rates when size, trading volume, institutional ownership ratio, and revenue factors were controlled, respectively. This paper finds that the earnings growth rate is a significant determinant of the lead-lag patterns observed in monthly stock returns.     

Regulatory Soft Interventions in the Chinese Market: Compliance Effects and Impact on Option Market Efficiency

Securities Laws in China are administered by the China Securities Regulatory Commission (CSRC). The CSRC has great flexibility in administering securities laws since the committee represents the will of the state. Under the state‐controlled financial system, the CSRC works closely with state‐controlled financial firms and suggests, but does not mandate, actions to be taken in the equity market, especially during periods of extreme market stress. These suggestions, or soft interventions, have been used to block trades associated with short sales, significantly reducing short‐sales volume. With daily and intraday data, we investigate the impact of these interventions on put‐call parity and implied volatilities. There is overwhelming evidence of increased deviations from put‐call parity and changes in implied volatility after soft interventions. Our results are robust after allowing for bid‐ask spreads, taxes, transaction costs, and difference‐in‐differences comparisons with control securities in the Hong Kong market.