The Role of Payout Ratio in the Relationship Between Stock Returns and Dividend Yield

Abstract:   This paper examines the relationship between returns and dividend yield in the UK stock market, and introduces earnings‐related data to the asset pricing model in the form of payout ratio. The latter has a considerable effect upon the inferences which would otherwise be drawn from a study of the dividend yield‐returns relationship in the absence of such earnings information. Payout ratio conveys additional signalling information and is an important adjunct to dividend yield in explaining returns.     

Can position limits restrain ‘rogue’ trading?

This paper studies the imposition of position limits on commodity futures from the perspective of curbing excessive speculation and thus manipulation. We present a simple general equilibrium model in a static rational expectations framework and agent heterogeneity to illustrate that excessive speculation serves to enrich other agents at the expense of the speculator. Position limits, on the contrary, are not only superfluous, but also counter-productive, as they exacerbate market power and lead to a deterioration in efficiency. Position limits not only reduce social welfare but also cannot restrain market manipulation.     

Structural changes,bid–ask spread composition and tick size in inter-bank futures trading

This paper studies a period containing three major structural changes, which constitute a natural experiment in the NYSE.Euronext-LIFFE European short-term interest rate (STIR) futures market. These changes comprise (1) a 50% reduction in minimum tick size for the most heavily traded contract, (2) European Monetary Union and (3) the transition from open outcry to electronic trading. We analyse a number of microstructure features of the four largest European interest rate futures contracts throughout this period. In particular, we focus on bid–ask spread composition using a recent model which is appropriate for this market structure. Our analysis identifies the tick size as the largest bid–ask spread component in almost every instance, which suggests that participants in this STIR future market might benefit from a reduction in minimum tick sizes.     

Foreign exchange market reactions to sovereign credit news

We analyse the reaction of the foreign exchange spot market to sovereign credit signals by Fitch, Moody’s and S&P during 1994–2010. We find that positive and negative credit news affects both the own-country exchange rate and other countries’ exchange rates. We provide evidence on unequal responses to the three agencies’ signals. Fitch signals induce the most timely market responses, and the market also reacts strongly to S&P negative outlook signals. Credit outlook and watch actions and multiple notch rating changes have more impact than one-notch rating changes. Considerable differences in the market reactions to sovereign credit events are highlighted in emerging versus developed economies, and in various geographical regions.     

The intraday determination of liquidity in the NYSE LIFFE equity option markets

We exploit an extensive high-frequency data set of all individual equity options trading at New York Stock Exchange London International Financial Futures and Options Exchange (Amsterdam, London and Paris) in order to study the determination of liquidity during the trading day. In particular, we focus on two main aspects of option liquidity: (i) the intraday behaviour of equity option liquidity and its determinants and (ii) the influence of macroeconomic events and commonality on intraday equity option liquidity. Inventory management models cannot explain the intraday variation in option spreads and depths. Instead, we show that the option liquidity measures are strongly correlated with option volatility. Increases in volatility are associated with decreases in liquidity, a finding that is in line with information asymmetry models and the derivatives hedging theory. However, the relationship between spreads and volume varies across the three markets. Option liquidity reacts strongly to macroeconomic news announcements, especially US events. The average systematic liquidity component is 12% for Amsterdam, 14% for London and 16% for Paris.     

Are single stock futures used as an alternative during a short‐selling ban?

The response of the single stock futures (SSF) market to a short‐selling ban is investigated. The hypothesis is that traders use SSF as a substitute instrument for short‐selling. A significant increase in SSF trading activity is documented, accompanied by narrower spreads. SSF market volatility did not react during the ban, which suggests that the increased trading activity did not weaken SSF market quality. The quality of the underlying market during the ban period is also assessed, with the results suggesting that changes in SSF market activity had neither positive nor negative effects on the stocks’ liquidity, volatility, and volume.     

Open interest,cross listing,and information shocks

This study examines the characteristics and behavior of the demand for hedging, proxied by open interest, for the cross‐listed Euribor futures contract traded at Euronext‐LIFFE and Eurex. The study is unique in its investigation of the simultaneous determinants of open interest in a cross‐listed setting. It also assesses the impact of shocks on traders' demand for hedging and shows how the 9/11 terrorist attacks and the credit crunch influence the level of dependency between Euronext‐LIFFE and Eurex. Differences of opinion, ECB Governing Council meetings, days of the week, contract maturity, illiquidity, and volatility are investigated as potential determinants of open interest. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:755–778, 2011     

Dividend Stability, Dividend Yield and Stock Returns: UK Evidence

This paper establishes an empirical role for two measures of dividend stability (as a proxy for dividend policy) in explaining UK stock returns. There is little systematic empirical evidence concerning the relation between dividend stability, dividend yield and stock returns despite the fact that a variety of theoretical models point to dividend policy as an important stock attribute. Here we construct two definitions of dividend stability, one of which involves dividend cuts, and use a sample of all listed UK firms from 1975 to 1997 to explore the relationship between stock returns and a variety of characteristics, including dividend stability. We find an inverse correlation between the stability of past dividend policy and systematic risk. Both stability measures have explanatory power over returns, but this is concentrated in January.