A cointegrated commodity pricing model

We propose a commodity pricing model that extends the Gibson–Schwartz two‐factor model to incorporate the effect of linear relations among commodity spot prices, and provide a condition under which such linear relations represent cointegration. We derive futures and call option prices for the proposed model, and indicate that, unlike in Duan and Pliska (2004), the linear relations among commodity prices should affect commodity derivative prices, even when the volatilities of commodity returns are constant. Using crude oil and heating oil market data, we estimate the model and apply the results to the hedging of long‐term futures using short‐term ones.     

Price discovery in electronic foreign exchange markets: The sterling/dollar market

This study finds that GLOBEX has a marginally lower Hasbrouck, J. (1995) information share than Reuters D3000 in the electronic sterling/dollar foreign exchange market when returns are computed from high frequency data on either midquotes or transaction prices. However, GLOBEX's information share declines sharply when returns are computed from a mixture of GLOBEX transaction prices and Reuters D3000 midquotes. This helps explain why prior studies using this latter methodology report relatively low information shares for GLOBEX in the yen/dollar market. Variations in GLOBEX's information share on an intraday basis can be explained by variations in relative liquidity, spreads and price volatility. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:590–606, 2010     

Capital market efficiency and the relationship between equity returns, interest rates, and monetary aggregates in Australia

This paper examines the efficiency with which the Australian share market incorporates new information relating to interest rates and the monetary aggregates into share prices. It finds a strong relationship between medium term government security yields and equity returns although little relationship could be found between unanticipated changes in the monetary aggregates and share returns. Furthermore, the interest rate relationship involved long lags and suggests inefficiency in stock market pricing in Australia.     

An empirical inquiry into the nature of the forward exchange rate bias

This paper tests whether anticipated real exchange rate movements fully account for the systematic, time-varying discrepancies between forward and future spot exchange rates. The data do not reject this hypothesis. The results demonstrate that (1) real exchange rate changes are predictable; (2) anticipated real exchange rate changes are reflected in the forward bias; and (3) information available at the signing of the forward contract is useless in forecasting differences between forward and future spot prices beyond the information's ability to predict real exchange rate changes. The results emphasize the importance of real exchange rates in international asset pricing.     

Stock price informativeness and analyst coverage

We examine whether more analyst coverage translates into more informative stock prices and apply this to both developed and emerging markets. We measure price informativeness using the association between current stock returns and future earnings. We argue that more informative stock prices contain more information about future earnings. Results indicate that analysts' activities do not contribute to the impounding of future earnings information into current stock prices, in accordance with the view that analysts are outsiders who do not have full access to firm‐level information. We also find that analysts specialize according to industry and that “industry expertise” is limited to developed countries. Overall, our evidence is consistent with the explanation that analysts focus on gathering and mapping industry‐ and market‐level information (macroeconomic information) into stock prices. Copyright © 2013 ASAC. Published by John Wiley & Sons, Ltd.     

Regime switching and cointegration tests of the efficiency of futures markets

Many researchers have found that spot and futures prices are not cointegrated in some commodity markets, or they are cointegrated but not with a cointegrating vector (1, −1). One interpretation is that disturbances to excess returns have a unit root persistence, which implies that spot and futures prices do not move together one-for-one in the long run. To provide an alternative explanation for this finding, this article proposes a regime switching model of spot prices that can be viewed in the same framework as Fama and French (1988). Based on this model, Monte Carlo experiments are performed to show that tests for cointegration and estimates of the cointegrating vector are likely to be biased when a sample contains infrequent changes in regime. Taking these shifts into account, the null hypothesis that spot and futures prices are cointegrated and move together one-for-one in the long run can no longer be rejected. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:871–901, 1998     

The Interrelationship Between Macroeconomic Variables and Stock Prices-The Case of China

ABSTRACT

Prior studies of industrialized countries have found that a definite relationship exists between the stock market returns and macroeconomic variables such as inflation and real output. This paper investigates the effects of changes in the consumer price index on industrial production and stock market returns for China. Six different types of Chinese shares are examined for the period 1994–1998. The results show a very significant positive relationship between inflation and real output. A positive and significant association is found between stock returns and real output in current periods. Inflation seems to have no impact on Chinese real stock returns. These relationships all hold for “B” shares, “H” shares and red chips. China's “A” share returns seem not to be impacted by either changes in domestic inflation or real industrial production.     

