Journal of Empirical Finance (J Empir Finance)

Publications in this journal

• Article: Asymmetric mean-reversion and contrarian profits: ANST-GARCH approach

  Kiseok Nam, Chong Soo Pyun, Augustine C Arize
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  ABSTRACT: This paper investigates the time-series evidence of asymmetric reverting patterns in stock returns that is attributable to “contrarian profitability.” Using asymmetric nonlinear smooth-transition (ANST) GARCH(M) models, we find that, for monthly excess returns of US market indexes over the period of 1926:01–1997:12, negative returns on average reverted more quickly, with a greater reverting magnitude, to positive returns than positive returns revert to negative returns. The results are quite consistent when the models are implemented not only for the different sample periods, such as 1926:01–1987:09 and 1947:01–1997:12, but also for portfolios with different characteristics, such as different firm-size portfolios and Fama–French risk-adjusted factor portfolios. We interpret the asymmetrical reversion as evidence of stock market overreaction.
  Journal of Empirical Finance 02/2013; 9:475-608.
• Article: Understanding Industry Betas

  Lieven Baele and Juan-Miguel Londono
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  ABSTRACT: This paper models and explains the dynamics of market betas for 30 US industry portfolios between 1970 and 2009. We use DCC-MIDAS and kernel regression techniques as alternatives to the standard ex-post measures. We find betas to exhibit substantial persistence, time variation, ranking variability, and heterogeneity in their business cycle exposure. While we find only a limited amount of structural breaks in the betas of individual industries, we do identify a common structural break in March 1998. We propose two practical applications to understand the economic significance of these results. We find the cross-sectional dispersion in industry betas to be countercyclical and negatively related to future market returns. We also find DCC-MIDAS betas to outperform other beta measures in terms of limiting the downside risk and ex-post market exposure of a market-neutral minimum-variance strategy.
  Journal of Empirical Finance 02/2013;
• Article: Market pricing of executive stock options and implied risk preferences

  Antti Pirjetä, Seppo Ikäheimo, Vesa Puttonen
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  ABSTRACT: When managers get to trade in options received as compensation, their trading prices reveal several aspects of subjective option pricing and risk preferences. Two subjective pricing models are fitted to show that executive stock option prices incorporate a subjective discount. It depends positively on implied volatility and negatively on option moneyness. Further, risk preferences are estimated using the semiparametric model of Aït-Sahalia and Lo (2000). The results suggest that relative risk aversion is just above 1 for a certain stock price range. This level of risk aversion is low but reasonable, and it may be explained by the typical manager being wealthy and having low marginal utility. Related to risk aversion, it is found that marginal rate of substitution increases considerably in states with low stock prices.
  Journal of Empirical Finance 01/2010; 17(3):394-412.
• Article: Do the prices of stock index futures in Asia overreact to U.S. market returns?

  Alexander Kwok-Wah Fung, Kin Lam, Ka-Ming Lam
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  ABSTRACT: We extend the overreaction study to interaction of international markets and find that intraday price reversals exist in Asian index futures markets following extreme movement in U.S. market. Profitable opportunities exist after considering transaction cost. We show that the reversal cannot be explained by rational arguments such as risk, liquidity and bid-ask spread. We further observe that a magnitude effect exists. Overreaction is more prominent in the latter period than in the initial period. After calm-down periods, overreaction is greatly reduced. These observations support the explanation that the source of price reversals lies in behavioral biases.
  Journal of Empirical Finance 01/2010; 17(3):428-440.
• Source

  Available from: wwwdocs.fce.unsw.edu.au

  Article: Is there a symmetric nonlinear causal relationship between large and small firms?

