Showing papers on "Stock exchange published in 2003"

What Works in Securities Laws

Abstract: We examine the effect of securities laws on stock market development in 49 countries. We find almost no evidence that public enforcement benefits stock markets, and strong evidence that laws facilitating private enforcement through disclosure and liability rules benefit stock markets.

Winter Blues: A SAD Stock Market Cycle

Abstract: This paper investigates the role of seasonal affective disorder (SAD) in the seasonal time-variation of stock market returns. SAD is an extensively documented medical condition whereby the shortness of the days in fall and winter leads to depression for many people. Experimental research in psychology and economics indicates that depression, in turn, causes heightened risk aversion. Building on these links between the length of day, depression, and risk aversion, we provide international evidence that stock market returns vary seasonally with the length of the day, a result we call the SAD effect. Using data from numerous stock exchanges and controlling for well-known market seasonals as well as other environmental factors, stock returns are shown to be significantly related to the amount of daylight through the fall and winter. Patterns at different latitudes and in both hemispheres provide compelling evidence of a link between seasonal depression and seasonal variation in stock returns: Higher latitude markets show more pronounced SAD effects and results in the Southern Hemisphere are six months out of phase, as are the seasons. Overall, the economic magnitude of the SAD effect is large.

The Presidential Puzzle: Political Cycles and the Stock Market

Abstract: The excess return in the stock market is higher under Democratic than Republican presidencies: 9 percent for the value-weighted and 16 percent for the equal-weighted portfolio. The difference comes from higher real stock returns and lower real interest rates, is statistically significant, and is robust in subsamples. The difference in returns is not explained by business-cycle variables related to expected returns, and is not concentrated around election dates. There is no difference in the riskiness of the stock market across presidencies that could justify a risk premium. The difference in returns through the political cycle is therefore a puzzle.

Cross-Border Listings and Price Discovery: Evidence from U.S.-Listed Canadian Stocks

Abstract: We examine the contribution of cross-listings to price discovery for a sample of Canadian stocks listed on both the Toronto Stock Exchange (TSE) and a U.S. exchange. We ¢nd that priceson the TSE and U.S. exchange are cointegrated and mutually adjusting. The U.S. share of price discovery ranges from 0.2 percent to 98.2 percent, with an average of 38.1 percent. The U.S. share is directly related to the U.S. share of trading and to the ratio of proportions of informative tradeson the U.S. exchange and the TSE, and inversely related to the ratio of bid-ask spreads. WITH THE ENHANCED GLOBALIZATION of ¢nancial markets, the number of non-U.S. ¢rms cross-listing shares on a U.S. exchange has substantially increased. Attracting non-U.S. listings is now a top priority of the U.S. stock exchanges. At the end of 2000, 420 non-U.S. ¢rmswere listed on the New York Stock Exchange (NYSE).The number of foreign ¢rmslisted on Nasdaq waseven higher.The popularity of international cross-listings has prompted many academic studies on the topic. 1 Most of these studies focus on the bene¢ts of international cross-listings, including the reduced cost of capital and the enhanced liquidity of a ¢rm’s stock. Studiessuch asAlexander, Eun, and Janakiramanan (1987, 1988) and Foerster and Karolyi (1993) suggest that the cost of capital declines because the portion of the risk premium that compensates for cross-border investment barriers dissipates. Miller (1999) and Foerster and Karolyi (1999) propose increased investor recognition as another possible explanation. Several studies examine changes in trading volume and costs due to international cross-listing. Foerster and Karolyi (1998) ¢nd that the bid-ask spreads in Canada decrease after the cross-listing of Canadian stocks in the United States. Domowitz, Glen, and Madhavan (1998) suggest that the impact of cross-listing is complex and depends on the degree of quote transparency, that is, the extent to which price information is observable in the two markets. Smith and So¢anos (1997) examine if cross-listing is a zerosum game, with increased trading in the United States being oiset by reduced

New Lists: Fundamentals and Survival Rates

Abstract: The class of firms that obtain public equity financing expands dramatically in the 1980s and 1990s. After 1979, the rate at which new firms are listed on major U.S. stock exchanges jumps from about 160 to near 550 per year, and the characteristics of new lists change. The cross-section of new list profitability becomes progressively more left skewed, and growth becomes more right skewed. The result is a sharp decline in new list survival rates. We suggest that the changes in the characteristics of new lists are due to a decline in the cost of equity capital that allows weaker firms and firms with more distant expected payoffs to become viable candidates for public equity financing.

