Some Tests of APT Mispricing Using Mimicking Portfolios

Cross-sectional and time-series tests using mimicking portfolios are used to assess the exactness of the APT with(out) a residual market factor. The first factor seems to be sufficient to span the efficient set, whether the model is estimated using (un)conditional variance-covariance matrices that are (un)adjusted for nonsynchronous trading. Although the conditional standard deviations of the mimicking portfolios significantly explain the time-variability of security volatilities, the residuals of the mean equation still exhibit heteroskedasticity. Similar results are obtained for portfolios of CAPM-betaranked securities, and for randomly selected individual securities.     

Incorporating contemporaneous residual relationships: A new approach

A direct (and easy to use) measure for capturing any information contained in the contemporaneous relationships among the residuals of different equations is derived herein from the moment generating function of the joint probability density function of the residuals.     

The impact of the dimensions of social performance on firm risk

This paper examines the impact of the individual dimensions of social performance (SP) on firm risk (total and idiosyncratic) using 16,599 firm-year observations over the period 1991–2007. We find that firm risk for S&P500 members is positively affected by Employee, Diversity, and Corporate Governance concerns. On the other hand, Community (Diversity) strengths negatively (positively) affect their risk. As to non-S&P500 members, firm risk is positively affected by Employee concerns and Diversity strengths. However, firm risk of non-S&P500 members is negatively affected by Environment strengths. The direction of causation between firm risk and SP depends on the dimension examined.     

Political corruption shielding and corporate acquisitions

Corruption includes rent‐seeking behavior by public officials (e.g., lavish in‐kind benefits and monetary kickbacks for contracts/permits/regulatory leniency, improper political contributions/support, etc.) that can negatively affect firm valuations, performances, and strategic choices. Shielding strategies are used to diminish rent‐seeking attractiveness of firms. Acquisitions provide a better channel than cash or leverage for assessing the wealth effects of shielding strategies. We find that the mean 3‐day announcement returns for acquirers for a large sample of U.S. domestic acquisitions between 1990 and 2014 is significantly lower for firms headquartered in relatively higher corruption states. Our results survive an array of robustness tests.     

Determinants of the decreasing term structure of relative yield spreads for taxable and tax-exempt bonds

The empirical finding that the relative yield spread for taxable and tax-exempt bonds decreases across the term structure is usually attributed to tax differentials and/or arbitrage opportunities. Using monthly data, it is found that the decresing term structure of relative yield spreads is determined by the decreasing forward marginal tax rate; increasing default risk premium; increasing tax-timing option premium; and expected rate of inflation     

THE INFORMATION CONTENT OF ORDERS ON THE SAUDI STOCK MARKET

Using order data for the Saudi Stock Market (SSM), we employ a new specification of an existing vector autoregressive (VAR) model to assess the information content of a newly submitted order. As predicted by the asymmetric information models, we find that larger and more aggressive orders are more informative. Private information is more important for infrequently traded stocks. Compared with previous findings, our findings imply the presence of much asymmetric information on the SSM. The correlation between a relative measure of informativeness and the spread provides further support for the previous empirical observation that these two variables measure different things and should not be used interchangeably.     

Trading Activity,Trade Costs and Informed Trading for Acquisition Targets and Acquirers

Abstract

Microstructure effects of tender offer acquisitions on targets and acquirers differentiated by listing venue and payment method are examined. Trading activity increases more for targets than for acquirers upon offer announcement. Investors are more likely to sell targets upon announcement using direct market orders against ask limit orders for cash payment offers. While target liquidity improves as spread costs fall and quoted depths increase, acquirer liquidity falls continuously to successful offer completion. Due to increased trading differences, temporary trade costs fall more for targets than for acquirers. Permanent trade costs decline over the tender offer cycle for both parties, and especially for targets for cash tender offers and for acquirers for shares tender offers. The probability of informed trading declines (remains constant) for targets (acquirers) because increased trading intensity is greater (the same) for uninformed versus informed traders. As expected, abnormal returns and changes in own-firm permanent return volatility are negatively (but weakly) and positively (and strongly) related, respectively, to changes in information asymmetry upon announcement.     

Dynamic betas for Canadian sector portfolios

The dynamic betas for ten Canadian sector portfolios using the Kalman filter approach are estimated herein and are found to be best described by a mix of the random walk (trend) and mean-reverting (cycle) processes. The relative importance of the trend and cycle components of sector betas is related to different sensitivities of the corresponding sectors to business cycles. Dynamic betas significantly increase the explanatory power of the market model, and particularly for the utilities sector. A dynamic hedging strategy using the one-step-ahead beta forecasts as the hedge ratios produces smaller hedging errors for every sector compared with the hedge ratios calculated from the alternative beta specifications.