Abnormal trading volume and autoregressive behavior in weekly stock returns in the Saudi stock market

This paper examines the relationship between the abnormal change in trading volume of both individual stocks and portfolios and short-term price autoregressive behavior in the Saudi stock market (SSM). Our objective is to investigate the informational role that trading volume plays in predicting the direction of short-term returns. We evaluate whether the abnormal change in lagged, contemporaneous, and lead turnovers affects serial correlation in returns. Specifically, we examine if and when the change in volume produces momentum (positive correlation) or reversal (negative autocorrelation) in consecutive weekly stock returns.We find a reversal in weekly stock returns when conditioned on the change in lagged volume in the SSM. Our results are consistent for the whole sample, the two sub-sample periods, and the large- and small-firm portfolios. The results are consistent with Campbell, Grossman, and Wang [Campbell, J. Y., S. J. Grossman, and J. Wang, 1993, Trading volume and serial correlation in stock returns, Quarterly Journal of Economics, 108, 905–939], who present a model in which risk-averse market makers accommodate the selling pressure of liquidity or non-informational traders. We also find that reversal is more pronounced with the loser portfolio as specified by filter-based methodology. The overall result of this paper is also consistent with the empirical findings of Conrad, Hameed, and Niden [Conrad, J., A. Hameed, and C. Niden, 1994, Volume and autocovariances in short-horizon individual security returns, Journal of Finance 49, 1305–1329.] and Gebka [Gebka, B., 2005, Dynamic volume-return relationship: evidence from an emerging market, Applied Financial Economics, 15, 1019–1029] in which they report price reversal for stock with high trading volume.     

Timing the Market with a Combination of Moving Averages

A combination of simple moving average trading strategies with several window lengths delivers a greater average return and skewness as well as a lower variance and kurtosis compared with buying and holding the underlying asset using daily returns of value‐weighted US decile portfolios sorted by market size, book‐to‐market, momentum, and standard deviation as well as more than 1000 individual US stocks. The combination moving average (CMA) strategy generates risk‐adjusted returns of 2% to 16% per year before transaction costs. The performance of the CMA strategy is driven largely by the volatility of stock returns and resembles the payoffs of an at‐the‐money protective put on the underlying buy‐and‐hold return. Conditional factor models with macroeconomic variables, especially the market dividend yield, short‐term interest rates, and market conditions, can explain some of the abnormal returns. Standard market timing tests reveal ample evidence regarding the timing ability of the CMA strategy.     

The impact of net buying pressure on VIX option prices

This paper analyzes the impact of intraday trading activity on option prices in the Volatility Index (VIX) options market. Our results show that there is a temporal relationship between net buying pressure (NBP) and changes in implied volatility of VIX options. Moreover, an increase in NBPs lowers the next-day delta-hedged option returns. Using several measures proxying for limits to arbitrage, the average levels of the implied volatility curve rise when limits to arbitrage are severe. A trading strategy in the VIX futures market constructed by using the NBP generates an average annualized return of 10.09%.     

Market Timing With Moving Averages

I present evidence that a moving average (MA) trading strategy has a greater average return and skewness as well as a lower variance compared to buying and holding the underlying asset using monthly returns of value‐weighted US decile portfolios sorted by market size, book‐to‐market, and momentum, and seven international markets as well as 18,000 individual US stocks. The MA strategy generates risk‐adjusted returns of 3–7% per year after transaction costs. The performance of the MA strategy is driven largely by the volatility of stock returns and resembles the payoffs of an at‐the‐money protective put on the underlying buy‐and‐hold return. Conditional factor models with macroeconomic variables, especially the default premium, can explain some of the abnormal returns. Standard market timing tests reveal ample evidence regarding the timing ability of the MA strategy.     

