Does futures trading increase stock market volatility? The case of the Nikkei stock index futures markets

We propose new tests to examine whether stock index futures affect stock market volatility. These tests decompose spot portfolio volatility into the cross-sectional dispersion and the average volatility of returns on the portfolio's constituent securities. Our tests show that for Nikkei stocks spot portfolio volatility increased and cross-sectional dispersion decreased compared with average volatility when Nikkei futures began trading on the Osaka Securities Exchange, but not on the Singapore International Monetary Exchange. For non-Nikkei stocks, no shift occurred when futures trading began on either exchange. These findings are consistent with the hypotheses that futures trading increases spot portfolio volatility but that there is no volatility “spillover” to stocks against which futures are not traded. However, the increase in volatility attributable to futures trading is small compared with volatility shifts induced by changes in broad economic factors.     

Which market dominates the price discovery in currency futures? The case of the Chicago Mercantile Exchange and the Intercontinental Exchange

This paper examines the relative contributions to the price discovery process of EUR/USD futures traded in the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). We find that the CME contributes 66.4%, 92.7%, and 97.3% to the price discovery process according to information share metrics suggested by Harris, McInish, and Wood (2002), Hasbrouck (1995), and Putninš (2013), respectively. The intraday information share metrics also show that the CME dominates the price discovery in most time periods. We attribute the CME's price discovery leadership to its higher trading activity, lower transaction costs, and higher volatility as compared to the ICE.     

A leader of the world commodity futures markets in the making? The case of China's commodity futures

We use the daily data of 16 commodity futures contracts traded in China and corresponding foreign markets (the US, the UK, Japan, and Malaysia) to analyze the linkages between markets. Several findings are noteworthy. First, trading returns of foreign markets, such as the US, have significant impact on China's overnight (close-to-open) returns and vice-versa. Second, daytime (open-to-close) returns of many Chinese commodity futures contracts are not led by foreign daytime returns. Finally, the close-to-close returns analysis suggests that there are no significant lead-lag relationships between the Chinese and foreign markets. These results suggest that (1) the Chinese commodity futures markets are information-efficient, and (2) they are likely to be driven by local market dynamics occurring during the daytime trading session.     

Does retailer power lead to exclusion?

This article examines whether retailer bargaining power and upfront slotting allowances prevent small manufacturers (who have no bargaining power) from obtaining adequate distribution. In contrast to the findings of Marx and Shaffer (2007) , who show that all equilibria involve limited distribution (i.e., exclusion of a retailer), we show that there is always an equilibrium in which full distribution is obtained, provided that full distribution is the industry profit‐maximizing outcome. The key feature leading to this differing result is that we do not restrict each retailer to offering the manufacturer a single tariff.     

Does more information in stock price lead to greater or smaller idiosyncratic return volatility?

We investigate the relation between price informativeness and idiosyncratic return volatility in a multi-asset, multi-period noisy rational expectations equilibrium. We show that the relation between price informativeness and idiosyncratic return volatility is either U-shaped or negative. Using several price informativeness measures, we empirically document a U-shaped relation between price informativeness and idiosyncratic return volatility. Our study therefore reconciles the opposing views in the following two strands of literature: (1) the growing body of research showing that firms with more informative stock prices have greater idiosyncratic return volatility, and (2) the studies arguing that more information in price reduces idiosyncratic return volatility.     

Who wins in the money game? The case of KOSPI 200 futures

This study investigates the information advantage of each investor category (i.e., foreigners, individuals, institutions, and the others) in the Korean stock index (i.e., KOSPI 200) futures market. To evaluate the information advantage of each investor category, we calculate futures trading and position gains; review and criticize the Value Weighted Average Price (VWAP) measure; and develop adjusted VWAP measures that are consistent with trading gains. Our main inferences are made based on adjusted VWAP measures. This study analyzes the transaction data of the nine years from January 1998 through 2006. From the perspectives of the adjusted VWAP measures, our findings support the information advantage of foreign investors over domestic (particularly, domestic individual) investors in the KOSPI 200 futures market.     

Does earnings management lead to favorable IPO price formation or further underpricing? Evidence from Japan

This study addresses an important but unanswered question regarding the relationship between earnings management and underpricing. Earnings management has long been one of the central issues in initial public offerings (IPOs), however little evidence exists on whether earnings management leads to favorable price formation or further underpricing. Using several proxies for earnings management, this study finds evidence that firms with aggressive earnings management during the pre-IPO period tend to be more underpriced than firms without it, in contrast to the dominant hypothesis that IPO firms can sell their stocks at inflated prices by manipulating earnings upwardly. This finding is consistent with the asymmetric information theory of underpricing and suggests that aggressive earnings management increases valuation uncertainty of IPO firms and leads to steeper price discounts.     