The Predictive Power of Zero Intelligence in Financial Markets

Abstract: Standard models in economics stress the role of intelligent agents who maximize utility. However, there may be situations where, for some purposes, constraints imposed by market institutions dominate intelligent agent behavior. We use data from the London Stock Exchange to test a simple model in which zero intelligence agents place orders to trade at random. The model treats the statistical mechanics of order placement, price formation, and the accumulation of revealed supply and demand within the context of the continuous double auction, and yields simple laws relating order arrival rates to statistical properties of the market. We test the validity of these laws in explaining the cross-sectional variation for eleven stocks. The model explains 96% of the variance of the bid-ask spread, and 76% of the variance of the price diffusion rate, with only one free parameter. We also study the market impact function, describing the response of quoted prices to the arrival of new orders. The non-dimensional coordinates dictated by the model approximately collapse data from different stocks onto a single curve. This work is important from a practical point of view because it demonstrates the existence of simple laws relating prices to order flows, and in a broader context, because it suggests that there are circumstances where institutions are more important than strategic considerations.

More on Finance and Growth: More Finance, More Growth?

Abstract: JULY/AUGUST 2003 31 Nobel Prize winners disagree about the impact of the financial sector on economic growth. Some do not even consider finance worth discussing. A collection of essays by the “pioneers of development economics”—including three winners of the Nobel Prize in Economics—does not discuss finance (Meier and Seers, 1984). At the other extreme, Nobel Prize winner Merton Miller (1998, p. 14) recently remarked “that financial markets contribute to economic growth is a proposition almost too obvious for serious discussion.” As a third view, Nobel Laureate Robert Lucas (1988) holds that the role of finance in economic growth has been “over-stressed” by the growth literature. Resolving the debate about the importance of financial development for economic growth is important for distinguishing among theoretical models. More importantly, information on the importance of finance for growth will affect the intensity with which researchers and policymakers attempt to identify and construct appropriate financial sector reforms around the world. This paper selectively discusses recent empirical work on the controversial issue of whether financial systems play a critical role in determining long-run rates of economic growth. Building on work by Bagehot (1873), Schumpeter (1912), Gurley and Shaw (1955), Goldsmith (1969), and McKinnon (1973), recent research has employed different econometric methodologies and data sets to assess the role of the financial sector in stimulating economic growth. I will focus on three classes of empirical studies: (i) pure cross-country growth regressions, (ii) panel techniques that exploit both the cross-country and time-series dimensions of the data, and (iii) microeconomic-based studies that examine the mechanisms through which finance may influence economic growth. Thus, I will largely ignore country case studies and purely time-series investigations, which generally confirm the conclusions from the cross-country, panel, and microeconomic-based studies. Also, this paper does not discuss the theory surrounding the role of financial contracts, markets, and intermediaries in economic growth.1 The growing body of empirical research, using different statistical procedures and data sets, produces remarkably consistent results. First, countries with better-developed financial systems tend to grow faster—specifically, those with (i) large, privately owned banks that funnel credit to private enterprises and (ii) liquid stock exchanges. The levels of banking development and stock market liquidity each exert a positive influence on economic growth. Second, simultaneity bias does not seem to be the cause of this result. Third, better-functioning financial systems ease the external financing constraints that impede firm and industrial expansion. Thus, access to external capital is one channel through which financial development matters for growth because it allows financially constrained firms to expand. Each of the different statistical procedures that have been brought to bear on the finance-growth debate has methodological shortcomings, which emphasizes the need for additional research to clarify the relationship between finance and growth. Moreover, data problems plague the study of finance and growth in general. Perhaps the biggest data problem involves the empirical proxies of “financial development,” because it is difficult to construct accurate, consistent measures of financial development for a broad cross-section of countries. Thus, more microeconomic-based studies that explore the possible channels through which finance influences growth will foster a keener understanding of the finance-growth nexus. Without ignoring the weaknesses of existing work and the need for future research, the consistency of existing empirical results across different data sets and statistical procedures suggests that finance plays an important role in the process of economic growth. The body of existing work motivates research

