Price discovery and volatility spillovers in the European Union emissions trading scheme: A high-frequency analysis

This paper models the relationship of European Union Allowance spot- and futures-prices within the second commitment period of the European Union emissions trading scheme. Based on high-frequency data, we analyze the transmission of information in first and second conditional moments. To reveal long-run price discovery, we compute common factor weights of Schwarz and Szakmary (1994) and information shares of Hasbrouck (1995) based on estimated coefficients of a VECM. To analyze the short-run dynamics, we perform Granger-causality tests. We identify the futures market to be the leader of the long-run price discovery process, whereas the informational role of the futures market increases over time. In addition, we employ a version of the UECCC-GARCH model as introduced by Conrad and Karanasos (2010) to analyze the volatility transmission structure. The volatility analysis indicates a close relationship between the volatility dynamics of both markets, whereas in particular we observe spillovers from the futures to the spot market. As a whole the investigation reveals that the futures market incorporates information first and then transfers the information to the spot market.     

Intraday jumps and US macroeconomic news announcements

This paper applies recent non-parametric intraday jump detection procedures to investigate the presence and importance of intraday jumps in US futures markets. More importantly, the paper investigates the extent to which statistically significant intraday jumps are associated with US macroeconomic news announcements. Jumps are prevalent, large and contribute heavily to total daily price variation. Approximately one third of jumps correspond to US macroeconomic news announcements, with pure announcement effects causing large increases in the absolute sizes of jumps and the informational surprise of the announcement explaining large proportions of the jumps. The statistical and economic significance of news-related jumps is confirmed by results that show higher volatility persistence, predictability of lower frequency returns, larger effects on microstructure variables, jump clustering and co-jumps from these jumps versus non-news-related jumps, although there are some interesting variations across asset classes.     

Simultaneous monetary policy announcements and international stock markets response: An intraday analysis

This paper investigates the return and volatility response of major European and US equity indices to monetary policy surprises by utilizing extensive intraday data on 5-min price quotes along with a comprehensive dataset on monetary policy decisions and macroeconomic news announcements. The results indicate that the monetary policy decisions generally exert immediate and significant influence on stock index returns and volatilities in both European and the US markets. The findings also show that press conferences held by the European Central Bank (ECB) that follow monetary policy decisions on the same day have a clear impact on European index return volatilities. This implies that they convey additional important information to market participants. Overall, our analysis suggests that the use of high frequency data is critical to separate the effect of monetary policy actions from those of macroeconomic news announcements on stock index returns and volatilities.     

Macroeconomic news, announcements, and stock market jump intensity dynamics

This paper examines the effect of macroeconomic releases on stock market volatility through a Poisson-Gaussian-GARCH process with time-varying jump intensity, which is allowed to respond to such information. The day of the announcement, per se, is found to have little impact on jump intensities. Employment releases are an exception. However, when macroeconomic surprises are considered, inflation shocks show persistent effects while monetary policy and employment shocks reveal only short-lived effects. Also, the jump intensity responds asymmetrically to macroeconomic shocks. Evidence on macroeconomic variables relevance in explaining jump dynamics and improving volatility forecasts on event days is provided.     

Impact of US and UK macroeconomic news announcements on the return distribution implied by FTSE-100 index options

This study investigates the effect of scheduled US and UK macroeconomic news announcements on the return distribution implied by FTSE-100 option prices. The results provide new evidence for the whole implied return distribution being systematically affected by certain macroeconomic news announcements. After controlling the unexpected content of the news announcement for quality (good vs. bad news) it is found that good (bad) news causes implied volatility to decrease (increase), option-implied return distribution becomes less (more) left-skewed and kurtosis increases (decreases). The results are consistent with the behavioral model created by Barberis et al. [Barberis, N., Shleifer, A., and Vishny, R. (1998). A model of investor sentiment. Journal of Financial Economics, 49, 307-343.], in which good (bad) news is expected to be followed by good (bad) news.     

Stock salience and the asymmetric market effect of consumer sentiment news

We document asymmetric announcement effects of consumer sentiment news on United States stock and stock futures markets. While a negative market effect occurs upon the release of bad sentiment news, there is no market reaction for the counterpart good news. This supports the “negativity effect” hypothesis. Notably, this effect seems most likely to occur in salient stocks, which is consistent with the availability heuristic.     

Good news, bad news and rating announcements: An empirical investigation

In this paper we employ a new approach to test the contribution of information in rating announcements. This is the first study to test and corroborate how the CDS market responds to rating actions after controlling for the presence of concurrent public and private information. We show that since the clustering of rating announcements characterizes economically significant developments, the common practice of using “uncontaminated” samples underestimates market response. As in previous studies, we find that the market response to bad news is stronger than to good news. Nevertheless, bad news and negative rating announcements tend to cluster. Therefore, the residual contribution of negative rating announcements is small and in some cases insignificant. Positive rating announcements are less frequent and less clustered, though their residual contribution is still significant.     

