The Information Content in Trades of Inactive Nasdaq Stocks

In this paper we analyze the frequency and information content of small Nasdaq stock trades and their impacts on return volatility at the intraday interval. We employ an autoregressive conditional duration (ACD) model to estimate the intensity of the arrival and information content of trades by accounting for the deterministic nature of intraday periodicity and irregular trading intervals in transaction data. We estimate and compare the price duration of thinly and heavily traded stocks to assess the differential information content of stock trades. We find that the number of transactions is negatively correlated with price duration or positively correlated with return volatility. The impact of the number of transactions on price duration or volatility is higher for thinly traded stocks. On the other hand, the persistence of the impact on price duration adjusted for intradaily periodicity is about the same for thinly and heavily traded stocks on average

Does Underwriter Reputation Affect the Performance of IPO Issues?

In this paper we examine the relationship between performance of the Chinese IPO firms and the reputation of investment bankers underwriting their stocks. Similar to previous studies on well-developed stock markets, we find that the initial return on the first day of trading is strongly positive for Chinese IPO stocks due to underpricing. This initial return is negatively related to the underwriter\u27s reputation, suggesting that the better the reputation of the underwriter, the less underpricing and hence, the lower the initial return of the IPO stock. Extending the analysis to a ten-day window after the first trading day, we find that the cumulative return becomes negative but that stocks with more prestigious underwriters experience less decline. We also examine the three year return of the IPOs. Contrary to previous findings, we find a positive long-run return for the Chinese IPO stocks. This long-run return is positively correlated with underwriter reputation. Finally, we find some evidence of positive long-run operating performance for the IPO firms that employ more prestigious underwriters

Term Structure of Default-Free and Defaultable Securities: Theory and Empirical Evidence

This article provides a survey on term structure models designed for pricing fixed income securities and their derivatives. 1 The past several decades have witnessed a rapid development in the fixed-income markets. A number of new fixed-income instruments have been introduced successfully into the financial market. These include, to mention just a few, strips, debt warrants, put bonds, commercial mortgage-backed securities, payment-in-kind debentures, zero-coupon convertibles, interest rate futures and options, credit default swaps, and swaptions. The size of the fixed-income market has greatly expanded. The total value of the fixed-income assets is about two-thirds of the market value of all outstanding securities.2 From the investment perspective, it is important to understand how fixed-income securities are priced. The term structure of interest rates plays a key role in pricing fixed income securities. Not surprisingly, a vast literature has been devoted to understanding the stochastic behavior of term structure of interest rate, the pricing mechanism of fixed-income markets, and the spread between different fixed-income securities. Past research generally focuses on: (i) modeling the term structure of interest rates and yield spreads; (ii) providing empirical evidence; and (iii) applying the theory to the pricing of fixed-income instruments and risk management. As such, our review centers on alternative models of term structure of interest rates, their tractability, empirical performance, and applications. We begin with the basic definitions and notations in Section 1. We provide clear concepts of term structure of interest rates that are easily misunderstood. Section 2 introduces bond pricing theory within the dynamic term structure model (DTSM) framework. This framework provides a general modeling structure in which most of the popular term structure models are nested. This discussion thus helps understand the primary ingredients to categorize different DTSMs, i.e., the risk-neutral distribution of the state variables and the mapping function between these state variables and instantaneous interest rate. Sections 3 provides a literature review of the studies on default free bonds. Several widely used continuous-time DTSMs are reviewed here, including affine, quadratic, regime switching, jump-diffusion and stochastic volatility models. We conclude this section with a discussion of empirical performance of these DTSMs, where we discuss some open issues, including the expectation puzzle, the linearity of state variables, the advantages of multifactor and nonlinear models, and their implications for pricing and risk management. The studies of defaultable bonds are explored in section 4. We review both structural and reduced-form models, with particular attention given to the later. Several important issues in reduced form models are addressed here, including the specification of recovery rates, default intensity, coupon payment, other factors such as liquidity and taxes, and correlated defaults. Since it is convenient to have a closed-form pricing formula, it is important to evaluate the tradeoff between analytical tractability and the model complexity. Major empirical issues are related touncovering the components of yield spreads and answering the question whether the factors are latent or observable. Section 5 reviews the studies on two popular interest rate derivatives: interest rate swap and credit default swap. Here we present the pricing formulas of interest rate swap and credit default swap based on risk-neutral pricing theory. Other risk factors, such as counterparty risk and liquidity risk are then introduced into the pricing formula. Following this, we review important empirical work on the determinants of interest rate swap spread and credit default swap spread. Section 6 concludes the paper by providing a summary of the literature and directions for future research. These include: (i) the economic significance of DTSM specification on pricing and risk management; (ii) the difference of interest rate dynamics in the risk neutral measure and physical measure; (iii) the decomposition of yield spreads; and (iv) the pricing of credit risk with correlated factors.This article is forthcoming in Handbook of Quantitative Finance and Risk Management, edited by C.F. Lee and A. Lee. Spring Publisher.

Are Corporate Bond Market Returns Predictable?

This paper examines the predictability of corporate bond returns using the transaction-based index data for the period from October 1, 2002 to December 31, 2010. We find evidence of significant serial and cross-serial dependence in daily investment-grade and high-yield bond returns. The serial dependence exhibits a complex nonlinear structure. Both investment-grade and high-yield bond returns can be predicted by past stock market returns in-sample and out-of-sample, and the predictive relation is much stronger between stocks and high-yield bonds. By contrast, there is little evidence that stock returns can be predicted by past bond returns. These findings are robust to various model specifications and test methods, and provide important implications for modeling the term structure of defaultable bonds.This paper is accepted by Journal of Banking and Finance

The 2000 presidential election and the information cost of sensitive versus

We investigate the information cost of stock trading during the 2000 presidential election. We find that the uncertainty of the election induces information asymmetry of politically sensitive firms under the Bush/Gore platforms. The unusual delay in election results in a significant increase in the adverse selection component of trading cost of politically sensitive stocks. Cross-sectional variations in bid-ask spreads are significantly and positively related to changes in information cost, controlling for the effects of liquidity cost and stock characteristics. This empirical evidence is robust to different estimation methods. JEL classification: G0, G1

The 2000 presidential election and the information

We investigate the information cost of stock trading during the 2000 presidential election. We find that the uncertainty of the election induces information asymmetry of politically sensitive firms under the Bush/Gore platforms. The unusual delay in election results creates a significant increase in the adverse selection component of the trading cost of politically sensitive stocks. Cross-sectional variations in bid-ask spreads are significantly and positively related to changes in information cost, controlling for the effects of liquidity cost and stock characteristics. This empirical evidence is robust to different estimation methods.It is published in Journal of Financial Markets (2008) .The whole title is The 2000 presidential election and the information cost of sensitive versus non-sensitive S&P 500 stocks

A further empirical investigation of the dividends adjustment process

Includes bibliographical references (p. 26-27)