Who Gambles in the Stock Market?

This study shows that the propensity to gamble and investment decisions are correlated. At the aggregate level, individual investors prefer stocks with lottery features, and like lottery demand, the demand for lottery-type stocks increases during economic downturns. In the cross-section, socioeconomic factors that induce greater expenditure in lotteries are associated with greater investment in lottery-type stocks. Further, lottery investment levels are higher in regions with favorable lottery environments. Because lottery-type stocks underperform, gambling-related underperformance is greater among low-income investors who excessively overweight lottery-type stocks. These results indicate that state lotteries and lottery-type stocks attract very similar socioeconomic clienteles.     

Are Financial Constraints Priced? Evidence from Firm Fundamentals and Stock Returns

Using comprehensive firm‐ and aggregate‐level data, this paper studies the real and financial implications of capital market imperfections. We first examine whether financially constrained firms' business fundamentals (capital spending and operating earnings) are more sensitive to macroeconomic movements than unconstrained firms' fundamentals. We then examine whether financial constraint “return factors” respond to macroeconomic shocks in tandem with the responses from business fundamentals. The evidence in this paper points to financial constraints affecting both fundamental quantities and asset returns.     

Do Newly Listed Derivatives Affect the Market Risk Premium in a Thin Stock Market?

This study examines the effects on the stock market unitaryrisk premium and volatility associated with the listing of stockand stock index derivatives in Switzerland. Based on a univariateGARCH (1,1) specification of the stock index variance and atime-varying unitary risk premium representation, we can rejectthe hypothesis that stock and stock index derivatives listingsdo not affect the total risk premium. Contrarily to previousempirical evidence, we find that derivatives listings affectboth the conditional market returns’ variance and theunitary risk premium through structural shocks. The gradualmarket completion hypothesis is further corroborated in that,cumulatively, the three stock and stock index options futuresderivatives listings reduced the unitary risk premium whilethe marginal impact of each successive listing decayed. JELClassification: G12, G14.     

Are Liquidity and Information Risks Priced in the Treasury Bond Market?

We provide a comprehensive empirical analysis of the effects of liquidity and information risks on expected returns of Treasury bonds. We focus on the systematic liquidity risk of Pastor and Stambaugh as opposed to the traditional microstructure-based measures of liquidity. Information risk is measured by the probability of information-based trading (PIN). We document a strong positive relation between expected Treasury returns and liquidity and information risks, controlling for the effects of other systematic risk factors and bond characteristics. This relation is robust to many empirical specifications and a wide variety of traditional liquidity and informed trading proxies.     

What Is the Expected Return on a Stock?

We derive a formula for the expected return on a stock in terms of the risk‐neutral variance of the market and the stock's excess risk‐neutral variance relative to that of the average stock. These quantities can be computed from index and stock option prices; the formula has no free parameters. The theory performs well empirically both in and out of sample. Our results suggest that there is considerably more variation in expected returns, over time and across stocks, than has previously been acknowledged.     

The South Pacific Stock Exchange: Is it a Market or Status Symbol?

Listing on a stock exchange is one of the most significant events in a company's life cycle. Using a case study approach we examine why companies in Fiji list on a stock exchange. The various factors that have been found to motivate companies to list include enhancing their image and reputation, increasing the firm's value and introducing better financial and managerial practices. Importantly, the accessing of new sources of finance has not been a determinant of a company's listing decision. The findings imply that in emerging economies, stock exchange listing can be perceived as a status symbol .     

Does IFRS Mandatory Adoption Affect Information Asymmetry in the Stock Market?

The purpose of International Financial Reporting Standards (IFRS), adopted mandatorily by European listed firms in 2005, is to increase the transparency and the comparability of accounting information, which should have led to improvements in these firms’ information environments. This study uses market microstructure proxies for information asymmetry to examine the effects of IFRS adoption on the level of information asymmetry in the Spanish stock market. Therefore, we consider a setting with substantial differences between local standards – Spanish Accounting Standards (SAS) ? and IFRS and where the level of enforcement is low. By controlling for conventional determinants of information asymmetry and firms’ characteristics that influence their information environments, we find a reduction of information asymmetry after IFRS adoption. Our findings suggest that the mandatory switch from local accounting standards to IFRS conveys benefits to the market, even when the enforcement level is not strong.     

