Showing papers on "Stock exchange published in 2011"

Does Algorithmic Trading Improve Liquidity

Abstract: Algorithmic trading (AT) has increased sharply over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The New York Stock Exchange automated quote dissemination in 2003, and we use this change in market structure that increases AT as an exogenous instrument to measure the causal effect of AT on liquidity. For large stocks in particular, AT narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that AT improves liquidity and enhances the informativeness of quotes. TECHNOLOGICAL CHANGE HAS REVOLUTIONIZED the way financial assets are traded. Every step of the trading process, from order entry to trading venue to back office, is now highly automated, dramatically reducing the costs incurred by intermediaries. By reducing the frictions and costs of trading, technology has the potential to enable more efficient risk sharing, facilitate hedging, improve liquidity, and make prices more efficient. This could ultimately reduce firms’ cost of capital. Algorithmic trading (AT) is a dramatic example of this far-reaching technological change. Many market participants now employ AT, commonly defined as the use of computer algorithms to automatically make certain trading decisions, submit orders, and manage those orders after submission. From a starting point near zero in the mid-1990s, AT is thought to be responsible for

Predicting direction of stock price index movement using artificial neural networks and support vector machines

Abstract: Prediction of stock price index movement is regarded as a challenging task of financial time series prediction. An accurate prediction of stock price movement may yield profits for investors. Due to the complexity of stock market data, development of efficient models for predicting is very difficult. This study attempted to develop two efficient models and compared their performances in predicting the direction of movement in the daily Istanbul Stock Exchange (ISE) National 100 Index. The models are based on two classification techniques, artificial neural networks (ANN) and support vector machines (SVM). Ten technical indicators were selected as inputs of the proposed models. Two comprehensive parameter setting experiments for both models were performed to improve their prediction performances. Experimental results showed that average performance of ANN model (75.74%) was found significantly better than that of SVM model (71.52%).

Using artificial neural network models in stock market index prediction

Abstract: Forecasting stock exchange rates is an important financial problem that is receiving increasing attention. During the last few years, a number of neural network models and hybrid models have been proposed for obtaining accurate prediction results, in an attempt to outperform the traditional linear and nonlinear approaches. This paper evaluates the effectiveness of neural network models which are known to be dynamic and effective in stock-market predictions. The models analysed are multi-layer perceptron (MLP), dynamic artificial neural network (DAN2) and the hybrid neural networks which use generalized autoregressive conditional heteroscedasticity (GARCH) to extract new input variables. The comparison for each model is done in two view points: Mean Square Error (MSE) and Mean Absolute Deviate (MAD) using real exchange daily rate values of NASDAQ Stock Exchange index.

The impact of intellectual capital on firms' market value and financial performance

Abstract: Purpose – Intellectual capital (IC) shows a significant growing acceptance as a worthy topic of academic investigation and practical implication. The purpose of this study is to examine the impact of IC on firms' market value and financial performance.Design/methodology/approach – The empirical data were drawn from a panel consisting of 96 Greek companies listed in the Athens Stock Exchange (ASE), from four different economic sectors, observed over the three‐year period of 2006 to 2008. Various regression models were examined in order to test the hypotheses included in the proposed conceptual framework.Findings – Results failed to support most of the hypotheses; only concluding that there is a statistically significant relationship between human capital efficiency and financial performance. Despite the fact that IC is increasingly recognised as an important strategic asset for sustainable corporate competitive advantage, the results of the present study give rise to various arguments, criticism and furthe...

Religious Beliefs, Gambling Attitudes, and Financial Market Outcomes

Abstract: We use religious background as a proxy for gambling propensity and investigate whether geographical variation in religion-induced gambling norms affects aggregate market outcomes. We examine four economic settings in which the recent literature has suggested a role for gambling and speculation. Our key conjecture is that gambling propensity would be stronger in regions with higher concentration of Catholics relative to Protestants. Consistent with our conjecture, we find that religion-induced gambling preferences influence the portfolio decisions of institutional investors. Investors located in regions with high Catholic-Protestant ratio (CPRATIO) exhibit a stronger propensity to hold stocks with lottery features. Further, in a corporate setting, we show that broad-based employee stock option plans, which are likely to appeal more to employees with stronger gambling preferences, are more popular in high CPRATIO regions. Examining the aggregate impact of gambling on stock returns, we find that the initial day return following an initial public offering is higher for firms located in high CPRATIO regions where local speculative demand is expected to be stronger. In a broader market setting, we find that the magnitude of the negative lottery-stock premium is larger in high CPRATIO regions. Collectively, our results indicate that religious beliefs, through their influence on gambling attitudes, impact investors' portfolio choices, corporate decisions, and stock returns.

