Two-sided markets and intertemporal trade clustering: insights into trading motives
We show that equity markets are typically two-sided and that trades cluster in certain trading intervals for both NYSE and Nasdaq stocks under a broad range of conditions-news and non-news days, different times of the day, and a spectrum of trade sizes. By "two-sided" we mean that the arrivals of buyer-initiated and seller-initiated trades are positively correlated; by "trade clustering" we mean that trades tend to bunch together in time with greater frequency than would be expected if their arrival were a random process. Controlling for order imbalance, number of trades, news, and ...
Firm value and cross-listings: the impact of stock market prestige
This study investigates the valuation impact of a firm?s decision to cross-list on a more (or less) prestigious stock exchange relative to its own domestic market. We use network analysis to derive broad market-based measures of prestige for forty-five country or regional stock exchange destinations between 1990 and 2006. We find that firms cross-listing in a more prestigious market enjoy significant valuation gains over the five-year period following the listing. We also document a reverse effect for firms cross-listing in less prestigious markets: These firms experience a significant ...
Do stock price bubbles influence corporate investment?
Building on recent developments in behavioral asset pricing, we develop a model in which an increase in the dispersion of investor beliefs under short-selling constraints predicts a "bubble," or a rise in a stock's price above its fundamental value. Our model predicts that managers respond to bubbles by issuing new equity and increasing capital expenditures. We test these predictions, as well as others, using the variance of analysts' earnings forecasts-a proxy for the dispersion of investor beliefs-to identify the bubble component in Tobin's Q. ; When comparing firms traded on the New York ...
The relation between time-series and cross-sectional effects of idiosyncratic variance on stock returns in G7 countries
This paper suggests that CAPM-based idiosyncratic variance (IV) correlates negatively with future stock returns because it is a proxy for loadings on discount-rate shocks in Campbell*s (1993) ICAPM. The ICAPM also implies that there are important links between the time-series and cross-sectional IV effects. For example, the coefficients on conditional stock market variance and value-weighted average IV obtained from the time-series regressions reflect loadings on stock market returns and discount-rate shocks, respectively; therefore, they should help explain the cross section of stock ...
Equity portfolio diversification under time-varying predictability and comovements: evidence from Ireland, the US, and the UK
We use multivariate regime switching vector autoregressive models to characterize the time-varying linkages among short-term interest rates (monetary policy) and stock returns in the Irish, the US and UK markets. We find that two regimes, characterized as bear and bull states, are required to characterize the dynamics of returns and short-term rates. This implies that we cannot reject the hypothesis that the regimes driving the markets in the small open economy are largely synchronous with those typical of the major markets. We compute time-varying Sharpe ratios and recursive mean-variance ...
When do stock market booms occur? the macroeconomic and policy environments of 20th century booms
This paper studies the macroeconomic conditions and policy environments under which stock market booms occurred among ten developed countries during the 20th Century. We find that booms tended to occur during periods of above-average growth of real output, and below-average and falling inflation. We also find that booms often ended within a few months of an increase in inflation and monetary policy tightening. The evidence suggests that booms reflect both real macroeconomic phenomena and monetary policy, as well as the extant regulatory environment.
Aggregate idiosyncratic volatility in G7 countries
The paper analyzes average idiosyncratic volatility in G7 countries. We find that idiosyncratic volatility is highly correlated across countries and there is a significant Granger causality from the U.S. to the other countries and vice versa. Consistent with U.S. data, when combined with stock market volatility, idiosyncratic volatility has significant predictive power for stock market returns and the value premium in many other G7 countries. Moreover, in U.S. data, idiosyncratic volatility has explanatory power for stock returns very similar to that of value premium volatility in both ...
Understanding stock return predictability
Over the period 1927:Q1 to 2005:Q4, the average CAPM-based idiosyncratic variance (IV) and stock market variance jointly forecast stock market returns. This result holds up quite well in a number of robustness checks, and we show that the predictive power of the average IV might come from its close relation with systematic risk omitted from CAPM. First, high lagged returns on high IV stocks predict low future returns on the market as a whole. Second, returns on a hedging portfolio that is long in stocks with low IV and short in stocks with high IV perform as well as the value premium in ...
Monetary policy and stock market booms and busts in the 20th century
This paper examines the association between monetary policy and stock market booms and busts in the United States, United Kingdom, and Germany during the 20th century. Booms tended to arise when output growth was rapid and inflation was low, and end within a few months of an increase in inflation and monetary policy tightening. Latent variable VAR analysis of post-war data finds that inflation has had a particularly strong impact on market conditions, with disinflation shocks moving the market toward a boom and positive inflation shocks moving the market toward a bust. We conclude that ...
What can bank supervisors learn from equity markets? a comparison of the factors affecting market-based risk measures and BOPEC scores
Much recent academic attention has focused on the relative ability of markets and bank supervisors to assess the risk of depository institutions. We add to that literature by comparing the factors influencing bank holding company risk, as gauged by equity markets, with the factors influencing the confidential BOPEC scores, as awarded by bank supervisors. Specifically, we regress stock market measures of holding company risk and BOPEC scores on a host of on- and off-balance sheet risk measures taken from the Federal Reserve*s Consolidated Financial Statements for Bank Holding Companies (FR ...