WEBS,SPDRs, and country funds: an analysis of international cointegration

Prior empirical studies analyzing linkages between international equity markets have suffered because suitable real-world financial instruments representing national equity markets were not available for trading. In March 1996, World Equity Benchmark Shares (WEBS) began trading on the American Stock Exchange. WEBS are open-end index funds that trade like closed-end index funds; they are designed to closely track the international indices developed by Morgan Stanley Capital International. This study utilizes WEBS along with Standard & Poor’s Depository Receipts (SPDRs) to avoid the previously encountered problems associated with nonsynchronous trading, fluctuating foreign exchange rates, non-liquidity, trading restrictions, and index replication. Results indicate that substantial pairwise cointegration exists among the 18 market indices as well as between individual closed-end country funds and their own-country WEBS. In addition, Granger causality tests indicate the existence of short-term causal relationships, suggesting market inefficiencies and the possibility of short-run arbitrage opportunities.     

Company name fluency,investor recognition,and firm value

Research from psychology suggests that people evaluate fluent stimuli more favorably than similar information that is harder to process. Consistent with fluency affecting investment decisions, we find that companies with short, easy to pronounce names have higher breadth of ownership, greater share turnover, lower transaction price impacts, and higher valuation ratios. Corporate name changes increase fluency on average, and fluency-improving name changes are associated with increases in breadth of ownership, liquidity, and firm value. Name fluency also affects other investment decisions, with fluently named closed-end funds trading at smaller discounts and fluent mutual funds attracting greater fund flows.     

The intertemporal risk-Return relation,investor behavior,and technical trading profits: evidence from the G-7 countries

The intertemporal risk-return relation and investor behavior are both important pricing factors that jointly determine the expected market risk premium. Using the price adjustment process as a control variable, we find that the intertemporal risk-return relation is positive conditional on bad market news, but is non-positive conditional on good market news. This implies that good (bad) market news weakens (strengthens) the positive risk-return relation. The pattern in the distortion of the risk-return relation is consistent with short-term mispricing in which investors overvalue (undervalue) the stock market in reaction to good (bad) market news. We also show that ignoring the price adjustment process in the estimation of the risk-return relation leads to model misspecification and induces an upward (downward) bias in estimates of the relative risk aversion parameter conditional on good (bad) news. Our model of the asymmetric risk-return relation along with the price adjustment process is capable of generating the return dynamics that is attributable to technical trading profits. We suggest that the profitability of technical trading rules is not a violation of market efficiency, but a consequence of trading rules exploiting the asymmetric effect of price changes on the risk-return relation, along with the persistence property of price changes.     

The effect of country-specific index trading on closed-end country funds: an empirical analysis

The American Stock Exchange initiated trading in 17 World Equity Benchmark Shares (acronym “WEBS”™) in April 1996. WEBS are index funds designed to track the Morgan Stanley Capital International (MSCI) indexes. We examine the effect of this event on closed-end country funds (CECFs) and find that percentage discounts increase. CECFs with a corresponding WEBS index experience the largest increase and also show a decline in trading volume. We attribute these results to (1) the effects of increased competition and (2) a reduction in the market segmentation premium. Since additional WEBS have begun trading, and other approvals may follow, similar effects could be experienced in the future.     

Noise trading and prime and score premiums

This paper documents that a common element drives the time-series variation of the premium pricing of Primes and Scores. I argue that this common element is noise trading. The noise trading model of Delong, Shleifer, Summers and Waldmann (1990) predicts that returns on assets that are predominantly traded by noise traders will be correlated, since the misperceptions of noise traders are cross-sectionally correlated. Consistent with the noise trading hypothesis, changes in the average premium of Primes and Scores, which are predominantly traded by individual investors, are correlated with both changes in average discounts of closed-end funds and small firms returns. These empirical facts provide additional evidence that noise traders can affect security prices.     

Investor Reaction to Salient News in Closed-End Country Funds

We use panel data on prices and net asset values to test whether dramatic country-specific news affects the response of closed-end country fund prices to asset value. In a typical week, prices underreact to changes in fundamentals; the (short-run) elasticity of price with respect to asset value is significantly less than one. In weeks with news appearing on the front page of The New York Times , prices react much more; the elasticity of price with respect to asset value is closer to one. These results are consistent with the hypothesis that news events lead some investors to react more quickly.     

