Owain ap Gwilym

• PhD
• Professor at Bangor University

This paper develops a dynamic structural model of bank behaviour. Banks can vary their financing structure, business model and decide on rating solicitation, in the presence of costly debt, corporation tax, insolvency costs and convex adjustment costs. The model is then simulated to examine the impact of regulation on banks’ behaviour. A bail-in re...

We investigate whether the European regulatory reforms of the credit rating industry have been successful in improving the quality of financial institutions’ credit ratings. A shift to more conservative rating behaviour rather than rating quality improvement is identified, which is attributable to increased regulatory scrutiny. This change leads to...

The market for sovereign ratings has been dominated by two agencies but credible new entrants have emerged. Decreasing market concentration has potentially significant implications for the quality of sovereign ratings. Using a global dataset from S&P, Moody’s, Fitch and DBRS for 2000-2016, we find that S&P and Moody’s ratings are higher (lower) in...

How did announcements about the implementation of the Banking Union (BU) in Europe impact on financial markets? This paper investigates the effect of the overall bank regulatory reform, considering each associated individual announcement, on Credit Default Swaps (CDS), bank stocks and stock futures during 2012–14. Announcements related to the imple...

This paper provides evidence of the impact of the new European bank resolution regime on the sovereign-bank nexus. The implementation of the Bank Recovery and Resolution Directive (BRRD) is considered as anexogenous shock which provides the setting for a natural experiment. This investigation tests the finan-cial markets’ perception of the effectiv...

This paper investigates the impact of the introduction of ESMA credit rating identifiers on the quality of ratings. These identifiers form part of the disclosure requirements placed upon credit rating agencies (CRAs) since 2012 under a new EU regulatory regime and have not featured in any prior empirical literature. Rating informativeness is gauged...

We propose a model in which sovereign credit news from multiple rating agencies interacts with market heterogeneity. The model illustrates that the first messenger discloses new information while additional messengers play an important role of coordinating heterogeneous beliefs. Empirical investigations based on sovereign credit ratings, foreign ex...

This study investigates the existence of common factors driving liquidity across different markets during a crisis period. The evidence suggests that liquidity across different European options and stock futures markets co-moves. This implies the existence of limits to the potential for liquidity risk management via options and stock futures becaus...

This paper assesses contagion and competition as alternative types of stock market spillovers arising from sovereign rating actions. Our research design is based on the premise that the type of spillover effects within and between groups of countries will be influenced by the sovereign rating level, split ratings and the extent of rating convergenc...

This paper investigates the causes of split sovereign ratings across S&P, Moody's, and Fitch for 64 countries from 1997 to 2011. We identify that split sovereign ratings are not symmetric, with S&P tending to be the most conservative agency. We find that opaque sovereigns are more likely to receive split ratings. Political risk plays a highly signi...

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...

This paper integrates three themes on regulation, unsolicited credit ratings, and the sovereign-bank rating ceiling. We reveal an unintended consequence of the EU rating agency disclosure rules upon rating changes, using data for S&P-rated banks in 42 countries between 2006 and 2013. The disclosure of sovereign rating solicitation status for 13 cou...

This paper examines commonality in liquidity for individual equity options trading in European markets. We use high-frequency data to construct a novel index of liquidity commonality. The approach is able to explain a substantial proportion of the liquidity variation across individual options. The explanatory power of the common liquidity factor is...

Motivated by the European debt crisis and the new European Union regulatory regime for the credit rating industry, we analyse differences of opinion in sovereign credit signals and their influence on European stock markets. Rating disagreements have a significant connection with subsequent negative credit actions by each agency. However, links amon...

Credit derivatives allow users to manage credit risk by isolating credit risk from underlying financial assets. Although small relative to other derivative and security markets, the credit derivative market has become one of the fastest-growing derivative markets since the late 1990s. The British Bankers Association’s (BBA) survey suggests that the...

On June 2, 2009, NYSE LIFFE Amsterdam reduced the tick size for options trading at prices below € 0.20 from € 0.05 to € 0.01 and on April 1, 2010, the exchange increased the price threshold to € 0.50. We study the effect of that tick size reduction on the liquidity of individual equity options. In this respect, this study is uniquely positioned in...