Stock Market Integration and Financial Crises: The Case of Asia

Abstract: This study examines long-run relationships and short-run dynamic causal linkages among the U.S., Japanese, and ten Asian emerging stock markets, with the particular attention to the 1997-1998 Asian financial crisis. Extending related empirical studies, comparative analyses of pre-crisis, crisis, and post-crisis periods are conducted to comprehensively evaluate how stock market integration is affected by financial crises. In general, the results for the case of Asia show that both long-run cointegration relationships and short-run causal linkages among these markets were strengthened during the crisis and that these markets have generally been more integrated after the crisis than before the crisis. Detailed country-by-country analyses are provided, which yield a variety of new results concerning the roles of individual countries in international stock market integration. An important implication of our findings is that the degree of integration among countries tends to change over time, especially around periods marked by financial crises.

Merger Momentum and Investor Sentiment: The Stock Market Reaction to Merger Announcements

Abstract: This paper examines the effects of mergers on bidding firms' stock prices. We find evidence of merger momentum: bidder stock prices are more likely to increase when a merger is announced if recent mergers by other firms have been received well (a "hot" merger market) or if the overall stock market is doing better. However, there is long run reversal. Long-run bidder stock returns are lower for mergers announced when the either merger or stock markets were hot at the time of the merger than for those announced at other times.

How rewarding is technical analysis? Evidence from Singapore stock market

Abstract: This paper focuses on the role of technical analysis in signalling the timing of stock market entry and exit. Test statistics are introduced to test the performance of the most established of the trend followers, the Moving Average, and the most frequently used counter-trend indicator, the Relative Strength Index. Using Singapore data, the results indicate that the indicators can be used to generate significantly positive return. It is found that member firms of Singapore Stock Exchange (SES) tend to enjoy substantial profits by applying technical indicators. This could be the reason why most member firms do have their own trading teams that rely heavily on technical analysis.

Liquidity-Based Competition for Order Flow

Abstract: We present a microstructure model of competition for order flow between exchanges based on liquidity provision. We find that neither a pure limit order market (PLM) nor a hybrid specialist/limit order market (HM) structure is competition-proof. A PLM can always be supported in equilibrium as the dominant market (i.e., where the hybrid limit book is empty), but an HM can also be supported, for some market parameterizations, as the dominant market. We also show the possible coexistence of competing markets. Order preferencing—that is, decisions about where orders are routed when investors are indifferent—is a key determinant of market viability. Welfare comparisons show that competition between exchanges can increase as well as reduce the cost of liquidity. Active competition between exchanges for order flow in cross-listed securities is intense in the current financial marketplace. Examples include rivalries between the New York Stock Exchange (NYSE), crossing networks, and ECNs and between the London Stock Exchange, the Paris Bourse, and other continental markets for equity trading and between Eurex and London International Financial Futures and Options Exchange (LIFFE) for futures volume. While exchanges compete along many dimensions (e.g., “payment for order flow,” transparency, execution speed), liquidity and “price improvement” will, in our view, be the key variables driving competition in the future. Over time, high-cost markets should be driven out of business as investors switch to cheaper trading venues. Moreover, “market structure” is increasingly singled out by regulators, exchanges, and other market participants as a major determinant of liquidity. 1

Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options

Abstract: This paper analyzes the early exercise of exchange-traded options by different classes of investors over the 1996 to 1999 period. A large number of exercises are identified as clearly irrational without invoking any model of market equilibrium. Customers of discount brokers and customers of full-service brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior. Rational and irrational exercise is triggered for discount and full-service customers by the underlying stock price attaining its highest level over the past year and by high returns on the underlying stock. IT IS WELL-KNOWN THAT in the absence of market frictions, it is irrational to exercise American call options early except in some circumstances just before the underlying stock goes ex-dividend. Even in the presence of market frictions, it is possible to identify-without the imposition of any model of market equilibrium call exercises that are clearly irrational. In this paper, we employ a previously unavailable data set to analyze the rationality of early exercises of Chicago Board Option Exchange (CBOE) calls over the 1996 to 1999 period by customers of discount brokers (discount customers), customers of full-service brokers (full-service customers), and traders at large investment houses trading for their firms' own accounts (firm proprietary traders). Our first main finding is that there are a large number of early exercises that can be definitively identified as irrational, and irrational exercise activity is not evenly distributed across the investor classes. Discount customers and full-ser

Dynamics of trade-by-trade price movements: decomposition and models

Abstract: In this article we introduce a decomposition of the joint distribution of price changes of assets recorded trade-by-trade. Our decomposition means that we can model the dynamics of price changes using quite simple and interpretable models which are easily extended in a great number of directions, including using durations and volume as explanatory variables. Thus we provide an econometric basis for empirical work on market microstructure using time series of transaction data. We use maximum likelihood estimation and testing methods to assess the fit of the model to one year of IBM stock price data taken from the New York Stock Exchange.