Insider trading,future earnings,and post-earnings announcement drift

This paper examines the association between insider trading prior to quarterly earnings announcements and the magnitude of the post-earnings announcement drift (PEAD). We conjecture and find that insider trades reflect insiders’ private information about the persistence of earnings news. Thus, insider trades can help investors better understand and incorporate the time-series properties of quarterly earnings into stock prices in a timely and unbiased manner, thereby mitigating PEAD. As predicted, PEAD is significantly lower when earnings announcements are preceded by insider trading. The reduction in PEAD is driven by contradictory insider trades (i.e., net buys before large negative earnings news or net sells before large positive earnings news) and is more pronounced in the presence of more sophisticated market participants. Consistent with investors extracting and trading on insiders’ private information, pre-announcement insider trading is associated with smaller market reactions to future earnings news in each of the four subsequent quarters. Overall, our findings indicate insider trading contributes to stock price efficiency by conveying insiders’ private information about future earnings and especially the persistence of earnings news.     

THE EFFECTS OF DECIMALIZATION ON RETURN VOLATILITY COMPONENTS,SERIAL CORRELATION,AND TRADING COSTS

We examine the composition of return volatility, serial correlation, and trading costs before and after decimalization on the New York Stock Exchange. We decompose the variance of price changes into components associated with public news, rounding errors, and market‐making frictions. We find that when stocks move from a fractional to a decimal trading system, the variance components due to market‐making frictions and rounding errors decline significantly, whereas the component due to public news remains unchanged. The serial correlation of price changes weakens substantially after decimalization. The uninformed component of bid‐ask spreads decreases significantly whereas the informed component has no significant change.     

Cryptocurrency,confirmatory bias and news readability – evidence from the largest Chinese cryptocurrency exchange

We investigate whether Chinese cryptocurrency investors show confirmatory bias when processing authority‐related news. Authority‐related news is defined as news that is related to government authority (including central bank) policies or talk. By using data from the largest cryptocurrency exchange in China, we find that investors’ response to authority‐related news is negative and significant in general. Moreover, we find that the abnormal trading volume and standard deviation of abnormal trading volume are significantly higher for authority‐related news with higher readability, suggesting investors respond to the more readable authority‐related news with more trading behaviour.     

International equity flows and country funds

This study investigates the relationships between U.S. equity flows in foreign countries and returns of closed-end country funds for emerging Latin American markets, emerging Asian markets and developed markets. The major issues addressed are (1) relationships between flows and fund returns based on two basic models—information contribution and feedback trading effects, (2) the role of volatility in these relationships, and (3) the effects of the Asian crisis. Basic findings include: (1) information contribution (past flows affect returns) and feedback trading arguments (past returns affect flows) are supported; (2) strong evidence is found for the market segmentation argument rather than the investor sentiment argument; (3) there exists strong evidence of significant volatility effects under information contribution and feedback trading; (4) the Asian crisis effects are important but limited to Asian funds.     

Are Economically Significant Stock Returns and Trading Volumes Driven by Firm‐specific News Releases?

This paper explores whether firm‐specific information events drive economically relevant positive and negative stock price changes and trading volume and, if so, the nature of such information. We find that no less than 65% of significant price changes and trading volume movements in our sample of FTSE 350 companies can be readily explained by public domain information contradicting the thesis that corporate news is not a primary driver, and that share price changes and trading volume activity are driven by factors unrelated to information flows per se. In addition, we find that a parsimonious set of news categories represent the key drivers. Sell‐side analyst stock recommendations and earnings forecast revisions as a class, unaccompanied by other news releases, dominate all other news categories in terms of significant market reaction. However, taking into account the relative magnitude of market response to different news releases, firms' formal accounting disclosures dominate within this domain. As such, we conclude these are not fully anticipated by apparently more timely market disclosures, and that the existence of news services and the activities of the sell‐side analyst are not substitutes for a firm's interim and preliminary results.     

高管持股、择时披露与市场反应

基于2001至2008年间A股公司业绩预告的样本,本文研究了高管持股对择时信息披露策略的影响,以及市场对择时披露信息的反应。研究发现,A股公司在业绩预告时存在择时披露的行为:好消息①更倾向于在交易日披露,坏消息更倾向于在休息日披露。高管持股比例会显著影响择时披露策略:高管持股比例越高的公司,进行择时披露的可能性也越高。从市场反应角度看,休息日披露的坏消息与交易日披露的坏消息没有显著差异,休息日披露的好消息反而会产生更加显著的正面市场反应。本文的研究意味着,高管持股比例会显著提高上市公司进行择时信息披露的可能性,但是市场在一定程度上能够识别择时披露策略,本文的研究结果支持了"信息消化"假说。     

News Trading and Speed

We compare the optimal trading strategy of an informed speculator when he can trade ahead of incoming news (is “fast”), versus when he cannot (is “slow”). We find that speed matters: the fast speculator's trades account for a larger fraction of trading volume, and are more correlated with short‐run price changes. Nevertheless, he realizes a large fraction of his profits from trading on long‐term price changes. The fast speculator's behavior matches evidence about high‐frequency traders. We predict that stocks with more informative news are more liquid even though they attract more activity from informed high‐frequency traders.     

