An evolutionary multi‐objective optimization of trading rules in call markets

We evaluate an agent‐based model featuring near‐zero‐intelligence traders operating in a call market with a wide range of trading rules governing the determination of prices and which orders are executed, as well as a range of parameters regarding market intervention by market makers and the presence of informed traders. We optimize these trading rules using a multi‐objective population‐based incremental learning algorithm seeking to maximize the trading volume and minimize the bid–ask spread. Our results suggest that markets should choose a small tick size if concerns about the bid–ask spread are dominating and a large tick size if maximizing trading volume is the main aim. We also find that unless concerns about trading volume dominate, time priority is the optimal priority rule. Copyright © 2011 John Wiley & Sons, Ltd.     

How information and communication technology affects decision‐making on innovation diffusion: An agent‐based modelling approach

We introduce a computational agent‐based model of innovation diffusion that allows us to analyse the influence of information and communication technology (ICT) development on decision‐making. Model dynamics are based on local emulation between pairs of individuals that generate an evolving social network on which an innovation is virally spread (by word of mouth). Results suggest that ICT development affects the data usefulness for decision‐making by changing the topology of the social network (the means whereby the innovation is propagated). Paradoxically, a higher level of ICT development (providing a larger volume of data) narrows the differences between better and worse launch strategies, thus reducing data‐driven decision‐making usefulness, which then shows diminishing returns on the ICT level.     

Co‐evolved genetic programs for stock market trading

The profitability of trading rules evolved by three different optimised genetic programs, namely a single population genetic program (GP), a co‐operative co‐evolved GP, and a competitive co‐evolved GP is compared. Profitability is determined by trading thirteen listed shares on the Johannesburg Stock Exchange (JSE) over a period of April 2003 to June 2008. An empirical study presented here shows that GPs can generate profitable trading rules across a variety of industries and market conditions. The results show that the co‐operative co‐evolved GP generates trading rules perform significantly worse than a single population GP and a competitively co‐evolved GP. The results also show that a competitive co‐evolved GP and the single population GP produce similar trading rules. The profits returned by the evolved trading rules are compared to the profit returned by the buy‐and‐hold trading strategy. The evolved trading rules significantly outperform the buy‐and‐hold strategy when the market trends downwards. No significant difference is identified among the buy‐and‐hold strategy, the competitive co‐evolved GP, and single population GP when the market trends upwards.     

Employee stock option plans and stock market reaction: evidence from Finland

This paper examines whether the adoption of stock option plans results in changes in shareholders’ wealth, and whether the stock market reactions to ESOP announcements could be explained by the target group of ESOP and the dilution effect. Short-horizon test methods are applied for this purpose. The sample consists of ESOP announcements of Finnish publicly quoted companies on the Helsinki Stock Exchange during the time period 1988–1998. The event study results show a slightly positive market reaction to announcements of ESOPs targeted to management and a negative market reaction in the case of ESOPs targeted to all employees. The results of regression analysis show that the ESOPs with limited dilution convey positive information to the stock market and the dilution effect has a negative impact on stock returns, especially in the case of ESOPs targeted to all employees.     

Increasing the Tick: Examining the Impact of the Tick Size Change on Maker‐Taker and Taker‐Maker Market Models

We investigate the effects of an increase in tick size on order and trading flow across market fee models. Using the pilot firms in the U.S. Securities and Exchange Commission's Tick Size Pilot Program, we document that trade and order volume declines on maker‐taker fee models after the tick size implementation. We find that the inverted fee models (taker‐maker) experience an increase in both trade and order volume. Additionally, we find that a tick size adjustment has a substantial influence on market participation in maker‐taker fee models. We also find that measures of both hidden and algorithmic trading decline with an increasing tick size, which is strongly moderated by the differences in the maker‐taker and taker‐maker fee models.     

Impact of liquidity on stock returns: an empirical investigation of the Tunisian stock market

This paper investigates the return–liquidity relationship on one Middle East and North Africa frontier market, the Tunisian Stock Exchange (TSE). The findings provide evidence that there is a significant and positive premium for companies with high price impact and low trading frequency. However, Tunisian investors appreciate more low spread stocks. We show, also, a non-linear relation between potential delays of execution and stock returns. In addition, we find that Tunisian investors require a premium to compensate past cumulative illiquidity risk (high price impact, low turnover and high potential delay of execution) over the prior three to 12 months and to compensate past cumulative spread over 12 months. We point out also that these effects are seasonal.     