Cashflow news,the value premium and an asset pricing view on European stock market integration

The decomposition of national CAPM market betas of European countries’ value and growth portfolio returns into cashflow and discount rate news driven components reveals that i) high average returns on value portfolios are associated with disproportionately high sensitivity to national cashflow news which corroborates recent evidence for the U.S. and ii) two-beta variants of national CAPMs capture the cross-sectional dispersion in European stock returns. The latter finding is suggestive of relatively well integrated stock markets among the core European countries and reflects basic asset pricing theory. One (national) discount factor should price any (international) asset.     

Sell on the news: Differences of opinion,short-sales constraints,and returns around earnings announcements

Miller [1977. Risk, uncertainty, and divergence of opinion. Journal of Finance 32, 1151–1168] hypothesizes that prices of stocks subject to high differences of opinion and short-sales constraints are biased upward. We expect earnings announcements to reduce differences of opinion among investors, and consequently, these announcements should reduce overvaluation. Using five distinct proxies for differences of opinion, we find that high differences of opinion stocks earn significantly lower returns around earnings announcements than low differences of opinion stocks. In addition, the returns on high differences of opinion stocks are more negative within the subsample of stocks that are most difficult for investors to sell short. These results are robust when we control for the size effect and the market-to-book effect and when we examine alternative explanations such as financial leverage, earnings announcement premium, post-earnings announcement drift, return momentum, and potential biases in analysts’ forecasts. Also consistent with Miller's theory, we find that stocks subject to high differences of opinion and more binding short-sales constraints have a price run-up just prior to earnings announcements that is followed by an even larger decline after the announcements.     

Reprint of: Stock salience and the asymmetric market effect of consumer sentiment news

We document asymmetric announcement effects of consumer sentiment news on United States stock and stock futures markets. While a negative market effect occurs upon the release of bad sentiment news, there is no market reaction for the counterpart good news. This supports the “negativity effect” hypothesis. Notably, this effect seems most likely to occur in salient stocks, which is consistent with the availability heuristic.     

Currency jumps,cojumps and the role of macro news

This study investigates the impact of macro news on currency jumps and cojumps. The analysis uses intra-day data, sampled at 5-min frequency, for four currencies for the period 2005–2010. Results indicate that currency jumps are a good proxy for news arrival. We find 9–15% of currency jumps can be directly linked to U.S. announcements. Notably, news can explain 22–56% of the 5-min jump returns, and there is evidence that better-than-expected news about the U.S. economy has a negative impact on currency jumps. Cojump statistics suggest close dependencies among European currencies, especially between the euro and the Swiss franc. We also provide evidence on the uncertainty resolution to news.     

Does sovereign debt ratings news spill over to international stock markets?

The evidence here indicates that sovereign debt rating and credit outlook changes of one country have an asymmetric and economically significant effect on the stock market returns of other countries over 1989–2003. There is a negative reaction of 51 basis points (two-day return spread vis-á-vis the US) to a credit ratings downgrade of one notch in a common information spillover around the world. Upgrades, however, have no significant impact on return spreads of countries abroad. Closeness (e.g., geographic proximity) and emerging market status amplify the effect of a spillover. Downgrade spillover effects at the industry level are more pronounced in traded goods and small industries.     

The wandering weekday effect in major stock markets

This paper reports a wandering weekday effect: the pattern of day seasonality in stock market returns is not fixed, as assumed in the Monday or weekend effects, but changes over time. Analysing daily closing prices in eleven major stock markets during 1993–2007, our results show that the wandering weekday is not conditional on average returns in the previous week (the “twist” in the Monday effect). Nor does it diminish through the period of analysis. The results have important implications for market efficiency, and help to reconcile mixed findings in previous studies, including the reported disappearance of the weekday effect in recent years.     

Volatility spillovers across NFTs news attention and financial markets

The aim of this study is to investigate the volatility spillover connectedness between NFTs attention and financial markets. This paper firstly proposes a new direct proxy for the public’s attention in the NFT market: the non-fungible tokens attention index (NFTsAI), based on 590m news stories from the LexisNexis News & Business database and applies the historical decomposition to assess the historical variations of the NFTsAI. Then the empirical analysis is performed via a TVP-VAR volatility spillover connectedness model. The empirical results show that NFTsAI indicates NFT markets are dominated by cryptocurrency, DeFi, equity, bond, commodity, F.X. and gold markets. And NFT markets are volatility spillover receivers. In addition, NFT assets could impede financial contagion and have significant diversification benefits. Employing a panel pooled OLS regression model as a supplementary analysis and a GARCH-MIDAS model as a robustness test. This study reveals that NFTsAI has sufficient power to explain the return of NFT assets from a fixed effect perspective, and NFTsAI contains useful forecasting information for both short and long-term volatility of NFT markets, separately. The new NFTsAI and the empirical findings contain useful insights for risk-averse investors, portfolio managers, institutional investors, academics and financial policy regulators.     