  Bill B. Francis, Mbodja Mougoué, Valentyn Panchenko
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  ABSTRACT: This paper uses both linear and nonlinear causality tests to reexamine the causal relationship between the returns on large and small firms. Consistent with previous results, we find that large firms linearly lead small firms. We also find a significant linear causality in the direction from small firms to large firms, particularly in the more recent time period where the impact from small firms to large firms is greater than from large to small. More important, in contrast to the received literature, we find significant nonlinear causality that is bi-directional and of the same duration in either direction. Using the BEKK asymmetric GARCH model we are able to capture most of the detected nonlinear relationship. This indicates that volatility spillovers are largely responsible for the observed nonlinear Granger causality.
  Journal of Empirical Finance 01/2010; 17(1):23-38.
• Source

  Available from: econstor.eu

  Article: GHICA -- Risk analysis with GH distributions and independent components

  Wolfgang Karl Härdle, Ying Chen, Vladimir Spokoiny
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  ABSTRACT: Over recent years, a study on risk management has been prompted by the Basel committee for regular banking supervisory. There are however limitations of some widely-used risk management methods that either calculate risk measures under the Gaussian distributional assumption or involve numerical difficulty. The primary aim of this paper is to present a realistic and fast method, GHICA, which overcomes the limitations in multivariate risk analysis. The idea is to first retrieve independent components (ICs) out of the observed high-dimensional time series and then individually and adaptively fit the resulting ICs in the generalized hyperbolic (GH) distributional framework. For the volatility estimation of each IC, the local exponential smoothing technique is used to achieve the best possible accuracy of estimation. Finally, the fast Fourier transformation technique is used to approximate the density of the portfolio returns. The proposed GHICA method is applicable to covariance estimation as well. It is compared with the dynamic conditional correlation (DCC) method based on the simulated data with d = 50 GH distributed components. We further implement the GHICA method to calculate risk measures given 20-dimensional German DAX portfolios and a dynamic exchange rate portfolio. Several alternative methods are considered as well to compare the accuracy of calculation with the GHICA one.
  Journal of Empirical Finance 01/2010; 17(2):255-269.
• Source

  Available from: szgerzensee.ch

  Article: Heavy tails and currency crises

  P. Hartmann, S. Straetmans, C.G. de Vries
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  ABSTRACT: In affine models of foreign exchange rate returns, the nature of cross sectional interdependence in crisis periods hinges on the tail properties of the fundamentals' distribution. If the fundamentals exhibit thin tails like the normal distribution, the dependence vanishes asymptotically; while the dependence remains in the case of heavy tailed fundamentals as in case of the Student-t distribution. The linearity of the monetary model and heavy tail distributed fundamentals are sufficient conditions for fundamentals-based repeated joint currency crises. An estimator for the extreme exchange rate interdependencies is obtained and applied to Western, Asian and Latin American currency block data.
  Journal of Empirical Finance 01/2010; 17(2):241-254.
• Article: Does group affiliation increase firm value for diversified groups?: New evidence from Indian companies

  Robert Lensink, Remco van der Molen
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  ABSTRACT: This article studies the impact of group affiliation on the performance of firms in India during 1996-2001, with the goal of determining whether the positive valuation effects of group affiliation depend on the degree of group diversification. The results from this study indicate that prior support for that hypothesis actually is fragile and highly influenced by extreme outliers. The authors also provide preliminary evidence for the hypothesis that group affiliation is particularly beneficial for firms that suffer financial constraints.
  Journal of Empirical Finance 01/2010; 17(3):332-344.
• Source

  Available from: SSRN

  Article: Strategic trading in the wrong direction by a large institutional insider

  Erasmo Giambona, Joseph Golec
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  ABSTRACT: Many theoretical papers suggest that large informed traders should make misleading or random trades to disguise their trading. Alternatively, informed traders may trade purely on their estimate of stock value. This paper examines the trading behavior of a large institutional insider that periodically trades in the wrong direction, i.e., makes occasional sell (buy) trades within packages of buy (sell) trades. Using a hand-collected data set, we find that three quarters of the trade packages include wrong-direction trades. Wrong trades appear to be used mostly to disguise right-direction trades. We find that the wrong-trade stocks are larger and have less noisy returns, hence, they lack natural disguise. Wrong trades are relatively small, used to accentuate return volatility, distributed evenly during a package of trades, and are not consistently profitable.
  Journal of Empirical Finance 01/2010; 17(1):1-22.
• Source

  Available from: nus.edu.sg

  Article: When does the dividend-price ratio predict stock returns?