We investigate whether there are any identifiable differences in market perceptions of rating news released by Moody’s, S&P and Fitch following the establishment of a new regulatory regime in July 2011, when the European Securities and Markets Authority assumed responsibility for rating agencies’ regulation in Europe.We focus the analysis on the im...

Using a novel proxy of investors' speculative demand constructed from online search interest in investment concepts, we examine how speculative demand affects the returns of Chinese stocks. We find that speculative demand increases following high market returns and predicts subsequent return reversals. Moreover, the speculative demand explains more...

This paper investigates the impact of the recent EU CRA regulation in relation to ESMA identifiers (from April 2012). Using a rich dataset of sovereign rating actions from Fitch, Moody’s and S&P originating from 69 countries for the period 2007-2014, we investigate rating quality. The main measure is the link between rating actions and bond yields....

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) th...

We analyse the impact of sovereign rating actions by S&P, Moody's and Fitch on bank valuations in emerging markets. We find strong evidence of a rating channel for the transmission of sovereign risk to bank valuations. Collateral and guarantee channels play modest roles, but are more relevant to countries that experienced positive actions. Positive...

We investigate how split ratings influence the information content of credit rating events on the sovereign bond markets during 2000-2012. We find that market reactions are far stronger for negative events on the inferior ratings and for positive events on the superior ratings. Such evidence suggests aversion of market participants to the ambiguity...

This paper examines the interaction between the equity index option market and sovereign credit ratings. S&P and Moody’s signals exhibit strong impact on option-implied volatility while Fitch’s influence is less significant. Moody’s downgrades reduce the market uncertainty over the rated countries’ equity markets. Strong causal relationships are fo...

We investigate the rating channel for the transmission of changes in sovereign risk to the banking sector, analysing data from Moody’s, S&P and Fitch before and during the European debt crisis. Sovereign rating downgrades and negative watch signals have strong effects on bank rating downgrades in the crisis period. The impact is stronger for multip...

We construct a measure of individual investors' speculative demand for stocks from their online queries on penny stocks provided by Google Search volume index (hereafter "SVI"). We examine how it affects the return dynamics of U.S. stock indices. We find that the speculative demand leads to a short-term return reversal. We build a simple trading st...

This study utilises an extensive dataset from three European exchanges, namely NYSE LIFFE Amsterdam, London and Paris, to study cross-sectional commonality in liquidity for individual equity options. We document that individual option liquidity is strongly associated with the underlying market activity, a finding that is consistent with the derivat...

In a perfectly liquid market, investors’ optimal allocation decisions refer to maximizing all three dimensions of liquidity, namely immediacy, width and depth. To the extent that investors fail to accommodate size (depth) along with price (width) in their optimal allocation decisions, their overall costs may increase. This paper focuses on the subs...

For the London Stock Exchange, this paper investigates differences in trading costs between market maker (off-book) and order book trades, in the context of clustering in trade sizes and prices. We report several substantial findings. Even after controlling for differences in trade size, the realised spread measure is lower for off-book trades. For...

This paper analyses the effects of sovereign rating actions on the credit ratings of banks in emerging markets, using a sample from three global rating agencies across 54 countries for 1999–2009. Despite widespread attention to sovereign ratings and bank ratings, no previous study has investigated the link in this manner. We find that sovereign rat...

The ongoing financial crisis has drawn considerable attention to the role of credit rating agencies in the financial system. We examine how the foreign exchange market reacts to sovereign credit events prior to (2000–2006) and during the crisis (2006–2010). The sample includes a broad set of countries in Europe and Central Asia in order to investig...

This paper studies the upstairs market of the Stock Exchange Trading System (SETS) of the London Stock Exchange (LSE). We hypothesise that the implicit interaction between the upstairs and the downstairs markets at the LSE alters the pricing mechanism at the upstairs market. We show that market makers employ “cluster undercutting” practices in the...

Equity options have a significant influence on the price discovery process. This study presents unique evidence of substantial price clustering in individual equity options contracts. A particular contribution arises from investigating competing hypotheses on the roles of moneyness and maturity as determinants of option price clustering. We assert...

Many of the empirical investigations in behavioural finance are focused on US markets; with their focus on investor psychology, biases and heuristics these explanations may well not be robust when exposed to different countries, races and cultures. This paper investigates a popular explanation for the equity risk premium, namely Myopic Loss Aversio...

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 sign...