Does inequality lead to a financial crisis?

The recent global crisis has sparked interest in the relationship between income inequality, credit booms, and financial crises. Rajan (2010) and Kumhof and Rancière (2011) propose that rising inequality led to a credit boom and eventually to a financial crisis in the US in the first decade of the 21st century as it did in the 1920s. Data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships. Credit booms heighten the probability of a banking crisis, but we find no evidence that a rise in top income shares leads to credit booms. Instead, low interest rates and economic expansions are the only two robust determinants of credit booms in our data set. Anecdotal evidence from US experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality, credit, crisis nexus. Rather, it points back to a familiar boom-bust pattern of declines in interest rates, strong growth, rising credit, asset price booms and crises.     

Does global economic uncertainty matter for the volatility and hedging effectiveness of Bitcoin?

We assess whether the long-run volatilities of Bitcoin, global equities, commodities, and bonds are affected by global economic policy uncertainty. Empirical results provide evidence supporting this hypothesis, except in the case of bonds. For Bitcoin investors, the results imply the ability to use information about the state of global economic uncertainty to enhance the predictions of Bitcoin volatility. We further examine whether the correlation between Bitcoin and global equities, commodities, and bonds are affected by global economic policy uncertainty. Empirical results reveal that global economic policy uncertainty has a negative significant impact on the Bitcoin-bonds correlation and a positive impact on both Bitcoin-equities and Bitcoin-commodities correlations, suggesting the possibility of Bitcoin acting as a hedge under specific economic uncertainty conditions. Interestingly, the hedging effectiveness of Bitcoin for both global equities and global bonds enhances slightly after considering the level of global economic policy uncertainty. Such a weak effect of the state of global economic uncertainty on the hedging ability of Bitcoin implies that investors cannot substantially enhance the hedging performance of Bitcoin under different economic uncertainty conditions.     

The lead–lag relationship between the spot and futures markets in China

Based on daily and one-minute high-frequency returns, this paper examines the lead–lag dependence between the CSI 300 index spot and futures markets from 2010 to 2014. A nonparametric and non-linear method based on the thermal optimal path method is adopted. Empirical results of the daily data indicate that the lead–lag relationship between the two markets is within one day but this relationship is volatile since neither of the two possible situations (the futures leads or lags behind the spot market) takes a dominant place. Our results using the high-frequency data demonstrate that there is a price discovery in the Chinese futures market: the intraday one-minute futures return leads the cash return by 0–5 min regardless of the price trend of the market.     

Does model complexity improve pricing accuracy? The case of CoCos

Review of Derivatives Research - In this study, we analyze whether model complexity improves accuracy of CoCo pricing models. We compare the out-of-sample pricing ability of four models using a...     

Does short selling improve stock price efficiency and liquidity? Evidence from a natural experiment in China

China introduced short selling for designated stocks in March 2010. Using this important policy change as a natural experiment, we examine the effect of short selling on stock price efficiency and liquidity. We show that the introduction of short selling significantly improves price efficiency, as measured by the differences in individual stock responses to market returns and the delay in price adjustments. Short selling also enhances stock liquidity, as measured by bid-ask spread and Amihud [2002. ‘Illiquidity and Stock Returns: Cross-section and Time-series Effects.’ Journal of Financial Markets 5: 31–56] illiquidity measure; and reduces stock volatility. Overall, our results suggest that short selling helps to stabilize asset prices, provides additional liquidity and improves market quality, even in an emerging economy with a less developed stock market than that in the US and Europe.     

The relation between earnings and price momentum: Does it vary across regimes?

Review of Quantitative Finance and Accounting - This paper investigates the time-varying relationship between earnings momentum and price momentum. Using a Markov-switching framework, allowing for...     

Better cross hedges with composite hedging? Hedging equity portfolios using financial and commodity futures

Unless a direct hedge is available, cross hedging must be used. In such circumstances portfolio theory implies that a composite hedge (the use of two or more hedging instruments to hedge a single spot position) will be beneficial. The study and use of composite hedging has been neglected; possibly because it requires the estimation of two or more hedge ratios. This paper demonstrates a statistically significant increase in out-of-sample effectiveness from the composite hedging of the Amex Oil Index using S&P500 and New York Mercantile Exchange crude oil futures. This conclusion is robust to the technique used to estimate the hedge ratios, and to allowance for transactions costs, dividends and the maturity of the futures contracts.     

