Asymmetric Volatility Spillovers between Stock Market and Real Activity: Evidence from the UK and the US

This paper examines the short-run dynamic relationships between stock market and real activity, within a country, for the UK and the US. The Cross Correlation Function testing procedure is applied to test for causality in mean and in variance between the stock market and the real economic sector. Besides variance causation, volatility spillover effects are examined through the multivariate specification form of the Exponential GARCH model. There is evidence of significant reciprocal volatility spillovers between the two sectors within a country, implying stronger interdependencies in the UK rather than in the US and asymmetric behavior only in the case of the UK.Stock market, Real activity, Volatility spillovers, UK, US

The Impact of Retail Investors Sentiment on Conditional Volatility of Stocks and Bonds

We measure bond and stock conditional return volatility as a function of changes in sentiment, proxied by six indicators from the Tel Aviv Stock Exchange. We find that changes in sentiment affect conditional volatilities at different magnitudes and often in an opposite manner in the two markets, subject to market states. We are the first to measure bonds conditional volatility of retail investors sentiment thanks to a unique dataset of corporate bond returns from a limit-order-book with highly active retail traders. This market structure differs from the prevalent OTC platforms, where institutional investors are active yet less prone to sentiment.Comment: 32 Pages, 4 Table

Long Term Changes in Voting Power and Control Structure following the Unification of Dual Class Shares

We follow the evolution of ownership structure in a sample of 80 Israeli companies that unified their dual-class shares in the 1990s, and compare it with a control sample of firms that maintained their dual share structure at least until 2000. Our main findings are as follows. First, controlling shareholders offset the dilution of voting rights they incurred upon unification by: 1) increasing their holdings prior to the unification (ex-ante preparation), and 2) by buying shares afterwards; by the end of the sample period their voting power was only marginally lower than in the control sample. This suggests that marginal voting rights are important to controlling shareholders even beyond the 50% threshold. Second, share unifications were not associated with much change in the identity of controlling shareholders. Third, the proportion of firms affiliated with pyramidal business groups in the sample of unifying firms was lower than in the population of listed firms as a whole and not different from that in the control sample, suggesting that pyramidal ownership structures did not replace dual class shares. Finally, unifying firms did not exhibit a substantial improvement in their performance and valuation in comparison with the control sample. We conclude that the regulatory attempt to enforce one share-one vote yielded, at best, a minor improvement in corporate governance.Dual class shares, corporate governance

Entropy and Efficiency of the ETF Market

We investigate the relative information efficiency of financial markets by measuring the entropy of the time series of high frequency data. Our tool to measure efficiency is the Shannon entropy, applied to 2-symbol and 3-symbol discretisations of the data. Analysing 1-min and 5-min price time series of 55 Exchange Traded Funds traded at the New York Stock Exchange, we develop a methodology to isolate residual inefficiencies from other sources of regularities, such as the intraday pattern, the volatility clustering and the microstructure effects. The first two are modelled as multiplicative factors, while the microstructure is modelled as an ARMA noise process. Following an analytical and empirical combined approach, we find a strong relationship between low entropy and high relative tick size and that volatility is responsible for the largest amount of regularity, averaging 62% of the total regularity against 18% of the intraday pattern regularity and 20% of the microstructure

Do Stock Market Returns Predict Changes to Output? Evidence from a Nonlinear Panel Data Model

Recent empirical work suggests a predictive relationship between stock returns and output growth. We employ quarterly data from a panel of 27 countries to test whether stock returns as useful in predicting growth. Unlike previous research, our approach allows for the possible non-linear effect of recessions on the growth-return relationship. There is strong evidence to suggest that a linear model would be misspecified and provide potentially misleading inference. Using a switching regression approach, we find evidence that returns are most useful in predicting growth when the economy is in recession.Panel data, current depth of recession, stock returns

[[alternative]]Exchange Listing Transfer, Liquidity, and Market Microstructure: Evidence from the Taiwanese Stock Market

