September 11 attacks matter, and why not? Given that globalization has integrated financial markets, the magnitudes of the effect of the September 11 attacks on global markets are expected to be pervasive. We used data from 53 equity markets to investigate the short term impact of the September 11 attacks on markets' returns and volatility. Our empirical findings indicate that the impact of the attacks resulted in significant increases in volatility across regions and over the study period. However, stock returns experienced significant negative returns in the short-run but recovered quickly afterwards. Nevertheless, we find that the impact of the attacks on financial markets varied across regions. The implication here is that the less integrated regions (e.g., Middle East and North Africa) are with the international economy, the less exposed they are to shocks.
This paper explores empirical relationships that involves the five quantity theories variables: rates of change in money supply, velocity, real output, inflation and also short-term nominal interest rate. Unlike, earlier studies that employ, primarily, regression methods to identify statistical relationships, this study uses the two-side exponentially weighted moving average methodology. This method smooths the original data to various degrees depending on the values of a given weight parameter to exclude as much noise as possible and, thus identifies probable trends. Using intermediate-terms and long-term data sets, some much analyzed quantity theoretic relationships are reconfirmed, some new ones are proposed and finally, some less known, are reemphasized.
It is documented in the literature that U.S. and many international stock returns series are sensitive to U.S. monetary policy. Using monthly data, this empirical study examines the short-term sensitivity of six international stock indices (the Standard & Poor 500 [S&P] Stock Index, the Morgan Stanley Capital International [MSCI] European Stock Index, the MSCI Pacific Stock Index, and three MSCI country stock indices: Germany, Japan, and the United Kingdom) to two major groups of U.S. monetary policy indicators. These two groups, which have been suggested by recent research to influence stock returns, are based on the U.S. discount rate and the federal funds rate. The first group focuses on two binary variables designed to indicate the stance in monetary policy. The second group of monetary indicators involves the federal funds rate and includes the average federal funds rate, the change in the federal funds rate, and the spread of the federal funds rate to 10-year Treasury note yield. Dividing the sample period (1970–2001) into three monetary operating regimes, we find that not all policy indicators influence international stock returns during all U.S. monetary operating periods or regimes. Our results imply that the operating procedure and/or target vehicle used by the Federal Reserve Board (Fed) influences the efficacy of the policy indicator. We suggest caution in using any monetary policy variable to explain and possibly forecast U.S. and international stock returns in all monetary conditions.
We examine the stability of correlations and the benefits of international portfolio diversification through investment in Argentina, Brazil, Chile and Mexico, the four largest Latin American markets, from the point of view of a U.S. investor. Three 44-month periods are examined characterized by closed markets (February 1984–September 1987, Period I), opening initiatives (November 1987–June 1991, Period II), and open markets with large portfolio inflows (July 1991–February 1995, Period III). The 1987 market crash is used as a break point because it was the only event before 1995 to have affected many emerging markets simultaneously. Our findings indicate that correlations are rising in time and that there are no significant gains to a domestically well diversified U.S. investor from holding a well diversified portfolio of Latin stocks in the most recent sample periods. Investment in Latin America probably should be made through a careful selection of countries and securities instead of the purchasing of a broad index of Latin American stocks.
This paper examines several seasonal regularities in stock returns before and after the international crash of October 1987. The analysis investigates the day of the week, pre- and post-holiday, turn of the year, turn of the month, and month of the year effects in Pacific Rim and U.S. equity markets. The incidence of return regularities decreases significantly in the period following the crash. We posit that an alteration of the returns generating process in these markets is the most likely cause of the change in the trading patterns.
We examine the relationship between the Irish, German, UK and US equity markets. Our main finding is that the Irish equity market depends heavily on trading activity in the other markets but not vice versa. Significant return and volatility spillover effects occur in the direction of, but not from the Irish market. We also find that dual listing in the form of ADRs has an important role to play in these spillover effects. Our findings obtain throughout the sample, but are strongest for the period after the ERM crises and before the introduction of the euro.
This article examines the cointegration level, changes in the existence and directions of causality of the foreign exchange (FX) rates in the Asian and emerging markets during the 1990s financial crises. Engle and Granger's simple bivariate and Johansen's multivariate cointegrations are applied to the FX rates for the 1994 Mexican, 1997 Asian, 1998 Russian, and 1999 Brazilian crises. In addition, the article conducts the Granger causality test and impulse response analysis to examine the causality pattern in all the FX rates. The analysis shows most of the pre-Mexican causality disappears and significant numbers of new causality emerge in the 1994 Mexican crisis while the 1997 Asian crisis generates significant spillover effects into the later part of the 1998 Russian and 1999 Brazilian crises.
