Stock price reactions to earnings announcements: evidence from Chinese markets

We examine the stock price reactions to changes in earnings per share (EPS) in the Chinese stock markets. We find that domestic A-share investors do not correctly anticipate the changes in earnings and fail to adjust new earnngs information quickly, but international B-share investors can predict earnings changes better than A-share investors. As a result, abnormal returns (ARs) can be obtained by trading on the earnings information, but for A shares only. An explanation is that most A-share holders are individuals with short-term investment horizon while most B-share holders are large institutions that trade on more detailed and accurate financial information not immediately available to A-share holders.     

Using price distributions to estimate search costs

We show how the equilibrium restrictions implied by standard search models can be used to estimate search‐cost distributions using price data alone. We consider both sequential and non‐sequential search strategies, and develop estimation methodologies that exploit equilibrium restrictions to recover estimates of search‐cost heterogeneity that are theoretically consistent with the search models. We illustrate the method using online prices for several economics and statistics textbooks.     

Investor propensity to speculate and price delay in emerging markets

Stocks with lottery-type payoffs exhibit more pronounced price delay. This finding holds for emerging market stocks even when jointly considering the impact of IVOL. In a cross-market analysis, a stronger market-level propensity to speculate, gauging the strength of investor preference for lottery-type payoffs, is found to delay the price reaction to information for stocks in the market in general. These conclusions remain robust when using a random sample that mitigates the bias from unevenly distributed sample observations across markets. Our findings add to the evidence that investors' asset choices that deviate from ideal portfolio diversification influence the process of stock pricing.     

Discrete games with flexible information structures: an application to local grocery markets

Game‐theoretic models are frequently employed to study strategic interaction between agents. Empirical research has focused on estimating payoff functions while maintaining strong assumptions regarding the information structure of the game. I show how to relax informational assumptions to enhance the credibility of empirical analysis in discrete games. I apply the method to data on the entry and exit patterns of grocery stores. The model provides useful bounds on equilibrium outcomes. In addition, the empirical analysis indicates that more restrictive informational assumptions can generate qualitatively misleading counterfactual outcomes.     

Model averaging in risk management with an application to futures markets

This paper considers the problem of model uncertainty in the case of multi-asset volatility models and discusses the use of model averaging techniques as a way of dealing with the risk of inadvertently using false models in portfolio management. Evaluation of volatility models is then considered and a simple Value-at-Risk (VaR) diagnostic test is proposed for individual as well as ‘average’ models. The asymptotic as well as the exact finite-sample distribution of the test statistic, dealing with the possibility of parameter uncertainty, are established. The model averaging idea and the VaR diagnostic tests are illustrated by an application to portfolios of daily returns on six currencies, four equity indices, four ten year government bonds and four commodities over the period 1991–2007. The empirical evidence supports the use of ‘thick’ model averaging strategies over single models or Bayesian type model averaging procedures.     

Integrating auction and search markets: The slow Dutch auction

The issue of choosing to sell property by auction or by traditional negotiated search markets is addressed in this article. A general selling institution called the slow Dutch auction is introduced. This general selling mechanism reduces to either a conventional auction, a posted offer, or some time dependent mix of these selling institutions depending on the pricing rule chosen by the seller. We model search by having potential buyers whose private valuation for the property is unknown to the seller arrive randomly over time. With this general framework the seller's problem is to choose a selling mechanism that maximizes expected wealth. Surprisingly, we find that the optimal selling institution is always a posted offer market. The seller chooses an optimal posted price and waits until a buyer arrives who is willing to pay this price. Auctions are never optimal.     