計畫編號：NSC89-2416-H032-031研究期間：200008~200107研究經費：145,000[[sponsorship]]行政院國家科學委員

Behavioral Finance in Corporate Governance - Independent Directors, Non-Executive Chairs, and the Importance of the Devil’s Advocate

The Common Law, parliamentary democracy, and academia all institutionalize dissent to check undue obedience to authority; and corporate governance reformers advocate the same in boardrooms. Many corporate governance disasters could often be averted if directors asked hard questions, demanded clear answers, and blew whistles. Work by Milgram suggests humans have an innate predisposition to obey authority. This excessive subservience of agent to principal, here dubbed a "type II agency problem", explains directors’ eerie submission. Rational explanations are reviewed, but behavioral explanations appear more complete. Experimental work shows this predisposition disrupted by dissenting peers, conflicting authorities, and distant authorities. Thus, independent directors, chairs, and committees excluding CEOs might induce greater rationality and more considered ethics in corporate governance. Empirical evidence of this is scant – perhaps reflecting problems identifying genuinely independent directors.

The Costs of Control-Enhancing Mechanisms: How Regulatory Dualism Can Create Value in the Privatization of State-Owned Firms in Europe

Empirical studies show that ownership structures that separate control and cash flow rights create agency problems and are associated with reduced value for minority shareholders. Institutional investors recognize these inefficiencies and expect a discount on the share price of companies with control-enhancing mechanisms like multiple voting rights shares or pyramidal ownership structures. In the US, corporate pyramids are discouraged through the taxation of intercompany dividends, whereas multiple voting rights shares are allowed but have to be issued before the firm goes public. Therefore controlling shareholders, who want to entrench themselves in control by retaining multiple voting rights shares, pay the costs of this inefficient capital structure when the firm initially goes public at a discounted price. Some European countries – including Italy, Spain, Portugal and Greece – have adopted a diametrically opposite solution. Multiple voting rights shares are expressly prohibited by the legislator, but corporate pyramids are commonly used by listed companies and can be created following the IPO of the firm without approval from the shareholders. In this situation, if institutional investors expect that a pyramidal ownership structure will be created in the future, they will discount the price of the shares when the firm goes public. Therefore, if Italy, Spain, Portugal and Greece are willing to privatize some of their states-owned companies and want to maximize the price of their stocks, they should create the conditions to assure the market that these companies will not be controlled through pyramids in the future. Because of strong opposition from national business elites, who control the largest corporate groups, it is very difficult to adopt strict regulations aimed at prohibiting – or at least limiting – the use of pyramidal ownership structures in a relatively short period of time. In order to solve this Olson problem I suggest that Italy, Spain, Portugal and Greece should use regulatory dualism to create new markets with enhanced corporate governance rules that prevent shareholders’ control through pyramids.HLS 2013 Student Writing Prize: Victor Brudney Priz

THE PRICE OF OPTIONS ILLIQUIDITY

The purpose of this paper is to examine the effect of illiquidity on the value of currency options. We use a unique data set which allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity. The value of these options is compared to similar options traded on the exchange. We find that the non-tradable options are priced about 21 percent less than the exchange traded options. This gap cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the bidding process

International Cross-Listing: The Effects of Market Fragmentation and Information Flows

We investigate the effects of market fragmentation and information flows in the case of stocks cross-listed on markets in Central Europe and London. First, we test for co-movement, interaction and error correction behavior between the local and London markets. Our results suggest that strong interactions exist between these markets, with the London market being slightly more important than the local one. The two prices of cross-listed stocks are cointegrated and pricing errors are corrected over a few days. These interactions suggest partial fragmentation. Second, we extend an earlier model to examine the impact of foreign listing on the variance of local returns. The focus of previous studies has concentrated almost exclusively on the return of cross-listed securities. The variance of returns has remained mostly unnoticed, even though some studies noted an increase of variance after the cross- listing. In our model, we introduce a new factor that influences return variance: tighter interaction with foreign markets as a consequence of cross-listing. Estimation results lend support to our model.cross-listing, information flow, order flow, return variance, market fragmentation