The capital asset pricing model (CAPM) is tested using data of all available stocks in the Caracas Stock Exchange (CSE) from 1992 to 1998. We use a multiple regression model to test several hypotheses that lead to the validation of the CAPM. We find significant evidence to conclude that the CAPM should not be used to predict stock returns in the CSE. However, we find evidence that the model is linear and significant evidence on the existence of other factors different from b that are important to predict returns. These results are consistent with previous studies in developed markets. Also, a practitioner approach to the CAPM is presented.
Foreign exchange (FX) pricing processes are nonstationary: Their frequency characteristics are time dependent. Most do not conform to Geometric Brownian Motion (GBM), because they exhibit a scaling law with Hurst exponents between zero and 0.5 and fractal dimensions between 1.5 and 2. Wavelet multiresolution analysis (MRA), with Haar wavelets, is used to analyze these time and scale dependencies (self-similarity) of intraday Asian currency spot exchange rates. We use the ask and bid quotes of the currencies of eight Asian countries (Japan, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Taiwan, and Thailand) and, for comparison, of Germany for the crisis period May 1, 1998–August 31, 1997, provided by Telerate (U.S. dollar is the numéraire). Their time-scale-dependent spectra, which are localized in time, are observed in wavelet scalograms. The FX increments are characterized by the irregularity of their singularities. Their degrees of irregularity are measured by homogeneous Hurst exponents. These critical exponents are used to identify the global fractal dimension, relative stability, and long-term dependence, or long-term memory, of each Asian FX series. The invariance of each identified Hurst exponent is tested by comparing it at varying time and scale (frequency) resolutions. It appears that almost all investigated FX markets show antipersistent pricing behavior. The anchor currencies of the D-mark and Japanese Yen (JPY) are ultraefficient in the sense of being most antipersistent or “fast mean-reversing.” This is a surprising result because most financial analyst either assume neutral or persistent behavior in the financial markets, based on earlier research by Granger in the 1960s. This is a pedagogical paper explaining the most rational methodology for the identification of long-term memory in financial time series.
The early years of the 21st century have been a difficult and challenging time for the managed funds industry. The neglected history of managed funds reveals prior episodes of sustained growth, questionable practices, upheaval and inevitably, regulation. The first fully diversified managed fund appeared in Britain in 1868, and the industry remained largely a British preserve until the rise of the investment company and the mutual fund in the United States during the 1920s. This paper documents the features of the early trusts, discusses the rise of the industry and the challenges it survived in the early years, and draws parallels with facets of the finance industry of today.
In this paper, Korean financial markets are investigated in two ways, time series and cross-sectional data analysis for the study of market microstructure of price discovery and pricing bias associated with stock index, futures and options. First, the lead–lag relationships among the KOSPI 200 stock index, the index futures, and the index options markets are explored based on minute-to-minute price data. The results explain that the KOSPI 200 stock index futures lead the index, as reported in the previous studies, and the at-the-money options lead the stock index. A symmetric lead–lag relationship is found between futures and options, except for out-of-the-money options. This paper also investigates the consistency of lead–lag relationships among the results from the different time intervals of price data. Second, the causes of the pricing bias in the index options market are analyzed. The pricing bias between the observed KOSPI stock index and implied stock index from at-the-money options are affected by market inefficiency, moneyness, and implied volatility. Time to maturity and trading volumes of call options also affect the pricing bias, while those of put options are not significant.
This paper analyses underpricing and short-run underperformance of the Chinese A-share IPOs from Mar, 2001 to 2005 when the new approval system was adopted. We find that the average market adjusted first-day return is 93.49% in this period, a more reasonable level when compared with those in previous periods in China. The findings show that underpricing in this period is significantly affected by offering mechanisms and inequality of demand and supply of IPOs. The effect of shareholder's structure is tested in the model and state-owned share's weight is shown to increase the degree of underpricing. Meanwhile, this paper analyses IPOs' short-run underpricing on their 10th, 20th, 30th trading days. It is found that most IPOs' underpricing shrinks and the degree of shrinking degrees is different across the groups categorized by offering mechanisms. Further, the underperformance of IPOs which are underwritten by more prestigious underwriters shows a comparatively lower range and is less severe in the short-run.
