Showing papers on "Stock exchange published in 2001"
TL;DR: In this article, the authors used the Jakarta Stock Exchange's reaction to news about former President Suharto's health to assess the value of political connections and found that as much as a quarter of a firm's share price may be accounted for by political connections.
Abstract: While political connections have been widely discussed in the literature on corruption, little work has been done to assess the value of these connections. This paper uses the Jakarta Stock Exchange's reaction to news about former President Suharto's health to address this issue. By examining the difference in share price reactions of firms with varying degrees of political exposure, a market valuation of the proportion of a firm’s value derived from political connections is inferred. The implied value is very high, suggesting that as much as a quarter of a firm’s share price may be accounted for by political connections. (JEL D21, G14)
2,560 citations
TL;DR: In this article, the authors examined the relation between morning sunshine at a country's leading stock exchange and market index stock returns that day at 26 stock exchanges internationally from 1982-97.
Abstract: Psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood. This paper examines the relation between morning sunshine at a country's leading stock exchange and market index stock returns that day at 26 stock exchanges internationally from 1982-97. Sunshine is strongly positively correlated with daily stock returns. After controlling for sunshine, other weather conditions such as rain and snow are unrelated to returns. If transactions costs are assumed to be minor, it is possible to trade profitably on the weather. These results are difficult to reconcile with fully rational price-setting.
1,211 citations
TL;DR: This article examined the relationship between stock market development and economic growth, controlling for the effects of the banking system and stock market volatility, and found that although both banks and stock markets may be able to promote economic development, the erects of the former are more powerful.
Abstract: Utilizing time series methods and data from five developed economies, we examine the relationship between stock market development and economic growth, controlling for the effects of the banking system and stock market volatility. Our results support the view that, although both banks and stock markets may be able to promote economic growth, the erects of the former are more powerful. They also suggest that the contribution of stock markets on economic growth may have been exaggerated by studies that utilize cross-country growth regressions.
903 citations
TL;DR: In this paper, the authors investigate the role of trading activity in terms of the information it contains about future prices and find that stocks experiencing unusually high ~low! trading volume over a day or a week tend to appreciate ~depreciate! over the course of the following month.
Abstract: The idea that extreme trading activity contains information about the future evolution of stock prices is investigated. We find that stocks experiencing unusually high ~low! trading volume over a day or a week tend to appreciate ~depreciate! over the course of the following month. We argue that this high-volume return premium is consistent with the idea that shocks in the trading activity of a stock affect its visibility, and in turn the subsequent demand and price for that stock. Return autocorrelations, firm announcements, market risk, and liquidity do not seem to explain our results. THE OBJECTIVE OF THIS PAPER is to investigate the role of trading activity in terms of the information it contains about future prices. More precisely, we are interested in the power of trading volume in predicting the direction of future price movements. We find that individual stocks whose trading activity is unusually large ~small! over periods of a day or a week, as measured by trading volume during those periods, tend to experience large ~small! returns over the subsequent month. In other words, a high-volume return premium seems to exist in stock prices. The essence of our paper’s results is captured in Figure 1. In this figure, we show the evolution of the average cumulative return of three groups of stocks: stocks that experienced unusually high, unusually low, and normal trading volume, relative to their recent history of trading volume, on the trading day preceding the portfolio formation date. We see that the stocks that experienced unusually high ~low! trading volume outperform ~are outperformed by! the stocks which had normal trading volume. Moreover, this effect appears to grow over time, especially for the high-volume stocks. We postulate that the high-volume premium is due to shocks in trader interest in a given stock, that is, the stock’s visibility. Miller ~1977! and
884 citations
TL;DR: In this paper, the role of excessive extrapolation in employees' company stock holdings was explored, and it was found that employees of firms that experienced the worst stock performance over the last 10 years allocate 10.37 percent of their discretionary contributions to company stock, whereas employees whose firms experienced the best stock performance allocate 39.70 percent.