Using a novel proxy of investors’ speculative demand constructed from online search interest in “concept stocks”, we examine how speculative demand affects the returns and trading volume of Chinese stock indices. We find that returns and trading volume increase with the contemporaneous speculative demand. In addition, the high speculative demand ca...

This article investigates the influence that the market state (bull versus bear) has on investment strategies based on characteristics such as size, value, and momentum. The authors find that the precise definition of positive and negative markets has a substantial effect on the results, with shorter-term definitions proving to be more useful. Size...

Sovereign credit rating actions have attracted considerable attention recently. This study employs a rich and unique data set of ratings from six international agencies to investigate the causes of split sovereign ratings in emerging countries. Three reasons are identified in explaining the relatively high frequency of disagreement across agencies...

Research Paper No. 2003-5Floor versus electronic trading of government bond futures

We investigate the relationship between gold prices and gold equity index levels and consider whether this offers any explanatory power for the future returns of gold stocks. It is observed that a simple, well-specified model can explain movements in the stock prices of gold-producing firms. Using evidence from gold exchange-traded funds, we also s...

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 tra...

We study the occurrence and visibility of the compass rose pattern in high frequency data from individual equity options contracts. We show that the compass rose pattern in options contracts is more complex than portrayed in prior work with other asset classes. We find that the tick/volatility ratio proposed in prior studies gives inconclusive resu...

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...

This chapter uses monthly UK stock market data sorted into a two-dimensional set of portfolios to establish the year-on-year migration dynamics of stock movements between portfolios. The system of (monthly re-balanced) portfolios comprises six dividend yield strata (including a separate zero-dividend category) each of which is further subdivided in...

This article investigates factors that have influenced stock market valuations across a number of international markets. Previous studies have found that factors such as long bond rates and stock and bond volatilities have been able to describe how investors have historically set equity multiples in the United States. We find that these variables d...

We analyse sovereign watch and outlook signals from Moody's, S&P and Fitch. Prior literature shows strong market reactions to these signals, which arguably contain more new information than rating changes. We show that the agencies' actions imply different policies: S&P has more emphasis on short-term accuracy, while Moody's actions are consistent...

Credit rating agencies play an essential role in global financial markets through the production of credit information and its distribution to market participants. Moody’s Investors Service and Standard & Poor’s (S&P) dominate the global credit rating industry, accounting for 80 per cent of the market (Alsakka and ap Gwilym, 2010a). Rating changes...

This paper analyses lead–lag relationships in sovereign ratings across five agencies, and finds evidence of interdependence in rating actions. Upgrade (downgrade) probabilities are much higher, and downgrade (upgrade) probabilities are much lower for a sovereign issuer with a recent upgrade (downgrade) by another agency. S&P tends to demonstrate th...

Employing a random effects ordered probit model, this paper examines the sources of heterogeneity in sovereign credit ratings in emerging economies. The analysis uses data from six rating agencies for 90 countries. The model highlights the importance of considering the cross-section error, which captures country-specific heterogeneity, in modelling...

We examine the role of market structure in identifying microstructure features of the NYSE.Euronext-LIFFE STIR futures market by comparing the ability of two bid-ask spread component models to explain bid-ask spreads. These two models differ only in their assumptions about whether or not market makers are present. The period we analyze includes dat...

This paper presents evidence on sovereign rating heterogeneity in emerging economies. Split rated sovereigns are prone to be upgraded (downgraded) by the agency from whom a lower (higher) rating exists. The harsher the split ratings between two agencies, the greater the effect on probabilities of future rating changes. Split ratings among Moody's,...

We develop a multiple-stage algorithm for detecting outliers in Ultra High-Frequency financial market data. We show that an efficient data filter needs to address four effects: the minimum tick size, the price level, the volatility of prices and the distribution of returns. We argue that previous studies tend to address only the distribution of ret...

The demand for sovereign ratings in emerging economies has grown rapidly in recent years due to globalisation of financial markets, and investors’ increasing focus on international diversification. This paper investigates the quantitative determinants of sovereign ratings in emerging markets provided by six international agencies. The study also ex...

This unique study employs a rich dataset of ratings from six international agencies to investigate the causes of sovereign split ratings in emerging countries. Three reasons are identified in explaining the relatively high frequency of disagreement across agencies on emerging sovereign ratings. Firstly, rating agencies use different economic factor...