Current account and relative prices: Are there any cointegration relationships in the presence of structural breaks in emerging economies?

The aim of this study is to examine the long-run relationship between the current account and relative prices, such as terms of trade (TOT) and real exchange rate, for the emerging economies. These variables have been exposed to large fluctuations for more than two decades in all emerging economies; therefore, structural breaks have to be taken into account in all estimations. In this article, various methodological techniques have been used to examine this long-run relationship (with and without the structural breaks). Two important results have emerged, first; when the structural changes are excluded there is a strong evidence for long-run relationship between current account and relative prices. Second; when the structural breaks are included, variables are found to be stationary. Hence, depending on the stability of the variables, the validity of the cointegration relationship has been seriously questioned. This study illustrates that the test results proving non-stationary of the series and the presence of cointegration may be spurious if there is any possibility of instability.     

Oil volatility and the option value of waiting: An analysis of the G‐7

There has recently been considerable interest in the potential adverse effects associated with excessive uncertainty in energy futures markets. Theoretical models of investment under uncertainty predict that increased uncertainty will tend to induce firms to delay production and investment. These models are widely utilized in capital budgeting and production decisions, particularly in the energy sector. There is relatively little empirical evidence, however, on whether such channels have effects on industrial production. Using a sample of G7 countries we examine whether uncertainty about a prominent commodity—oil—affects the time series variation in industrial production. Our primary result is consistent with the predictions of real options theory—uncertainty about oil prices has had a negative and significant effect on manufacturing activity in Canada, France, UK, and US. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:679–702, 2011     

Equity market data, bank failures and market efficiency

The paper examines the informational content of market data for long-term horizons in models, which predict bank failure. Univariate results document patterns such as declining prices, negative returns, declining dividends, and rising return volatility, up to 4 years before failure. Multivariate analysis shows that market information improves the failure predictive content of traditional models, which are based on accounting data. Out-of-sample predictions show that the use of stock market data does improve the forecast of bank failure. Furthermore, the persistence of this contribution generally increases with greater distances from the date of failure documenting the forward-looking nature of financial markets.     

Replacing executive stock options with share units: A Canadian study

Are share units a better compensation tool than stock options? This paper studies the impact of a transition within the compensation structures of CEOs of companies listed on the TSX Composite Index. Specifically, we ask whether replacing options with units-based compensation reduces the volatility of these companies' stock prices while promoting better returns. Our findings show that a shift to share units reduces large-cap Canadian companies' total risk through its idiosyncratic component. This transition is also accompanied by an increase in their risk-adjusted accounting and market performance. This suggests that share units are better for compensation contracts.     

Assessing marketing risk

A model for assessing the risks specific to a marketing strategy is developed and applied to data generated by executive decisions made in the Markstrat environment. The specific risks of a marketing strategy are those associated with changes in primary demand and market share. The riskiness and profitability of different strategies are assessed statistically. Primary-demand risk and return on investments are found to be positively correlated. More volatile, risky, market segments yield higher average returns. The strong temptation to harvest market share is isolated in the positive correlation between harvesting risk and rate of return. The pressure not to build long-term positions is found in the high negative correlation between building risk and return on investments. Overall, the model successfully explains risk-taking behavior in the Markstrat environment, and offers theoretical direction for future research in the real world.     

Monetary Conditions in the Philippines: An Assessment from DOLS and ARDL

This article examines key transmission mechanism channels for the Philippines over 1983:1-2010:4 using ARDL and DOLS. Results show evidence of cointegration between the real Gross Domestic Product, short- and long interest rates, exchange rate, claims on private sectors, and share prices. Relatively small coefficient of share price implies the existence of insider trading and the lack of local liquidity and limited private participation. The sign of interest rates implies the domination of the money market by the government securities. The economy may be exposed to the risk of recession when BSP increases the short rate continuously as the long rate will react conversely.     

The Impact of Fraudulent False Information on Equity Values

There are two types of stock price manipulation examined in the theoretical literature: (1) insider trading, which involves private information that is true and (2) the public spreading of fraudulent false information. While there is a large empirical literature on insider trading, this is the first empirical article to examine the impact of false, fraudulent public information on stock prices and trading volume. We find that such false information, even after being denied by a credible source such as the SEC, generates both abnormal returns and abnormal trading volume. We also find that the effects of the false information on security returns and volume can be persistent for at least 2 weeks. In addition, we show that perpetrators of false news attacks can make potentially large profits from such market manipulations.     

