Trading costs for listed options: The implications for market efficiency

This paper reexamines the anomalous evidence concerning the efficiency of the listed options exchanges. We focus on the structure of trading costs in that market, and note several costs which generally have been ignored, the largest of which is the bid-ask spread. When we adjust the published trading rules for our estimates of these trading costs, the reported abnormal returns are eliminated.     

Effective credit costs in retail financial markets: Leasing versus borrowing

This study examines reported credit cost information in the automobile sales market to determine if vehicle leasing really is cheaper than installment borrowing. In addition, the study evaluates the accuracy of credit cost data furnished to consumers by commercial banks, vehicle leasing firms, and automobile dealers to gauge whether any systematic differences exist in the accuracy of reported credit cost information. Results of the study suggest that the cost of leasing is significantly different from borrowing, yet neither financing alternative is unilaterally cheaper than the other. In addition, suppliers of credit in consumer finance markets routinely and significantly understate effective credit costs reported to consumers.     

Interdependence and dynamics in currency futures markets: A multivariate analysis of intraday data

This paper investigates long-term interdependencies and short-term dynamics in currency futures utilizing intraday data for six major foreign currencies: the British Pound, Deutsche Mark, Swiss Franc, Australian Dollar, Canadian Dollar, and Japanese Yen. Lack of cointegration (CI) among the foreign exchange futures is found to be the prevailing mode of behavior, but some temporary deviations from the no-CI condition are detected. There is a notable overlap between detected CI relationships and the timing of policy changes, world events, and regime shifts, indicating that the observed CIs are event-driven. The robustness of the CI results is checked with respect to variations in the model, lag structure, data period, sample horizon, and currency basket grouping. Impulse–response functions (IRFs) reveal that currency markets are in general efficient and absorb new information within the day. The interdependence among currencies is found to be asymmetric.     

Firm-level effects of asymmetric intervention in foreign exchange markets: Evidence from the Swiss currency floor

In January 2015, the Swiss National Bank (SNB) abandoned the Swiss franc's exchange rate floor against the Euro. This paper is the first to study the firm-level effects of this asymmetric type of central bank intervention in foreign exchange markets. Using weekly stock returns for a sample of Swiss non-financial firms, I find significant reductions in total stock return volatility as well as market risk following the introduction of the currency floor. Accounting for the asymmetric nature of the intervention, I show that the enforcement of this policy solely manifests in a significant reduction of incremental EUR/CHF exchange rate risk exposures of exporting firms, while importing firms experience reductions in proportion to the market portfolio only. Thus, the asymmetric policy design is reflected in asymmetric responses of firm-level currency exposures. All effects, however, do not depend on the extent of business activity in the Eurozone. The overall results suggest that the currency floor was successful in supporting the performance of the Swiss economy by effectively reducing stock return sensitivities to market fluctuations and EUR/CHF exchange rate volatility.     

Information, Trading, and Product Market Interactions: Cross-sectional Implications of Informed Trading

I present a simple model of informed trading in which asset values are derived from imperfectly competitive product markets and private information events occur at individual firms. The model predicts that informed traders may have incentives to make information‐based trades in the stocks of competitors, especially when events occur at firms with large market shares. In the context of 759 earnings announcements, I use intraday transactions data to test the hypothesis that net order flow and returns in the stocks of nonannouncing competitors have information content for announcing firms.     

Dual foreign currency markets and the role of expectations: Evidence from the Pacific Basin countries

This paper analyzes the role of expectations about the government policy in the official foreign currency market in determining the black market premium. We use data for the recent float from six emerging markets of the Pacific Basin where active black markets for foreign currency exist, namely, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand. To test the impact of anticipated and unanticipated shocks to the official exchange rate on the black market premium, we employ the two-step procedure of Hoffman et al. [Hoffman, D.L., Low, S.A., Schlagenhauf, D.E., 1984. Tests of rationality, neutrality and market efficiency: a Monte Carlo analysis of alternative test statistics. J. Monet. Econ. 14, 339–363] which provides corrected F-statistics and allows us to draw valid inference in the presence of generated regressors. The main finding of our analysis is that anticipated and unanticipated shocks to the official exchange rate have an impact on the black market premium in all six Pacific Basin countries. These results suggest that portfolio balance models provide the suitable theoretical framework for analyzing the behaviour of the black market premium in the markets for foreign currency in the Pacific Basin countries. Furthermore, this implies that economic agents in these countries are sensitive to expected returns in foreign exchange.     