Macroeconomic announcements, volatility, and interrelationships: An examination of the UK interest rate and equity markets

This study investigates the intraday and daily pricing behavior of UK interest rate and equity index futures contracts. The paper initially examines the response of Short Sterling, Long Gilt, and FTSE100 to the release of scheduled macroeconomic announcements before employing dynamic time series techniques in order to reveal the nature of causal transmission patterns between these variables. In brief, short-term interest rates were found to be highly sensitive to indicators of prevailing economic conditions. However, the release of data important in the formation of inflationary expectations had a relatively subdued impact on long-term rates. Announcement effects appear somewhat ambiguous for the stock market. The analysis also reveals the bid-ask bounce and swift mean reversion in volatility to be important behavioral features of the return-generating process. Whilst the three variables appear to be bound by two cointegrating relationships, the tests for lead/lag relationships produce mixed results.     

The effect of macroeconomic news on beliefs and preferences: Evidence from the options market

We examine the effect of regularly scheduled macroeconomic announcements on the beliefs and preferences of participants in the U.S. Treasury market by comparing the option-implied state-price densities (SPDs) of bond prices shortly before and after the announcements. We find that the announcements reduce the uncertainty implicit in the second moment of the SPD regardless of the content of the news. The changes in the higher-order moments, in contrast, depend on whether the news is good or bad for economic prospects. We explore three alternative explanations for our empirical findings: relative mispricing, changes in beliefs, and changes in preferences. We find that our results are consistent with time-varying risk aversion.     

The effect of a closing call auction on market quality and trading strategies

We study the effects of the introduction of a closing auction (CA) on the microstructure on the continuous trading phase in Borsa Italiana and Paris Bourse. We postulate and compare several empirical predictions based on both standard Kyle-type models and more recent models of limit order book. We find that while the CA has no effect during most of the day, its effect on the last minutes of trading is dramatic. We document a sharp decline in volume, associated with a significant reduction in spread and volatility, and an increase in aggressiveness of liquidity suppliers during the last minutes. We show that the differences in the Reference Price algorithm between Milan and Paris have a significant effect: the CA attracts greater volumes when the Reference Price is equated to the CA price.     

Day-of-the-week effect in the Taiwan foreign exchange market

This study uses stochastic dominance with and without risk-free assets to examine whether trading days can affect patterns of the day-of-the-week effect in the Taiwan foreign exchange market. Our results generally indicate that higher returns appear on the first three days of the week across different trading-day regimes in the Taiwan foreign exchange market, confirming day-of-the-week effect. Allocating part of investors’ assets in risk-free assets is useful in distinguishing returns among weekdays for all currencies.     

Nonparametric,conditional pricing of higher order multivariate contingent claims

This paper describes and applies a nonparametric model for pricing multivariate contingent claims. Multivariate contingent claims are contracts whose payoffs depend on the future prices of more than one underlying variable. The pricing however of these kinds of contracts represents a challenge. All known models are adaptations of earlier ones that have been introduced to price plain vanilla calls and puts. They are imposing strong assumptions on the distributional properties of the underlying variables. In contrast, this study adopts a methodology that relaxes such restrictions. Following [Barone-Adesi, G., Bourgoin, F., Giannopoulos, K., 1998. Don’t Look Back, Risk 11 (August), 100–104; Barone-Adesi, G., Engle, R., Mancini, L., 2004. GARCH Options in Incomplete Markets, mimeo, University of Applied Sciences of Southern Switzerland; Long, X., 2004. Semiparametric Multivariate GARCH Model, mimeo, University of California, Riverside], multivariate pathways for a set of underlying variables are constructed before the option payoffs are computed. This enables the covariances, in addition to the means and variances, to be modelled in a dynamic and nonparametric manner. The model is particular suitable for options whose payoffs depend on variables that are characterised by high nonlinearities and extremes and on higher order multivariate options whose underlying variables are more unlikely to conform to a common theoretical distribution.     

Accurate minimum capital risk requirements: A comparison of several approaches

In this paper we estimate, for several investment horizons, minimum capital risk requirements for short and long positions, using the unconditional distribution of three daily indexes futures returns and a set of short and long memory stochastic volatility and GARCH-type models. We consider the possibility that errors follow a t-Student distribution in order to capture the kurtosis of the returns’ series. The results suggest that accurate modelling of extreme observations obtained for long and short trading investment positions is possible with an autoregressive stochastic volatility model. Moreover, modelling futures returns with a long memory stochastic volatility model produces, in general, excessive volatility persistence, and consequently, leads to large minimum capital risk requirement estimates. Finally, the models’ predictive ability is assessed with the help of out-of-sample conditional tests.