  Cheolbeom Park
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  ABSTRACT: If the dividend-price ratio becomes I(1) while stock returns are I(0), the unbalanced predictive regression makes the predictability test more likely to indicate that the dividend-price ratio has no predictive power. This might explain why the dividend-price ratio evidences strong predictive power during one period, while it exhibits weak or no predictive power at other times. Using international data, this paper demonstrates that the dividend-price ratio generally has predictive power for stock returns when both are I(0). However, this paper also shows that the dividend-price ratio loses its predictive power when it becomes I(1). The results are shown to be robust across countries.
  Journal of Empirical Finance 01/2010; 17(1):81-101.
• Article: Predicting issuer credit ratings using a semiparametric method

  Ruey-Ching Hwang, Huimin Chung, C.K. Chu
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  ABSTRACT: This paper proposes a prediction method based on an ordered semiparametric probit model for credit risk forecast. The proposed prediction model is constructed by replacing the linear regression function in the usual ordered probit model with a semiparametric function, thus it allows for more flexible choice of regression function. The unknown parameters in the proposed prediction model are estimated by maximizing a local (weighted) log-likelihood function, and the resulting estimators are analyzed through their asymptotic biases and variances. A real data example for predicting issuer credit ratings is used to illustrate the proposed prediction method. The empirical result confirms that the new model compares favorably with the usual ordered probit model.
  Journal of Empirical Finance 01/2010; 17(1):120-137.
• Article: The effects of financial distress and capital structure on the work effort of outside directors

  Xiangkang Yin, Hsin-I Chou, Hui Li
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  ABSTRACT: This paper investigates the conflict of interests between shareholders and debtholders by examining the work effort of outside directors when a company experiences financial distress or has a high financial leverage. We find that at both company level and individual director level: (i) outside directors of a firm with higher financial distress exert less work effort in controlling for financial leverage; (ii) outside directors of a firm with a higher financial leverage work harder controlling for financial distress.
  Journal of Empirical Finance 01/2010; 17(3):300-312.
• Source

  Available from: SSRN

  Article: Local bias in venture capital investments

  Douglas J. Cumming, Na Dai
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  ABSTRACT: This paper examines local bias in the context of venture capital (VC) investments. Based on a sample of U.S. VC investments between 1980 and June 2009, we find more reputable VCs (older, larger, more experienced, and with stronger IPO track record) and VCs with broader networks exhibit less local bias. Staging and specialization in technology industries increase VCs' local bias. We also find that the VC exhibits stronger local bias when it acts as the lead VC and when it is investing alone. Finally, we show that distance matters for the eventual performance of VC investments.
  Journal of Empirical Finance 01/2010; 17(3):362-380.
• Source

  Available from: SSRN

  Article: Frequency of observation and the estimation of integrated volatility in deep and liquid financial markets

  Alain P. Chaboud, Benjamin Chiquoine, Erik Hjalmarsson, Mico Loretan
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  ABSTRACT: Using two newly available ultrahigh-frequency datasets, we investigate empirically how frequently one can sample certain foreign exchange and U.S. Treasury security returns without contaminating estimates of their integrated volatility with market microstructure noise. Using the standard realized volatility estimator, we find that one can sample dollar/euro returns as frequently as once every 15 to 20Â s without contaminating estimates of integrated volatility; 10-year Treasury note returns may be sampled as frequently as once every 2 to 3Â min on days without U.S. macroeconomic announcements, and as frequently as once every 40Â s on announcement days. Using a simple realized kernel estimator, this sampling frequency can be increased to once every 2 to 5Â s for dollar/euro returns and to about once every 30 to 40Â s for T-note returns. These sampling frequencies, especially in the case of dollar/euro returns, are much higher than those that are generally recommended in the empirical literature on realized volatility in equity markets. The higher sampling frequencies for dollar/euro and T-note returns likely reflect the superior depth and liquidity of these markets.
  Journal of Empirical Finance 01/2010; 17(2):212-240.