Showing papers in "Journal of Banking and Finance in 1990"
TL;DR: In this article, the authors present a new strategy for pricing average value options, i.e. options whose payoff depends on the average price of the underlying asset over a fixed period leading up to the maturity date.
Abstract: In this paper, we present a new strategy for pricing average value options, i.e. options whose payoff depends on the average price of the underlying asset over a fixed period leading up to the maturity date. Such options are of particular interest and importance for thinly-traded assets (e.g. crude oil), since price manipulation is inhibited, and both the investor and issuer enjoy a welcome degree of protection from the vagaries of the market. These options are often implicit in a bond contract, although they also appear in a straightforward form. Our results suggest that the price of an average-value option will always be lower than that of a standard European option. Our pricing strategy involves Monte Carlo simulation with variance reduction elements and offers an enhanced pricing method to both arbitragers and hedgers, as well as to the issuers of such bonds.
535 citations
TL;DR: In this paper, the mean absolute changes of logarithmic prices are found to follow a scaling law against the time interval on which they are measured, although the distributions of the price changes strongly differ for different interval sizes.
Abstract: In this paper we present a statistical analysis of four foreign exchange spot rates against the U.S. Dollar with several million intra-day prices over 3 years. The analysis also includes gold prices and samples of daily foreign exchange prices over 15 years. The mean absolute changes of logarithmic prices are found to follow a scaling law against the time interval on which they are measured. This empirical law holds although the distributions of the price changes strongly differ for different interval sizes. Systematic variations of the volatility are found even during business hours by an intra-day analysis of price changes. Seasonal heteroskedasticity is observed with a period of one day as well as one week as the result of an analogous intra-week analysis; taking this into account is necessary for any future study of intra-day price change distributions and their generating process. The same type of analysis is also made for the bid-ask spreads.
532 citations
TL;DR: In this article, the authors show that the utility-maximization literature does not support its conclusions regarding the effects of bank capital regulation because it has mischaracterized the bank's investment opportunity set by neglecting the option value of deposit insurance.
Abstract: The mean-variance framework has been used to analyze the effects of bank capital regulation on the asset and bankruptcy risk of insured, utility-maximizing banks. This literature claims that more stringent capital regulation will increase asset risk and can increase bankruptcy risk. These conclusions are notable because they are opposite to those obtained for insured, value-maximizing banks. In this paper, we show that the utility-maximization literature does not support its conclusions regarding the effects of bank capital regulation because it has mischaracterized the bank's investment opportunity set by neglecting the option value of deposit insurance.
311 citations
TL;DR: In this paper, the authors examined the effect of option introductions on the underlying stocks in addition to the price increase and volatility decrease that take place when new options are listed, and obtained and explain the following new empirical results: (i) an increase in the value of the market around the listing dates of new options, (ii) an increased industry index which excludes the optioned stocks, (iii) the dissipation of the price and volatility effects in recent periods and (iv) the existence of an announcement effect in one subperiod of their sample and its dissipation in
Abstract: This article examines the effect of option introductions on the underlying stocks In addition to the price increase and volatility decrease that take place when new options are listed, we obtain and explain the following new empirical results: (i) an increase in the value of the market around the listing dates of new options, (ii) an increase in the value of an industry index which excludes the optioned stocks, (iii) the dissipation of the price and volatility effects in recent periods and (iv) the existence of an announcement effect in one subperiod of our sample and its dissipation in recent periods
219 citations
TL;DR: In this article, the authors present evidence on the day-of-the-week effect on a stock market with a particular settlement procedure: the Paris Bourse, showing that the mean return on Mondays is the largest in the week, a result at odds with the evidence in the U.S.A.
Abstract: We present evidence on the day-of-the-week effect on a stock market with a particular settlement procedure: the Paris Bourse. A strong and persistent negative return is found on Tuesdays. A similar result was previously found for Japan and Australia. The settlement procedure is shown to have an effect on the distribution of daily returns consistent with forward pricing theory; it cannot explain the negative Tuesday return. After adjusting for this settlement effect, the mean return on Mondays is the largest in the week, a result at odds with the evidence in the U.S.A.
208 citations
TL;DR: In this paper, the impact of particular dates and periods of the civil year and stock exchange calendar on stock price changes to test the existence of information inefficiencies was analyzed based on the Milan Stock Exchange's "MIB storico" stock index with reference to the period 2 January 1975-22 August 1989.