商品市场的金融化与油价泡沫

在过去几年中,商品市场发生了巨大的变化。衍生品交易量大幅度超过了实物的产量,而在衍生品市场中,金融机构已经取代了传统的商品买家和卖家,成为了市场的主动性力量。商品市场这种＂金融化＂现象改变了商品价格的形成机制。以油价为例,实证分析表明,自2003年以来油价的暴涨,其系统性的推动因素就在于石油衍生品市场金融机构过于活跃、甚至是投机性质的交易行为。     

Risk aversion and price limits in futures markets

Assuming that a representative trader is risk-neutral, Brennan [1986. Journal of Financial Economics 16, 213–233] shows that price limits, in conjunction with margins, may help reduce the default risk, lower the margin requirement, and decrease the total contract cost. We show that Brennan's result is true only when the trader's degree of risk aversion is low and the precision of additional information about the equilibrium futures price is also low. When the trader either is more risk-averse or can receive precise information, price limits become ineffective in either reducing the default probability, cutting down the margin requirement, or lowering the contract cost.     

Trading activity and price reversals in futures markets

We use the standard contrarian portfolio approach to examine short-horizon return predictability in 24 US futures markets. We find strong evidence of weekly return reversals, similar to the findings from equity market studies. When interacting between past returns and lagged changes in trading activity (volume and/or open interest), we find that the profits to contrarian portfolio strategies are, on average, positively associated with lagged changes in trading volume, but negatively related to lagged changes in open interest. We also show that futures return predictability is more pronounced if interacting between past returns and lagged changes in both volume and open interest. Our results suggest that futures market overreaction exists, and both past prices and trading activity contain useful information about future market movements. These findings have implications for futures market efficiency and are useful for futures market participants, particularly commodity pool operators.     

Conditional dependence in post-crisis markets: dispersion and correlation skew trades

Review of Quantitative Finance and Accounting - Strengthening of asset return dependence during the 2007–2008 credit crisis highlighted its dynamic and conditional nature. Option prices...     

Correlation and return dispersion dynamics in Chinese markets

This paper studies the relation between firm-level return dispersions and correlations among Chinese stocks during periods of unusually large upward and downward swings. We analyze individual stock returns across 18 sectors and test if return dispersions and stock correlations show asymmetric patterns for extreme up and down markets. Evidence from studies on U.S. stocks suggests that equity return correlations tend to be much greater on the downside than on the upside and that the degree of comovement gets even stronger during extreme market states. However, in the case of Chinese stock market, we find that higher downside correlations apply to only stocks within the Financial sector. With the exception of Financial stocks, we find that stock correlations are significantly higher during up markets, rather than down markets. Regarding firm-level return dispersions, our findings are consistent with rational asset pricing model predictions. We find that equity return dispersions are significantly higher during periods of large price changes.     

The price of a smile: hedging and spanning in option markets

The volatility smile changed drastically around the crash of1987, and new option pricing models have been proposed to accommodatethat change. Deterministic volatility models allow for moreflexible volatility surfaces but refrain from introducing additionalrisk factors. Thus, options are still redundant securities.Alternatively, stochastic models introduce additional risk factors,and options are then needed for spanning of the pricing kernel.We develop a statistical test based on this difference in spanning.Using daily S&P 500 index options data from 1986-1995, ourtests suggest that both in- and out-of-the-money options areneeded for spanning. The findings are inconsistent with deterministicvolatility models but are consistent with stochastic modelsthat incorporate additional priced risk factors, such as stochasticvolatility, interest rates, or jumps.     

Trading activity and price discovery in Bitcoin futures markets

This study examines the impact of trading activities on price discovery in the Bitcoin futures markets. We find that trades of hedgers are positively correlated with the modified information shares in both CME and CBOE futures markets, suggesting that their trading promotes futures market efficiency. Retailers’ trading activity relates negatively to the price discovery of the CME Bitcoin futures and thus destabilizes the market. Speculators exert positive (negative) impact on the price discovery in the CME (CBOE) Bitcoin futures. Our finding that CME’s Bitcoin futures exhibit superior price discovery than CBOE’s provides plausible justification for CBOE’s decision in March 2019 to suspend further listings of Bitcoin futures contracts.     