Publicly traded venture capital funds: implications for institutional “fund of funds” investors

Institutional investors supply the bulk of the funds which are used by venture capital investment firms in financing emerging growth companies. These investors typically place their funds in a number of venture capital firms, thus achieving diversification across a range of investment philosophy, geography, management, industry, investment life cycle stage and type of security. Essentially, each institutional investor manages a “fund of funds,” attempting through the principles of portfolio theory to reduce the risk of participating in the venture capital business while retaining the up-side potential which was the original source of attraction to the business. Because most venture capital investment firms are privately held limited partnerships, it is very difficult to measure risk adjusted rates of return on these funds on a continuous basis.In this paper, we use the set of twelve publicly traded venture capital firms as a proxy to develop insight regarding the risk reduction effect of investment in a portfolio of venture capital funds, i.e., a fund of funds. Measurements of weekly total returns for the shares of these funds are compared with similar returns on a set of comparably sized “maximum capital gain” mutual funds and the daily return of the S&P 500 Index. A comparison of returns on an individual fund basis, as well as a correlation of daily returns of these individual funds, were made. In order to adjust for any systematic bias resulting from the “thin market” characteristic of the securities of the firms being observed, the Scholes-Williams beta estimation technique was used to reduce the effects of nonsynchronous trading.The results indicate that superior returns are realized on such portfolios when compared with portfolios of growth-oriented mutual funds and with the S&P 500 Index. This is the case whether the portfolios are equally weighted (i.e., “naive”) or constructed to be mean-variant efficient, ex ante, according to the capital asset pricing model. When compared individually, more of the venture funds dominated the S&P Market Index than did the mutual funds and by much larger margins. When combined in portfolios, the venture capital funds demonstrated very low beta coefficients and very low covariance of returns among portfolio components when compared with portfolios of mutual funds. To aid in interpreting these results, we analyzed the discounts and premia from net asset value on the funds involved and compared them to Thompson's findings regarding the contribution of such differences to abnormal returns. We found that observed excess returns greatly exceed the level which would be explained by these differences.The implications of these results for the practitioner are significant. They essentially tell us that, while investment in individual venture capital deals is considered to have high risk relative to potential return, combinations of deals (i.e., venture capital portfolios) were shown to produce superior risk adjusted returns in the market place. Further, these results show that further combining these portfolios into larger portfolios (i.e., “funds of funds”) provides even greater excess returns over the market index, thus plausibly explaining the “fund of funds” approach to venture capital investment taken by many institutional investors.While the funds studied are relatively small and are either small business investment companies or business development companies, they serve as a useful proxy for the organized venture capital industry, despite the fact that the bulk of the funds in the industry are institutionally funded, private, closely held limited partnerships which do not trade continuously in an open market. These results demonstrate to investors the magnitude of the differences in risk adjusted total return between publicly traded venture capital funds and growth oriented mutual funds on an individual fund basis. They also demonstrate to investors the power of the “fund of funds” approach to institutional involvement in the venture capital business. Because such an approach produces better risk adjusted investment results for the institutional investor, it seems to justify a greater flow of capital into the business from more risk averse institutional investment sources. This may mean greater access to institutional funds for those seeking to form new venture capital funds. For entrepreneurs seeking venture capital funds for their young companies, it may also mean a lower potential cost of capital for the financing of business venturing. From the viewpoint of public policy makers interested in facilitating the funding of business venturing, it may provide insight regarding regulatory issues surrounding taxation and the barriers and incentives which affect venture capital investment.     

Flight-to-liquidity: Evidence from China's stock market

In an order-driven and strictly regulated stock market, illiquidity risks' effects on asset pricing should be highlighted, particularly in such extreme market conditions as those in China. This paper utilizes panel data from China's stock market in an attempt to answer whether the illiquidity risk in various dimensions—including price impacts, the transaction speed, trading volume, transaction costs, and asymmetric information—can explain stock returns. We find that almost all dimensions of stock illiquidity are positively associated with excess stock returns. More importantly, smaller, less-liquid stocks suffer more liquidity costs, providing a strong evidence for “flight-to-liquidity.” Additionally, the transaction costs and asymmetric information, denoted by bid-ask spreads, robustly account for these illiquidity effects on stock pricing and differ from the findings in the U.S. market. We also find that the “flight-to-liquidity” can partially explain the idiosyncratic volatility puzzle, investors' gambling, and herding psychologies. This study provides substantial policy implications in regulation and portfolio management for emerging markets.     