Abstract: After describing the various concepts of efficiency (information, valuation, full-insurance and functional) with special reference to the Italian stock market, the paper analyzes the impact of particular dates and periods of the civil year and stock exchange calendars on stock price changes to test the existence of information inefficiencies. The analysis is based on the Milan Stock Exchange's ‘MIB storico’ stock index with reference to the period 2 January 1975–22 August 1989. The events tested for systematic anomalies include weekend and public holidays, the end of the calendar and stock exchange months, and the end of the year. The results obtained are in line with those found for the U.S. market, with evidence of anomalous changes, though not all are stable over time.
173 citations
TL;DR: In this paper, the real value of the U.S. dollar relative to the G-10 has been studied and the dynamics of the fundamental determinants of the real exchange rate and its steady state value.
Abstract: This essay concerns the real value of the $U.S. relative to the G-10. (i) What are the dynamics of the fundamental determinants of the real exchange rate and its steady state value? (ii) To what extent are the observed movements in the exchange rate from 1973 to 1988 due to the fundamentals? (iii) How integrated are international capital markets? (iv) How does the real exchange rate respond to (a) changes in the cyclically adjusted government budget deficit, and to (b) changes in the marginal efficiency of investment?
167 citations
TL;DR: In this article, the authors used daily data on U.K. stock market returns over the period 1955-1989 to predict stock market volatility, and found that even apparently innocuous forms of data-snooping significantly enhance reported forecast quality.
Abstract: Data-snooping arises when the properties of a data series influence the researcher's choice of model specification. When data has been snooped, tests undertaken using the same series are likely to be misleading. This study seeks to predict equity market volatility, using daily data on U.K. stock market returns over the period 1955–1989. We find that even apparently innocuous forms of data-snooping significantly enhance reported forecast quality, and that relatively sophisticated forecasting methods operated without data-snooping often perform worse than naive benchmarks. For predicting stock market volatility, we therefore recommend two alternative models, both of which are extremely simple.
160 citations
TL;DR: In this paper, the authors investigated the hypothesis that large shareholders use shares with differential voting rights for the purpose of expropriating minority shareholders and found that large owners own much more equity than required for control.
Abstract: The paper investigates the hypothesis that large shareholders use shares with differential voting rights for the purpose of expropriating minority shareholders Consistent with several theoretical arguments but inconsistent with the expropriation hypothesis, we find that large shareholders own much more equity than required for control We also show how the law can construct a regulation which reduces the opportunity for expropriation and at the same time allows for the possible benefits of differential voting rights
155 citations
TL;DR: Using the likelihood ratio test, this article showed that interest-rate risk is priced using a different sample and methodology, which is consistent with earlier findings presented by Sweeney and Warga, and further revealed that failure to discern significant interest rate premia is attributable to insufficient rate sensitivity rather than being an outcome of monetary policy.
Abstract: Using the likelihood ratio test, this paper presents evidence that interest-rate risk is priced. These results are consistent with earlier findings presented by Sweeney and Warga, based on a different sample and methodology. The statistical results further reveal that failure to discern significant interest-rate premia is attributable to insufficient rate sensitivity rather than being an outcome of monetary policy (i.e., inadequate rate volatility).
139 citations
TL;DR: In this article, the impact of the stock market microstructure on return volatility and on the value discovery process in the Milan Stock Exchange is studied, where the primary trading mechanism employed by this exchange is a call market, which is usually preceded by trading in a continuous market.
Abstract: This paper studies the impact of the stock market microstructure on return volatility and on the value discovery process in the Milan Stock Exchange. The primary trading mechanism employed by this exchange is a call market, which is usually preceded and followed by trading in a continuous market. We find that the opening transaction in the continuous market has the highest volatility, and that opening the market with the call transaction seems to produce relatively lower volatility. In the closing transaction, investors correct perceived errors or noise in the prices set at the call. The implications of the results for market design are examined.
TL;DR: In this paper, the authors examined the overreaction hypothesis within the Spanish capital market and found that after portfolio formation, losers win 24.5% more than winners, and there is a correspondence between excess returns and changes in the earnings pattern of losers and winners firms.
