FURTHER EVIDENCE ON THE LIQUIDITY EFFECTS OF STOCK SPLITS AND STOCK DIVIDENDS

Currently, there is a limited amount of empirical evidence suggesting that stock splits are associated with a decline in trading liquidity. This evidence directly contrasts with managements' professed intentions for undertaking a split. The evidence to date, however, is of a short-run nature. This study reexamines the liquidity effects of stock splits and stock dividends by assessing both their short- and long-term effects on trading liquidity (i.e., proportional trading volume and percentage bid-ask spreads). The results suggest that stock dividends are associated with decreased proportional trading volume in both the short term and long term, but stock splits are not. The results also indicate that neither stock splits nor stock dividends have an effect on percentage bid-ask spreads.     

Seasonalities in NYSE Bid-Ask Spreads and Stock Returns in January

Using end-of-month bid-ask spreads for 540 NYSE stocks over the period 1982–1987, we document a seasonal pattern in which both relative and absolute spreads decline from the end of December to the end of the following January. Cross-sectional regressions do not, however, provide evidence of a significant correlation between changes in spreads at the turn of the year and January stock returns. Either there is no cause and effect relation between the coincidental seasonals in bid-ask spreads and January returns for NYSE stocks or the data are too “noisy” to reveal any relation.     

DEALER BID-ASK SPREADS AND OPTIONS TRADING ON OVER-THE-COUNTER STOCKS

In this study the impact of option listings on bid-ask spreads for over-the-counter stocks is examined. Option listings are hypothesized to impact spreads by affecting the inventory-holding cost and/or the informed risk component of spreads. Univariate tests reveal that the commencement of options trading is accompanied by a statistically significant decline in percentage spreads. In addition, it is found that there is a significant rise in the average daily stock trading volume in the post-option-listing period, while there is no significant change in variance of the underlying stock returns in the short term. Regression results indicate that some stocks experience a decline in spreads even after controlling for changes in inventory-holding costs. The univariate and regression results taken in conjunction indicate a favorable impact of option listings on both the inventory-holding cost and informed-trading risk components of spread determinants. The combined evidence suggests that initiation of options trading enhances the overall liquidity of the underlying stock.     

Trading Patterns and Prices in the Interbank Foreign Exchange Market

The behavior of quote arrivals and bid-ask spreads is examined for continuously recorded deutsche mark-dollar exchange rate data over time, across locations, and by market participants. A pattern in the intraday spread and intensity of market activity over time is uncovered and related to theories of trading patterns. Models for the conditional mean and variance of returns and bid-ask spreads indicate volatility clustering at high frequencies. The proposition that trading intensity has an independent effect on returns volatility is rejected, but holds for spread volatility. Conditional returns volatility is increasing in the size of the spread.     

Volatility increases Subsequent to NYSE and AMEX Stock Splits

The post-split increase in daily returns volatility is less for AMEX stocks than for NYSE stocks. The exchange trading location is a significant factor in explaining the volatility shift even after stock price and firm size are considered. Furthermore, when measured on a weekly basis, there is no increase in AMEX stocks' returns volatility. These results suggest that measurement errors created by bid-ask spreads and the 1/8 effect, and also one or more of the elements that make the NYSE different from the AMEX, explain why the estimated volatility of daily stock returns increases after the ex split date.     

Analysis of REIT IPOs Using a Market Microstructure Approach: Anomalous Behavior or Asset Structure

In this research, we examine and present new evidence on the market activity following the initial public offering (IPO) of a real estate investment trust (REIT) using microstructure data. We analyze the bid-ask spread differences for REIT securities compared to common stocks and closed-end funds for all IPOs between 1985 and 1988. Our results show that REITs, as a whole sample, experience significantly greater bid-ask spreads immediately following the IPO compared to common stocks and funds. However, this outcome is driven by the equity REIT sample, with the mortgage REIT sample having significantly smaller bid-ask spreads. This is in contrast to the evidence documented by Nelling, Mahoney, Hildebrand, and Goldstein (1995). We attribute our result to the underlying asset structure (such as equity, hybrid, and mortgage portfolios) of the various REITs. Overall, however, we find that bid-ask spreads for REITs are similar to those of common stock when both asset structure and the traditional determinants of the spread (share price, trade volume, and returns variance) are considered.     

Stock Price Dynamics and Firm Size: An Empirical investigation

We show that after controlling for the effects of bid-ask spreads and trading volume the conditional future volatility of equity returns is negatively related to the level of stock price. This “leverage effect” is stronger for small, as compared to large, firms. We also document that while the essential characteristics of the relations between stock price dynamics and firm size are stable, the strengths of the relationships appear to change over time.     