Internet Search Intensity and Its Relation with Trading Activity and Stock Returns*

Using Google search volume as a proxy for investor attention, this paper provides evidence on the role attention plays in financial markets. We first show that abnormal Google search volume (ASVI) helps explain cross‐sectional variations in trading activity, even after controlling for its important determinants. Specifically, ASVI is positively related to trading volume, order imbalance and liquidity. When the relation between stock returns and ASVI is examined, we find a strong positive relation in the month after attention shocks and a reversal over a longer holding period. We further conjecture that the attention effect is more pronounced in stocks with higher limits to arbitrage. For this purpose, we construct a limits‐to‐arbitrage index and show that limits to arbitrage play an important role in explaining the attention effect.     

Non‐Tradable Share Reform,Liquidity, and Stock Returns in China

This article studies the influence of the non‐tradable share reform in the cross‐section of stock returns in China. Prior research has generally neglected this important development in the Chinese stock market. We find that the firm‐specific illiquidity measures that reflect direct transaction costs, price impact and difficulties in trading immediacy, exhibit a positive and significant relationship with stock returns. These effects are particularly pronounced after the non‐tradable share reform. Furthermore, in the post‐reform era, portfolios with high illiquidity (i.e. high relative bid–ask spread, high Amihud illiquidity, low Amivest liquidity ratio) significantly outperform portfolios with low illiquidity, controlling for size, and book‐to‐market effects.     

Maximum utility portfolio construction in the forward freight agreement markets: Evidence from a multivariate skewed t copula

We form portfolios consisting of diverse quarterly forward freight agreement (FFA) contracts to maximize the market participant's expected utility. The empirical findings indicate that individual FFA returns display clear autocorrelation, seasonality, fat tail, and heteroscedasticity. The multivariate positively skewed t copula is suggested for constructing maximum utility FFA portfolios, implying that the constituent FFA returns exhibit higher correlations when they rise together. The out-of-sample trading strategy performance metrics and various robustness checks further indicate that the aforementioned copula performs best and robustly for all portfolios. These findings provide profound methodological and managerial implications for market participants to improve risk management.     

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.     

Pricing efficiency of the S&P 500 index market: Evidence from the Standard & Poor's Depositary Receipts

Standard & Poor's Depositary Receipts (SPDRs) are exchange traded securities representing a portfolio of S&P 500 stocks. They allow investors to track the spot portfolio and better engage in index arbitrage. We tested the impact of the introduction of SPDRs on the efficiency of the S&P 500 index market. Ex‐post pricing efficiency and ex‐ante arbitrage profit between SPDRs and futures were also examined. We found an improved efficiency in the S&P 500 index market after the start of SPDRs trading. Specifically, the frequency and length of lower boundary violations have declined since SPDRs began trading. This result is consistent with the hypothesis that SPDRs facilitate short arbitrage by simplifying the process of shorting the cash index against futures. Tests of pricing efficiency comparing SPDRs and futures suggested that index arbitrage using SPDRs as a substitute for program trading in general results in losses. Although short arbitrages earn a small profit on average, gains are statistically insignificant. A trade‐by‐trade investigation showed that prices are instantaneously corrected after the presence of mispricing signals, introducing substantial risk in arbitraging. Evidence in general supported pricing efficiency between SPDRs and the S&P 500 index futures—both ex‐post and ex‐ante. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:877–900, 2002     

Investor behavior and volatility of futures market: A theory and empirical study based on the OLG model

