Pricing inefficiencies and feedback trading: Evidence from country ETFs

In view of the established presence of wide deviations of US-listed country ETFs' prices from their net asset values, we study whether feedback trading exists in this category of ETFs and whether it varies with their premiums and discounts. Using a sample of nineteen country ETFs for the 2000–2019 window, we find that feedback trading is present in several of them, particularly those targeting Asia Pacific markets. Feedback trading varies with the sign (i.e., premiums and discounts), level, and nature (observed/forecast) of these deviations, as well as prior to and after the outbreak of the 2008 crisis. Of particular note is the widespread feedback trading reported across the vast majority of country ETFs on those days for which there exist successful predictions of premiums/discounts, a fact suggesting that country ETFs' premiums/discounts contain useful information as per their trading dynamics.     

Premiums and discounts in ETFs: An analysis of the arbitrage mechanism in domestic and international funds

We study premiums/discounts associated with ETFs using the Ornstein–Uhlenbeck process augmented with jumps. Our results confirm the high efficiency of the ETFs' arbitrage pricing mechanism. The median long-term mean premium of U.S. equity ETFs is zero. International equity ETFs and bond ETFs face more barriers to arbitrage, which results in higher long-term mean premiums and lower speeds of adjustment. Enhancing the mean-reverting process with jumps improves the model fit. The probability of jumps is the highest for international equity ETFs.     

Evidence of herding and positive feedback trading for mutual funds in emerging Asian countries

When analysing the behavior of investors, the emphasis is usually on positive feedback and herding behavior, and the existing literature abounds with studies on the domestic strategy of mutual funds or on their impact. Due to the advantages in terms of the data, many studies investigate US data. However, with the increased flows of capital into emerging markets, studying the behavior of international mutual funds in emerging markets has become more and more important. Nevertheless, studies involving emerging markets are relatively rare. This study examines whether the positive feedback effect and herding behavior exist in Asian markets based on mutual fund data covering the period from 1996 to 2004. The long period enables us to test the sensitivities under the following four conditions, namely the capital volatility (volatile vs. stable), the degree of suffering during the Asian crisis (more suffering vs. less suffering), and the timing of the Asian crisis (pre-, during, and post-crisis), using the exchange rate regime. It was found in this study that mutual fund inflows into the Asian market were attracted by positive stock returns and currency appreciation. Furthermore, it was found that the positive feedback effect and herding behavior did exist in the Asian markets. However, the extent of the above behavior is not the same under different conditions.     

Investor sentiment and feedback trading: Evidence from the exchange-traded fund markets

This paper extends the standard feedback trading model of Sentana and Wadhwani (1992) by allowing the demand for shares by feedback traders to depend on sentiment. Our empirical analysis of three largest Exchange-Traded Fund (ETF) contracts in the U.S. suggests that there is a significant positive feedback trading in these markets and the intensity of which is generally linked to investor sentiment. Specifically, the level of feedback trading tends to increase when investors are optimistic. In addition, we find that the influence of sentiment on feedback trading varies across market regimes. These results are consistent with the view that feedback trading activity is largely caused by the presence of sentiment-driven noise trading. Overall, the findings are important in understanding the role of sentiment in investment behaviour and market dynamics and are of direct relevance to the regulators and investors in ETF markets.     

Commodity financialization and sector ETFs: Evidence from crude oil futures

We investigate the diversification benefits of energy assets in the setting of commodity financialization using data on crude oil futures and Sector ETFs (SPDRs). Correlations between commodities and financial assets increased during the post-Commodity Futures Modernization Act (CFMA)/commodity bull cycle period, resulting in lower benefits of diversification. However, we find that conditional correlations between crude oil futures and sector ETFs meaningfully increased only since the 2008–09 financial crisis. The results therefore suggest that the financial crisis, rather than CFMA regulation, explains changes in the diversification benefits of commodities. Moreover, we find that oil futures returns are less correlated with SPDRs than with the S&P index. Thus, energy futures, and crude oil in particular, offer the potential for diversification benefits in sector-style investing.     

Evidence of feedback trading with Markov switching regimes

Previous research has concluded that the degree of return autocorrelation observed in index returns varies linearly with the volatility of the series, and that feedback traders are at least partly responsible for this phenomenon. Using daily Australian bond and equity market returns, we test this conclusion directly by using a Markov switching model for changing variance that explicitly allows the autocorrelation of returns to vary with the volatility regime. We find evidence that a significant proportion of investors in both the Australian equity and bond markets are positive feedback traders and are responsible for the observed increase in negative autocorrelation in index returns during periods of high and increasing volatility.