Measuring the costs and benefits of regulation: Conceptual issues in securities markets

This paper reviews the economic theory of regulation and surveys the empirical evidence on its application to past and recent changes in U.S. securities regulation. The theory provides multiple potential motives for regulation and cautions the empirical researcher against naïve modeling of the costs and benefits of regulatory change. Moreover, the nature of the regulatory process compounds the standard pitfalls of empirical analysis such as endogeneity and confounding events. Productive empirical techniques include the development of cross-sectional predictions of the effects of regulation as well as the use of unregulated control samples. An important avenue for future research is a more refined estimation of the extent to which regulation has unintended consequences.     

Analytical pricing of discretely monitored Asian-style options: Theory and application to commodity markets

We compute an analytical expression for the moment generating function of the joint random vector consisting of a spot price and its discretely monitored average for a large class of square-root price dynamics. This result, combined with the Fourier transform pricing method proposed by Carr and Madan [Carr, P., Madan D., 1999. Option valuation using the fast Fourier transform. Journal of Computational Finance 2(4), Summer, 61–73] allows us to derive a closed-form formula for the fair value of discretely monitored Asian-style options. Our analysis encompasses the case of commodity price dynamics displaying mean reversion and jointly fitting a quoted futures curve and the seasonal structure of spot price volatility. Four tests are conducted to assess the relative performance of the pricing procedure stemming from our formulae. Empirical results based on natural gas data from NYMEX and corn data from CBOT show a remarkable improvement over the main alternative techniques developed for pricing Asian-style options within the market standard framework of geometric Brownian motion.     

交易量的信息含量:台湾期权市场的证据

本文应用台湾股指期权市场详细的交易数据,对台指期权交易量的信息含量进行了全面系统的实证检验。我们从全市场、不同投资者以及不同在值程度期权分类角度分别构建了多个五分钟交易量指标,并检验它们对未来台指走势的预测能力。我们发现,全市场的期权交易量指标基本不具备未来指数走势预测能力,但境内机构投资者和境外机构投资者交易量中包含显著的预测信息,价外期权的信息明显地优于价内期权和平价期权。     

Information content of options trading volume for future volatility: Evidence from the Taiwan options market

This study follows the approach of Ni et al. [Ni, S.X., Pan, J., Poteshman, A.M., 2008. Volatility information trading in the option market. Journal of Finance 63, 1059–1091] – based upon the vega-weighted net demand for volatility – to determine whether volatility information exists within the Taiwan options market. Our empirical results show that foreign institutional investors possess the strongest and most direct volatility information, which is realized by the delta-neutral options/futures trades. In addition, a few individual investors (less than 1% of individuals’ trades) might be informed and realize their volatility information using the strangle strategy. Surprisingly, we find no evidence to support the predictive ability of the volatility demand from straddle trades, despite the widespread acknowledgement that such trades are sensitive to volatility.     

Trading Against the Random Expiration of Private Information: A Natural Experiment

For years, the Securities and Exchange Commission (SEC) accidentally distributed securities disclosures to some investors before the public. We exploit this setting, which is unique because the delay until public disclosure was exogenous and the private information window was well defined, to study informed trading with a random stopping time. Trading intensity and the pace at which prices incorporate information decrease with the expected delay until public release, but the relation between trading intensity and time elapsed varies with traders' learning process. Noise trading and relative information advantage play similar roles as in standard microstructure theories assuming a fixed time window.     

Realizing the volatility impacts of sovereign credit ratings information on equity and currency markets: Evidence from the Asian Financial Crisis

We examine the effects of different types of sovereign rating announcements on realized stock and currency market volatilities and cross-asset correlations around periods of financial crises. Using intraday market data and sovereign ratings data for nine sample countries in the Asia-Pacific region over 1997–2001, we find that currency and stock markets react somewhat heterogeneously to various rating announcements and that stock markets are more responsive to rating news than currency markets. We find new evidence that ratings events have significant and asymmetric impacts on intraday market data and that national market attributes influence rating impacts during financial crises.     

A theory of acquisition markets: mergers versus tender offers, and golden parachutes

We develop a model of the acquisition market in which the acquirerhas a choice between two takeover mechanisms: mergers and tenderoffers. A merger is modeled as a bargaining game between theacquiring and target firms; whereas a tender offer is modeledas an auction in which bidders arrive sequentially an competefor the target. At any stage of the bargaining game the acquiringfirm can stop negotiating and make a tender offer. In equilibrium,there is a unique level of synergy gains below which the acquiringfirm makes only a merger attempt as it expects to lose in thecompetition resulting from a tender offer. For synergy gainsabove this level, tender offers can occur. However, to get tenderoffers, target shareholders must give their managers gold parachutesthat give higher payoffs in tender offers than in mergers.     