Forecasting stock markets using wavelet transforms and recurrent neural networks: An integrated system based on artificial bee colony algorithm

Abstract: This study presents an integrated system where wavelet transforms and recurrent neural network (RNN) based on artificial bee colony (abc) algorithm (called ABC-RNN) are combined for stock price forecasting. The system comprises three stages. First, the wavelet transform using the Haar wavelet is applied to decompose the stock price time series and thus eliminate noise. Second, the RNN, which has a simple architecture and uses numerous fundamental and technical indicators, is applied to construct the input features chosen via Stepwise Regression-Correlation Selection (SRCS). Third, the Artificial Bee Colony algorithm (ABC) is utilized to optimize the RNN weights and biases under a parameter space design. For illustration and evaluation purposes, this study refers to the simulation results of several international stock markets, including the Dow Jones Industrial Average Index (DJIA), London FTSE-100 Index (FTSE), Tokyo Nikkei-225 Index (Nikkei), and Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX). As these simulation results demonstrate, the proposed system is highly promising and can be implemented in a real-time trading system for forecasting stock prices and maximizing profits.

Automation, Speed, and Stock Market Quality: The NYSE’s Hybrid

Abstract: Automation and trading speed are increasingly important aspects of competition among financial markets. Yet we know little about how changing a market’s automation and speed affects the cost of immediacy and price discovery, two key dimensions of market quality. At the end of 2006 the New York Stock Exchange introduced its Hybrid market, increasing automation and reducing the execution time for market orders from 10 seconds to less than one second. We find that the change raises the cost of immediacy (bid-ask spreads) because of increased adverse selection and reduces the noise in prices, making prices more efficient.

Dividend Behavior for the Aggregate Stock Market

Abstract: We develop and estimate a model of the dynamic behavior of aggregate corporate dividends as a function of the change in permanent earnings of firms. Although structured along the lines of the Lintner-Brittain-FamaBabiak models of individual-firm dividend behavior, the model uses changes in stock prices instead of accounting earnings to measure permanent earnings changes. The performance of the model is compared with both the accounting earnings-based models and the trend-autoregressive model associated with Shiller (1981a).

Going, Going, Gone? The Apparent Demise of the Accruals Anomaly

Abstract: Consistent with public statements made by sophisticated practitioners, we document that the hedge returns to Sloan's (Sloan, R. G. 1996. Do stock prices fully reflect information in accruals and cash flows about future earnings? Accounting Rev.71(3) 289--315) accruals anomaly appear to have decayed in U.S. stock markets to the point that they are, on average, no longer reliably positive. We explore some potential reasons why this has happened. Our empirical analyses suggest that the anomaly's demise stems in part from an increase in the amount of capital invested by hedge funds into exploiting it, as measured by hedge fund assets under management and trading volume in extreme accrual firms. A decline in the size of the accrual mispricing signal, as measured by the magnitude of extreme decile accruals and the relative persistence of cash flows and accruals, may also play a (weaker) role. This paper was accepted by Stefan Reichelstein, accounting.

Peer Performance and Stock Market Entry

Abstract: Peer performance can influence the adoption of financial innovations and investment styles. We present evidence of this type of social influence: recent stock returns that local peers experience influence an individual’s stock market entry decision, particularly in areas with better opportunities for social learning. The likelihood of entry does not decrease as returns fall below zero, consistent with people not talking about decisions that have produced inferior outcomes. Market returns, media coverage, local stocks, omitted local variables, short sales constraints, and stock purchases within households do not seem to explain these results.