Primacy in stock market participation: the effect of initial returns on market re-entry decisions

We examine whether initial returns influence investors’ decisions to return to the stock market following withdrawal. Using a survival analysis technique to estimate Finnish retail investors’ likelihood of stock market re-entry reveals that investors who experience lower initial returns are less likely to return, even after controlling for returns in the last month and average monthly returns for the duration of investing. This primacy effect is robust to accounting for endogeneity in investors’ exit decisions, and other behavioural biases such as recency and saliency of investment experience. Individual investors appear to be subject to primacy bias and tend to put a significant weight on initial experiences in re-entry decisions.     

THE IMPLICATIONS OF TRADER COGNITIVE ABILITIES ON STOCK MARKET PROPERTIES

Market structure and individual rationality remain at the centre of a debate as to which is the main driving force in market performance. We examine the role of individual rationality, comparing zero‐intelligence traders with traders with different levels of intelligence using a special adaptive form of strongly typed genetic programming‐based learning algorithm. We use this approach with real data: historical quotes of the S&P 500 and Coca‐Cola stock prices. We find a mixture of positive and negative impacts from intelligence on market performance. Because the concept of market structure as a driving force has been significantly challenged in the literature, we suggest that the inclusion of both intelligence and market structures is important when examining the driving forces of market performance. This inclusion is consistent with the research of Todd and Gigerenzer (Journal of Economic Psychology, 24 (2003) 143–165), which asserts that both environment (market structure) and agents’ cognition play important roles. Copyright © 2013 John Wiley & Sons, Ltd.     

Risk,return, and liquidity during Ramadan: Evidence from Indonesian and Malaysian stock markets

Indonesia and Malaysia are common in religion; however, the two countries have different developments in their equity markets. This study investigates the risk, return, and liquidity during Ramadan for the Indonesia and Malaysia stock markets. We find that the volatility is higher around Ramadan for the Indonesia stock market, while displays dynamic patterns in different phases around the month of Ramadan for Malaysia. Despite the changing risk during Ramadan, the risk-adjusted return remains unchanged. Furthermore, this study finds that the liquidity in most stock index markets of the two countries is higher around Ramadan. These findings support the notion that Ramadan affects investors’ risk-taking attitude and facilitates the trade in stocks.     

Managerial characteristics and stock market investment: evidence from China

We examine the effect of managerial characteristics on investment in the stock market by listed firms in China. Our empirical findings suggest that higher levels of cash‐based compensation may increase both the propensity of investing in the stock market and the total amount of investment. On the other hand, managerial holdings discourage managers from investing in stock markets and also lead to a decrease in the amount of investment. This study sheds light on managerial risk‐taking incentives. Moreover, this study fills the gap in the literature by providing evidence for the determinants of listed firms’ stock market investment.     

Tick Size and Financial Reporting Quality in Small-Cap Firms: Evidence from a Natural Experiment

Using a natural experiment (the SEC's 2016 Tick Size Pilot Program), we investigate the effects of an increase in tick size on financial reporting quality. The tick size pilot program reduces algorithmic trading (AT) and increases fundamental investors’ information acquisition and trading activities. This in turn increases the scrutiny of managers’ financial reporting choices and reduces their incentives to engage in misreporting. Using a difference-in-differences research design, we find a significant decrease in the magnitude of discretionary accruals, a significant reduction in the likelihood of just meeting or beating analysts’ forecasts, and a marginally significant decrease in restatements for the treated firms in the pilot program. Furthermore, we find that the change in financial reporting quality is concentrated in treated firms experiencing decreases in AT and increases in information acquisition activities. We also find that the mispricing of accruals is significantly lower for treated firms. Taken together, our results suggest that an increase in tick size has a causal effect on firms’ financial reporting quality.     

Semi‐transparency,dealership market,and foreign exchange market quality

This paper examines the effects of a semi-transparency event, the introduction of the electronic trading system (EBS), on the market quality of a typical dealership market – the FX market. We find that increasing transparency leads to smaller quote disagreement among dealers and higher trading volume, but the beneficial effects are bigger for uninformed dealers than informed dealers. We also find that information efficiency improves overall in the semi-transparent system; however, informed dealers are found to quote less aggressively in the more transparent market. We conclude that semi-transparency raises market quality in general, but that it is the uninformed dealers who benefit more from this increased quality.     