Using data from fourteen equity markets, this study empirically examines the impact of the 2008 short-selling bans on market quality. Evidence indicates that restrictions on short-selling lead to artificially inflated prices, indicated by positive abnormal returns. This is consistent with Miller's (1977) overvaluation theory, and suggests that the bans are effective in temporarily stabilizing prices in struggling financial stocks. Market quality is reduced during the restrictions, as evidenced by wider bid-ask spreads, increased price volatility and reduced trading activity. While these effects are strong, regulators may view the deterioration in market quality as a necessary by-product of the bans to maintain prices and protect investors.
Academic research has highlighted the inherent flaws within the RiskMetrics model and demonstrated the superiority of the GARCH approach in-sample. However, these results do not necessarily extend to forecasting performance. This paper seeks answer to the question of whether RiskMetrics volatility forecasts are adequate in comparison to those obtained from GARCH models. To answer the question stock index data is taken from 31 international markets and subjected to two exercises, a straightforward volatility forecasting exercise and a Value-at-Risk exceptions forecasting competition. Our results provide some simple answers to the above question. When forecasting volatility of the G7 stock markets the APARCH model, in particular, provides superior forecasts that are significantly different from the RiskMetrics models in over half the cases. This result also extends to the European markets with the APARCH model typically preferred. For the Asian markets the RiskMetrics model performs well, and is only significantly dominated by the GARCH models for one market, although there is evidence that the APARCH model provides a better forecast for the larger Asian markets. Regarding the Value-at-Risk exercise, when forecasting the 1% VaR the RiskMetrics model does a poor job and is typically the worst performing model, again the APARCH model does well. However, forecasting the 5% VaR then the RiskMetrics model does provide an adequate performance. In short, the RiskMetrics model only performs well in forecasting the volatility of small emerging markets and for broader VaR measures.
The addition of antitakeover provisions to corporate charters restricts the options of shareholders in the disposition of the firm's ownership. At the state level, previous research has produced mixed findings regarding stockholder wealth effects. The purpose of this study is to investigate the wealth effects of Pennsylvania Act 36 on banking firms. This study is different from previous work in this field in that it is postulated that the passage of the Pennsylvania legislation affected not only the wealth of shareholders whose banking firms are headquartered in the state, but also affected the wealth of shareholders of banking corporations headquartered in states with whom Pennsylvania has a reciprocal banking arrangement. The results indicate that Pennsylvania banking firms experience significantly negative abnormal returns as a consequence of the legislation. For banking firms in states with reciprocal arrangements, the results were also significantly negative, reflecting the existence of a contamination effect.
This paper empirically contributes to the existing trading rule literature by providing a methodology for the calculation of Point and Figure charts using ultra-high-frequency data and tests trading rules using eight objective, pre-defined trading rules on S&P 500 futures contracts traded between 1990 and 1998. To assess the robustness of reported profits, a bootstrapping adjustment was conducted to determine the forecasting power of the PF trading rules. The results producing mixed statistical significance with some rules proving significant while many others were not.
This paper investigates the price discovery function in three S&P 500 index markets: the spot index, index futures, and S&P Depositary Receipts markets. Four hypotheses regarding market structure and security design are proposed to differentiate the price discovery function performed by the three index instruments. Using matched synchronous intraday trading data, Johansen's maximum likelihood estimator is employed to disclose the cointegration relationships among the three markets. Results indicate that the three price series are a cointegrated system with one long-run stochastic trend. Estimated coefficients of the vector error correction model suggest that price adjustment takes place in the spot index market and for SPDRs, but not in the futures market. When the common stochastic trend is decomposed, it is found that the futures market serves the dominant price discovery function. The leverage hypothesis and the uptick rule hypothesis explain its superior price discovery function.
The usual test of cumulative abnormal returns for multiple-day periods assumes that abnormal returns are serially independent. The assumption imparts an upward bias to test statistics even when raw returns are serially independent. In simulation, the usual test rejects true null hypotheses too frequently in the longest cumulation periods and in shorter periods when events are clustered in calendar time. Excessively frequent rejection implies that the nominal significance level understates the actual significance level. A corrected statistic, derived without the serial independence assumption, rejects true null hypotheses with a frequency less than or equal to the nominal significance level. However, the corrected test is not very powerful in the longest event periods.