The relative efficiency of commodity futures markets

The ability of futures markets to predict subsequent spot prices has been a controversial topic for a number of years. Empirical evidence to date is mixed; for any given market, some studies find evidence of efficiency, others of inefficiency. In part, these apparently conflicting findings reflect differences in the time periods analyzed and the methods chosen for testing. A limitation of existing tests is the classification of markets as either efficient or inefficient with no assessment of the degree to which efficiency is present. This article presents tests for unbiasedness and efficiency across a range of commodity and financial futures markets, using a cointegration methodology, and develops a measure of relative efficiency. In general, the findings suggest that spot and futures prices are cointegrated with a slope coefficient that is close to unity, so that the postulated long-run relationship is accepted. However, there is evidence that the long-run relationship does not hold in the short run; specifically, changes in the spot price are explained by lagged differences in spot and futures prices as well as by the basis. This suggests that market inefficiencies exist in the sense that past information can be used by agents to predict spot price movements. A measure of the relative degree of inefficiency (based on forecast error variances) is then used to compare the performance of different markets. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 413–432, 1999     

The Impact of IFRS Convergence on the Effectiveness of Accounting Information for Share Valuation: Evidence from the Mainland of China

This study examines whether the reconciliation amounts between IFRS and PRC GAAP provide additional incremental value-relevant information. More specifically, it investigates whether firms applying IFRS experience an increase in the quality of accounting information in the post-IFRS convergence period. Results show that IFRS convergence increases the values of balance-sheet items and enlarges variation across firms. Moreover, there is no difference in the explanatory power of value relevance of accounting information under IFRS and PRC GAAP for share prices and returns of A-shares. The incremental value relevance analysis suggests that the IFRS adjustments to earnings are value relevant, whereas the adjustments to book values are not. The IFRS adjustments to change in inventory are value relevant for predicting future operating cash flows. Finally, accounting quality improved in post-convergence period. These results are robust after controlling for the unique characteristics of Chinese firms.     

Is the Australian wool futures market efficient as a predictor of spot prices?

Giles and Goss (1980) have suggested that, if a futures market provides a forward pricing function, then it is an efficient market. In this article a simple test for whether the Australian Wool Futures market is efficient is proposed. The test is based on applying cointegration techniques to test the Law of One Price over a three, six, nine, and twelve month spread of futures prices. We found that the futures market is efficient for up to a six-month spread, but no further into the future. Because futures market prices can be used to predict spot prices up to six months in advance, woolgrowers can use the futures price to assess when they market their clip, but not for longer-term production planning decisions. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 565–582, 1999     

Market share response and competitive interaction: The impact of temporary, evolving and structural changes in prices

Managing pricing is a challenging task due to the significant impact on shares and the likelihood of strong consumer and competitor reaction. The major contributions of this paper are to assess comprehensive share response to temporary, evolving and structural changes in prices and to determine the level of market share as a function of levels of prices. For the empirical analysis, we examine two consumer product categories and find that it is valuable to distinguish among temporary, evolving and structural changes in prices, as their impact on market shares tends to differ. Further, we find that subsequent competitive reaction will influence predictions of price response. Accordingly, it is important for managers to use conjectures regarding competitive price reactions in assessing the impact of policy changes. We conclude with the strategic implications of the findings and discuss a number of opportunities for future research.     

Do retail gasoline prices rise more readily than they fall?: A threshold cointegration approach

This paper revisits the controversy over whether retail gasoline prices respond to increases in upstream prices more rapidly than decreases. Using threshold and momentum models of cointegration and daily data at different stages in the distribution chain, we find that transmission between upstream and downstream prices is mostly asymmetric in the momentum model: increases in upstream prices are passed on to downstream prices more quickly than decreases. We distinguish between small and large shocks and show that the asymmetry is more pronounced for small shocks, which may be due to consumer search costs.     

Is there a housing bubble in China?

This paper aims to conduct a series of bubble diagnostic analysis over 35 representative Chinese cities. We apply the Log-Periodic-Power-Law-Singularity (LPPLS) model to detect whether there is any evidence of unsustainable, self-reinforcing speculative behaviours amongst the price series. We also investigate whether the prices had been significantly deviating from economic fundamentals by applying the E-G cointegration test. Overall, we found that 10 out of the 35 cities being examined had exhibited positive LPPLS signals. We propose that it is vital to conduct bubble diagnostic tests and implement relevant policies toward specific bubble characteristics.