Trading volume and stock market volatility: The Polish case

Relying on the mixture of distributions hypothesis (MDH), this paper investigates the relationship between daily returns and trading volume for 20 Polish stocks. Our empirical results show that in the majority of cases volatility persistence tends to disappear when trading volume is included in the conditional variance equation, which is in agreement with the findings of studies on developed stock markets. However, we cannot confirm the testable implications of the MDH in all cases, which indicates that future research on the causes and modeling of Polish stock market volatility is necessary.     

Corporate investment and stock market valuation

We study the driving forces behind the positive association observed between corporate investment and stock market valuation, and how they interact with managerial equity incentives and informativeness of investment. We build a dynamic model where managers use investment choices to influence investors' opinions about firms' future prospects and increase the market valuation. The incentives to manipulate the valuation processes increase with managerial equity incentives and informativeness of investment. Our empirical findings support the model's predictions that the tendency of using investment to boost market valuation is stronger when managerial stock ownership is high or when earnings quality is low (i.e., there is strong reliance on investment for information).     

Analysis of efficiency for Shenzhen stock market based on multifractal detrended fluctuation analysis

We divided the whole series of Shenzhen stock market into two sub-series at the criterion of the date of a reform and their scale behaviors are investigated using multifractal detrended fluctuation analysis (MF-DFA). Employing the method of rolling window, we find that Shenzhen stock market was becoming more and more efficient by analyzing the change of Hurst exponent and a new efficient measure, which is equal to multifractality degree sometimes. We also study the change of Hurst exponent and multifractality degree of volatility series. The results show that the volatility series still have significantly long-range dependence and multifractality indicating that some conventional models such as GARCH and EGARCH cannot be used to forecast the volatilities of Shenzhen stock market. At last, the abnormal phenomenon of multifractality degrees for return series is discussed. The results have very important implications for analyzing the influence of policies, especially under the environment of financial crisis.     

Option prices and stock market momentum: evidence from China

Option prices tend to be correlated to past stock market returns due to market imperfections. We unprecedentedly examine this issue on the SSE 50 ETF option in the Chinese derivatives market. To measure the price pressure in the options market, we construct an implied volatility spread based on pairs of the SSE 50 ETF option with identical expiration dates and strike prices. By regressing the implied volatility spread on past stock returns, we find that past stock returns exert a strong influence on the pricing of index options. Specifically, we find that SSE 50 ETF calls are significantly overvalued relative to SSE 50 ETF puts after stock price increases and the reverse is also true after the stock price decreases. Moreover, we validate the momentum effects in the underlying stock market to be responsible for the price pressure. These findings are both economically and statistically significant and have important implications.     

The empirical relationship between risk and return: evidence from the UK stock market

Previous studies reach no consensus on the relationship between risk and return using data from one market. We argue that the world market factor should not be ignored in assessing the risk-return relationship in a partially integrated market. Applying a bivariate generalized autoregressive conditional heteroscedasticity in mean (GARCH-M) model to the weekly stock index returns from the UK and the world market, we document a significant positive relationship between stock returns and the variance of returns in the UK stock market after controlling for the covariance of the UK and the world market return. In contrast, conventional univariate GARCH-M models typically fail to detect this relationship. Nonnested hypothesis tests supplemented with other commonly used model selection criteria unambiguously demonstrate that our bivariate GARCH-M model is more likely to be the true model for UK stock market returns than univariate GARCH-M models. Our results have implications for empirical assessments of the risk-return relationship, expected return estimation, and international diversification.     

Risk‐based explanation for the book‐to‐market effect

This paper proposes a risk‐based explanation for the book‐to‐market (B/M) effect. I decompose B/M into net operating asset‐to‐market (NOA/M) and net financing asset‐to‐market (NFA/M) components. Portfolio analysis shows that (i) positive B/M, NOA/M and NFA/M are positively related to future returns and (ii) negative B/M, NOA/M and NFA/M are negatively related to future returns. To the extent that positive B/M, NOA/M and NFA/M act as measures of asset risk and negative B/M, NOA/M and NFA/M act as inverse measures of borrowing risk, the nonlinear relations between B/M, NOA/M and NFA/M and future returns provide some evidence to support the risk‐based explanation for the book‐to‐market effect in stock returns.