An empirical examination of the impact of market microstructure changes on the determinants of option bid-ask spreads

This paper examines the determinants of bid-ask spreads in the Australian Options Market before and after it switched from a quote-driven floor-traded market to an order-driven screen-traded market. This study reports that both put and call option bid-ask spreads are positively related to the option's value, its remaining term-to-maturity, its absolute hedge ratio and the volatility of returns from the underlying asset and negatively related to the level of trading activity in that option series. The study also reports that spreads are generally less when market makers are obliged to maintain continuous quotes in the market. The paper also finds that following the change in trading regime, both call and put option spreads became more sensitive to the absolute value of the option's delta. This finding is consistent with previous theoretical and empirical work from equities markets that has suggested that a switch to an electronic trading regime results in an increase in the adverse selection component of the bid-ask spread. There is also some limited evidence that suggests that the switch to electronic trading resulted in call option spreads being less sensitive to the return volatility of the underlying asset but more sensitive to the option's price.     

Gone fishin’: Seasonality in trading activity and asset prices

We use seasonality in stock trading activity associated with summer vacation as a source of exogenous variation to study the relationship between trading volume and expected return. Using data from 51 stock markets, we first confirm a widely held belief that stock turnover is significantly lower during the summer because market participants are on vacation. Interestingly, we find that mean stock return is also lower during the summer for countries with significant declines in trading activity. This relationship is not due to time-varying volatility. Moreover, both large and small investors trade less and the price of trading (bid-ask spread) is higher during the summer. These findings suggest that heterogeneous agent models are essential for a complete understanding of asset prices.     

Determinants of Trading Profits: The Liquidity Provision Decision

Theories show that liquidity provision implies negative contemporaneous correlation between trades and returns. Dealers on the Taiwan Stock Exchange are granted typical dealer trading advantages without obligations to provide liquidity and, thus, are ideal to test whether these advantages lead to voluntary liquidity provision (earning bid-ask spreads) or information trading (trading in the direction of the market). We find a strong positive correlation in aggregate, implying that these unrestricted dealers prefer information trading. We also find that smaller dealers are more likely to provide liquidity and that small-cap stocks (with larger bid-ask spreads) are more profitable for liquidity provision.     

The Effectiveness of Technical Trading for Arab Stocks

In this paper, we examine the profitability of technical analysis for a cross section of individual Arab stocks. Our analysis, undertaken from the perspective of an Islamic investor, reveals that technical trading rules do not yield economically or statistically significant returns. While our results uncover some scant statistical evidence of technical trading rule profitability, risk adjusting the returns weakens the evidence in favor of predictability. Furthermore, break-even transaction costs do not exceed estimated transaction costs or bid-ask spreads in the markets examined.     

THE DETERMINANTS OF MARKET BID ASK SPREADS ON THE AUSTRALIAN STOCK EXCHANGE: CROSS-SECTIONAL ANALYSIS

Prior research into the cost of trading on the Australian Stock Exchange has identified brokerage fees and the bid-ask spread as significant elements of total transaction costs. While an enormous volume of research has examined the determinants of spreads in US markets, no work has so far addressed the issue for the Australian market-place. Given the importance of spreads as a transaction cost, this work redresses this imbalance and at the same time provides evidence on whether alternative market structures underlying different exchanges give rise to differences in the determinants of spreads. Using prior US research as our benchmark, our results suggest that notwithstanding microstructure differences between the Australian and US exchanges, there are three fundamental determinants of spreads that transcend differences in the market-places. These are the level of trading activity, price volatility and stock price levels. Together these three factors account for up to 94% of the total cross-sectional variation in percentage bid ask spreads on the ASX.     

Forecasting liquidity-adjusted intraday Value-at-Risk with vine copulas

We propose to model the joint distribution of bid-ask spreads and log returns of a stock portfolio by using Autoregressive Conditional Double Poisson and GARCH processes for the marginals and vine copulas for the dependence structure. By estimating the joint multivariate distribution of both returns and bid-ask spreads from intraday data, we incorporate the measurement of commonalities in liquidity and comovements of stocks and bid-ask spreads into the forecasting of three types of liquidity-adjusted intraday Value-at-Risk (L-IVaR). In a preliminary analysis, we document strong extreme comovements in liquidity and strong tail dependence between bid-ask spreads and log returns across the firms in our sample thus motivating our use of a vine copula model. Furthermore, the backtesting results for the L-IVaR of a portfolio consisting of five stocks listed on the NASDAQ show that the proposed models perform well in forecasting liquidity-adjusted intraday portfolio profits and losses.     

