The relationship between bid–ask spreads and holding periods: The case of Chinese A and B shares

The Chinese stock markets for A (domestic) shares and B (foreign) shares were completely separated. This study examines the relationship between spreads and holding periods across these segmented markets on the same set of firms. Our major findings are as follows. (1) There is a positive relationship between holding periods and bid–ask spreads in the Chinese stock market. (2) Investors' sensitivity toward liquidity is approximately the same in the A and B share markets, even though bid–ask spreads are substantially different across the two markets. These results provide strong support for the theoretical argument of Amihud and Mendelson [Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid–ask spread. Journal of Financial Economics, 17, 223–249.] that stocks with higher spreads tend to be held by long-term investors. Evidence also suggests that liquidity has a role in explaining the B share discount, although the results are less than conclusive.     

Trading activity and bid–ask spreads of individual equity options

We empirically examine the impact of trading activities on the liquidity of individual equity options measured by the proportional bid–ask spread. There are three main findings. First, the option return volatility, defined as the option price elasticity times the stock return volatility, has a much higher power in explaining the spread variations than the commonly considered liquidity determinants such as the stock return volatility and option trading volume. Second, after controlling for all the liquidity determinants, we find a maturity-substitution effect due to expiration cycles. When medium-term options (60–90 days maturity) are not available, traders use short-term options as substitutes whose higher volume leads to a smaller bid–ask spread or better liquidity. Third, we also find a moneyness-substitution effect induced by the stock return volatility. When the stock return volatility goes up, trading shifts from in-the-money options to out-of-the-money options, causing the latter’s spread to narrow.     

Share repurchase tender offers and bid–ask spreads

This paper examines the impact of share repurchase tender offers on the market microstructure. We find that there is a temporary reduction in the bid–ask spread, and a temporary increase in volume and quotation depth during the offer period. Our evidence suggests that the bid–ask spread is asymmetric during the offer period with the bid-side spread smaller than the ask-side spread. The temporary reduction in the spread around offers is consistent with the competing-market-maker hypothesis which predicts that the intensified competition for the market maker raises bid prices and narrows the spread asymmetrically during the offer period.     

An empirical comparison of quoted and implied bid–ask spreads on futures contracts

This paper investigates the performance of a range of alternative measures of quoted and implied bid–ask spreads on futures contracts, using a complete record of all quotes and trades. Accurate calibration of bid–ask spreads is important for many applications, including tests of market efficiency and assessment of market microstructure models. The results show that the transactions based spread measures are biased estimates of quoted and effective spreads, which illustrates the need for considered implementation of such measures. Similar intraday behaviour is shown by the different measures, with wide spreads at the open and narrow spreads at the close under a competing market maker environment.     

Institutional determinants of bid–ask spreads in Caribbean offshore stock exchanges

My study contrasts the influence of firm level adoption of shareholder value governance against that of formal institutional quality on listed firm’s bid ask spread in a unique sample of eight Caribbean offshore stock exchanges. Using panel data from 146 listed firms from 2004 to 2017 my findings reveal the importance of Worldwide Governance Indicator dimensions of corruption control and regulatory quality in explaining firm’s bid ask spreads. Furthermore, formal institutional quality is consistently statistically superior in explaining firm’s bid ask spreads than firm level governance adoption. My findings emphasise the importance in considering political economy in offshore financial markets.     

Relation between bid–ask spread,impact and volatility in order-driven markets

We show that the cost of market orders and the profit of infinitesimal market-making or -taking strategies can be expressed in terms of directly observable quantities, namely the spread and the lag-dependent impact function. Imposing that any market taking or liquidity providing strategies is at best marginally profitable, we obtain a linear relation between the bid–ask spread and the instantaneous impact of market orders, in good agreement with our empirical observations on electronic markets. We then use this relation to justify a strong, and hitherto unnoticed, empirical correlation between the spread and the volatility per trade, with R ²s exceeding 0.9. This correlation suggests both that the main determinant of the bid–ask spread is adverse selection, and that most of the volatility comes from trade impact. We argue that the role of the time-horizon appearing in the definition of costs is crucial and that long-range correlations in the order flow, overlooked in previous studies, must be carefully factored in. We find that the spread is significantly larger on the NYSE, a liquid market with specialists, where monopoly rents appear to be present.     

The relationship between a firm’s information environment and its cash holding decision

This study directly investigates the relationship between the firm’s information environment and its cash holding decision using two separate country-level events as proxies for a general improvement of the information environment: the initial enforcement of new insider trading laws and the mandatory adoption of International Financial Reporting Standards. Analysing a large international sample, we find that firms reduce their cash holdings after both exogenous information shocks. We also find that the reductions are greater for firms facing greater financing constraints and agency issues, and for those for which the informational shocks are stronger. Further analyses reveal a reduction in firms’ average cash savings rate, an increase in performance, an increase in the use of external debt, a decrease in abnormal investment, and an increase in the value of cash holdings. Taken together, our results suggest that an improvement in the information environment mitigates both the adverse selection and moral hazard problems thereby, leading to a reduction in cash reserves held for transaction and precautionary motives, and the likelihood of entrenched managers building large cash balances for private benefit.     

