Pricing behavior of exchange traded funds

We attempt to determine whether characteristics found to be effective indicators of individual stock price performance are effective indicators of exchange traded fund (ETF) price performance. Specifically, we test the performance of investing strategies based on separately categorizing ETFs into deciles according to size, trading volume, and momentum. When analyzing the entire sample, we find that the indicators can effectively signal differences in future performance. However, the indicators appear to be indirect proxies for the types of ETFs (broad-based, sector, or international). When we isolate each type of ETF, the indicators are not as effective. The indicators are not as useful for signaling unusual stock price performance of ETFs as they have been for individual stocks. We attribute the distinctly different results found here for ETFs to the unusual characteristics of ETFs that distinguish them from individual stocks. Investing strategies that rely on these indicators for selecting individual stocks may be indirectly driven by stock-specific fundamentals. However, fundamentals are not as meaningful for stock indexes (represented by ETFs) as for individual stocks.

Inter-market competition for exchange traded funds

We examine how the different mix of informed and liquidity trading in the market for ETFs affects the nature of inter-market competition. We find that both the characteristics of the securities and the structures of the competing markets jointly determine the nature of inter-market competition. Given the superior execution quality on the ECNs and the low adverse selection costs in the ETF market, anonymous market such as the ECNs, attract both liquidity and informed traders. We also find that markets compete in a subset of ETFs. In addition, we find that quotebased competition is prevalent in the market for ETFs.     

A note on put-call parity and the market efficiency of the London traded options market

Put-call parity and the efficiency of the London traded options market are tested via the construction of long and short hedges which incorporate the effects of ‘known’ dividend payments. Examination of the resulting returns and their subsequent analysis via regression models yield findings which support the put-call parity theorem and market efficiency.     

Volatility, trade size, and order imbalance in China and Japan exchange traded funds

In recent years there have been reports of excessive price volatility and value differences between prices of exchange traded funds (ETFs) and their underlying asset values. The objective of our study is to shed light on these facts by taking a closer look at the relationship between return volatility, trade size, and order imbalance for international ETFs. Even after controlling for order imbalance, volume as represented by number of trades in one of five trade size categories continues to have a significant and predominantly positive impact on volatility. Both trade size and order imbalance are important determinants of the Japan and China ETFs’ price volatility.     

The impact of security concentration on adverse selection costs and liquidity: an examination of exchange traded funds

We examine the determinants of liquidity and adverse selection costs in a sample of basket securities. Using Exchange Traded Funds (ETFs), we find evidence that adverse selection costs are decreasing in the number of equities held in the underlying portfolio, but adverse selection costs do not increase as the concentration among the securities increases. We find no evidence that industry concentration increases basket security adverse selection costs or reduces liquidity. We also document significantly lower levels of adverse selection costs in ETFs versus a matched sample of equities. In addition, ETFs have quoted dollar depth that is 35 times larger than a matched sample of equities, but ETFs also have higher effective and quoted spreads. However, when considering spreads and depth in a single metric, ETFs have significantly higher levels of liquidity.     

Analysis on the exchange rate of Australian dollar

Australian dollar （AUD） maintains a fluctuant increase for long period, but in recent two years, this currency represents an anomalistic change. In order to forecast the trend of AUD, this essay examines the exchange rate of AUD in then years from March of 2000 to March of 2010, and argues the factors which create these trend changes. By means of secondary research and graphs analysis, the relevant evidence and argument was selected into four terms below： relative raw materials prices changes, relative domestic price level and Import-Expert changes, relative interest rate changes, and other factors. The examples based on the theoretics, graphs, statistics and experts＇ opinions.     