Dual-listings on international exchanges: the case of emerging markets' stocks

This paper examines the effects on stock returns of dual-listing on an international exchange. My sample consists of 70 firms from 10 emerging markets that dual-listed on the NYSE, NASDAQ and SEAQ-I (London) over the period 1991–1995. I evaluate whether an international dual-listing has any significant effect on returns, for the particular case of emerging markets' firms, and I proceed to investigate whether there is evidence to support an International Asset Pricing based explanation. In addition I compare the impact of US and London SEAQ-I listings. My results confirm previous empirical findings on international listings: the firms in my sample experience significant positive abnormal returns before listing and a significant decline in returns following listing. Evidence seems to be supportive of the segmentation hypothesis: dual-listing effects are more pronounced for emerging markets' listings and that pattern is similar across exchanges.
G15     

More insiders,more insider trading: Evidence from private-equity buyouts

Prior theoretical research has found that, in the absence of regulation, a greater number of insiders leads to more insider trading. We show that optimal regulation features detection and punishment policies that become stricter as the number of insiders increases, reducing insider trading in equilibrium. We construct measures of the likelihood of insider activity prior to bid announcements of private-equity buyouts during the period 2000–2006 and relate these to the number of financing participants. Suspicious stock and options activity is associated with more equity participants, while suspicious bond and CDS activity is associated with more debt participants — consistent with models of limited competition among insiders but inconsistent with our model of optimal regulation.     

Default Premiums in Commodity Markets: Theory and Evidence

We model the effect of nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the “Hunt Brothers”episode. Changes in default premiums are measured and related to the sequence of events in the metals markets during this period. Results suggest first that ex ante costs of nonperformance can be a significant, priced factor in commodity markets and second that the arrival of new information is often associated with changes in these costs. The evidence has implications for both theoretical and empirical research on commodity markets.     

Index futures and positive feedback trading: evidence from major stock exchanges

This paper tests the hypothesis that the introduction of index futures has increased positive feedback trading in the spot markets of six industrialized nations. The analysis is based on a model that assumes two different groups of investors, i.e., risk averse expected utility maximizing investors and positive feedback traders. There is evidence consistent with positive feedback trading before the introduction of index futures across all markets under investigation. In the period following the introduction of index futures, there is no evidence supporting the hypothesis that positive feedback trading drives short-term dynamics of stock returns. The possibility that this is due to possible migration of feedback traders from the spot to the futures markets is also tested. The results show no evidence of positive feedback trading in the futures markets. Overall, the findings support the view that futures markets help stabilize the underlying spot markets by reducing the impact of feedback traders and thus attracting more rational investors who make the markets more informationally efficient and thus providing investors with superior ways of managing risk.     

Trading performance and market efficiency: Evidence from algorithmic trading

In India, National Stock Exchange directly identifies algorithmic trading participation. Algorithmic traders possess intraday market timing skills. Results are not motivated by extreme short-term signals or transitory price trading. Magnitude of market timing performance in cross-sectional group of traders shows that they earn profit across all the cases, and maximize while providing liquidity. Volume-weighted-average-price decomposition analysis reports algorithmic traders earn profits through intraday market timing performance for five-minute and one-minute intervals, and it is higher compared to short-term market timing performance across all trader groups. Order imbalance and price delay regressions show that algorithmic trading significantly improves price efficiency.     

Market concentration,risk-taking,and bank performance: Evidence from emerging economies

This paper investigates the relationship between market concentration, risk-taking, and bank performance using a unique dataset of the BRIC banks over the period 2003–2010. We find a negative association between market concentration and performance, in support of the “quiet life” hypothesis. We also find that banks taking a lower level of risks perform better, in favor of prudential practice. Moreover, the BRICs' banking sectors were all negatively affected by the 2007–2008 global financial crisis with China and Russia being the least and most affected, respectively. On average Chinese and Brazilian banks outperform Indian and Russian ones, indicating that China and Brazil have more favorable institutional infrastructure. These results are robust to alternative model specifications and estimation techniques. Our analysis may have important policy implications for bankers and regulators in the BRICs and other developing and transition countries.     

Taxes and dividend clientele: Evidence from trading and ownership structure

Although dividend clientele have been studied over several decades, their existence remains controversial. We study the interaction of dividends and taxes by exploiting a unique dataset from Taiwan, where the capital gains tax is zero. We find strong evidence of a clientele effect. Agents subject to high rates of taxation on dividends tend to hold stocks with lower dividends and sell (buy) stocks that raise (lower) dividends. Agents in lower tax brackets behave in the opposite manner. After legalization of repurchases in 2000, firms with higher concentrations of more heavily taxed shareholders were more apt to begin repurchase programs.     

