Interdependence and Volatility Spillovers Under Market Liberalization: The Case of Istanbul Stock Exchange

This paper analyzes stock returns and volatility relations between the Istanbul Stock Exchange (ISE) and the global market as represented by stock markets in the US, the UK, Japan and Germany. Results from monthly data and multivariate cointegration tests suggest that the ISE became significantly integrated in the global market only in the period following market liberalization in late 1989. We also find evidence based on GARCH estimations that capital liberalization actually mitigated, rather than intensified, volatility in the ISE. Our results further suggest that the Asian crisis in mid‐1997 and the consequent Russian economic meltdown in mid‐1998 are partly responsible for the recent excessive volatility in the Turkish market. The results also identify the US and the UK markets as dominate sources of volatility spillovers for the ISE, even in the period following the Asian‐Russian crises. Consequently, it appears that the two matured markets of the US and the UK shoulder significant responsibility for the stability and financial health of smaller emerging markets like the ISE.     

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.     

Tests of Weak‐Form Efficiency of the Dhaka Stock Exchange

Abstract:   Conflicting evidence on weak form efficiency of the Dhaka Stock Market appears to stem from the use of monthly versus daily data, structural changes after the 1996 market crash, and the use of tests with or without heteroscedasticity adjustment. Heteroscedasticity‐robust tests indicate short‐term predictability of share prices prior to the crash, but not afterwards. Although a heteroscedasticity‐robust Box‐Pierce test was used by Lo and MacKinlay (1989) in their simulations, our study appears to be the first to apply this test to stock prices. Typical rejection of weak‐form market efficiency by the usual autocorrelation tests may be reversed by a heteroscedasticity‐robust test.     

Intra Day Bid‐Ask Spreads, Trading Volume and Volatility: Recent Empirical Evidence from the London Stock Exchange

With the benefit of very high frequency (25 million 1 minute observations) and recent data (2001) for the UK, this paper explores a number of intra day patterns of stock market behaviour. More specifically, a distinct reverse J shaped bid‐ask spread pattern is noted for SETS securities, a declining bid‐ask spread pattern for non‐SETS securities, a two hump pattern for trading volume and a U‐shaped pattern for returns volatility for all securities. In terms of complementing the existing literature, the paper shows that differences in trading systems may affect the bid‐ask spread patterns, while differences in market environments (i.e. US and UK markets) seems to affect the trading volume pattern. The paper suggests avenues for future research, in particular, the need to consider what factors are significant in determining intra day patterns for different trading systems and the need for additional cross‐market comparisons to identify how institutional factors affect the behaviour of investors on an intra day basis.     

Bank Relationship and Firm Performance: Evidence From Thailand Before the Asian Financial Crisis

Abstract:   This study examines the relation between bank relations and market performance in Thailand, an economy in which commercial banks play a crucial role through lending relationship and, for a number of companies, equity ownership. Overall, bank relationships, both equity‐based and debt‐based, positively affect capital investment. However, there is a negative relation between lending relationships, both short‐term and long‐term, and market performance indicating that bank lending may not always be consistent with value maximization. There is also evidence of a positive marginal effect of bank monitoring through equity ownership on market performance. Further, the relation between bank equity ownership and market performance appears to be non‐linear with a concave function. Ownership by corporate insiders is also negatively related to bank equity ownership. Overall, the findings highlight the detrimental effects of excessive short‐term debt usage, one of the factors believed to contribute to the financial crisis in Thailand, and the marginal benefit of the equity‐based relationship on firm value.     

Regime Change and the Role of International Markets on the Stock Returns of Small Open Economies

We examine the influence of US, UK and German macroeconomic and financial variables on the stock returns of two relatively small, open European economies, Ireland and Denmark. Within a nonlinear framework, we allow for time variation via regime switching using a smooth transition regression (STR) model. We find that US (global) and UK and German (regional) stock returns are significant determinants of returns in both markets. Further, global information represented by oil and US asset price movements drive changes between states in each market. Significantly, the role of country‐specific domestic variables is typically confined to a single state while global and regional variables pervade all states.     

The Long Run Abnormal Performance of UK Acquirers and the Free Cash Flow Hypothesis

Abstract:   Evidence from recent US and UK studies reveals a pattern of poor long run post acquisition performance by acquiring firms. One explanation, due to Jensen (1986) is that acquirers with an excess of free cash flow (FCF) will have a propensity to squander this on wasteful investments, including take‐overs. In this paper, using a dataset of UK take‐overs and proxies for free cash flow similar to those used by Lang, Stulz and Walking (1991) , we find no support for the FCF hypothesis and show that this conclusion is robust to the model of long run returns employed. Contrary to the free cash flow hypothesis there is evidence that acquirers with high free cash flow perform better than acquirers with low free cash flow. Although not consistent with the Jensen hypothesis, this evidence is compatible with the emerging UK evidence that shows cash flow‐to‐price measures are associated with market returns.     