Abstract: This paper examines the overreaction hypothesis within the Spanish capital market. The hypothesis is clearly accepted even after correcting for size when estimating excess returns. Twelve months after portfolio formation, losers win 24.5% more than winners. There is also a correspondence between excess returns and changes in the earnings pattern of losers and winners firms.
TL;DR: Using transactions data for a large sample of NYSE stocks for six months in 1971-1972 and calendar year 1982, Wood, McInish and Ord as discussed by the authors showed that the graph of the variability of index returns across days against time of day has a crude U-shaped pattern.
Abstract: Using transactions data for a large sample of NYSE stocks for six months in 1971–1972 and calendar year 1982, Wood, McInish and Ord (1985) (WMO) show that the graph of the variability of index returns across days against time of day has a crude U-shaped pattern This study demonstrates that relatively high variability of returns at the beginning and end of the trading day also occurs during calendar years 1980, 1981, 1983 and 1984 In addition, the variability of intra-minute returns across stocks is shown to have a crude U-shaped pattern when plotted against time of day A model is developed and tested that explains this pattern of variability of intra-minute returns in terms of variability of market returns over the trading day The empirical results are consistent with this explanation
TL;DR: Using transactions data for all stocks traded on the Toronto Stock Exchange, the authors showed that returns and number of shares traded have a U-shaped pattern when plotted against time of the trading day.
Abstract: Using transactions data for all stocks traded on the Toronto Stock Exchange, this study shows that returns and number of shares traded have a U-shaped pattern when plotted against time of the trading day. These results confirm that the findings of Wood, Mclnish and Ord (1985), Harris (1986), Mclnish and Wood (1988) and Jain and Joh (1989) for the New York Stock Exchange (NYSE) also hold for both another exchange and another country and are not due to peculiarities of United States securities markets. Further, evidence is provided to support the view of Harris (1989) and Terry (1986) that these relatively high end-of-day returns are due, at least in part, to an increase in the proportion of trades at the ask relative to trades at the bid.
TL;DR: In this article, the authors argue that bank processing of asymmetric information and external monitoring of corporate activities reduce the ex ante uncertainty of investors about firm value, and demonstrate that the existence of bank debt and/or lines of credit lowers the expected initial return associated with initial public offerings.
Abstract: In this paper we test the hypothesis that banking relations are a signal about firm value. We argue that bank processing of asymmetric information and external monitoring of corporate activities reduce the ex ante uncertainty of investors about firm value. We demonstrate that the existence of bank debt and/or lines of credit lowers the expected initial return associated with initial public offerings. The empirical results are robust with respect to the inclusion of variables which reflect other mechanisms that can ameliorate ex ante uncertainty. Our work adds to the body of evidence that supports the hypothesis that intermediaries provide valuable asset services to corporate borrowers.
TL;DR: In this article, the authors provide empirical evidence about the determinants of corporate ownership structure in Swedish listed corporations and find that ownership concentration decreases with firm size and increases with firm-specific risk.
Abstract: This paper provides empirical evidence about the determinants of corporate ownership structure. In Swedish listed corporations, ownership concentration decreases with firm size and increases with firm-specific risk. We also find that dual classes of shares create vote concentration but that the presence of differential voting rights have limited impact on equity concentration. Our results indicate that the ambition to control a firm is not motivated by a ‘pure demand for power’. Furthermore, the value of control does not derive from the possibility to expropriate the fringe of minority shareholders. The value of control has to be motivated by some other economic motives including ownership of equity.
TL;DR: In this article, the impact of international listing on common stock risk is examined and the results suggest that markets are already reasonably well integrated and listing is an ineffective mechanism for reducing segmentation.
Abstract: In this paper, we examine the impact of international listing on common-stock risk. While previous research has used event study methodology, our research focuses on permanent shifts in risk. Different measures of risk are estimated to test for intertemporal shifts in risk attributable to an overseas listing. No significant shifts in risk from international listing are documented. The results are robust with respect to the location and year of listing. These findings suggest that: (1) markets are already reasonably well integrated; or (2) listing is an ineffective mechanism for reducing segmentation.
TL;DR: The authors examined the intraday relationship between the volatility of S&P 500 futures prices and index volatility and found that index volatility was systematically greater during the first 30 minutes of trading each day than at other times.