A tale of two prices: Liquidity and asset prices in multiple markets

This paper investigates the liquidity effect in asset pricing by studying the liquidity–premium relationship of an American depositary receipt (ADR) and its underlying share. Using the [Amihud, Yakov, 2002. Illiquidity and stock returns: cross-section and time series effects. Journal of Financial Markets 5, 31–56] measure, the turnover ratio and trading infrequency as proxies for liquidity, we show that a higher ADR premium is associated with higher ADR liquidity and lower home share liquidity, in terms of changes in these variables. We find that the liquidity effects remain strong after we control for firm size and a number of country characteristics, such as the expected change in the foreign exchange rate, the stock market performance, as well as several variables measuring the openness and transparency of the home market.     

The impact of reputation on analysts’ conflicts of interest: Hot versus cold markets

During periods of high IPO underpricing, unaffiliated all-star analysts from high reputation banks issue fewer strong-buy recommendations while unaffiliated all-star analysts from low reputation banks do not change their level of optimism. In contrast, unaffiliated non-star analysts from both high and low reputation banks issue more strong-buy recommendations. Consistent with the results on analyst optimism, the market reacts more favorably to strong-buy recommendations by unaffiliated all-star analysts from high reputation banks than other unaffiliated analysts during high IPO underpricing periods. Finally, we find that unaffiliated non-star analysts from low reputation banks reduce their coverage following an SEO if they are not selected as a part of the managing syndicate. Collectively, our results indicate that during periods of high IPO underpricing unaffiliated analysts face conflicts of interest, but personal-level reputation, and to a lesser extent bank-level reputation, plays a role in reducing this bias.     

A Note on the Information Content of Relocating Corporate Domicile: A Trading Volume Approach

Overseas location of corporate domicile is not new for Hong Kong. Before the eighties, some companies operating in Hong Kong, principally shipping companies and financial institutions, registered overseas for tax purposes. Since 1989 there has been a rapid increase in the number of companies deciding to relocate, including industrial companies. This study examinies the association between sharemarket trading and the relocation announcement. The results indicate that unusually large trading volumes are observed immediately after the announcement day.     

The Impact of Regulation Fair Disclosure on Information Asymmetry and Trading: An Intraday Analysis

This study examines the impact of Regulation Fair Disclosure (FD) on liquidity, information asymmetry, and institutional and retail investors trading behavior. Our main findings suggest three conclusions. First, Regulation FD has been effective in improving liquidity and in decreasing the level of information asymmetry. Second, retail trading activity increases dramatically after earnings announcements but there is a significant decline in institutional trading surrounding earnings announcements, particularly in the pre‐announcement period. Last, the decline in information asymmetry around earnings announcements is closely associated with a lower participation rate in the pre‐announcement period and more active trading of retail investors after earnings releases.     

Information asymmetry,contract design and process of negotiation: The stock options awarding case

Stock option plans are used to increase managerial incentives, and business practices usually set the exercise price equal to the stock market price. The purpose of this paper is to underline the importance of a process of negotiation leading to a possible equilibrium contract satisfying both managers and shareholders. The two key variables of the model are the percentage of equity capital offered by the shareholders to the managers and the exercise price of the options that may be at a discount. We explicitly introduce risk aversion and information asymmetries in the form of (i) an economic uncertainty in the gain of cash flow, (ii) possibly biased information between the two parties and (iii) a noise in the valuation price of the stock in the market. The existence of a process of negotiation between shareholders and managers leading to a possible disclosure of private information is highlighted. As a conclusion, we show that “efficient” stock option plans should be granted in a context of trade-off between the percentage of capital awarded to managers and the discount in stock price.     

The Impact of Information Release on Stock Price Volatility and Trading Volume: The Rights Offering Case

This paper examines whether information released via rights offering announcements induces changes in price volatility and trading volume of underlying stock. The results of this paper provide support for the release of new information via offering announcements and evidence of its effects on price volatility and volume of underlying stock. Specifically, utilization of the announced information by investors is evidenced by greater trading volume following the announcement date than during the pre-announcement period. We interpret this result to mean that informedness dominates consensus. However, stock price volatility decreased from the pre-announcement period to the post-expiration period of rights offerings.