The effects of the introduction of the euro on the volatility of European stock markets

Have convergence of European economies and introduction of the euro produced some effects on European stock markets? Theory suggests that stabilization of fundamentals should decrease variance of stock returns for historically unstable stock markets. We test this proposition with daily data for the period January 1988–May 2000 and apply a three-regime Markov switching model for the variance-covariance matrix among several stock indices, including the UK and the US. The analysis shows that introduction of the euro, after an initial burst of volatility common to all European stock markets, has indeed stabilized the Spanish and Italian stock markets.     

Market Impact on financial market integration: Cross-quantilogram analysis of the global impact of the euro

We contribute to the literature by providing a more comprehensive understanding of the impact the euro has had on financial market integration with economies of different characteristics outside and within the European market via inclusion of market conditions influence on the level of financial integration. Our paper employs the recently developed cross-quantilogram (Han et al., 2016) approach to examine quantile dependence between the conditional stock return distributions of Germany and the UK with that of three common currency groups within EMU (Finland, France, and Italy), two global leading markets (the US and Japan), and two of the most promising emerging markets (China and India). We find three key results. First, both the EU membership and the common currency union affect the degree of financial market integration. Nevertheless, disentangling the effects of EU membership from the common currency shows that the common currency group has an additional impact on financial integration, as the degree of dependence is stronger in the common currency group than in the sovereign currency group and other groups. Second, there is a heterogeneous dependence structure, which is strongly observed for the UK and German stock returns with that of developed (the US and Japan) and emerging markets (India and China). Third, cross-quantile correlations change over time, especially in low and high quantiles, indicating that they are prone to jumps and discontinuities in the dependence structure. As far as we are aware, this is the first study in this field employing a cross-quantilogram method to examine the impact of different market conditions on the correlations, making our study a pioneer in the field of stock market integration.     

Volatility dependences of stock markets with structural breaks

We develop a Vector Heterogeneous Autoregression model with Continuous Volatility and Jumps (VHARCJ) where residuals follow a flexible dynamic heterogeneous covariance structure. We employ the Bayesian data augmentation approach to match the realised volatility series based on high-frequency data from six stock markets. The structural breaks in the covariance are captured by an exogenous stochastic component that follows a three-state Markov regime-switching process. We find that the stock markets have higher volatility dependence during turmoil periods and that breakdowns in volatility dependence can be attributed to the increase in market volatilities. We also find positive correlations between the Asian stock markets, the European stock market, and the UK stock market. The US stock market has positive correlations with all other markets for most of the sample periods, indicating the leading position of US stock market in the global stock markets. In addition, the proposed three-state VHARCJ model with Dynamic Conditional Correlation (DCC) and break structure under student-t distribution has a superior density forecast performance as compared to the competing models. The forecast models with structural breaks outperform those without structural breaks based on the log predicted likelihood, the log Bayesian factor, and the root mean square loss function.     

Co-movement of Asia-Pacific with European and US stock market returns: A cross-time-frequency analysis

We investigate the co-movement of 13 Asia-Pacific stock market returns with that of European and US stock market returns using the wavelet coherence method. Our results show consistent co-movement between most of the Asia-Pacific stock markets and that of Europe and the US in the long run. We also uncover evidence of a wide variation in co-movement across the time scale of the financial crises. The co-movement dynamics of the Asia-Pacific markets with that of Europe and the US are different during the two financial crises. The difference in the co-movement dynamics could be the result of the different natures of the financial crises or a change in regime.     

Glamour Acquirers, Method of Payment and Post‐acquisition Performance: The UK Evidence

We study the effect of different acquirer types, defined by financial status and their payment methods, on their short and long‐term performance, in terms of abnormal returns using a variety of benchmark models. For a sample of 519 UK acquirers during 1983–95, we examine the abnormal return performance of acquirers based on their pre‐bid financial status as either glamour or value acquirers using both the price to earnings (PE) ratio and market to book value ratio (MTBV). Value acquirers outperform glamour acquirers in the three‐year post‐acquisition period. One interpretation is that glamour firms have overvalued equity and tend to exploit their status and use it more often than cash to finance their acquisitions. As we move from glamour to value acquirers, there is a greater use of cash. Our results are broadly consistent with those for the US reported by Rau and Vermaelen (1998). However, in contrast to their study, we find stronger support for the method of payment hypothesis than for extrapolation hypothesis. Cash acquirers generate higher returns than equity acquirers, irrespective of their glamour/ value status. Our conclusions, based on four benchmark models for abnormal returns, suggest that stock markets in both the US and the UK may share a similar proclivity for over‐extrapolation of past performance, at least in the bid period. They also tend to reassess acquirer performance in the post‐acquisition period and correct this overextrapolation. These results have implications for the behavioural aspects of capital markets in both countries.     

The International Transmission of Arbitrage Information Across Futures Markets

Abstract:   This paper examines whether deviations from a domestic spot‐futures relation, as identified through mispricing series in stock index futures, spillover international boundaries. Such spillovers suggest that information from a mispricing series in one market conveys a signal of similar mispricing in another market. In the presence of arbitrage traders and in the absence of market frictions, mispricing series should be independent across international boundaries. The study employs a VAR analysis of stock index futures mispricing across three large futures markets – Australia, the UK and the USA. Using time zone differences, tests are conducted for the daily transmission of arbitrage information. The results reveal the relationship between mispricing series is bi‐directional. Based on this finding, a trading strategy is employed to examine the economic significance of apparent profits. The results show that some profits are possible after transaction costs but that a long horizon, probably beyond the scope of most traders, is required to exploit the spillover information.     