Investor trading behaviors are always an important issue in behavioral finance and market supervision. This study examines the relationship between investor behavior and future market volatility. We first introduce a two-period OLG model into the futures market, and develop an investor behavior model based on future contract price. We then extend the model to two scenarios: complete and incomplete information. We provide the equilibrium solution, and develop two hypotheses, which are tested with cuprum tick data in Shanghai Futures Exchange (SHFE). Empirical results show that the two-period OLG model for future market is consistent with the market situation in China. More specifically, investors with sufficient information such as institutional investors usually adopt the contrarian trading strategy, whereas investors with insufficient information, e.g., individual investors, usually adopt the momentum trading strategy. These findings reveal that investor behaviors in the Chinese futures market are different from those of in the Chinese stock market.     

Machine learning portfolios with equal risk contributions: Evidence from the Brazilian market

We investigate the use of machine learning (ML) to forecast stock returns in the Brazilian market using a rich proprietary dataset. While ML portfolios can easily outperform the local market, the performance of long-short strategies using ML is hampered by the high volatility of the short portfolios. We show that an Equal Risk Contribution (ERC) approach significantly improves risk-adjusted returns. We further develop an ERC approach that combines multiple long-short strategies obtained with ML models, equalizing risk contributions across ML models, which outperforms, on a risk-adjusted basis, all individual ML long-short strategies, as well as alternative combinations of ML strategies.     

机构投资者的交易行为研究:来自中国台湾股市的证据

文章以中国台湾股市为研究对象,主要研究机构投资者的交易行为。文章构建了机构投资者交易不平衡性指标——净交易,在此基础上研究机构投资者的交易行为。研究结果表明:台湾股票市场中以外资和投信基金为代表的金融机构投资者表现为正反馈的交易策略,并且交易的信息含量较高;一般法人的交易表现为负反馈的交易策略,并且交易的信息含量不足;而自营商由于交易动机复杂,交易的信息含量不明确。可见不同的机构投资者的交易行为并不相同。     

Returns on ADRs and arbitrage in emerging markets

In this paper we compare the distributions of ADR returns and the returns of the locally traded shares between Chile and Argentina. This comparison is interesting because both countries are emerging economies with a similar free market orientation and the trading hours in both countries virtually coincide with the trading hours in New York. Argentina and Chile differ, however, in two important aspects: During our sample period: (1) The Argentinean market was completely under a fixed-exchange rate system, while Chile maintained a flexible exchange rate regime; and (2) Argentina did not impose any restrictions on foreign investments, while Chile did. We find that the return distributions of the Chilean ADRs are significantly different from the distributions of the returns on the respective underlying Chilean shares. While the mean returns are the same, the return's S.D. are significantly different. In contrast, the hypothesis that the distributions of the returns on the Argentinean ADRs and the returns on their respective underlying shares are the same cannot be rejected. We then use a threshold model to estimate the transaction costs of trading the ADRs and the locally traded shares. We find that the transaction costs that must be added to the returns spread before arbitrage is possible were between 100 and 200 basis points for Chilean ADRs. It was between 66 and 165 basis points for the Argentinean ADRs. The daily return spread reversion caused by arbitrage activities was estimated to be approximately 30% for Chilean ADRs and 40% for Argentinean ADRs. Finally, we cannot reject the hypothesis that low liquidity was a major factor in the cost difference between the two countries.     

Toward A Convergence Theory For Continuous Stochastic Securities Market Models1

This article reviews some recently developed approximation schemes for financial markets with continuous trading. Two methods for approximating continuous-time stochastic securities market models whose exogenously given prices have continuous sample paths are described and compared One method approximates both the paths and the information structure; the other is an approximation in distribution with a Markovian structure. In both cases, the approximating models have a finite state space, discrete time, and possess the same “structural” properties (e.g., “no arbitrage” and “completeness”) as the continuous model. the latter characteristic is an important criterion for judging the merits of the approximations. Taking advantage of the “structure-preserving” characteristic, one can formulate a convergence theory for frictionless markets with continuous trading. the theory provides convergence results for objects such as contingent claim prices, replicating portfolio strategies (hedging policies), optimal consumption policies, and cumulative financial gains (i.e., stochastic integrals), which are constructed along the approximation. the convergence theory enables one to combine the intuitive appeal of discrete models and the analytic tractability of continuous models to provide new insight into the theory of modern financial markets. We survey the current state of such a convergence theory and illustrate the results with some examples of well-known continuous securities market models.     