Abstract: This paper examines the intraday relationships between the volatility of S&P 500 futures prices and the volatility of the S&P 500 index. We calculate variance measures for minute-to-minute price changes on a daily basis and across 30-minute intervals. The empirical results indicate that: (i) futures volatility is greater than index volatility, (ii) volatility increased for both futures prices and the index in absolute terms from 1984 through 1986, (iii) both futures and index volatility increased directly with futures trading volume, and (iv) index volatility was systematically greater during the first 30 minutes of trading each day than at other times. Granger tests, however, reveal no systematic pattern of futures volatility leading index volatility, or index volatility leading futures volatility.
TL;DR: A comparison of the financial characteristics of banks involved in hostile takeover bids with a control group of non-hostile bank mergers indicates that hostile targets experience abnormal returns that are significantly greater than those of nonhostile targets.
Abstract: A comparison of the financial characteristics of banks involved in hostile takeover bids with a control group of nonhostile bank mergers indicates: (1) hostile targets experience abnormal returns that are significantly greater than for the targets of nonhostile bank mergers; (2) hostile bidders experience negative abnormal returns that are insignificantly different than for bidders involved in nonhostile bank mergers; (3) hostile bank acquisition announcements produce positive net wealth effects which are larger than the wealth effects of nonhostile acquisitions; (4) a Logit regression model using financial ratios, stock price data, and ownership data is able to distinguish between hostile and nonhostile targets.
TL;DR: In this paper, the authors examined the impact of loan commitment agreements on the way in which monetary policy affects the economy and found that loan commitments effectively protect borrowers from quantity credit rationing and thus force monetary policy to work mainly through interest-rate channels.
Abstract: In this paper, we examine the impact of loan commitment agreements on the way in which monetary policy affects the economy. We estimate a vector autoregressive (VAR) model and find evidence of a smaller impact of monetary policy on loans made under commitment agreements than on loans not made under commitment. Our conclusion is that loan commitments effectively protect borrowers from quantity credit rationing and, thus, force monetary policy to work mainly through interest-rate channels.
TL;DR: In this paper, the authors examined the extent to which regulatory capital standards influence infusions of external equity into commercial banks while such infusions occur infrequently, they result in large adjustments to overall bank capital and provide important signals to regulators of managerial intent.
Abstract: This article examines the extent to which regulatory capital standards influence infusions of external equity into commercial banks While such infusions occur infrequently, they result in large adjustments to overall bank capital and provide important signals to regulators of managerial intent Using a sample of 753 equity capital issues occurring during 1986 and 1987, we find evidence that regulatory minimum capital constraints are instrumental in influencing the financing decisions made by a significant subset of banks
TL;DR: In this paper, the wealth effects of the announcement of the Basle Committee's intention to impose, across international boundaries, a pre-determined minimum level of risk-adjusted capital are examined.
Abstract: The imposition of risk-based capital requirements has been advocated by some regulatory authorities as a means of mitigating the incentive problems created by fixed-premium deposit insurance. However, their imposition also constitutes a requirement to maintain an exogenously influenced capital structure, which may adversely affect the values of the firms involved. This paper examines the wealth effects of the announcement of the Basle Committee's intention to impose, across international boundaries, a pre-determined minimum level of risk-adjusted capital. We find that, in general, the equity values of a sample of large, publicly traded banks decrease at the time of the announcement. Further, those banks with capital levels which are deficient relative to the mandated levels suffer the largest relative losses.
TL;DR: This paper found that stock returns are significantly related to both size and E/P. But, the size effect appears to be of secondary importance when compared with the E/p effect.
Abstract: Results of U.S. studies about the relation between stock returns and the effects of firm size and earnings to price ratio (E/P) are not consistent. Basu (1983) argues that E/P dominates size, while others conclude that size dominates E/P. This paper attempts to provide evidence on these two effects with a sample of data, 1975–1985 from the Stock Exchange of Singapore. We find that stock returns are significantly related to both size and E/P. But, the size effect appears to be of secondary importance when compared with E/P effect.
TL;DR: In this paper, the authors present empirical evidence that the benefits of this evaluation and monitoring are reflected in the share price reaction to announcements of corporate selloff decisions, and they also find a consistency in the pattern of selloff returns with respect to bank debt and insider trading.
Abstract: Recent theoretical models suggest that banks carry out an evaluation and monitoring function for borrowers that entails the collection of private information from borrowers. In this paper, we present empirical evidence that the benefits of this evaluation and monitoring are reflected in the share price reaction to announcements of corporate selloff decisions. We also find a consistency in the pattern of selloff returns with respect to bank debt and insider trading. This implies that decisions of both quasi-insiders (banks) and traditionally recognized insiders (management) convey important information to financial market participants about the valuation of a major managerial announcement.