Abstract: About a third of the assets in large retirement savings plans are invested in company stock, and about a quarter of the discretionary contributions are invested in company stock. From a diversification perspective, this is a dubious strategy. This paper explores the role of excessive extrapolation in employees’ company stock holdings. I find that employees of firms that experienced the worst stock performance over the last 10 years allocate 10.37 percent of their discretionary contributions to company stock, whereas employees whose firms experienced the best stock performance allocate 39.70 percent. Allocations to company stock, however, do not predict future performance. ROUGHLY A THIRD OF THE ASSETS in large retirement savings plans are invested in company stock ~i.e., stocks issued by the employing firm! .I n extreme cases, such as Coca-Cola, the allocation to company stock reaches 90 percent of the plan assets. From a diversification perspective, it is even more puzzling that Coca-Cola employees allocate 76 percent of their own discretionary contributions to Coca-Cola shares. This strategy seems dubious, and it is in complete contrast to Markowitz ~1952! and Sharpe ~1964!, who predict that people will hold well-diversified portfolios. This paper examines whether excessive extrapolation of past returns could explain at least part of the discretionary allocations to company stock. 1 The empirical analysis utilizes a unique database of SEC filings that describes the variation in investment elections across companies for 1993. There are at least two reasons why the allocation to company stock is an interesting topic to study. First, the costs of insufficient diversification can be substantial. For example, with the assumption of a constant relative risk aversion of two, Brennan and Torous ~1999! find that the certainty equivalent of investing one dollar in a single stock over a 10-year period is only 36 cents! In the case of company stock, the costs of insufficient diversification
720 citations
TL;DR: This paper examined how corporate payout policy is affected by managerial stock incentives using data on more than 1,100 nonfinancial firms during 1993-97 and found that management stock ownership is associated with higher payouts by firms with potentially the greatest agency problems.
703 citations
TL;DR: In this article, the authors show that firms and industries with lower market model R2 statistics exhibit higher association between current returns and future earnings, indicating more information about future earnings in current stock returns.
Abstract: Roll (1988) observes low R2 statistics for common asset pricing models due to vigorousfirms-specific returns variation not associated with public information. He concludes (p. 56) that this implies â¬Seither private information or else occasional frenzy unrelated to concrete information.â¬?We show that firms and industries with lower market model R2 statistics exhibit higher association between current returns and future earnings, indicating more information about future earnings in current stock returns. This supports Rollâ¬"s first interpretation ⬠higher firms-specific returns variation as a fraction of total variation signals more information-laden stock prices and, therefore, more efficient stock markets.
674 citations
TL;DR: This article used an identification technique based on the heteroskedasticity of stock market returns to identify the reaction of monetary policy to the stock market and found that monetary policy reacts significantly to stock market movements, with a 5% rise (fall) in the S&P 500 index increasing the likelihood of a 25 basis point tightening (easing) by about a half.
Abstract: Movements in the stock market can have a significant impact on the macroeconomy and are therefore likely to be an important factor in the determination of monetary policy. However, little is known about the magnitude of the Federal Reserve's reaction to the stock market. One reason is that it is difficult to estimate the policy reaction because of the simultaneous response of equity prices to interest rate changes. This paper uses an identification technique based on the heteroskedasticity of stock market returns to identify the reaction of monetary policy to the stock market. The results indicate that monetary policy reacts significantly to stock market movements, with a 5% rise (fall) in the S&P 500 index increasing the likelihood of a 25 basis point tightening (easing) by about a half. This reaction is roughly of the magnitude that would be expected from estimates of the impact of stock market movements on aggregate demand. Thus, it appears that the Federal Reserve systematically responds to stock price movements only to the extent warranted by their impact on the macroeconomy.
636 citations
TL;DR: This article found that there is no long-run significant relationship between stock prices and exchange rates in the G-7 countries and that the short run significant relationship has only been found for one day in certain G7 countries, and they also found that the record of stock price and the value of the dollar cannot be depended on when predicting the future in the US.
464 citations
TL;DR: In this article, the authors examined whether or not the convergence of European economies towards economic and monetary Union (EMU) and the launch of the single currency leads to an increase in stock market integration through a reduction in investment barriers.
Abstract: The paper examines whether or not the convergence of European economies towards Economic and Monetary Union (EMU) and the launch of the single currency leads to an increase in stock market integration through a reduction in investment barriers. We estimate a conditional asset pricing model, which allows for a time-varying degree of integration that measures the importance of EU-wide risk relative to country-specific risk. The model accounts for intra-European currency risk, time-varying quantities and prices of risk. The results indicate that the degree of integration is closely related to forward interest differentials vis-a-vis Germany, i.e. to the probability of a country joining EMU. As the probability of the single currency materializing increases, restrictions on holding foreign assets become less binding, leading to higher market integration.