Does ESG Certification Improve Price Efficiency in the Chinese Stock Market?

Asia-Pacific Financial Markets - This paper investigates the impact of ESG certification on the pricing efficiency in Chinese listed firms and examines the internal mechanism of this impact....     

Does Cross-Listing Really Enhance Market Efficiency for Stocks Listed in the Home Market? The Perspective of Noise Trading in the Chinese Stock Market

The investor recognition hypothesis and the bonding hypothesis, which help us understand the market quality of stocks that are cross-listed on different stock markets, imply improved market efficiency after cross-listing because of increased investor participation. However, the noise trading of inexperienced investors in the Chinese stock market negatively affects market efficiency. By employing propensity score matching and multivariate regression analysis, we show that the increased individual investor participation actually lowers market efficiency in their home market after cross-listing. This effect is more evident for stocks that were either listed first on the Chinese stock market or listed on the Chinese stock market and the Hong Kong stock exchange (SEHK) on the same date than for stocks that were listed first on the SEHK.     

Is Foreign Exchange Risk Priced in Bank Loan Spreads?

Review of Quantitative Finance and Accounting - This study investigates the effects of foreign exchange (FX) exposure on bank loan spreads. Private bank loans are a major form of corporate...     

Where Is the Market? Evidence from Cross-Listings in the United States

We analyze the location of stock trading for firms with a UScross-listing. The fraction of trading that occurs in the UnitedStates tends to be larger for companies from countries thatare geographically close to the United States and feature lowfinancial development and poor insider trading protection. Forcompanies based in developed countries, trading volume in theUnited States is larger if the company is small, volatile, andtechnology-oriented, while this does not apply to emerging countryfirms. The domestic turnover rate increases in the cross-listingyear and remains higher for firms based in developed markets,but not for emerging market firms. Domestic trading volume actuallydeclines for companies from countries with poor enforcementof insider trading regulation.     

Is There Market Discipline in the European Insurance Industry? An Analysis of the German Insurance Market

Economists often argue in favour of market discipline as a means to distribute resources effectively and efficiently. These same arguments likely influence decision-makers as they incorporate market discipline as the third pillar of Solvency II, the European insurance regulatory scheme currently being implemented. Success for Solvency II, then, is dependent in part on the strength of influence found in market discipline. Our research indicates that the German insurance market demonstrates the existence of such discipline, although the actual effect appears smaller than previously found in the U.S. insurance market. Solvency II, therefore, seems to be following an appropriate path, although further research is needed to evaluate whether or not enhancements to market discipline within the European market are warranted.     

Does the Stock Market See a Zero or Small Positive Earnings Surprise as a Red Flag?

This study shows that firms collectively incur a cost for managing earnings and analyst expectations to meet earnings forecasts. We compare the coefficient in the regression of abnormal stock returns on earnings surprise (the earnings response coefficient [ERC]) across ranges of earnings surprises. The ERC for earnings surprises in the range [0, 1¢] is significantly lower than ERCs for earnings surprises in adjacent ranges for firm-quarters in the early and mid 2000s, but not for those in the 1990s. The results are robust to controlling for the sign of estimated discretionary accruals and the trajectory of analyst earnings forecasts. We further find that investors are right to be skeptical about earnings surprises in the range [0, 1¢]. The relation of future earnings surprise with current earnings surprise is more negative for current earnings surprises in that range than for those in any other range. Evidence also suggests analysts react negatively to earnings surprises in that range.     

What Is the Cost of Financial Flexibility? Theory and Evidence for Make‐Whole Call Provisions

Firms commonly incorporate make-whole call provisions in their newly issued debt, presumably to improve their ability to retire debt early if circumstances require. In return for increased financial flexibility, firms must compensate bondholders with additional (incremental) yield. To estimate theoretical incremental yields, we use and calibrate a structural model for a large sample of callable and noncallable US corporate bonds issued between 1995 and 2004. In a frictionless model where calls occur only when they are in-the-money, theoretical incremental yields average approximately 2 basis points (bp). In an extended model that incorporates taxes, transactions costs, and randomly occurring exogenous events requiring early bond retirement, incremental yields average approximately 5 bp. Empirical analysis, however, indicates that observed incremental yields are significantly greater than model-generated values, averaging between 13 and 24 bp. In the later years of our sample period, however, observed incremental yields begin to converge to model-generated values.     