Does acquisition lead to the growth of high-tech scale-ups? Evidence from Europe

The post-acquisition growth of high-tech scaleups has received relatively little research attention. This is surprising since buyers are known to target these firms for growth opportunities whilst sellers increasingly seek strategic partners to access resources to scale their ventures. We examine the post-acquisition revenue and employment growth of high-tech scaleups in a multi-country setting, comprising five European economies. Using a propensity-score matching approach and difference-in-differences regression, for a sample of 2187 high-tech scaleups, we demonstrate that acquisition has a positive effect on target firms equivalent to cumulative growth of revenue (employment) of 9–13 (6−10) percent after five (four) years, relative to control firms. We find that nationality matters such that the targets of foreign-owned acquirers exhibit significantly higher cumulative revenue and employment growth than their domestic counterparts. Taking a longer-term perspective, we show that growth dips in the first year, then stabilizes and accelerates in the years following acquisition, indicating a period of adjustment.     

Pricing and hedging of credit derivatives via?the?innovations approach to nonlinear filtering

In this paper, we propose a new, information-based approach for modelling the dynamic evolution of a portfolio of credit risky securities. In our setup, market prices of traded credit derivatives are given by the solution of a nonlinear filtering problem. The innovations approach to nonlinear filtering is used to solve this problem and to derive the dynamics of market prices. Moreover, the practical application of the model is discussed: we analyse calibration, the pricing of exotic credit derivatives and the computation of risk-minimizing hedging strategies. The paper closes with a few numerical case studies.     

Does ESG matter to investors? ESG scores and the stock price response to new information

We examine how a third-party assessment of a firm's relative ESG attractiveness affects investor demand for the firm's equity in the presence of new information. Utilizing an event-study methodology, with credit-rating change events as proxies for new positive and negative information, we find evidence supporting a high ESG score as a significant factor in determining how investors respond to new positive information. Specifically, after controlling for relevant fixed effects, we find that the highest quartile of ESG scores amplifies the positive stock-price reaction to credit-rating upgrades by 130 basis points, providing evidence of confirmation bias.     

Does financial reporting above or below operating income matter to firms and investors? The case of investment income in China

We explore a unique regulatory change in China in 2007 that moves investment income in an income statement from below the line of operating income to above the line. We find that, post-regulatory change, firms report high investment income when core earnings (operating income excluding investment income) are low and vice versa. Investment income and core earnings exhibit a significantly negative correlation every year post regulation, in contrast to a significantly positive correlation beforehand. We also find that investors do not fully see through the change. Before the regulation, both core earnings and investment income are positively correlated with contemporaneous stock returns and uncorrelated with future stock returns, suggesting appropriate pricing of the information. However, afterward, the results on core earnings are similar to those in the pre-regulation period, but investment income is negatively correlated with future stock returns, implying that the stock market overreacts to the information in investment income in the contemporaneous year.     

Does favorable investor sentiment lead to costly decisions to go public?

We investigate the real effects of decisions to undertake an initial public offering of stock in periods of favorable investor sentiment. Specifically, we examine potential effects of favorable investor sentiment on investment expenditures and how effects on investment affect firm operating performance and value as well as the likelihood of survival. We find that firms going public during periods of favorable sentiment, on average, spend substantially more on investments, especially acquisitions, than firms going public in other periods. The effect of favorable investor sentiment on investment is more pronounced for younger firms. We do not find, however, that the higher investment spending in the wake of favorable sentiment leads to worse operating or stock performance. Stock returns around acquisitions announcements are also positive for firms going public in favorable sentiment periods. The preponderance of our findings indicate that decisions to go public in favorable investor sentiment periods do not lead to corporate investment decisions that harm firm performance and value.     

Margin trading and price efficiency: information content or price-adjustment speed?

The literature offers contradictory views on the effect of margin-trading activities on price efficiency. Based on data from a Chinese margin-trading pilot programme in 2010, we separate price efficiency into information content and price-adjustment speed and investigate the effect of margin-trading activity on price efficiency. We find that after adding to the eligible list, pilot stocks experience a decrease in information content, but an increase in price-adjustment speed. Furthermore, increased margin-buying activities are associated with lower information content, but faster price adjustment. Our results reconcile the debate over the effect of margin trading on price efficiency.