The Cross-autocorrelation of Size-Based Portfolio Returns is Not an Artifact of Portfolio Autocorrelation
Terry Richardson
Bowling Green State University
David R. Peterson
Florida State University
Abstract
Prior studies find evidence of asymmetric size-based portfolio return cross-autocorrelations where lagged large-firm returns lead current small-firm returns. However, Boudoukh, Richardson, and Whitelaw (1994) question whether this economic relationship is independent of the impact of portfolio return autocorrelation. We formally test for this independence using size-based portfolios of New York and American Stock Exchange securities and, separately, portfolios of NASDAQ securities. Results from Granger (1969) causality regressions indicate that, across all markets, lagged large-firm returns predict current small-firm returns, even after controlling for autocorrelation in small-firm returns. These cross-autocorrecation patterns are stronger for NASDAQ securities.
Underwriting Spreads and the Reputational Capital: An Analysis of New Corporate Securities
Kenneth A. Carow
Indiana University
Abstract
When entering a new security market, investment banks must establish their reputation. This is done through direct experience in the security market or through the use of reputational capital established in existing security markets. I examine the effects of underwriters' market reputation in publicly underwritten offerings in each of 43 financial innovations and find more significant entry barriers for less prestigious underwriters. An analysis of underwriting spreads reveals first-issue pricing advantages due to reputational capital. Unlike the more prestigious underwriters, the less prestigious reduce spreads on their first entry into each new security market to overcome their lack of market reputation.
Information Transmission in the Shanghai Equity Market
D. Michael Long
University of Tennessee at Chattanooga; The University of Alabama in Huntsville
Janet D. Payne
University of South Alabama
Chenyang Feng
Providian Financial Corporation
Abstract
We examine market efficiency and the price-volume relation in Class A and Class B shares on the Shanghai exchange relative to the U. S. equity market. Variance ratios and runs tests for market efficiency support the hypothesis that both Class A and Class B markets follow a random-walk. In addition, the augmented Dickey-Fuller test supports the null hypothesis that the Shanghai market follows a random-walk process with drift. We also find a significantly positive relation between changes in volume and absolute price returns in both Class A and Class B shares, which is consistent with studies on U.S. equity markets. However, when using signed returns our results are stronger than most U.S. studies on price-volume relations. We find no significant difference between the price-volume correlations in Class A and Class B shares. However, the price-volume correlations in both Class A and Class B shares are significantly stronger than the price-volume correlation in the U.S. market. This suggests that volume may be more important to information transmission in China than in the U. S. markets.
Liquidity and Maturity Effects Around News Releases
Rohan Christie-David
University of Southern Mississippi
Mukesh Chaudhry
Northern State University
Abstract
We study the effects of liquidity and term-to-maturity following macroeconomic news announcements. To do this we select five instruments that differ in liquidity, or term-to-maturity, or both, and examine their response to the release of macroeconomic news. The results from this study suggest that variance on announcement days is higher in more liquid, longer term-to-maturity instruments. When instruments differ in both term-to-maturity and liquidity, term-to-maturity effects dominate. Tests for persistence in higher volatility in the five instruments following news releases show that most of the effects of the announcements seem to be well absorbed within fifteen minutes of the announcements. However, the evidence also suggests that the effects persist for longer periods in instruments that are more liquid. Term-to-maturity appears to have little or no effect in this instance.
On the Wealth Effects of the Supervisory Goodwill Controversy
Leonard Bierman, Donald R. Fraser and Asghar Zardkoohi
Texas A&M University
Abstract
We provide evidence on the potential wealth effects of the 1996 U.S. Supreme Court decision that the U.S. government had violated contractual obligations when, in 1989, it passed legislation prohibiting savings and loan associations from counting "supervisory goodwill" as capital. The Supreme Court decision did produce large wealth gains for the savings and loan plaintiffs, as did prior court decisions in favor of these savings and loans. However, little evidence exists to suggest negative market responses to important events surrounding the 1989 legislation.
International Investors' Exposure to Risk in Emerging Markets
Babak Eftekhari
Goldman Sachs International
Stephen E. Satchell
Trinity College , University of Cambridge
Abstract
We examine the empirical differences in emerging market betas (bs) taken across four major currencies (US dollars, sterling, yen, and German marks) where the bs considered are either mean-variance or mean-lower partial moment bs. The mean-variance bs are found to be statistically similar to lower partial-moment bs in the majority of cases, which suggests they are robust to the nonnormality in the data. The difference between the two bs has become less significant in recent years as the emerging markets have become more stable. Furthermore, evidence is presented that bs obtained from both risk measures and calculated from returns denominated in different currencies have the same ordinal association. This shows the primacy of local risk over foreign exchange risk. We conclude that international investors can continue to use the mean-variance b in assessing risk in emerging markets, although investors should not give it a conventional equilibrium interpretation.
A State-Space Approach to Estimate and Test Multifactor Cox-Ingersoll-Ross Models of the Term Structure
Alois L. J. Geyer
University of Economics, Vienna
Stefan Pichler
Vienna University of Technology
Abstract
The objective of this paper is to estimate and test multifactor versions of the Cox-Ingersoll-Ross (CIR) model of the nominal term structure of interest rates. The proposed state-space approach integrates time-series and cross-sectional aspects of the CIR model, is consistent with the underlying economic model, and can use information from all available points of the term structure. We recover estimates of the underlying factors that are consistent with the assumptions about the stochastic processes and compare them with factors obtained from standard factor analysis. We perform thorough diagnostic checking and thereby provide new evidence regarding conclusions about the adequacy of the CIR model. We present empirical results for U.S. Treasury market data. Although the specification of multifactor CIR models is sufficiently flexible for the shape of the term structure, we find strong evidence against the adequacy of the CIR model.