Real options game analysis of sleeping patents

Using the real options game approach, we analyze the two-stage preemptive patent-investment race between an incumbent and a challenger (new entrant) in a product market with profit flow uncertainty. The challenger can gain entry into the monopolized product market dominated by the incumbent by patenting related technologies for a substitute product. To maintain its monopolized advantage, the incumbent has an incentive to block challenger’s entry by patenting the substitute product before the challenger. Either firm can pay an upfront fee to gain an immediate acquisition of the patent and subsequently holding the real option to develop the new substitute product. Under our simplified real options game model, there is no potential patent litgation risk. Also, the costs of holding the patent, like the payment of annual fees, are taken to be zero. We provide a full characterization of the optimal strategies adopted by the incumbent and challenger firm in this asymmetric patent-investment race. In particular, we examine the phenomena of sleeping patent, where the patented product is not launched immediately into the product market.     

An improved combinatorial approach for pricing Parisian options

Parisian options are path-dependent options whose payoff depends on whether the underlying asset’s price remains continuously at or above a given barrier over a given time interval. Costabile’s (Decis Econ Finance 25(2):111–125, 2002b) algorithm for pricing Parisian options based on a combinatorial approach in binomial tree has a time complexity of O( n³){O\left( {n^{3}}\right)}. We improve that algorithm to yield one with a time complexity of only O(n²){O\left({n^{2}}\right)}.     

An efficient binomial method for pricing¶American options

We present a new method for obtaining fast and accurate estimates of the price of an American put option by binomial trees. The method is based on the interpolation of suitable values obtained by modifying the contractual strike. A time-saving procedure allows us to derive all the interpolating data from a unique standard backward procedure. Received: 16 July 2001 / Accepted: 19 April 2002 {The authors would like to thank an anonymous referee for helpful comments. We also thank Antonino Zanette for his help in the refinements of the numerical procedures.     

Technology and market structure in the analysis of exchange

Economists treat the ‘market’ as a black box in which prices rise and fall to equate supplies with demands. Obviously, however, markets are usually collections of institutions. Using conventional methods of economic analysis, it is argued that certain physical characteristics of commodities, the technologies of their production and use, and buyer and seller concentration lead to the development of particular institutional arrangements composing markets. These institutional arrangements are efficient in the sense that they require the least use of resources in effecting transactions.     

Optimal multiple stopping models of reload options and shout options

The reload provision in an employee stock option entitles its holder to receive one new (reload) option from the employer for each share tendered as the payment of strike upon the exercise of the stock option. The number of reloads allowed can be finite or infinite. The shout feature in a call option allows its holder to reset the option's strike price to the prevailing stock price upon shouting. We explore a symmetry relationship between the price functions of the employee reload options and shout call options. When the dividend yield of the underlying stock is zero, the value of the employee reload option can be expressed in terms of the price functions of a shout call option and a forward contract. For an employee reload option with an infinite number of allowable reloads, the payoff of the employee reload option can be related to the lookback feature of the stock price process. We also examine the optimal exercise policies of the multi-reload employee stock options. The behavior of the critical stock price at which the holder should exercise optimally is shown to depend on the relative magnitude of the dividend yield, interest rate and volatility. Our analysis of the multi-reload and multi-shout options contributes to the literature on optimal stopping policies of contingent claims with multiple stopping rights.     

Foreign exchange markets in South-East Asia 1990–2004: An empirical analysis of spillovers during crisis and non-crisis periods

The East Asian crisis of 1997 sparked an extensive literature in an effort to explain the causes and spread of heightened foreign exchange (FX) market pressures in the region. In this paper, we model FX movements and calculate spillover effects covering the extended period between 1990 and 2004. Using Markov switching vector autoregressions, we find evidence that FX correlations vary across crisis and non-crisis states, a result that bears implications for international portfolio diversification and reserve pooling. Even though the direction of effects does not follow discernible patterns, it is clear from the data that contagion effects are present.     

Measuring efficiency in Australian Schools: A preliminary analysis

In this paper, we apply a public sector Data Envelopment Analysis model to estimate the efficiency of Australian primary and secondary schools. Standard microeconomic production theory showing the transformation of inputs into outputs is extended to allow nondiscretionary environmental variables characteristic of educational production. Failure to properly control for the socioeconomic environment leads to inappropriate comparisons and biased efficiency estimates. We employ a conditional estimator that does not allow a school with a better environment to serve as a benchmark for a school with a worse environment. The results suggest that Australian schools are moderately inefficient and that efficiency increases for the quintile of schools with the most favorable environment. Further, efficiency gains are realized with increasing enrollment.     