Market Sidedness: Insights into Motives for Trade Initiation

We infer motives for trade initiation from market sidedness. We define trading as more two-sided (one-sided) if the correlation between the number of buyer- and seller-initiated trades increases (decreases), and assess changes in sidedness (relative to a control sample) around events that identify trade initiators. Consistent with asymmetric information, trading is more one-sided before merger news. Consistent with belief heterogeneity, trading is more two-sided before earnings and macro announcements with greater dispersion in analyst forecasts, and after news with larger announcement surprises. We examine the codeterminacy of sidedness, bid-ask spread, volatility, number of trades, and order imbalance.     

The impact of public information on investors

This study investigates the trading behavior of institutional and individual investors around both firm-specific news releases in the Wall Street Journal and macro-economic announcements. For the firm-specific news releases we find that investors conduct a high degree of trading around news releases, especially earnings and dividend news. Institutions buy and sell on both good and bad news, while individual investors only trade on good news. The length of the news article (visibility) is also an important attribute to motivate individual investor trading. Lastly, both institutions and individuals buy large firms after good economic news and sell large firms after bad economic news. The trading of small firms does not appear to be motivated by macro-news.     

Market efficiency, the Mexican peso crisis, and the US bank stock returns: An application of the event parameter method

This paper examines the impact of the 1994 Mexican peso crisis on US bank returns using an event parameter approach. The event parameter approach explicitly predicts the stochastic return generating process on the occurrence or nonoccurrence of specific events. The event parameter method assumes that only the intercept term may vary between the estimation and analysis periods. Specifically, this study will examine two pairs of hypotheses, new information vs. information leakage and rational pricing vs. investor contagion, in the context of the 1994 Mexican peso and banking crisis. The empirical results support the new information hypothesis, which states that US stock prices reacted quickly to events related to the Mexican peso crisis. This research has also found evidence for bank contagion, although these did not spill over to other banks. The US government and international agencies acted promptly to contain the effect of the Mexican peso and banking crisis spreading to the US and to other Latin American countries.     

Aggregate insider trading: Contrarian beliefs or superior information?

We decompose realized market returns into expected return, unexpected cash-flow news and unexpected discount rate news to test the relation between aggregate market returns and aggregate insider trading. We find that (1) the predictive ability of aggregate insider trading is much stronger than what was reported in earlier studies, (2) aggregate insider trading is strongly related to unexpected cash-flow news, (3) market expectations do not cause insider trading contrary to what others have documented, and (4) aggregate insider trading in firms with high information uncertainty is more likely to be associated with contrarian investment strategy. These results strongly suggest that the predictive ability of aggregate insider trading is because of insider’s ability to predict future cash-flow news rather than from adopting a contrarian investment strategy. These results hold even after we control for non-informative trades and information uncertainty.     

Analyst talent,information, and insider trading

We examine 1984–2018 data and show that the talent or ability of sell-side financial analysts affects a covered firm's information environment—more so than the simple number of analysts covering a firm. We find that while analysts in general produce market and industry-level information, high-ability analysts contribute more firm-specific information. Firms covered by high-ability analysts experience significantly less insider trading prior to positive earnings news. Results only reside in opportunistic (not routine) trades. When an analyst initiates (terminates) coverage we find decreased (increased) subsequent insider trading. Both changes are primarily driven by analyst talent. Analyst ability also negatively relates to insider trading profitability.     

Public information releases, private information arrival and volatility in the foreign exchange market

This paper estimates the impact of market activity and news on the volatility of returns in the exchange market for Japanese Yen and US dollars. We examine the effects of news on volatility before, during and after news arrival, using three categories of news. Market activity is proxied by quote arrival, separated into a predictable seasonal component and an unexpected component. Results indicate that both components of market activity, as well as news releases, affect volatility levels. We conclude that both private information and news effects are important determinants of exchange rate volatility. Our finding that unexpected quote arrival positively impacts foreign exchange rate volatility is consistent with the interpretation that unexpected quote arrival serves as a measure of informed trading. Corroborating this interpretation is regression analysis, which indicates that spreads increase in the surprise component of the quote arrival rate, but not in the expected component. The estimated impact of a unit increase in unexpected quote arrival and the range of values observed for this variable imply an important volatility conditioning role for informed trading.     

Risk characteristics of closed-end stock fund IPOs

We examine 34 closed-end stock fund initial public offerings (IPOs) during the period of January 1, 1986, through June 30, 1987. We find that the funds have low systematic risk during their first trading months, especially the initial month. We also observe that the funds' beta risk tends to increase as the funds season in aftermarket trading. This pattern is in sharp contrast to new issues by nonfinancial corporations, which have very high initial betas that decline over time.