The Effect of Capital Structure on Profitability: Evidence from the United States

Abstract: The relationship between capital structure and profitability cannot be ignored because the improvement in the profitability is necessary for the long-term survivability of the firm. This paper seeks to extend Abor's (2005) findings regarding the effect of capital structure on profitability by examining the effect of capital structure on profitability of the American service and manufacturing firms. A sample of 272 American firms listed on New York Stock Exchange for a period of 3 years from 2005 - 2007 was selected. The correlations and regression analyses were used to estimate the functions relating to profitability (measured by return on equity) with measures of capital structure. Empirical results show a positive relationship between i) short-term debt to total assets and profitability and ii) total debt to total assets and profitability in the service industry. The findings of this paper show a positive relationship between i) short-term debt to total assets and profitability, ii) long-term debt to total assets and profitability, and iii) total debt to total assets and profitability in the manufacturing industry. This paper offers useful insights for the owners/operators, managers, and lending institutions based on empirical evidence. Introduction The capital structure decision is crucial for business organizations. The capital structure decision is important because of the need to maximize returns of the firms, and because of the impact, such a decision has on the firm's ability to deal with its competitive environment. The capital structure of a firm is a mixture of different securities. In general, firms can choose among many alternative capital structures. For example, firms can arrange lease financing, use warrants, issue convertible bonds, sign forward contracts or trade bond swaps. Firms can also issue dozens of distinct securities in countless combinations to maximize overall market value (Abor, 2005, p. 438). A number of theories have been advanced in explaining the capital structure of firms. Despite the theoretical appeal of capital structure, researchers in financial management have not been able to find a model for an optimal capital structure. The best that academics and practitioners have been able to achieve are prescriptions that satisfy short-term goals (Abor, 2005, p. 438). The lack of a consensus about what would qualify as optimal capital structure in the sendee and manufacturing industries has motivated us to conduct this research. Abetter understanding of the issues at hand requires a look at the concept of capital structure and its effect on the firm's profitability. Most other empirical studies on the capital structure of the firm and profitability have been conducted on industrial firms. There might be other factors that affect the profitability of service firms, which are not involved in manufacturing. In service industry, investment in machinery and equipment is very low. If service firms lease their facilities (buildings), then their total capital invested is mainly working capital (Gill, Biger, and Bhutani, 2009, p. 48). In order to examine whether these different investment patterns are also related to the capital structure of these firms, we chose to sample companies from both service industries and manufacturing. This study examines the relationship between capital structure and profitability of the American service and manufacturing firms. The literature cites a number of variables that are potentially associated with the profitability of firms. In this study, the selection of exploratory variables is based on the alternative capital structure, profitability theories and previous empirical work. The choice can be limited, however, due to data limitations. As a result, the set of proxy variables includes six factors: three ratios of short-term debt to total assets, long-term debt to total assets, total debt to total assets and, in addition, sales growth, firm size, and profitability (measured by return on equity). …

Predicting corporate financial distress based on integration of decision tree classification and logistic regression

Abstract: Lately, stock and derivative securities markets continuously and rapidly evolve in the world. As quick market developments, enterprise operating status will be disclosed periodically on financial statement. Unfortunately, if executives of firms intentionally dress financial statements up, it will not be observed any financial distress possibility in the short or long run. Recently, there were occurred many financial crises in the international marketing, such as Enron, Kmart, Global Crossing, WorldCom and Lehman Brothers events. How these financial events affect world's business, especially for the financial service industry or investors has been public's concern. To improve the accuracy of the financial distress prediction model, this paper referred to the operating rules of the Taiwan Stock Exchange Corporation (TSEC) and collected 100 listed companies as the initial samples. Moreover, the empirical experiment with a total of 37 ratios which composed of financial and other non-financial ratios and used principle component analysis (PCA) to extract suitable variables. The decision tree (DT) classification methods (C5.0, CART, and CHAID) and logistic regression (LR) techniques were used to implement the financial distress prediction model. Finally, the experiments acquired a satisfying result, which testifies for the possibility and validity of our proposed methods for the financial distress prediction of listed companies. This paper makes four critical contributions: (1) the more PCA we used, the less accuracy we obtained by the DT classification approach. However, the LR approach has no significant impact with PCA; (2) the closer we get to the actual occurrence of financial distress, the higher the accuracy we obtain in DT classification approach, with an 97.01% correct percentage for 2 seasons prior to the occurrence of financial distress; (3) our empirical results show that PCA increases the error of classifying companies that are in a financial crisis as normal companies; and (4) the DT classification approach obtains better prediction accuracy than the LR approach in short run (less one year). On the contrary, the LR approach gets better prediction accuracy in long run (above one and half year). Therefore, this paper proposes that the artificial intelligent (AI) approach could be a more suitable methodology than traditional statistics for predicting the potential financial distress of a company in short run.