Option trading after the opening bell and intraday stock return predictability

Prior literature finds that information is reflected in option markets before stock markets, but no study has explored whether option volume soon after market open has predictive power for intraday stock returns. Using novel intraday signed option-to-stock volume data, we find that a composite option trading score (OTS) in the first 30 min of market open predicts stock returns during the rest of the trading day. Such return predictability is greater for smaller stocks, stocks with higher idiosyncratic volatility, and stocks with higher bid–ask spreads relative to their options’ bid–ask spreads. Moreover, OTS is a significantly stronger predictor of intraday stock returns after overnight earnings announcements. The evidence suggests that option trading in the 30 min after the opening bell has predictive power for intraday stock returns.     

Liquidity of the CBOE Equity Options

We examine the CBOE option market depth and bid-ask spreads. Absence of price effects surrounding large option trades suggests excellent market depth. However, bid-ask spreads for the CBOE options and the NYSE stocks are nearly equal, even though an average option is equivalent to less than half a stock plus borrowing. We explain this tradeoff between market depth and bid-ask spreads on the CBOE and the NYSE by differences in market mechanisms. We also show that the adverse-selection component of the option spread, which measures the extent of information-related trading on the CBOE, is very small.     

Corporate Takeovers: Mode of Payment, Returns and Trading Activity

This paper examines the impact of takeover bids and, in particular, the method of payment to the shareholders of the target firms on the returns, trading activity and bid-ask spreads of target and bidding firms traded on the London Stock Exchange. It suggests that the shareholders of target firms benefit substantially from takeover activity while the shareholders of bidding firms do not suffer. The combined value of the firms engaged in takeover activity increases by a small percentage during the event period. However, the benefit from a takeover announcement to the shareholders of the target firm varies from year to year and has declined in the recent past. The magnitude of excess returns available to the shareholders is also dependent on the mode of payment. Prices of target (bidding) firms increase (decrease) most if the shareholders of the target firms are given an option to receive payment in shares or in cash. The findings also reveal that during the event period trading activity in target and bidding companies increases depending on the form in which payments to shareholders are made. In response to this increased liquidity, the bid-ask spreads of target and bidding firms decline during the event period.     

EVIDENCE ON THE BEHAVIOR OF BID AND ASK PRICES AT THE TURN OF THE YEAR: IMPLICATIONS FOR THE SURVIVAL OF STOCK RETURN SEASONALITY

We analyze changes at the turn of the year in the relative and standardized bid-ask spreads of New York Stock Exchange stocks before and after the introduction of personal income taxes in 1917. Previous research indicates the return seasonal arose in 1917. Here, we investigate when spread seasonals arose and whether spread changes are cross-sectionally correlated with the return seasonal. The results indicate that the year-end selling pressure, which began in 1917, is apparent as downward shifts in the stocks' bid and ask prices rather than as widening spreads. Additional evidence suggests the January return seasonal originated as compensation to specialists, as well as to competing traders, for incurring the costs of providing liquidity during the tax-induced seasonal trading pattern.     

The 2000 presidential election and the information cost of sensitive versus non-sensitive S&P 500 stocks

We investigate the information cost of stock trading during the 2000 presidential election. We find that the uncertainty of the election induces information asymmetry of politically sensitive firms under the Bush/Gore platforms. The unusual delay in election results creates a significant increase in the adverse selection component of the trading cost of politically sensitive stocks. Cross-sectional variations in bid-ask spreads are significantly and positively related to changes in information cost, controlling for the effects of liquidity cost and stock characteristics. This empirical evidence is robust to different estimation methods.     

Insider Trading in the OTC Market

In this paper, we examine the profitability of insider trading in firms whose securities trade in the OTC/NASDAQ market. Although the evidence suggests timing and forecasting ability on the part of insiders, high transaction costs (especially bid-ask spreads) appear to eliminate the potential for positive abnormal returns from active trading. By implication, outside investors who mimic the trading of insiders are also precluded from earning abnormal profits. In addition, we provide evidence on the determinants of insiders' profits. The data suggest that insiders closer to the firm trade on more valuable information than insiders removed from the firm.     

Earnings seasonality,management earnings forecasts and stock returns

We examine whether management earnings forecasts (MEFs) help reduce the stock return seasonality associated with earnings seasonality around earnings announcements (EAs) in Chinese A-share markets. We find that firms in historically low earnings seasons outperform firms in high earnings seasons by 2.1% around MEFs. Firms in low earnings seasons also have higher trading volume and return volatility than their counterparts around EAs and MEFs. MEFs significantly reduce the ability of historical seasonal earnings rankings to negatively predict announcement returns, volume and volatility around EAs. The reduction effects are stronger when MEFs are voluntary or made closer to EAs. The evidence suggests that MEFs facilitate the correction of investors’ tendency to extrapolate earnings seasonality and its resulted stock mispricing.