How effective are trading pauses?

Exploiting Nasdaq order book data and difference-in-differences methodology, we identify the distinct effects of trading pause mechanisms introduced on US stock exchanges after May 2010. We show that the mere existence of such a regulation makes market participants behave differently in anticipation of a pause. Pauses enhance price discovery during the break but have adverse effects on price stability and liquidity after the pause. We find that pauses ultimately do not “cool off” markets but cause extra volatility. This implies a regulatory trade-off between the protective role of trading pauses and their adverse effects on market quality.     

Are candlestick technical trading strategies profitable in the Japanese equity market?

We show that candlestick charting, the oldest known form of technical analysis, is not profitable in the Japanese equity market over the 1975–2004 period. Candlestick technical analysis, which was developed in Japan in the 1600s, is deeply intertwined with Japanese culture and is very popular in Japan. However, there is no evidence candlestick technical trading strategies add value in either the entire 30 year period, in three 10 year sub-periods or in bull or bear markets.

How suboptimal are linear sharing rules?

The objective of this paper is to analyze criteria for portfolio choice when two investors are forced to invest in a common portfolio and share the proceeds by a linear sharing rule. A similar situation with many investors is typical for defined contribution pension schemes. The restriction implies two sources of suboptimal investment decisions as seen from each of the two investors individually. One is the suboptimal choice of portfolio, the other is the forced linear sharing rule. We measure the combined consequence for each investor by their respective loss in wealth equivalent. We show that significant losses can arise when investors are diverse in their risk attitude. We also show that an investor with a low degree of risk aversion, like the logarithmic or the square root investor, often applied in portfolio choice models, can either inflict or be subject to severe losses when being forced to participate in such a common investment pool.     

Is trading in the shortest-term index options profitable?

Review of Derivatives Research - The aim of this study is to examine the return rates of the TAIEX options with at most 8 calendar days to maturity using a buy-and-hold strategy. Although our...     

Does FOMC news increase global FX trading?

Does global currency volume increase on Federal Open Market Committee (FOMC) days? To test hypotheses of abnormal currency volume on FOMC days, a new data set from the Continuous Linked Settlement (CLS) Bank is used. The CLS measure captures more than half of the global trading volume in foreign exchange (FX) markets. The evidence shows that FX trading volume increases about 5% in the spot and the spot-next market following FOMC deliberations. The novelty of this result is that the aggregated CLS data controls for responses in various derivatives markets: a feature that existing studies based on intradaily data for specific trading platforms do not consider.     

A comprehensive look at the efficacy of technical trading rules applied to cross-rates ∗

Moving average (MA) and channel rules (CH) are applied to ten spot cross-rates – AUD/JPY,GBP/JPY,CAD/JPY,DEM/GBP,DEM/ITL,DEM/JPY,DEM/CHF,CHF/GBP, and CHF/JPY – to examine whether opportunities for profitable trading exist. The results suggest that neither trasding rule is profitable. Overall, the results are consistent with those reported in Lee and Mathur ^{?? ??}Lee C.I. and Mathur, I. (1996), Trading rule profits in European currency spot cross-rates, Journal of Banking and Finance, 20, 949–62. and in sharp contrast with the evidence from studies on dollar-denominated exchange rates. The costs of direct currency exchange through cross-rates and through indirect dollar-related transactions are also estimated. The savings related to direct cross-rate currency exchanges are estimated to range from 0.004% to 0.22%.     

How and when is dual trading irrelevant?

Within a general model of speculative trade, we derive the aggregate consequences of dual traders who process retail liquidity trades and trade on their own account. We prove that dual trading reduces total expected speculator profits unless speculators process all liquidity trade and trade with the same intensity on liquidity trade. In contrast, dual trading does not affect the information content of prices. We show how results generalize when we endogenize (a) speculator information via costly information acquisition about fundamentals or costly processing of liquidity trade, and (b) liquidity trader motives and welfare via endowment shocks.     

Is momentum trading profitable from Shari'ah compliant stocks?

This research offers fresh evidence supporting the pervasiveness of the momentum effect. Two decades after the momentum profitability firstly documented by Jegadeesh and Titman (1993), yet little research has been specifically devised for the momentum profitability on Shari'ah compliant stocks. We assess the momentum profitability over the Shari'ah compliant stocks in a Malaysian setting. We find evidence of strong return persistence as far as toward four-year holding period. Interestingly, no significant momentum returns are found among the conventional stocks. Upon further exploration we find neither an industry-driven momentum effect nor the small size firms can account for the momentum returns. Using return persistency formation criteria, we further find that underreaction seems to well fit in explaining this unique long lasting momentum profitability.     

How does trading volume affect financial return distributions?

We assess investors' reaction to new information arrivals in financial markets by examining the relationships between trading volume and the higher moments of returns in 18 international equity and currency markets. Our volume-volatility results support extant information theories and further contribute new evidence of cross market relations between volume and volatility. We also find that the direct impact of volume on the level of negative skewness is less significant for more diversified regional portfolios. Furthermore, the negative interaction between volume and kurtosis can be explained by the differences of opinion in financial markets. We observe stronger interdependence among higher moments in reaction to significant events, but the strength is dampened by trading volume. This result is consistent with trading volume being a source of heteroskedasticity in asset returns.     

Can technical trading beat the foreign exchange market in times of crisis?

I examine the profitability of three simple foreign exchange technical trading rules (moving average, momentum, and relative strength index) before, during, and after the 2007–2008 global financial crisis. These rules significantly improve profitability during the crisis (as opposed to before and after it). The moving average rule significantly increases profitability for exchange rate changes during the crisis. The momentum and relative strength index rules generate significant positive excess currency returns (defined as the difference between the forward premium and spot rate changes), but this profitability is not visible in spot rate changes. These findings are robust for portfolios of developed and emerging market currencies as well as for bilateral exchange rates.     

