Showing papers on "Algorithmic trading published in 1990"
TL;DR: In this paper, the authors investigated the relationship between price changes and trading volume of options and stocks for a sample of firms whose options traded on the CBOE during the first quarter of 1986 and found that the stock market lead the option market by as much as fifteen minutes.
Abstract: This study investigates intraday relations between price changes and trading volume of options and stocks for a sample of firms whose options traded on the CBOE during the first quarter of 1986. After purging the price change series of the effects of bid/ask spreads, multivariate time-series analysis is used to estimate the lead/lag relation between the price changes in the option and stock markets. The results indicate that price changes in the stock market lead the option market by as much as fifteen minutes. The analysis of trading volume indicates that the stock market lead may be even longer. THE INTENSE TRADING ACTIVITY in and, in fact, the very existence of organized stock option markets attest to the economic benefits that these financial contracts provide. Reduced transaction costs and increased financial leverage are two reasons why trading in the stock option market may be more attractive than trading in the market for the underlying stock. In addition, these cheaper and more flexible trading opportunities attract new and differently informed investors to the marketplace. The resulting increase in trading activity, together with the inextricable arbitrage linkage between stock and option prices, imply an increase in market efficiency. This study investigates empirically the intraday price change and trading volume relations between stocks and options for a sample of firms whose options were actively traded on the Chicago Board Options Exchange during the first quarter of 1986. In particular, intraday call option price changes are translated into implied stock price changes using the American call option pricing model. These intraday implied stock price changes are then compared with the actual stock price changes to identify which, if either, market leads the other. In perfectly functioning capital markets, there should be complete simultaneity between the series, that is, new information disseminating into the marketplace should be reflected in the prices and the trading activity of both securities simultaneously. Institutional factors, however, may make the stock option market more attractive to information traders. This may cause price changes and trading activity due to new information to be observed in the option market first, followed by price
483 citations
TL;DR: In this article, the determinants of stock-return variances were investigated and the overall results were consistent with the predictions of private-information-based rational trading models, but inconsistent with both the irrational trading noise and public-information hypotheses.
Abstract: New evidence is provided on the determinants of stock-return variances. First, when the Tokyo Stock Exchange is open on Saturday, the weekend variance increases; weekly variance is unaffected, however, despite an increase in weekly volume. Second, the listing of U.S. stocks in Tokyo substantially increases the number of trading hours, but Tokyo volume is negligible for these U.S. stocks and their 24-hour variance is unaffected. The overall results are consistent with the predictions of private-information-based rational trading models, but inconsistent with both the irrational trading noise and public-information hypotheses.
392 citations
TL;DR: This paper examined the variance of hourly market returns during 1964-89 and found that return volatility falls from the opening hour until early afternoon and rises thereafter, and is significantly greater for intraday versus overnight periods.
Abstract: This paper examines the variance of hourly market returns during 1964-89. Results indicate that return volatility falls from the opening hour until early afternoon and rises thereafter, and is significantly greater for intraday versus overnight periods. Market variance is also shown to change significantly over time, rising after NASDAQ began in 1971, rising after trading in stock options began in 1973, falling after fixed commissions were eliminated in 1975, rising after trading in stock index futures was introduced in 1982, and falling after margin requirements for stock index futures became larger in 1988. Copyright 1990 by American Finance Association.
276 citations
Posted Content•
234 citations
TL;DR: This article found no evidence that the substantial variations in the reactions to the crash of October 1987 across countries are related to the structure of markets, however, trading halts and capital controls on residents may have moderated the speed of declines in some markets.
203 citations
TL;DR: In this paper, the authors found a high correlation between the open to close returns for U.S. stocks in the previous trading day and the Japanese equity market performance in the current period.
Abstract: This paper finds a high correlation between the open to close returns for U.S. stocks in the previous trading day and the Japanese equity market performance in the current period. In contrast, the Japanese market has only a small impact on the U.S. return in the current period. High correlations among open to close returns are a violation of the efflcient market hypothesis; however, in trading simulations, the excess profits in Japan vanish when transactions costs and transfer taxes are included. THE TWO LARGEST STOCK markets in the world in terms of capitalization, volume, and shares listed are the Tokyo Stock Exchange (TSE) and the New York Stock Exchange (NYSE). Because Tokyo is 14 hours ahead of New York, there is an eight and one-half hour difference between the close of the TSE and open of the NYSE. Since there is no overlap between the two markets, traders or technical analysts may look to the TSE as a predictor of market movement on the NYSE and/or examine changes on the NYSE as indicators of TSE performance. As shown in Figure 1, the TSE opens at 7:00 p.m. Eastern Standard Time (EST) and closes at 1:00 a.m. EST.1 The NYSE opens at 11:30 p.m. Japanese time (9:30 a.m. EST) and closes at 5:00 a.m. Japanese time (4:00 p.m. EST). Thus, there is no common time interval in which both markets are open. High correlations between the respective open to close returns are a violation of the efficient market hypothesis because public information about the performance in one market could be used to profitably trade in another market. If the markets are efficient, information about the open to close performance in one market (for example, the U.S. return in period t - 1) will be fully reflected in the open price of the other market (Japan in period t, for example). Since new information flows randomly into the market, subsequent price changes should be random and the open to close returns in Japan will be uncorrelated with the U.S. returns. Thus, the U.S. performance should affect the open price in Japan, and the correlation between the open to close returns of the two markets will be zero. Early research on the synchronization among stock prices across countries (Grubel (1968), Levy and Sarnat (1970), Agmon (1972), Ripley (1973), Lessard
200 citations
TL;DR: Since the overhaul of its established securities trading practices, London’s financial markets have undergone profound change while continuing to operate smoothly; a number of benefits have been realized.