462 citations
TL;DR: In this paper, the authors define the regime-switching lognormal model and compare the fit of the model to the data with other common econometric models, including the generalized autoregressive conditionally heteroskedastic model.
Abstract: In this paper I first define the regime-switching lognormal model. Monthly data from the Standard and Poor’s 500 and the Toronto Stock Exchange 300 indices are used to fit the model parameters, using maximum likelihood estimation. The fit of the regime-switching model to the data is compared with other common econometric models, including the generalized autoregressive conditionally heteroskedastic model. The distribution function of the regime-switching model is derived. Prices of European options using the regime-switching model are derived and implied volatilities explored. Finally, an example of the application of the model to maturity guarantees under equity-linked insurance is presented. Equations for quantile and conditional tail expectation (Tail-VaR) risk measures are derived, and a numerical example compares the regime-switching lognormal model results with those using the more traditional lognormal stock return model.
Book•
15 Feb 2001
TL;DR: In this paper, the authors investigated the effect of companies going public on the stock market and found that companies taking this route systematically underprice their shares and over the longer term they underperform other companies.
Abstract: A critical decision in the life of a company is if, and when, to "go public" by listing themselves on the stock exchange. Two anomalies are apparent: that companies taking this route systematically initially underprice their shares and that over the longer term they under-perform other companies. This book investigates these issues in a non-technical manner, drawing upon international evidence from private sector companies and privatizations.
TL;DR: Empirical results show that the PNN-based investment strategies obtain higher returns than other investment strategies examined in this study.
Abstract: In the last decade, neural networks have drawn noticeable attention from many computer and operations researchers. While some previous studies have found encouraging results with using this artificial intelligence technique to predict the movements of established financial markets, it is interesting to verify the persistence of this performance in the emerging markets. These rapid growing financial markets are usually characterized by high volatility, relatively smaller capitalization, and less price efficiency, features which may hinder the effectiveness of those forecasting models developed for established markets. In this study, we attempt to model and predict the direction of return on the Taiwan Stock Exchange Index, one of the fastest growing financial exchanges in developing Asian countries. Our approach is based on the notion that trading strategies guided by forecasts of the direction of price movement may be more effective and lead to higher profits. The Probabilistic Neural Network (PNN) is used to forecast the direction of index return after it is trained by historical data. The forecasts are applied to various index trading strategies, of which the performances are compared with those generated by the buy and hold strategy, and the investment strategies guided by the forecasts estimated by the random walk model and the parametric Generalized Methods of Moments (GMM) with Kalman filter. Empirical results show that the PNN-based investment strategies obtain higher returns than other investment strategies examined in this study. The influences of the length of investment horizon and the commission rate are also considered.
TL;DR: The use of price earnings ratios and dividend-price ratios as forecasting variables for the stock market is examined using aggregate annual US data 1871 to 2000 and aggregate quarterly data for twelve countries since 1970.
Abstract: The use of price earnings ratios and dividend-price ratios as forecasting variables for the stock market is examined using aggregate annual US data 1871 to 2000 and aggregate quarterly data for twelve countries since 1970. Various simple efficient-markets models of financial markets imply that these ratios should be useful in forecasting future dividend growth, future earnings growth, or future productivity growth. We conclude that, overall, the ratios do poorly in forecasting any of these. Rather, the ratios appear to be useful primarily in forecasting future stock price changes, contrary to the simple efficient-markets models. This paper is an update of our earlier paper (1998), to take account of the remarkable behavior of the stock market in the closing years of the twentieth century.
TL;DR: This article examined the dynamic linkages between oil prices and the stock market and found that the linkage between oil price and stock market was stronger in the 1990s, which is consistent with the documented influence of oil on economic output.
Abstract: This paper examines the dynamic linkages between oil prices and the stock market. Prior work argues that daily oil futures price changes and the S&P 500 stock index movements are not related. This conclusion could be due to the fact that only linear linkages have been examined. Relying on nonlinear causality tests, this study provides evidence that oil shocks affect stock index returns, which is consistent with the documented influence of oil on economic output. Moreover, the study finds that the linkage between oil prices and the stock market was stronger in the 1990s.