Local and global price memory of international stock markets

The prime focus of this paper is on the impact of the world’s leading markets (USA, Japan, Hong Kong, UK, France, Switzerland and Germany) on the returns of the small Nordic markets (Denmark, Finland, Norway and Sweden). The order and the degree of processing both ‘local’ and ‘global’ information are uncovered using a combination of cointegration analysis and structural VAR modeling utilizing daily index returns. The results indicate that the US price changes, conditioned on the same day changes on the other markets, have an impact on all other markets during the following day, including the US market itself. Price changes on the Asian–Pacific markets are completely absorbed in price changes in Europe and do not have any direct effect on US prices. Finally, a cointegration relationship between Sweden and Norway is found, which affects also Finland.     

Quote disclosure and price discovery in multiple-dealer financial markets

We examine the effects of price disclosure on market performancein a continuous experimental multiple-dealer market in whichseven professional market makers trade a single security. Thedealers trade with one another and with computerized informedand liquidity traders. Our key comparison is between fully publicprice queues (pretrade transparent market) and bilateral quoting(pretrade opaque). We find that opening spreads are wider andtrading volume is lower in the opaque markets due to highersearch costs there. More importantly, however, higher searchcosts also induce more aggressive pricing strategies, so thatprice discovery is much faster in the opaque markets.     

Influence of cultural factors on price clustering and price resistance in China's stock markets

This paper builds on prior research by analysing the impact of cultural factors on both price clustering and price resistance in China's stock markets. The results support the presence of cultural factors impacting on price clustering with the digit 8 showing a higher propensity for clustering and the digits 4 and 7 showing a lower propensity in the A‐share market, where stock is denominated in renminbi and traded by mainland Chinese. These results are further supported by an analysis of the B‐share market, where cultural factors have no (or less) impact on the price of Chinese stocks traded by foreign investors in US dollars (or in Hong Kong dollars). A range of measures for price resistance show the digits 0 and 5 to be significant resistance points in the A‐share market. Although digit 8 cannot be considered as a resistance point, its resistance level is highest among the remaining numbers. In conclusion, cultural factors help to explain not only price clustering in the Chinese stock markets but price resistance levels as well, albeit at a weak level.     

Stock price synchronicity and analyst coverage in emerging markets

This paper examines the relation between the stock price synchronicity and analyst activity in emerging markets. Contrary to the conventional wisdom that security analysts specialize in the production of firm-specific information, we find that securities which are covered by more analysts incorporate greater (lesser) market-wide (firm-specific) information. Using the R² statistics of the market model as a measure of synchronicity of stock price movement, we find that greater analyst coverage increases stock price synchronicity. Furthermore, after controlling for the influence of firm size on the lead–lag relation, we find that the returns of high analyst-following portfolio lead returns of low analyst-following portfolio more than vice versa. We also find that the aggregate change in the earnings forecasts in a high analyst-following portfolio affects the aggregate returns of the portfolio itself as well as those of the low analyst-following portfolio, whereas the aggregate change in the earnings forecasts of the low analyst-following portfolio have no predictive ability. Finally, when the forecast dispersion is high, the effect of analyst coverage on stock price synchronicity is reduced.     

Stock price synchronicities and speculative trading in emerging markets

The literature suggests that the strong price synchronicity observed in emerging markets is driven by the lack of firm-specific information acquisition. This paper extends previous studies by focusing on the question of whether investors’ speculative trading behavior or market conditions make the synchronicity in emerging markets more pronounced. Our results indicate that the propensity to engage in speculative trades and a low level of linkage with the world market lead to greater stock price synchronicity. These results are consistent with the hypotheses that it is difficult to price firm-level fundamentals in a speculative market where noise trades prevail, and that less weight is attached to firm-specific fundamentals in pricing stocks in a more segmented market. The price synchronicities are largely found to be stronger in bearish markets, a finding consistent with the hypothesis that investors have increased loss aversion during bear markets, which further limits informed arbitrage.