Abstract: :The London Stock Exchange’s Big Bang on October 27, 1986, marked the arrival of sweeping and long-awaited deregulation. Numerous changes occurred simultaneously, including elimination of fixed brokerage commissions, a marked increase in the number of market participants, changes in the structure and ownership of trading firms, and, perhaps most importantly, swift movement of securities trading away from the floor of the Exchange. This remains the most rapid and complete regulatory reform of any market, and the most striking example to date of a regulatory event engineered to benefit the local financial industry. The transformation was accomplished in large part through the Exchange’s implementation of a screen-based dealing system. Since the overhaul of its established securities trading practices, London’s financial markets have undergone profound change while continuing to operate smoothly; a number of benefits have been realized.
162 citations
TL;DR: In this paper, the authors consider a securities market in which orders are channeled through professional broker-dealers such as London's market makers or the large banks operating on continental exchanges, and they show that the dealers have an incentive to satisfy roughly half of their customers' orders from their own inventory if they are sure that orders are liquidity-motivated and not based on inside information.
159 citations
TL;DR: In this article, the Measurement and Control of Trading Costs (MCTC) is used to measure and control trading costs in the stock market, and it is shown that trading costs can be quantified and controlled.
Abstract: (1990). The Measurement and Control of Trading Costs. Financial Analysts Journal: Vol. 46, No. 6, pp. 73-80.
131 citations
128 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: The price and trading volume behaviors of individual stocks in the Standard and Poor's 500 Stock Index (S&P 500) are analyzed on stock index futures expiration days, a time when the market is known to be subject to heavy program trading as discussed by the authors.
Abstract: The price and trading volume behaviors of individual stocks in the Standard and Poor's 500 Stock Index (S&P 500) are analyzed on stock index futures expiration days, a time when the market is known to be subject to heavy program trading. The price behavior of stocks that are subject to program trading is shown to be very similar to stocks that are not. Stocks that decline in price in the last half hour Friday tend to increase in price at the opening on Monday and vice versa. The Monday reversal as a fraction of the Friday price change is only slightly higher for the S&P 500 stocks than for non-S& P 500 stocks, indicating that the price reversals reflect, for the most part, the bid-ask spreads of the individual stocks. Trading volume in the last half hour of expiration days is shown to be substantially higher than normal. Copyright 1990 by the University of Chicago.
TL;DR: In this article, the authors provide a comprehensive test of the profitability of technical trading systems on 30 futures markets for 11 years and find that all but two trading systems had significant gross returns.
Abstract: Whether or not trading with technical analysis is profitable is a controversial topic. This study seeks to add to our knowledge about this controversy by providing a comprehensive test of the profitability of technical trading systems. Trading is simulated for 23 trading systems on 30 futures markets for 11 years. All but two trading systems had significant gross returns. Thus, the results strongly reject the random walk model and suggest that disequilibrium models more appropriately describe daily futures prices. Although returns were less than expected by many users of these systems, several systems did generate returns significantly above transaction costs. The result for net returns are not conclusive, but they suggest there may be causes of disequilibrium beyond transaction costs. No conclusion is made about market efficiency since possible causes of disequilibrium beyond transaction costs exist.
TL;DR: In this article, the authors discuss arbitrage opportunities in the Japanese stock and futures markets, and propose a method to exploit the arbitrage opportunity in Japanese stock markets, which is based on the Japanese Stock and Futures Market.
Abstract: (1990). Arbitrage Opportunities in the Japanese Stock and Futures Markets. Financial Analysts Journal: Vol. 46, No. 2, pp. 14-24.
Journal Article•
TL;DR: In the wake of the 1987 stock market crash, the New York Stock Exchange was singled out for blame as though the price at which securities are bought and sold on that market, unlike others, was determined by the market participants themselves, rather than by more fundamental economic factors, such as new information about the firms whose securities are being bought or sold, or changes in macroeconomic conditions as discussed by the authors.