Equity Trading in the 21st Century

Abstract: The US equity market has changed dramatically in recent years. Increasing automation and the entry of new trading platforms have resulted in intense competition among trading platforms.Despite these changes, traders still face the same challenges as before. They seek to minimize the total cost of trading, including commissions, bid/ask spreads, and market impact. New technologies allow traders to implement traditional strategies more effectively. For example, dark pools and indications of interest are just an updated form of tactics that NYSE (New York Stock Exchange) floor traders used to search for counterparties while minimizing the exposure of their clients' trading interest to prevent front running.Virtually every measurable dimension of US equity market quality has improved. Execution speeds and retail commissions have fallen. Bid-ask spreads have fallen and remain low, although they spiked upward along with volatility during the recent financial crisis. Market depth has increased. Studies of institutional transactions costs find US costs among the lowest in the world. Unlike during the Crash of 1987, the US equity market mechanism handled the increase in trading volume and volatility without disruption. However, our markets lack a market-wide risk management system that would deal with computer-generated chaos in real time, and our regulators should address this."Make or take" pricing, the charging of access fees to market orders that "take" liquidity and paying rebates to limit orders that "make" liquidity, causes distortions that should be corrected. Such charges are not reflected in the quotations used for the measurement of best execution. Direct access by nonbrokers to trading platforms requires appropriate risk management. Front running orders in correlated securities should be banned.

Determinants of Corporate Cash Holdings: Evidence from Canada

Abstract: The purpose of this study is to investigate the determinants of corporate cash holdings in Canada. This study also seeks to extend the findings of Afza and Adnan (2007). A sample of 166 Canadian firms listed on Toronto Stock Exchange for a period of 3 years (from 2008-2010) was selected. This study applied co-relational and non-experimental research design. The results show that market-to-book ratio, cash flow, net working capital, leverage, firm size, board size, and the CEO (chief executive officer) duality significantly affect the corporate cash holdings in Canada. This study contributes to the literature on the factors that determine the corporate cash holdings. The findings may be useful for the financial managers, investors, and financial management consultants.

The evolving importance of banks and securities markets

Abstract: This paper examines the evolving importance of banks and securities markets during the process of economic development. As economies develop, they increase their demand for the services provided by securities markets relative to those provided by banks, such that securities markets become increasingly important for future economic development. Some exploratory evidence further suggests that deviations of a country’s actual financial structure -- the mixture of banks and markets operating in an economy -- from the estimated optimal structure are associated with lower levels of economic activity.

Transmission of the Financial and Sovereign Debt Crises to the EMU: Stock Prices, CDS Spreads and Exchange Rates

Abstract: This paper tests for the transmission of the 2007-2010 financial and sovereign debt crises to fifteen EMU countries. We use daily data from 2003 to 2010 on country financial and non-financial stock market indexes. First, we find strong evidence of crisis transmission to European non-financials from US non-financials, whereas the increase in dependence of European financials on US financials is rather limited. Second, in order to test how the sovereign debt crisis affected stock market developments we split the crisis in pre- and post-Lehman sub periods. Results show that financials become significantly more dependent on changes in Greek CDS spreads after Lehman’s collapse, compared to the pre-Lehman sub period. However, this increase is not present for non-financials. Third, before the crisis euro appreciations are associated with European stock market decreases, whereas during the crisis this is reversed. Finally, the reversal in the relationship between the Eurodollar exchange rate and stock prices seems to have been triggered by Lehman’s collapse.