This is the first paper to systematically investigate price clustering in new equity assets using a high frequency transactions dataset. We test the hypotheses that past price information and market maker activities are related to price clustering. We report that price clustering in IPOs is substantially greater than the clustering observed for non...

This article investigates volatility transmission among the credit default swap (CDS), equity, and bond markets, using a multivariate GARCH model. The authors hypothesise that volatility in the bond and equity markets can originate from the CDS market where there is potential insider trading and increased trading activity due to private credit info...

This chapter analyses the impact on liquidity of a transition from open outcry to a fully electronic trading system in the U.K. futures market. The study makes a unique contribution in comparing microstructural characteristics of different trading systems. Particular focus is placed on price clustering and its relationships with bid-ask spreads and...

This article investigates whether firms in the United Kingdom that have a long, uninterrupted history of dividend growth outperform the broader equity market. It is observed that firms with more than 10 years of consistent growth have returned considerably more than the equity market as a whole, with the additional benefits of lower volatility and...

Recent literature has begun to explore size clustering in financial markets. If a market is perfectly liquid, traders should be able to trade the exact amount that they desire; however, the presence of size clustering may prevent them from achieving optimal trade sizes. This study is novel in its investigation of size clustering in a futures market...

The equity risk premium has attracted considerable debate and various proposed explanations. We re-examine one approach based on myopic loss aversion, while incorporating time variation in returns distributions. We identify optimal asset allocations across a two-century period for the UK, in the context of a range of plausible investment evaluation...

This is a unique study of the relationship between emerging sovereign rating migrations and the sources of rating heterogeneity. It employs data from six international rating agencies and 90 emerging countries. Rating momentum is present, and we are the first to document that multiple-notch rating changes have greater impact on the probability of s...

This article investigates the relationship that exists between dividend yield and momentum strategies. Both have been shown to explain the cross-section of returns, and yet they are negatively related to each other. The article finds that the outperformance of zero dividend stocks disappears when returns are measured on a value-weighted basis. Both...

Trading volume and order flow have both been closely associated with informed trader activity in the market microstructure literature. Using theory that explains regular intraday patterns in trading data, we transform these two variables into proxies for private information and examine their relationships with bid–ask spreads and return volatility....

This article investigates the performance of momentum and timing approaches for investing across 32 international equity markets, adding to a growing body of literature, which includes Siegel [2002] and Faber [2007, 2009], using data back to 1971. Momentum strategies are found to be profitable using a global portfolio, although the outperformance h...

This article investigates the determinants of trading volume for the Euribor futures contract traded at both Euronext-LIFFE and Eurex. Granger causality tests suggest that volumes on the two exchanges are interdependent. Hausman tests demonstrate that the volumes are determined simultaneously. Such results are consistent with a scenario of competit...

This study investigates the determinants of liquidity in the credit default swap (CDS) market. The article considers a range of possible factors influencing bid-ask spreads, including demand-supply pressure, inventory risk, and clientele effects. We find that demand-supply pressure, volatility, price clustering, and downgrade-watch status are posit...

This paper applies an established bid-ask spread decomposition model to spot foreign exchange market in order to assess the impact of European Monetary Union (EMU). Additionally, the paper presents and tests a modified decomposition model which is specifically adapted to the features of order-driven markets. The latter model provides much improved...

This is the first systematic empirical study of the characteristics and the evolution of credit default swap (CDS) trading. We study single name reference entities and find a prevalence of five-year maturities, US5 million and US10 million notional amounts, senior-ranked underlying debt and modified restructuring clauses. We find increased trading...

This paper applies an established bid-ask spread decomposition model to the inter-dealer spot foreign exchange market. In addition, the paper presents and tests a modified decomposition model which is specifically adapted to the features of order-driven markets and which is found to produce more plausible results than the original model. Price clus...

We analyse a survey of 200 plan sponsors and investment managers in the US and Europe regarding the use of credit rating guidelines in the conduct of their investment activities. We find that ratings-based guidelines are widespread, but their forms and motivations vary considerably. The usage of ratings appears remarkably similar in the US and Euro...

This article examines how microstructure effects, evident in high frequency data, influence bid–ask spreads and volatility in transaction price series. It uses the event of European Monetary Union (EMU), and the upheaval that this entailed, as an opportunity to empirically investigate these relationships in the electronic inter-dealer spot FX marke...