Modelling sovereign credit spreads with international macro-factors: The case of Brazil 1998–2009

This paper develops a macro-finance model of the Brazilian economy and its sovereign debt markets that allows for domestic and international macroeconomic influences as well as swings in investor confidence. It finds significant evidence of common trends in the US and Brazilian economies and bond markets as well as spillover effects from US inflation and business cycles to the Brazilian economy. The US Fed Funds rate influences Brazilian sovereign spreads, as do Brazilian inflation and policy rates. The Brazilian confidence factor dominates the behavior of the spreads during periods of crisis and we find that it also has a powerful effect on the level and volatility of macroeconomic variables. These results suggest that the macro-finance approach could throw light upon the behavior of other economies that are troubled by sovereign risk.     

The lead–lag relationship between the spot and futures markets in China

Based on daily and one-minute high-frequency returns, this paper examines the lead–lag dependence between the CSI 300 index spot and futures markets from 2010 to 2014. A nonparametric and non-linear method based on the thermal optimal path method is adopted. Empirical results of the daily data indicate that the lead–lag relationship between the two markets is within one day but this relationship is volatile since neither of the two possible situations (the futures leads or lags behind the spot market) takes a dominant place. Our results using the high-frequency data demonstrate that there is a price discovery in the Chinese futures market: the intraday one-minute futures return leads the cash return by 0–5 min regardless of the price trend of the market.     

Globalization and the state–profession relationship: the case the Bank of Credit and Commerce International

Globalization of businesses raises major questions about the regulation of corporations, both in the national and international context. The debate is marked by two competing views. The ‘hyperglobalists’ claim that in a globalized world, nation-states cannot take effective actions to regulate multinational businesses, especially those relating to banking and finance. In response, the ‘skeptics’ accept the view that to regulate corporations, the nation-state has always had to restructure itself. However, they challenge the contention that globalization has reduced the power, functions and authority of the state. The paper contributes to the debate through an examination of some of the processes leading to the forced closure (and the aftermath) of the Bank of Credit and Commerce International (BCCI), a bank that operated from 73 countries. It particularly focuses upon the role of the banking regulators and their reliance upon auditing technologies to regulate major banks. The paper sides with the ‘skeptics’ and argues that the nation states, especially major Western states, remain important players in the regulation of global businesses. It concludes that the nation-state’s capacity to regulate global enterprises is compromised by history, domestic concerns and relationships with class and capitalist interests rather than by globalization per se.     

A time–frequency comovement and causality relationship between Bitcoin hashrate and energy commodity markets

This study examines time–frequency relationship between Bitcoin prices and Bitcoin mining based on daily data from January 2013 to October 2018. Bitcoin mining is measured through Bitcoin hashrate, which represents the completion speed of the Bitcoin code. We also include three energy commodities, i.e. oil, coal, and gas in a multivariate model employing time–frequency wavelet extensions in the form of partial and multivariate models. Results of our study suggest that both oil and gas lead Bitcoin returns from mid 2014 till 2016 across 64– 128 days' period. Under the investment period of 64– 256, hashrate and Bitcoin returns share significant comovement in the presence of oil and natural gas however exhibit no comovement when the effect of coal market is considered. Our results of wavelet decomposition suggest that the magnitude of comovement ranging from short- to long-run is time varying. Finally, results of the causality on quantile test suggest that Bitcoin returns cause changes in Bitcoin hashrate mostly during median quantiles with an asymmetric pattern. Our work entail implications for investors in the Bitcoin and energy market and is also helpful in forecasting the pricing behavior of Bitcoin using the hashrate and vice versa.     

Unexpected inflation and bank stock returns: The case of France 1977–1991

This paper evaluates the impact of unexpected inflation on the stock returns of a sample of French banks. It offers an empirical test of theories that have predicted an impact of inflation on the stock returns of banks. The paper complements a large literature that has focused exclusively on the impact of unexpected interest rates. The analysis provides empirical support to the hypothesis that, in periods of volatile inflation, there exists an inflation risk factor which is independent of the well-documented interest rate factor.     

The relationship between banking market competition and risk-taking: Do size and capitalization matter?