Charting intellectual capital performance of the gateway to China

Abstract: Purpose – This paper aims to investigate whether intellectual capital (IC) has an impact on the financial aspects of organizational performance as well as attempting to identify the IC components that are associated with corporate financial performance indicators that signal organizational growth.Design/methodology/approach – This study drew on financial data from publicly available annual reports of all the constituent companies of the Hang Seng Index of the Hong Kong Stock Exchange for the years 2001‐2009. Following the value added intellectual coefficient™ (VAIC) methodology, regression models were constructed to examine the relationships between IC and the corporate financial performance indicators.Findings – Evidence was found to suggest that IC, as measured by VAIC, was positively associated with profitability of businesses. In particular, structural capital, as a key component of IC, played a notable part in enhancing corporate profitability, and showed a growing trend in its significance. Empirica...

How Does Investor Sentiment Affect Stock Market Crises? Evidence from Panel Data

Abstract: We test the impact of investor sentiment on a panel of international stock markets. Specifically, we examine the influence of investor sentiment on the probability of stock market crises. We find that investor sentiment increases the probability of occurrence of stock market crises within a one-year horizon. The impact of investor sentiment on stock markets is more pronounced in countries that are culturally more prone to herd-like behavior, overreaction and low institutional involvement.

Board compensation and ownership structure: empirical evidence for Italian listed companies

Abstract: This paper investigates the relationships among corporate ownership, the level of board compensation, and firms’ future performance within Italian listed companies. Board compensation could be related to corporate ownership characteristics, like the type of controlling shareholder, ownership concentration, the separation between cash flow and voting rights, and the presence of shareholders’ agreements. The evidence of high levels of board compensation associated with certain governance characteristics could signal, in a principal-agent framework, rent extraction by entrenched managers or by controlling shareholders versus minority shareholders; high board compensation, however, could be related to the need to hire directors with higher professional standing and also to the desire to create a network with other companies through the enlargement of the board, according to a social network view. In this paper we disentangle this issue showing the relationship between excess board compensation and future performance: examining firms listed on the Milan Stock Exchange over the period 1995–2002, we show that board compensation is linked to many governance characteristics, but excess compensation is never positively related to future performance. For founder family firms, in particular, high board compensation is associated with (a) smaller board size; (b) higher proportion of family members on the board; (c) lower future performance. The whole evidence therefore doesn’t support the hypothesis suggested by the social network view, but is consistent with a rent extraction hypothesis. These results could add new empirical evidence to the recent debate on the need for global remuneration reform. According to our results, some control mechanism and an increase in transparency of executive compensation schemes could be appropriate.

Free Cash Flow, Issuance Costs, and Stock Prices

Abstract: We develop a dynamic model of a firm facing agency costs of free cash flow and external financing costs. An explicit solution for the firm's optimal balance sheet dynamics is derived. Financial frictions affect issuance and dividend policies, the value of cash holdings, and the dynamics of stock prices. The model predicts that the marginal value of cash varies negatively with the stock price, and positively with the volatility of the stock price. This yields novel insights on the asymmetric volatility phenomenon, on risk management policies, and on how business cycles and agency costs affect the volatility of stock returns

The Role of Stock Liquidity in Executive Compensation

Abstract: We explore the role of stock liquidity in influencing the composition of CEO annual pay and the sensitivity of managerial wealth to stock prices. We find that as stock liquidity goes up, the proportion of equity-based compensation in total compensation increases while the proportion of cash-based compensation declines. Further, the CEO’s pay-for-performance sensitivity with respect to stock prices is increasing in the liquidity of the stock. Our main findings are supported by additional tests based on shocks to stock liquidity and two-stage-least squares specifications that mitigate endogeneity concerns. Our results are consistent with optimal contracting theories and contribute to the ongoing debate about the increasing trend of both equity-based over cash-based compensation and the sensitivity of total CEO wealth to stock prices rather than earnings.

Liberalisation and stock market co-movement between emerging economies

Abstract: This paper investigates the impact of trade and financial liberalisation on the degree of stock market co-movement among emerging economies. Using a sample of 25 developing countries observed over 15 years, we estimate the impact of reforms aimed at opening these countries through trade and financial channels to the rest of the world. The estimation of time-varying cross-country correlations allows the econometric investigation to be performed using a panel data framework, thus raising the quality of the statistical inference. Our results offer strong support in favour of a positive impact of trade and financial liberalisation reforms on the degree of cross-country stock market linkages.