TL;DR: In this paper, the authors compared the returns of three distinct sets of approaches to industry rotation in the U.S. stock market: passive, semi-passive, and active.
Abstract: This paper compares the returns to three distinct sets of approaches to industry rotation in the U.S. stock market: passive, semi-passive, and active. Using the 12-industry breakdown of Breeden, Gibbons, and Litzenberger (1989), the passive strategies are based on the up- and down-levered value-weighted industry indices and the semi-passive strategies are similarly constructed from the equal-weighted industry indices. The active strategies are based on multiperiod investment theory and the empirical probability assessment approach applied to past realized returns. The semi-passive and active strategies performed well in both the full 1934–1986 period and in the 1966–1986 subperiod, achieving statistically significant excess returns in several instances.
TL;DR: In this paper, a survey of the existing single-equation structural models of exchange-rate determination is presented and a survey on how the exchange rate is modelled in the main economy-wide macro-econometric models.
Abstract: We first give a brief presentation of the existing single-equation structural models of exchange-rate determination and a survey of how the exchange rate is modelled in the main economy-wide macroeconometric models. We then show, with respect to the lira/$ exchange rate, that the out-of-sample predictive performance of the single-equation models is inferior to that of the simple random walk model. This confirms the thesis that only by moving away from these single-equation, semi-reduced form models towards suitable economy-wide macroeconometric models can one hope to beat the random walk. Following this course, we finally show that the Mark V version of our continuous time macroeconometric model of the Italian economy outperforms both the existing structural models and the random-walk process, in out-of-sample forecasting tests concerning the lira/$ exchange rate.
TL;DR: The new issue process in Singapore is examined and evidence for underpricing is presented in this article, where solutions are proposed to ameliorate the under-pricing problem.
Abstract: The new issue process in Singapore is examined and evidence for underpricing is presented Underpricing will reduce revenues when the Singapore government privatizes its companies and statutory boards Solutions are proposed to ameliorate the underpricing problem These solutions relate to the merchant banking arrangements by which companies are brought public; the allocation procedures of new issues; and the means through which the purchase of new shares are funded
TL;DR: This article showed that real exchange rates defined for different sectors of an economy move closely together with one another even though each of the sectoral real exchange rate taken alone has a large random component.
Abstract: Many recent studies have documented the random behavior of real exchange rates. This paper shows that real exchange rates defined for different sectors of an economy move closely together with one another even though each of the sectoral real exchange rates taken alone has a large random component. The sectoral real exchange rates are tied together by internal price links due to factor mobility within each national economy. Any differences between real exchange rates which develop, moreover, can be explained almost entirely by productivity differentials, at least in the long run. This paper contrasts the strong ties which bind together prices from different sectors internally with ties that bind the prices of goods from the same sector internationally. Prices are shown to be much more highly correlated internally than externally because flexible exchange rates disrupt normal pricing relationships between goods from different countries.
TL;DR: In this paper, conditions under which a moral hazard problem caused promised pension benefits to increase were derived using data on individual pension contracts from the pre- and post-PBGC periods. But these conditions were not tested using data from individual contracts.
Abstract: The Pension Benefit Guarantee Corporation (PBGC) initially insured private pension benefits in exchange for a premium that was not risk sensitive. This paper derives conditions under which a moral hazard problem caused promised pension benefits to increase. The hypotheses are tested using data on individual pension contracts from the pre- and post-PBGC periods.
TL;DR: In this article, the authors examined the behavior of overnight and intraday returns during (and across) bull and bear markets, and found that the volatility of returns is significantly greater in the early stages of the day.
Abstract: This paper examines the behavior of overnight and intraday returns during (and across) bull and bear markets. Robust tests, new to the finance literature, are performed to examine the stability of both variability of returns and mean returns over time Comparing bull and bear markets, intraday returns are significantly more volatile during bear markets, but no statistical difference in overnight returns is found. Variability of returns is significantly greater intraday than overnight during both bull and bear markets. Differences in mean returns between bull and bear markets are shown to occur primarily intraday rather than overnight. Implications for future studies of trading phenomena and return generating processes are presented.