Stock splits to profit insider trading: Lessons from an emerging market

Stock splits have long presented financial puzzles: Why are they undertaken? Why are they associated with abnormal returns? Abnormal returns, particularly those coming shortly before a split’s announcement date, should raise strong suspicions of insider trading, particularly in nations with weak regulatory structures. We examined the 718 split events in the emerging stock market of Vietnam from 2007 through 2011. We found evidence consistent with illegal insider trading, particularly in firms that were vulnerable to insider manipulation and, therefore, more likely to split their stocks. When vulnerable firms’ stocks did split, they provided significant excess short-term returns. Tellingly, the abnormal returns on those stocks prior to the split announcements were also extremely high, indeed higher than their abnormal post-announcement returns. Moreover, trading volume increased prior to the split announcement date. This suspicious pattern is what we would expect if insiders were trading on their knowledge. We propose that illegal insider trading in contexts where it is possible to escape serious penalty provides a previously undiscussed and cogent explanation for both stock splits and abnormal short-term returns.     

Volatility and dark trading: Evidence from the Covid-19 pandemic

We study the effect(s) of volatility on the share of trading in dark pools by exploiting the exogenous shock of the Covid-19 pandemic on financial markets and regulatory restrictions on dark trading. We find that high levels of volatility in lit exchanges is linked to an economically significant loss of market share by dark pools to lit exchanges. In line with the theory, the loss appears to be driven by informed traders’ migration from lit to dark markets during high volatility periods. The market quality implications of the trading dynamics are mixed: while it tempers liquidity decline in the lit market, it exacerbates the loss of informational efficiency.     

Social networks and managerial rent-seeking: Evidence from executive trading profitability

This study examines whether board social networks are associated with executive trading profitability. Using a sample of US public firms with a history of executive trading from years 2000 to 2015, we find robust evidence that the profitability of executive trading is significantly lower in firms with higher levels of board social networks. The evidence is consistent with our view that board social networks effectively curb executives' private information advantage over outsiders, thus leading to a lower level of managerial rent-seeking. Our research has policy implications for regulators concerned about the role of corporate board in capital markets.     

Abnormal trading volume,news and market efficiency: Evidence from the Jamaica Stock Exchange

This paper investigates market efficiency of the Jamaica Stock Exchange (JSE). Together, weak and semi-strong form efficiency claim that historical and newly released public information do not predict future stock price movement. We test both forms of market efficiency by analyzing stock price behavior during times of abnormal trading volume and around the release dates of earnings information. Abnormal trading volume may be driven by liquidity demand or reflect new or private information flow to the market. Using JSE data over the period 2000 to 2021, we find price dynamics consistent with price pressure as firms experience negative abnormal returns on the day of abnormal trading activity but offsetting positive abnormal stock returns on the following day. Further findings show post earnings announcement drift on the JSE. Taken as a whole, the evidence suggests violations of market efficiency and has implications for capital allocation in this emerging market.     

Informed trading before analyst downgrades: Evidence from short sellers

This paper studies short-selling prior to the release of analyst downgrades in a sample of 670 downgrades of Nasdaq stocks between 2000 and 2001. We find abnormal levels of short-selling in the three days before downgrades are publicly announced. Further, we show that this pre-announcement abnormal short-selling is significantly related to the subsequent share price reaction to the downgrade, and especially so for downgrades that prompt the most substantial price declines. Our findings are robust to various controls that might also affect short-selling such as pre-announcement momentum, three-day pre-announcement returns, and announcement-day share price. In addition, the results are independent of scheduled earnings announcements, analyst herding, and non-routine events near downgrades. Further evidence suggests that tipping is more consistent with the data than the prediction explanation which posits that short sellers successfully predict downgrades on the basis of public information about firms’ financial health. Finally, we present evidence that downgraded stocks with high abnormal short-selling perform poorly over the subsequent six months by comparison with those with low abnormal short-selling. Overall, our results support the hypothesis that short sellers are informed traders and exploit profitable opportunities provided by downgrade announcements.     

Pre-bid price run-ups and insider trading activity: Evidence from Canadian acquisitions

A sample of 128 Canadian acquisitions from 1985 through 1995 is used to examine the relationship between pre-bid price run-ups in target shares and insider trading activity. We find that abnormal stock price performance at an early stage before the acquisition announcement is due to actual trading by corporate insiders. However, the run-up immediately preceding the takeover announcement appears due to market anticipation about an impending bid for the target. Furthermore, our results identify the stages in the acquisition process at which each effect occurs.