TRACTABLE ROBUST EXPECTED UTILITY AND RISK MODELS FOR PORTFOLIO OPTIMIZATION

Expected utility models in portfolio optimization are based on the assumption of complete knowledge of the distribution of random returns. In this paper, we relax this assumption to the knowledge of only the mean, covariance, and support information. No additional restrictions on the type of distribution such as normality is made. The investor’s utility is modeled as a piecewise‐linear concave function. We derive exact and approximate optimal trading strategies for a robust (maximin) expected utility model, where the investor maximizes his worst‐case expected utility over a set of ambiguous distributions. The optimal portfolios are identified using a tractable conic programming approach. Extensions of the model to capture asymmetry using partitioned statistics information and box‐type uncertainty in the mean and covariance matrix are provided. Using the optimized certainty equivalent framework, we provide connections of our results with robust or ambiguous convex risk measures, in which the investor minimizes his worst‐case risk under distributional ambiguity. New closed‐form results for the worst‐case optimized certainty equivalent risk measures and optimal portfolios are provided for two‐ and three‐piece utility functions. For more complicated utility functions, computational experiments indicate that such robust approaches can provide good trading strategies in financial markets.     

On the market viability under proportional transaction costs

This paper studies the market viability with proportional transaction costs. Instead of requiring the existence of strictly consistent price systems as in the literature, we show that strictly consistent local martingale systems (SCLMS) can successfully serve as the dual elements such that the market viability can be verified. We introduce two weaker notions of no arbitrage conditions on market models named no unbounded profit with bounded risk (NUPBR) and no local arbitrage with bounded portfolios (NLABPs). In particular, we show that the NUPBR and NLABP conditions in the robust sense are equivalent to the existence of SCLMS for general market models. We also discuss the implications for the utility maximization problem.     

Market Reactions to Increased Reliability of Sustainability Information

This article investigates whether investors consider the reliability of companies’ sustainability information when determining the companies’ market value. Specifically, we examine market reactions (in terms of abnormal returns) to events that increase the reliability of companies’ sustainability information but do not provide markets with additional sustainability information. Controlling for competing effects, we regard companies’ additions to an internationally important sustainability index as such events and consider possible determinants for market reactions. Our results suggest that first, investors take into account the reliability of sustainability information when determining the market value of a company and second, the benefits of increased reliability of sustainability information vary cross-sectionally. More specifically, companies that carry higher risks for investors (e.g., higher systematic investment risk, higher financial leverage, and higher levels of opportunistic management behavior) react more strongly to an increase in the reliability of sustainability information. Finally, we show that the benefits of an increase in the reliability of sustainability information are higher in times of economic uncertainty (e.g., during economic downturns and generally high stock price volatilities).     

What is the value of corporate sponsorship in sports?

This paper investigates the stock market reaction to investor mood swings resulting from the Indian Premier League (IPL) cricket matches. We find that stocks listed on the Bombay Stock Exchange (BSE) that sponsor the IPL cricket are unaffected by the cricket matches. This finding is robust along two lines: (a) the effect is insignificant both statistically and economically which we demonstrate using a simple trading strategy; and (b) results hold across a wide range of portfolios. Our results, both statistical and trading strategy-based, suggest that the portfolios of companies that sponsor cricket in India are efficient. Our findings stand in sharp contrast to the evidence obtained by the broader sports literature suggesting that sports actually impact stock returns, driven principally by psychological factors.