Is the Swedish stock market efficient? Evidence from some simple trading rules

In this paper we examine the profitability of some technical trading rules in the Swedish stock market over the 1986-2004 periods. The results indicate that moving average rules do indeed have predictive power and could discern recurring-price patterns for profitable trading, even after accounting for the effects of data snooping biases. To assess the profitability of different technical trading rules and strategies, we adopt White's [White, H. (2000). A Reality Check for data snooping, Econometrica, 68, 1097-1126.] Reality Check test that quantifies the data snooping bias adjusting for its effects. Our results also support the hypothesis that technical trading rules can outperform the buy-and-hold strategy even considering transaction costs.     

How costly are debt crises?

The aim of this paper is to assess the short and medium-term impact of debt crises on GDP. Using an unbalanced panel of 154 countries from 1970 to 2008, the paper shows that debt crises produce significant and long-lasting output losses, reducing output by about 10 percent after 8 years. The results also suggest that debt crises tend to be more detrimental than banking and currency crises. The significance of the results is robust to different specifications, identification and endogeneity checks, and datasets.     

Are tightened trading rules always bad? Evidence from the Chinese index futures market

This paper investigates the impact of tightened trading rules on the market efficiency and price discovery function of the Chinese stock index futures in 2015. The market efficiency and the price discovery of Chinese stock index futures do not deteriorate after these rule changes. Using variance ratio and spectral shape tests, we find that the Chinese index futures market becomes even more efficient after the tightened rules came into effect. Furthermore, by employing Schwarz and Szakmary [J. Futures Markets, 1994, 14(2), 147–167] and Hasbrouck [J. Finance, 1995, 50(4), 1175–1199] price discovery measures, we find that the price discovery function, to some extent, becomes better. This finding is consistent with Stein [J. Finance, 2009, 64(4), 1517–1548], who documents that regulations on leverage can be helpful in a bad market state, and Zhu [Rev. Financ. Stud., 2014, 27(3), 747–789.], who finds that price discovery can be improved with reduced liquidity. It also suggests that the new rules may effectively regulate the manipulation behaviour of the Chinese stock index futures market during a bad market state, and then positively affect its market efficiency and price discovery function.     

Profitability of technical stock trading: Has it moved from daily to intraday data?

This paper investigates how technical trading systems exploit the momentum and reversal effects in the S&P 500 spot and futures market. When based on daily data, the profitability of 2580 technical models has steadily declined since 1960, and has been unprofitable since the early 1990s. However, when based on 30-minutes-data the same models produce an average gross return of 7.2% per year between 1983 and 2007. These results do not change substantially when trading is tested over eight subperiods. In particular, there is no clear trend of a declining profitability of technical stock trading based on 30-minutes-data. Those 25 models which performed best over the most recent subperiod produce a significantly higher gross return over the subsequent subperiod than all models. Between 2001 and 2007 the 2580 models perform worse than over the 1980s and 1990s. This result could be due to stock markets becoming recently more efficient or to stock price trends shifting from 30-minutes-prices to prices of higher frequencies.     

How predictable are precious metal returns?

This paper provides strong evidence of time-varying return predictability of three precious metals from January 1987 to September 2014. We use three variations of the variance ratio test, the nonlinear Brock, Dechert and Schieinkman test as well as the Hurst exponent to evaluate the time-varying return predictability of precious metals to reduce the risk of spurious results. Our full sample results report mixed findings where some tests indicate significant predictability while some suggest no predictability. However through a time-varying procedure, we show that each precious metal market goes through periods of significant predictability as well as periods of unpredictability. Therefore this finding suggests that return predictability does vary over time and is not a static, all-or-nothing condition and therefore is consistent with the adaptive market hypothesis. We also show that platinum is the most predictable of the three precious metals and silver the least predictable, which may be of great to investors who include precious metals in their investment portfolios.     

Board directors’ preferences – What are good aggregation rules?

I analyze how boards of directors with heterogeneous preferences can affect the information shared with the CEO with the help of a cheap-talk model that allows for large groups of receivers. This paper provides new insights on how heterogeneity of boards can change the way of communication between the board and the CEO, related to different ways of decision making. I also indicate how coalition forming in the boardroom can be influenced by heterogeneous preferences. Finally this model gives a possible answer why board of directors’ heterogeneity differs for shareholder representatives if there are any employees on the board.     

When is upstream collusion profitable?

Motivated by the recent antitrust cases in which Japanese auto parts suppliers colluded to raise supply prices against their long‐term collaborators, the Japanese carmakers, we study the conditions under which an upstream collusion is profitable even after compensating downstream direct purchasers. Oligopoly competition in successive industries is shown to give rise to a vertical externality and a horizontal externality. If a collusive price of intermediate goods better balances the two externalities, the collusion will raise the joint profit of all firms in the two industries and is therefore profitable for the upstream after compensation of downstream firms.     

How sub-optimal are age-based life-cycle investment products?

We investigate the conditions under which life-cycle investment strategies based on age may be ‘near enough’ to optimal, focusing on the treatment of the pension account balance and assumptions about risk aversion. We show that dynamically adjusting the strategy in response to fluctuations in balance as well as age can lead to moderate improvements over product designs currently seen in the market; although most of the potential gains might be captured by specifying the glide path with reference to measures reflecting the projected balance over time. The risk aversion assumption emerges as a far more important consideration, with much greater reductions in expected utility arising from mismatches between the risk aversion of the investor and that underpinning the glide path design. Our analysis suggests possibilities for improving life-cycle or target date funds, and highlights the benefit of offering a suite of such funds that cater for members with differing risk aversion.