This empirical study examines whether the optimistic forecasts of analysts explain the long-run abnormal return following initial public offerings (IPOs). Consistent with prior research, this paper concludes that the analysis of earning forecasts for firms going public has an upward bias. While the usually calculated buy-and-hold abnormal return is not significantly negative on average, a proper control for risk confirms the long-run underperformance hypothesis for the 1-year period following IPOs. The risk-adjusted return is positively correlated to the surprise effect and earning forecast revisions, and appears to be the response to new information about the true earnings perspectives.
This paper uses a sequential bargaining model to analyze bankruptcy reorganizations. It is shown that deviations from absolute priority rules are rational responses by bondholders and the courts to management bargaining power engendered by the formal reorganization process. It is proved that even solvent firms may find it optimal to initiate bankruptcy proceedings. The factors that determine the extent of the deviations are also analyzed.
Ederington (1979) proposed an effectiveness measure for futures hedging. Since then, this measure has been widely adopted in the literature to compare different hedge ratios against the OLS (ordinary least squares) hedge ratio. This note attempts to demonstrate this application is inappropriate. Ederington hedging effectiveness is only useful for measuring the risk reduction effect of the OLS hedge ratio. It does not apply to other hedge ratios and therefore should not serve as a criterion to compare different hedge strategies against the OLS strategy. A strict application of this measure almost always leads to an incorrect conclusion stating that the OLS hedge ratio is the best hedging strategy.
This is a condensed and edited version of two roundtable discussions titled “Post-Modern Finance,” that took place at the EFA, and FMA 1997 meetings, respectively. Both the editing and the condensation were made for the sake of contextual clarity and continuity. Utmost effort was made to preserve the content of what was said during these two events.Data are not information. Information is not knowledge. Knowledge is not truth. Truth is not reality.
In this study, we examine financial reporting lags, the incidence of late filing, and the relationship between reporting lags, firm performance and the degree of capital market scrutiny. We use a large sample of firms spanning 22 countries over a eleven-year period. A focal point of our analysis is whether the incidence of late filing, and the relations between reporting days and other variables, differ systematically between common and code law countries. Relative to U.S. firms, we report that the time taken and allowed for filing is usually longer in other countries and that the statutory requirement is more frequently violated. Timely filing is found to be less frequent in code law countries. Poor firm performance and longer reporting lags are more strongly linked in common law countries. We also find that whereas greater capital market scrutiny and more timely filing are related, there is less support for a relationship between the level of debt financing and timely filing in code law countries.
This paper provides new evidence on how the relationship in time between stock returns and accounting earnings affects the observed Finnish returns-earnings relation in two subperiods, the boom in 1988–1990 and the recession in 1991–1993. Similar to the earlier U.S. results, we find that stock returns lead accounting earnings rather than vice versa. When taking into account this lead-lag structure between stock returns and accounting earnings, we find that the estimated returns-earnings relation is significantly weaker in the recession period than in the boom period. After controlling for the different valuation impact of accounting losses and profits, the explanatory power of accounting earnings on stock prices is similar between the two periods. These findings are consistent with the hypothesis that investors perceive losses as temporary, being not reflected in future cash flows.
This paper focuses on the disclosure of accounting information in the financial statements of UK firms. The primary objective of the study is to analyse the financial characteristics of firms that provide extensive disclosures, and assess the financial impact of their motives, such as for example the need to raise equity finance. The study examines the financial attributes of firms that disclose information about key accounting issues including risk exposure, changes in accounting policies, use of international financial reporting standards and hedging practices. Firms are inclined to disclose accounting information in order to assure the market participants that their accounting policies are consistent with the accounting regulation and meet the information needs of their stakeholders. The study shows that in order to raise finance in the capital and debt markets, firms tend to provide extensive accounting disclosures. Firms that provide informative accounting disclosures appear to display higher size, growth and leverage measures. The findings also show that the disclosure of sensitive accounting information has not adversely affected firms' profitability. In fact, firms that provide detailed accounting disclosures tend to exhibit higher profitability. The implementation of international financial reporting standards enhances the quality and the comparability of financial statements; hence it promotes consistency and reliability in financial reporting and facilitates companies in raising capital internationally.