Abstract: Although the importance of well-developed secondary trading markets for securities is widely known,1 the economic function of stock exchanges is one of the most poorly understood elements of modem economic life. This lack of understanding of the nature and purposes of organized stock exchanges became particularly obvious in the wake of the stock market crash of October, 1987. On that day, the DowJones Industrial Average of New York Stock Exchange listed securities dropped 508 points, and the New York Stock Exchange (\"NYSE\") lost $1 trillion in value.2 Similar declines affected other world markets, including the Tokyo Stock Exchange (\"TSE\").3 In the wake of this rapid decline in value, the New York Stock Exchange was singled out for blame as though the price at which securities are bought and sold on that market, unlike others, was determined by the market participants themselves, rather than by more fundamental economic factors, such as new information about the firms whose securities are being bought and sold, or changes in macroeconomic conditions. 4
TL;DR: In this paper, the authors discuss the conditions which are necessary for a futures market in housing and discuss the role of intermediaries such as building societies and banks in the new market.
Abstract: Overviews the conditions which are necessary for a futures market in housing. Indicates some ways in which the new market might be used. Examines whether a national price index would benefit hedgers in different regions. Discusses the role intermediaries such as building societies and banks would have in the new market. Considers whether there are ways of “streamlining” house transactions which would be simpler than futures trading. Concludes that a futures market could succeed if banks and building societies offered insurance to purchasers, offsetting the risk on the futures market. Suggests that such a system could dramatically reduce the cost of “chain breaking”.
Journal Article•
TL;DR: In this article, the authors explore the hypothesis that the Irish forward exchange market is efficient and show that rejection of the market efficiency hypothesis does not necessarily imply market inefficiency, since rejection of market efficiency does not always imply a lack of profitable arbitrage opportunities.
Abstract: he purpose o f this paper is to explore the hypothesis that the Irish forward A exchange market is efficient. The simple market efficiency hypothesis assumes investors are risk neutral and that agents are rational, i.e., they use all available informat ion. Testing for efficient markets is thus a test o f a j o i n t hypothesis. I n the case of forward market efficiency, the forward rate is required to be an unbiased predictor o f the future spot rate. However, rejection of the j o i n t hypothesis does not necessarily imply market inefficiency. I f investors are risk-averse, then they w i l l require a risk premium to compensate for bearing exchange rate risk. But this does not give rise to profitable arbi trage opportunities. Only i f there is inefficient use of available informat ion , w i l l there be unexploi ted profits — and by def ini t ion, market inefficiencies present. I n the tests that fo l low, forward exchange market efficiency is examined using Irish spot and forward exchange rates against sterling and the Deutschmark. Mon th ly data (expressed in logs), ranging f rom January 1984-March
TL;DR: In this paper, the relationship between price changes and trading volume in Hong Kong stock market has been investigated using the Granger causality test, which checks the asymmetry of the price change and volume relationship.
Abstract: Studies on the relationship between price changes and trading volume can provide insight into the structure of the financial market. In this paper, we will study the above topic and concentrate on the stock market of Hong Kong. The correlation between price changes and trading volume as well as that between the magnitude of price changes and trading volume will be examined. We will also check the asymmetry of the price changes and volume relationship. Moreover, we will investigate the relationship between the variance of return and trading volume. Finally, the Granger causality test of price changes and volume will be performed.
Book•
01 Jan 1990TL;DR: In this paper, the authors used individual data of 473 S&P 500 firms to analyze the relation between increases in trading volume and firm and security characteristics, and found that the crash of 1987 led to significant increases in the trading volume in the N.Y.S.E.
TL;DR: The authors empirically tested rational pricing conditions applicable to American gold spot and futures options and found that a substantial number of violations of a condition applicable to call options are found, and most of these violations are sufficient in magnitude to cover the relevant transaction costs of arbitrage.
Abstract: This study empirically tests rational pricing conditions applicable to American gold spot and futures options. A number of ancillary pricing relations also are tested. Transactions data supplied by the Montreal Stock Exchange and the New York Commodity Exchange are used in these tests. Arbitrage trading strategies designed to exploit violations of these conditions also are provided. The results indicate potential intermarket inefficiency: a substantial number of violations of a condition applicable to call options are found, and most of these violations are sufficient in magnitude to cover the relevant transaction costs of arbitrage.
Book•
01 Apr 1990
TL;DR: In this paper, the authors present the Marketplace, Arbitrage Statics, International Capital Flows, and Arbitrage Dynamics as well as a discussion of the relationship between arbitrage and international capital flows.
Abstract: 1. The Marketplace 2. Arbitrage Statics 3. Arbitrage Dynamics 4. International Capital Flows.
Journal Article•