On the Predictability of the Stock Market Volatility: Does History Matter?

This study compares the performance of the ISD, the GARCH (1,1) , the historical volatility estimates and of two lagged trading volume measures for predicting the Swiss Stock Market Index's (SMI) volatility. The ISD has a superior daily informational content than the GARCH (1,1) estimate and retains unbiased but decreasing explanatory power over up to 20 days ahead horizons. Mean and spread daily volume measures play a significant correcting role when forecasting stock market volatility over daily and longer intervals respectively and clearly dominate the GARCH (1,1) forecasts. Their significance emphasises heterogeneous horizon traders' influence on the SMI volatility time series properties     

Does the Stock Market Compensate Banks for Diversifying into the Insurance Business?

This paper explores a wide range of corporate restructurings, all available deals from wire services, in the banking and insurance sectors that led to bancassurance ventures. An event study methodology is employed to calculate excess returns on and around the deals’ announcement date. Using both univariate and multivariate analysis the paper finds bank driven mergers, deal's size and regional categorization all triggering positive and significant market reactions. Unlike the univariate framework, multivariate analysis shows that geographic focus and language are not significant factors. The results also indicate that markets are indifferent with respect to bank withdrawals from the bank‐insurance operations. Finally, Canadian, U.S. and European bank‐insurance deals produce positive results, while Australasian bidders offer statistically insignificant equity returns.     

Is There Private Information in the FX Market? The Tokyo Experiment

We provide evidence of private information in the foreign exchange market. The evidence comes from the introduction of trading in Tokyo over the lunch hour. Lunch-return variance doubles with the introduction of trading, which cannot be due to public information since the flow of public information did not change with the trading rules. We then exploit microstructure theory to discriminate between the two alternatives: private information and mispricing. Four key results support the predictions of private-information models. Three of these involve changes in the intraday volatility U-shape. The fourth is that opening trade causes mispricing's share in variance to fall.     

Are Chinese Stock Market Cycles Duration Independent?

This paper studies the duration properties of the Chinese stock market cycle. We find evidence for duration dependence in both A‐share and B‐share markets for whole cycles. The results reject the random‐walk hypotheses for both markets. For half cycles, evidence of duration dependence for expansions in the Shanghai A‐share market is found. For the Shenzhen B‐share market, there is little evidence of duration dependence for half cycles. Although the B‐share market is less liquid as compared to the A‐share market, the results of this study suggest that the B‐share market is more efficient than the A‐share market. An important implication is that the quality of market participants plays an important role in the duration property of the Chinese stock market.     

Do Focused Funds Offer Superior Performance in an Emerging Market? Evidence from Taiwan's Stock Market

We examine the effects of the number of stock holdings and industry concentration on Taiwan's equity fund performance. The quadratic regression model is applied to explore the optimal number of stock holdings for mutual funds. The empirical results suggest that funds with a smaller number of stock holdings and with a higher level of industry concentration achieve better performance. We also find that mutual fund performance and the number of stock holdings have an inverted U-shaped relationship, and funds that hold twenty-four to twenty-eight stocks can generate superior performance.     

What Influences Stock Market Behavior in Russia and Other Emerging Countries?

We empirically test the dependence of the Russian stock market on the world stock market and world oil prices in the period 1997:10–2012:02. We also analyze countries that can be considered to be relatively similar to Russia, e.g., Poland, the Czech Republic, and South Africa. First, we apply a rolling regression to identify periods when oil prices or stock indices in the United States and Japan were important. Surprisingly, oil prices are not significant for the Russian stock market after 2006. Second, we employ a TGARCH-BEKK model to assess the degree of correlation between the markets in question, taking into account the global market stochastic trend. Correlation between markets increased between 2000 and 2012.