An options pricing approach to ramping rate restrictions at hydro power plants

This paper investigates the impact of ramping rate restrictions imposed on hydro operations to protect aquatic ecosystems. The optimal ramping decision is specified as an optimal control problem which results in a Hamilton Jacobi Bellman (HJB) equation. Electricity prices are modelled as a regime switching stochastic process. The optimal control is determined by solving the HJB equation numerically using a fully implicit finite difference approach with semi-Lagrangian time stepping. The paper focuses on the effect of ramping restrictions on a hydro plant׳s value and optimal operations, and provides an analysis of which factors cause ramping restrictions to have a greater or lesser impact on profitability. It is shown that hydro plant value is negatively affected by ramping restrictions, but the extent of the impact depends on key parameters which determine the desirability of frequent changes in water release rates. Interestingly for the case considered, value is not sensitive to ramping restrictions over a large range of restrictions. The results point to the importance of accurately modelling electricity prices in gauging the trade offs involved in imposing restrictions on hydro operators which may hinder their ability to respond to volatile electricity prices and meet peak demands.     

Network analysis of exchange data: interdependence drives crisis contagion

In this paper, we examine linear and nonlinear co-movements that appear in the real exchange rates of a group of 28 developed and developing countries. The matrix of Pearson correlation and Phase Synchronous coefficients have been used in order to construct a topology and hierarchy of countries by using the Minimum Spanning Tree (MST). In addition, the MST cost and global correlation coefficients have been calculated to observe the co-movements’ dynamics throughout the time sample. By comparing Pearson and Phase Synchronous information, a new methodology is emphasized; one that can uncover meaningful information pertaining to the contagion economic issue and, more generally, the debate surrounding interdependence and/or contagion in financial time series. Our results suggest some evidence of contagion in the Asian currency crises; however, this contagion is driven by previous and stable interdependence.     

Comprehensive analysis of market conditions in the foreign exchange market

We investigate quotation and transaction activities in the foreign exchange market for every week during the period of June 2007 to December 2010. A scaling relationship between the mean values of number of quotations (or number of transactions) for various currency pairs and the corresponding standard deviations holds for a majority of the weeks. However, the scaling breaks in some time intervals, which is related to the emergence of market shocks. There is a monotonous relationship between values of scaling indices and global averages of currency pair cross-correlations when both quantities are observed for various window lengths ?? t.     

Illusory profitability of technical analysis in emerging foreign exchange markets

We conduct an extensive examination of the profitability of technical analysis in ten emerging foreign exchange markets. Studying 25,988 trading strategies for emerging foreign exchange markets, we find that the best rules can sometimes generate an annual mean excess return of more than 30%. Based on standard tests, we find hundreds to thousands of seemingly significant profitable strategies. However, almost all of these profits vanish once the data snooping bias is taken into account. Overall, we show that the profitability of technical analysis is illusory.     

Galerkin infinite element approximation for pricing barrier options and options with discontinuous payoff

Abstract We analyze the Galerkin infinite element method for pricing European barrier options and, more generally, options with discontinuous payoff. The infinite element method is a simple and efficient modification of the more common finite element method. It keeps the best features of finite elements, i.e., bandedness, ease of programming, accuracy. Three main aspects are considered: (i) the degeneracy of the pricing PDE models at hand; (ii) the presence of discontinuities at the barriers or in the payoff clause and their effects on the numerical approximation process; (iii) the need for resorting to suitable numerical methods for unbounded domains when appropriate asymptotic conditions are not specified. The numerical stability and convergence of the proposed method are proved. Mathematics Subject Classification (2000): 65N30, 65J10 Journal of Economic Literature Classification: G13, C63