Dissertation•
01 Jan 2001
TL;DR: In this paper, the authors examined the relationship between stock markets and economic growth using Toda and Yamamoto (1999) technique in testing for the causal relationship between the variables concerned and found evidence that the level and productivity of investment are important channels through which stock markets enhance economic growth.
Abstract: The relationship between financial markets and economic growth has interested
economists for decades. However, previous studies do not identify the unique role of
stock markets in economic growth, nor do they test explicitly if stock markets affect the
level or the growth rate of the economy. Several theoretical and empirical papers by
Levine (1991), Levine and Zervos (1995), Kunt (1992), and Kunt and Levine (1996) have
contributed to our understanding of how stock market development may affect
economic growth, but the common problem with them all is that no channel through
which stock markets can stimulate economic growth is explicitly identified.
This thesis deals with two issues concerning the relationship between stock markets
and economic growth. The study examines the nature of the causal link between stock
markets and economic growth using Toda and Yamamoto (1999) technique in testing for
causality relationship between the variables concerned. Focusing on the nature of
causality between stock markets and economic growth, the study examines the
endogenous growth hypothesis that fmancial markets enhance economic growth
performance specifically through the level and productivity of investment.
In the empirical part of the study, we analyze stock market data from seven countries
over 1979-1995. We use time-series analysis, and find that the development of stock
markets has a significant effect on the growth rate of real GDP. We also find evidence
that supports the endogenous growth hypothesis, where the level and productivity of
investment are important channels through which stock markets enhance economic
growth.
TL;DR: In this paper, the role of limit orders in the liquidity provision in a pure order-driven market was investigated, and it was shown that market depth rises subsequent to an increase in transitory volatility.
Abstract: We investigate the role of limit orders in the liquidity provision in a pure orderdriven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask ~bid! side, investors will submit more limit sell ~buy! orders than market sell ~buy! orders. This result is consistent with the existence of limit-order traders who enter the market and place orders when liquidity is needed.
TL;DR: In this article, a dynamic general equilibrium model of stock prices is developed which yields a stock price volatility and equity premium that are close to the historical values, where non-observability of the expected dividend growth rate introduces an element of learning which increases the volatility of stock price.
TL;DR: In this article, the authors investigated the timing of open market share repurchases and the resultant impact on firm liquidity using the Stock Exchange of Hong Kong's unique disclosure environment, identifying the exact implementation dates for more than five thousand equity buybacks.
TL;DR: This article found that European companies are more likely to cross-list in more liquid and larger markets, and in markets where several companies from their industry are already cross-listed, but not with more stringent accounting standards.
TL;DR: In this paper, the authors present a new methodology for testing economic restrictions on the price schedules offered in a limit order book that are based on break-even conditions for marginal limit orders and rational updating conditions for order book revisions over time.
Abstract: This article presents a new methodology for testing economic restrictions on the price schedules offered in a limit order book that are based on (i) break-even conditions for marginal limit orders and (ii) rational updating conditions for order book revisions over time. Using order flow data from the Stockholm Stock Exchange, I find strong evidence of insufficient depth in the limit order books relative to the theoretical predictions. An extended model, which allows the model parameters to depend on market conditions, captures some of the systematic variation in the observed order book depth. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
TL;DR: In this paper, a broad sample of firms in eight countries over an eighteen-year period was studied and it was found that firm-level and industry-level share values are significantly influenced by exchange rates and that significant firm, industry and country-specific differences remain even as financial markets become more and more integrated.
Abstract: Finance theory suggests that changes in exchange rates should have little influence on asset prices in a world with integrated capital markets. Indeed, the existing literature examining the relationship between international stock prices and exchange rates finds little evidence of systematic exchange rate exposure. We argue in this paper that the absence of evidence may be due to restrictions imposed on the sample of data and the empirical specifications used in previous studies. We study a broad sample of firms in eight countries over an eighteen-year period. We find that firm-level and industry-level share values are significantly influenced by exchange rates. Further, we do not find evidence that exchange rate exposure is falling (or becoming less statistically significant) over time. Our results suggest that significant firm, industry and country-specific differences remain even as financial markets become more and more "integrated".
TL;DR: In this article, the effect of the tick size reduction on execution costs of stocks was studied. But the authors emphasize that spreads are not a sufficient statistic for market quality and that small smaller tick sizes may actually reduce market liquidity.