On the Existence of Visual Technical Patterns in the UK Stock Market

The aim in this paper is to replicate and extend the analysis of visual technical patterns by Lo et al. (2000) using data on the UK market. A non‐parametric smoother is used to model a nonlinear trend in stock price series. Technical patterns, such as the 'head‐and‐shoulders' pattern, that are characterised by a sequence of turning points are identified in the smoothed data. Statistical tests are used to determine whether returns conditioned on the technical patterns are different from random returns and, in an extension to the analysis of Lo et al. (2000), whether they can outperform a market benchmark return. For the stocks in the FTSE 100 and FTSE 250 indices over the period 1986 to 2001, we find that technical patterns occur with different frequencies to each other and in different relativities to the frequencies found in the US market. Our extended statistical testing indicates that UK stock returns are less influenced by technical patterns than was the case for US stock returns.     

Earnings Conservatism, Litigation and Contracting: The Case of Cross‐Listed Firms

Abstract:   We compare earnings conservatism of UK companies cross‐listed in the US to that of UK companies without a US‐listing. We expect that conservatism will be more pronounced for cross‐listed firms than for firms with a UK listing only, because the cross‐listed firms face a stricter enforcement regime. Furthermore, cross‐listed firms may use a listing on a US exchange to signal high‐quality reporting to investors. Using a matched‐pairs research design, we find that earnings of UK cross‐listed firms are significantly more conservative than earnings of UK firms without a US listing. Moreover, cross listed firms display particularly high levels of conservatism during the early years of their cross‐listing. This indicates that firms use earnings conservatism to commit to highly demanding reporting requirements and in doing so communicate a perception of investor care.     

Stock market contagion in Central and Eastern Europe: unexpected volatility and extreme co-exceedance

We examine whether there is contagion from the US stock market to six Central and Eastern European stock markets. We use a novel measure of contagion that examines whether volatility shocks in the US stock market coupled with negative returns are followed by higher co-exceedance between US and emerging stock markets. Using our approach and controlling for a set of market-related variables, we show that during the period from 1998 to 2014, financial contagion occurred, that is, unexpected negative events in the US market are followed by higher co-exceedance between US and Central and Eastern European stock markets. Even though contagion is stronger during the financial crisis, it also occurs in tranquil times.     

Determinants of the Capital Structures of European SMEs

The aim of this paper is to examine the degree to which the determinants of SMEs' capital structures differ between European countries. The study is based on data for four thousand SMEs, five hundred from each of eight European countries. Regressions were run using short‐term and long‐term debt as dependent variables and profitability, growth, asset structure, size and age as independent variables. A key feature of this paper is the use of restricted and unrestricted regressions to isolate the country‐effect from the firm‐specific‐effect. The results show that variations are likely to be due to country differences as well as firm‐specific ones.     

Dynamic linkages between emerging European and developed stock markets: Has the EMU any impact?

This paper investigates the short- and long-run behavior of major emerging Central European (Poland, Czech Republic, Hungary, Slovakia), and developed (Germany, US) stock markets and assesses the impact of the EMU on stock market linkages. Evidence of one cointegration vector in both a pre- and a post-EMU sub-period indicates market comovements towards a stationary long-run equilibrium path. Central European markets tend to display stronger linkages with their mature counterparts, whereas the US market holds a world leading influential role. No dramatic post-EMU shock is detected in stock market dynamics. The empirical findings have important implications for the effectiveness of domestic policy decisions, as the emerging Central European states have recently joined the EU and local stock markets may become less immunized to external shocks.     

The Real Options Component of Firm Market Value: The Case of the Technological Corporation

Abstract:   This paper tests whether stock prices reflect investor's expectations regarding the value of real options. The analysis is implemented based on a sample of 391 high‐tech companies listed on main OECD stock markets during the period December 1994 through December 2000. Results confirm the predicted relation between the fraction of a firm's market value not accounted for by its assets‐in‐place, and a series of variables that are assumed to disclose its real options value, variables such as research and development activity, risk and skewness of stock returns, and size. The results are robust even after controlling for valuation date, sub‐industry, country, and alternative measures of risk.     

The Term Structure of Implicit Discount Rates in Security Valuation

Abstract:   A reformulation of the residual income model is used to generate estimates of discount rates implicit in UK security prices. The terminal value of the infinite valuation model is incorporated into the coefficient on current earnings. By varying the length of the forecast horizon, different combinations of implicit discount rates are revealed that allow the estimation of time‐variant costs of equity. Results indicate no specific pattern of discount rates, thus revealing neither myopia on short‐term earnings nor excessive optimism on long(er)‐term earnings. Surprisingly, there is weak evidence that if any myopia exists, it is concentrated in larger and lower price‐earnings firms.