Investor Protection Under Unregulated Financial Reporting

Abstract: We examine whether availability of higher quality financial information lessens investor losses during a period seen as a stock market crash. We focus on October 1929, which partly motivated sweeping financial reporting regulations in the 1930s. Using a sample of 540 common stocks traded on the New York Stock Exchange during October 1929, we find that the quality of firms' financial reporting increases with managers' incentives to supply higher quality financial information demanded by investors. Moreover, firms with higher quality financial reporting before October 1929 experienced smaller stock price declines during the market crash.

Economic impact of national sporting success: evidence from the London stock exchange

Abstract: In this article strong association is reported between the performance of the England football team and subsequent daily changes in the FTSE 100 index, representing the price of shares in the 100 largest companies traded on the London stock exchange.

Firm size, book-to-market equity and security returns: evidence from the Shanghai Stock Exchange

Abstract: Capital market theory is concerned with the equilibrium relationship between risk and expected return on risky assets. Within this framework, this paper seeks to extend the mounting evidence against the view that the beta coefficient of the Capital Asset Pricing Model is the sole measure of risk. In this paper we test the multifactor approach to asset pricing in one of the most challenging international markets, the Shanghai Stock Exchange, China. Firstly, we seek to determine whether the size and value premia exists in China. Secondly, we address the challenge that size and value premia are largely determined by seasonal factors (such as the January and/or Chinese New Year effect). Our findings suggest that mean-variance efficient investors in China can select some combination of small and low book-to-market equity firms in addition to the market portfolio to generate superior risk-adjusted returns. Moreover, we find no evidence to support the view that seasonal effects explain the findings of the multifactor model. In summary, we find the market factor alone is not sufficient to describe the cross-section of average stock returns in China.

On the origin of power law tails in price fluctuations

Abstract: In a recent Nature paper, Gabaix et al. \cite{Gabaix03} presented a theory to explain the power law tail of price fluctuations. The main points of their theory are that volume fluctuations, which have a power law tail with exponent roughly -1.5, are modulated by the average market impact function, which describes the response of prices to transactions. They argue that the average market impact function follows a square root law, which gives power law tails for prices with exponent roughly -3. We demonstrate that the long-memory nature of order flow invalidates their statistical analysis of market impact, and present a more careful analysis that properly takes this into account. This makes it clear that the functional form of the average market impact function varies from market to market, and in some cases from stock to stock. In fact, for both the London Stock Exchange and the New York Stock Exchange the average market impact function grows much slower than a square root law; this implies that the exponent for price fluctuations predicted by modulations of volume fluctuations is much too big. We find that for LSE stocks the distribution of transaction volumes does not even have a power law tail. This makes it clear that volume fluctuations do not determine the power law tail of price returns.

Markets as Cultures: An Ethnographic Approach

Abstract: The approach to the markets as cultures supposes at least three fields of studies: constitutive rules and roles; local rationality; dynamics of authorities and changes The paper deals with each of the fields The methodological issues of the study the markets as cultures are discussed after that The author supports his statement by giving examples of his own ethnographic studies of the stock exchange, bond market and futures markets on the Wall-street

Short-term reaction of stock markets in stressful circumstances

Abstract: In this paper we document the short-term stock price behaviour following a period of stock market stress. We focus on price behaviour using daily market indexes from 39 stock exchanges over the period 1989–1998. Our results are not consistent with the overreaction hypothesis. We find positive (negative) abnormal price performance in the short-term window (up to 10 days) following positive (negative) price shocks. Our analysis also highlights differences between developed and emerging markets. We show that the post-shock abnormal performances are significantly larger for emerging markets but that this momentum behaviour is markedly less in the late 1990s. We find the size of the after-shock tremors to be related to market liquidity, with larger post-shock price changes in less-liquid markets.