Posted Content•
TL;DR: In this article, the authors analyse order placement strategies in a limit order market, using data on the order flow from the Stockholm Stock Exchange and find evidence against the hypothesis that the trader's decision to be a buyer or a seller depends only on the trading profits available in the limit order book.
Abstract: We analyse order placement strategies in a limit order market, using data on the order flow from the Stockholm Stock Exchange. Traders submitting market or limit orders trade off the order price against both the execution probability and the winner's curse risk associated with different order choices. The optimal order strategy is characterized by a monotone function, which maps the liquidity demand of the investors into their order choice. We develop and implement a semiparametric test of this monotonicity property, and find no evidence against the monotonicity property for buy orders or sell orders. We do find evidence against the hypothesis that the trader's decision to be a buyer or a seller depends only on the trading profits available in the limit order book. We estimate that traders submitting market buy orders have private valuations that exceed the asset value by 2.3% on average and receive an average payoff of at least 1.8% of the asset value. Traders submitting limit buy orders at the price below the best ask quote have private valuations between 0.1% and 2.3% above the asset value and earn an average payoff of between 0.3% and 1.8% of the asset value. Although the distribution of liquidity demand does not depend on conditioning information, conditioning information helps us to predict the composition of the order flow in our data. These findings imply that variation in the composition of the order flow can be explained by empirical variation in the relative profitability of alternative order choices and movements in the common value of the asset.
TL;DR: In this article, the authors examined abnormal stock price changes prior to executive stock option grants and found a statistically significant abnormal decrease in stock prices during the 10-day period immediately preceding the grant date.
TL;DR: In this paper, market segmentation in China's stock markets is studied, where local firms issue two classes of shares: class A shares available only to Chinese citizens and class B shares available to foreign citizens.
Abstract: We study market segmentation in China's stock markets, in which local firms issue two classes of shares: class A shares available only to Chinese citizens and class B shares available only to foreign citizens. Significant stock price discounts are documented for class B shares. We find that the price difference is primarily due to illiquid B-share markets. Relatively illiquid B-share stocks have a higher expected return and are priced lower to compensate investors for increased trading costs. However, between the two classes of shares, B-share prices tend to move more closely with market fundamentals than do A-share prices. Therefore, we find A-share premiums rather than B-share discounts in China's markets.
JEL classification: G15
TL;DR: A comprehensive review of the literature on the interaction between real stock returns, inflation, and money growth, with a special emphasis on the role of monetary policy is given in this paper.
Abstract: This paper gives a comprehensive review of the literature on the interaction between real stock returns, inflation, and money growth, with a special emphasis on the role of monetary policy. This is an area of research that has interested monetary and financial economists for a long time. Monetary economists have been interested in the question whether money has any effect on real stock prices, while financial economists have investigated whether equity is a good hedge against inflation. Empirical studies show that money can be helpful in predicting future stock returns. Empirical evidence also suggest that equity is not a good hedge against inflation in the short run but may be so in the long run. The short-run negative relation between stock returns and inflation can easily be explained by theoretical models. If the central bank conducts a countercyclical monetary policy this will result in a negative relation between inflation and stock returns, while if it conducts a procyclical policy we could observe a positive relation. According to both theoretical and empirical studies investors receive an inflation risk premium for holding equity.
TL;DR: Wang et al. as mentioned in this paper examined empirically whether domestic investors in the Chinese stock market perceive accounting information based on Chinese GAAP to be value-relevant based on a return and a price model.
TL;DR: In this paper, the performance of one group of technical trading rules using index data for four emerging South Asian capital markets (the Bombay Stock Exchange, the Colombo stock exchange, the Dhaka Stock Exchange and the Karachi Stock Exchange) and examines the implications of the results for the weak form of the efficient market hypothesis.
TL;DR: In this paper, the authors examined the costs of food recalls from the perspective of capital markets and found that returns to shareholders fell in some cases, but stock market reaction was not discernible in other incidents.
Abstract: The costs of food recalls are examined from the perspective of capital markets. A partial event analysis technique is used in this quantitative investigation of firm-specific repercussions of incidents of microbiological contamination of food. These recalls vary by product, company size and scope, and severity. Returns to shareholders fell in some cases, but stock market reaction was not discernible in other incidents. Effects on volatility of returns also are mixed. These findings point out the potentially distinct crisis management tools that would be used for reputation in the stock market versus measures to communicate with the general public.