This paper addresses the effects of bank competition on the risk-taking behaviors of banks in 10 Latin American countries between 2003 and 2008. We conduct our empirical approach in two steps. First, we estimate the Boone indicator, which is a measure of competition. We then regress this measure and other explanatory variables on the banking “stability inefficiency” derived simultaneously from the estimation of a stability stochastic frontier. Unlike previous findings, this paper concludes that competition affects risk-taking behavior in a non-linear way as both high and low competition levels enhance financial stability, while we find the opposite effect for average competition. In addition, bank size and capitalization are essential factors in explaining this relationship. On the one hand, the larger a bank is, the more it benefits from competition. On the other hand, a greater capital ratio is advantageous for banks that operate in collusive markets, while capitalization only enhances the stability of larger banks under high and average competition. These results are of extreme importance when considering bank regulations, especially in light of the recent turmoil in the global financial markets.     

The monitoring role of independent directors in CEO pay–performance relationship: the case of Malaysian government linked companies

This study looks into the pay-performance and monitoring issues in Malaysian government linked companies (GLCs). Our study utilizes 21 Malaysian public listed GLCs data from financial year 2001 until 2006. We adopt panel regression to study pay–performance relationship while the internal monitoring mechanism is measured by board independence. In our analysis, chief executive officer (CEO pay is regressed to individual performance as well as benchmarked against industry average. Generally, we document that the pay–performance relationship in Malaysian GLCs is sporadically significant, implying that CEO pay is not properly aligned to performance. However, pay-earning-sensitivity (EPS) is high and statistically significant when individual performances are benchmarked against industry average in GLCs with more than 50% independent directors (majority board). This implies that for Malaysian GLCs, a majority independent board is required to ensure effective monitoring on CEOs' performance.     

The impact of a new term auction facility on Libor–OIS spreads and volatility transmission between money and mortgage markets during the subprime crisis

During the subprime crisis, the U.S. Federal Reserve was concerned about widening spreads between overnight interbank lending rates such as the overnight index swap (OIS) and term London Interbank Offer Rate (Libor). Among the tools it used to counter the impact of the crisis, the innovative term auction facility (TAF) attracted much attention. We investigate the impact of the TAF on the Libor–OIS spread. We find that the TAF has clear initial and sustained expectation effects on the three-month Libor–OIS spread, but no real initial or short-term funding effects, which casts doubt on the usefulness of the TAF in reducing risk spreads. Since the subprime crisis also spilled across the interbank, commercial paper, and jumbo mortgage markets, we further examine the lead–lag relation between Libor–OIS, commercial paper, and jumbo spreads and the volatility transmission effects between them. For the period before the crisis, we find that the three markets behave largely independently. For the subprime crisis period, however, we find multidirectional lead–lag relations and one-way volatility transmission between these markets.     

A note on the time–series relationship between market industry concentration and market volatility

Using cross-sectional regression analysis, previous studies provide conflicting results regarding the relationship between market industry concentration and market volatility. This paper investigates this relationship in the time–series. Using data from twenty one developed markets and the world market, we find that this relationship is significant and positive in about 61% of the markets: the more concentrated the market, the more volatile the market. We also find that, in 70% of the markets, there exists a causal relationship between market industry concentration and market volatility and the direction of causality runs from the former to the latter. Our results suggest that market industrial structure is a significant factor in explaining market volatility.     

The chicken or the egg? A note on the dynamic interrelation between government bond spreads and credit default swaps

This note provides the first empirical assessment of the dynamic interrelation between government bond spreads and their associated credit default swaps (CDS). We use data for the Southern European countries (Greece, Italy, Portugal and Spain) that found themselves with a problematic public sector in the dawn of the recent financial distress. We find that CDS prices Granger-cause government bond spreads after the eruption of the 2007 sub-prime crisis. Feedback causality is detected during periods of financial and economic turmoil, thereby indicating that high risk aversion tends to perplex the transmission mechanism between CDS prices and government bond spreads.     

Stock market closure and intraday stock index futures market volatility: “contagion”, bid–ask bias or both?

Chang et al. [Journal of Business 68 (1) (1995) 61] examine the impact of the closure of the New York Stock Exchange (NYSE) on S&P500 stock index futures traded on the Chicago Mercantile Exchange. They document a decline in futures market volatility immediately after the close of the NYSE, and an increase 15 minutes later when the futures market closes. They attribute this to contagion–i.e. a decline in information transfer from equities to futures markets following the closure of the underlying market. This paper examines the impact of the extension of trading hours in Hang Seng Index futures traded on the Hong Kong Futures Exchange on the 20 November, 1998 to 15 minutes after the close of the underlying market (the Stock Exchange of Hong Kong). Using the unique natural experiment provided by this change, a pattern similar to US markets is documented for the Hang Seng Index Futures following the change in trading hours. This provides strong evidence that the intraday pattern in volatility is caused by market closure. Unlike US futures exchanges, price reporters on the floor of the Hong Kong Futures Exchange collect quote data in addition to trade data. This data facilitates a test of another plausible microstructure explanation for the observed behaviour–bid–ask bounce associated with trading activity. This paper provides evidence that bid–ask bounce also explains part of the observed intraday behaviour in price volatility.