Equity markets are frequently valued on the basis of the relative yields of stocks and bonds. The most widely known of these comparisons is the Fed model. We extend previous research by examining the performance of this metric across six international markets and also relative to more traditional valuation measures such as earnings and dividend yie...

Equity markets are frequently valued on the basis of the relative yields of stocks and bonds. The most widely known of these comparisons is the Fed model; stocks are considered cheap when their earnings yield exceeds a long bond yield. Comparisons examining the performance of this metric and more traditional valuation measures such as earnings and...

Purpose – A growing strand of literature has focused on the returns performance of zero dividend stocks. This paper seeks to provide new evidence on the link between dividend payment and returns history and firms’ subsequent stock market performance. Design/methodology/approach – Prior research draws a distinction between those stocks which have ne...

Sovereign credit ratings are becoming increasingly important both within a financial regulatory context and as a necessary prerequisite for the development of emerging capital markets. Using a comprehensive dataset of rating agencies and countries over the period 1989–1999, this paper demonstrates that artificial neural networks (ANN) represent a s...

Recent evidence for the U.S. market has shown that, contrary to popular wisdom, the greater the proportion of earnings paid out as dividends, the greater the subsequent real earnings growth. This study extends previous work by examining whether a similar relationship exists in 11 international markets and by considering the role the payout ratio pl...

Recent evidence for the U.S. market has shown that, contrary to popular wisdom, the greater the proportion of earnings paid out as dividends, the greater the subsequent real earnings growth. This study extends previous work by examining whether a similar relationship exists in 11 international markets and by considering the role the payout ratio pl...

This study considers the application of both high- and zero-dividend strategies to the U.K. market. Following recent academic studies we conjecture that the payout ratio may provide a useful additional filter for portfolio construction and that zero-dividend stocks may also offer higher returns. These strategies do indeed outperform both the high-y...

This paper applies an established bid-ask spread decomposition model to short-term interest rates (STIR) futures to assess the impact of both the migration from floor to electronic trading and European Monetary Union (EMU). Additionally, the paper presents and tests a modified decomposition model which is specifically adapted to the features of ord...

This paper investigates the extent to which consumers' demographic factors influence their financial policy purchasing behaviours and also explores how the external economic environment affects consumers' propensities to purchase financial products. The Cox proportional hazard model is used to explore these issues. The results suggest that consumer...

We present a new approach to examining the dividend signalling hypothesis by investigating dividend resumptions by former payers. Evidence regarding the signalling hypothesis has been mixed to date. In support of previous work, we fund that dividend policy is sticky, whereby the achievement of profitability does not necessarily lead to the resumpti...

Financial markets generally, and the spot foreign exchange market in particular, are reputed to be excessively volatile. Previous research has linked this excess volatility to private information. This article re-examines the theory and challenges that link. Empirical evidence suggests that random variation between buy and sell volumes is a more im...

This paper analyses the impact of a move from fractional to decimal pricing in the UK Long Gilt futures market. The reduced tick size following decimalisation leads to an increase in price clustering. The bid-ask spread, measured in ticks, increases following the tick size reduction. However, due to a reduced tick value, the monetary value of the s...

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...

This paper investigates the dividend decisions of firms in the UK reporting losses after sustained periods of profitability. It is found that loss-making firms are more likely to reduce dividends compared to firms that remain profitable, although a loss is far from a guarantee that the dividend payment will be reduced. A lower propensity to reduce...

This paper investigates the relationship between real earnings growth, real dividend growth, the dividend payout ratio and real stock returns in the US and UK between 1900-2001. We find a positive relationship in the UK between the payout ratio and subsequent real earnings growth contrary to conventional theory, though consistent with the US eviden...

Despite a documented decline in the number of dividend payers in the UK it is found that aggregate real dividends paid by industrials actually increased between 1979 and 2000. This was attributed to the firms lost from the sample being generally small distributors of dividends whilst the growth in payments by large firms more than compensated for t...

This article examines how microstructure effects, evident in high frequency data, influence bid-ask spreads and volatility in transaction price series. It uses the event of European Monetary Union (EMU), and the upheaval that this entailed, as an opportunity to empirically investigate these relationships in the electronic inter-dealer spot FX marke...