Accounting, Finance, Financial Planning and Insurance Series
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No. 2009_02   (Download full text)
Michael T. Chng and Gerard L. Gannon
The Trading Performance of Dynamic Hedging Models: Time Varying Covariance and Volatility Transmission Effects
In this paper, we investigate the value of incorporating implied volatility from related option markets in dynamic hedging. We comprehensively model the volatility of all four S&P 500 cash, futures, index option and futures option markets simultaneously. Synchronous half-hourly observations are sampled from transaction data. Special classes of extended simultaneous volatility systems (ESVL) are estimated and used to generate out-of-sample hedge ratios. In a hypothetical dynamic hedging scheme, ESVLbased hedge ratios, which incorporate incremental information in the implied volatilities of the two S&P 500 option markets, generate profits from interim rebalancing of the futures hedging position that are incremental over competing hedge ratios. In addition, ESVL-based hedge ratios are the only hedge ratios that manage to generate sufficient profit during the hedging period to cover losses incurred by the physical portfolio .
JEL-Codes: G14; G28
Keywords: volatility transmission, dynamic hedging, optimal hedge ratio, S&P 500
No. 2009_01   (Download full text)
Gerard L. Gannon
Dispersion of Information or Market Behaviour: General Public Trading in S&P500 Index Futures
This paper considers 15 minute records of trading volume and traded prices coinciding with the reporting intervals required by the Commodity Futures Trading Commission. Records are extracted from trade records for two way trade between market makers (CTI1) and the general public (CTI4) from January 1994 to June 2004. Futures price records are matched with S&P500 cash index price records. Simultaneous volatility models are specified and estimated to test trading volume to futures volatility lead/lag effects and also futures volatility to cash index volatility lead/lag effects. There is evidence that existing theoretical models of the general public trading behaviour do not explain such behaviour in these very actively traded markets. These effects can depend more on market conditions than what is suggested in theoretical models.
JEL-Codes: G14
Keywords: S&P500 Trade Data, Simultaneous Volatility, Market Makers, General Public, Volume, Lead/Lag Volatility
No. 2008_02   (Download full text)
Gerard L. Gannon
Market Makers V's The General Public: A First Look at S&P500 Futures Trade Data
This paper considers 15 minute records of trading volume and traded prices coinciding with the reporting intervals required by the Commodity Futures Trading Commission. Records are extracted from trade records for market trade and also two way trade between market makers (CT1) and the general public (CT4) from January 1994 to June 2004. Futures price records are matched with S&P500 cash index price records. Simultaneous volatility models are specified and estimated to test trading volume to futures volatility lead/lag effects and also futures volatility to cash index volatility lead/lag effects. As we disaggregate from the market records to CT1 and CT4 records and further into year to year samples volume to futures volatility leading effects and also futures volatility to cash volatility leading effects dominate. The results raise important issues for risk management and dynamic hedging models employing intra-day trader data. A number of important issues for further analysis are also raised in this paper.
JEL-Codes: G14
Keywords: S&P500 Trade Data, Simultaneous Volatility, Volume, Lead/Lag
No. 2008_01   (Download full text)
Michael T. Chng and Gerard L. Gannon
The Trading Performance of Dynamic Hedging Models: Time Varying Covariance and Volatility Transmission Effects
In this paper, we investigate the value of incorporating implied volatility from related option markets in dynamic hedging. We comprehensively model the volatility of all four S&P 500 cash, futures, index option and futures option markets simultaneously. Synchronous half-hourly observations are sampled from transaction data. Special classes of extended simultaneous volatility systems (ESVL) are estimated and used to generate out-of-sample hedge ratios. In a hypothetical dynamic hedging scheme, ESVLbased hedge ratios, which incorporate incremental information in the implied volatilities of the two S&P 500 option markets, generate profits from interim rebalancing of the futures hedging position that are incremental over competing hedge ratios. In addition, ESVL-based hedge ratios are the only hedge ratios that manage to generate sufficient profit during the hedging period to cover losses incurred by the physical portfolio .
JEL-Codes: G14; G28
Keywords: volatility transmission, dynamic hedging, optimal hedge ratio, S&P 500
No. 2007_20   (Download full text)
Marcus Clements, Harminder Singh and Antonie Van Eekelen
Trading in Target Stocks Before Takeover Announcements: An Analysis of Stock and Option Markets
In this study we examine both informed trading and contraire trading preceding takeover announcements on US target firms. Our findings suggest that both informed trading and contraire trading exists within the period preceding takeover announcements on both the stock and option markets as evident through abnormal returns and trading volumes. In regard to contraire trading, this study investigates possible explanations for its existence including liquidity clustering, falsely informed trading and deliberate contraire trading. The results find that bid-ask spreads actually increase over the pre-announcement period indicating that liquidity clustering is an unlikely explanation. However, through analysis of an unbiased sample of rumoured target firms, deliberate contraire trading appears both a profitable and more likely explanation for contraire trading than falsely informed trading.
Keywords: Informed Trading; Contraire Trading; Market Efficiency; Event Study
No. 2007_19   (Download full text)
Lisa Hotson, Navjot Kaur and Harminder Singh
The Information Content of Directors’ Trades: Empirical Analysis of the Australian Market
We examine the trading activities of directors in shares of their own companies on the Australian Stock Exchange during the July-December 2005 period. We find that directors of small companies in particular earn abnormal return after both their ‘Purchase’ and as well as their ‘Sale’ trade. Directors of these companies have an uncanny ability to time the market by trading when mispricing is greatest, and are able to predict the future performance of their firms in short run. For directors of medium and large companies, we find evidence that ‘Sale’ trades are the ones which work as loss avoiders. Outsiders recognise to some extent that directors’ trades are informative, however they are slow to incorporate the new information into prices, refuting much of the market efficiency literature.
No. 2007_18   (Download full text)
Sang-Hoon Kang and Hoa Nguyen
Long Memory in the Australian Stock Market
In this paper, we re-examine the evidence of long memory in the Australian stock market. Using the rescaled range analysis, we find evidence of long memory and non-periodic cycles in the All Ordinaries Index. The result suggests that long memory is present in the Australian stock market. Furthermore, we add to the literature by investigating the presence of long memory in the daily ASX 50 index and its 50 constituent stocks using a GPH test proposed by Geweke and Porter-Hudak (1983). The results of individual stocks differ from those of the ASX 50 index and suggest that a common stock index is not representative of all market features.
Keywords: long memory, persistence, rescaled range analysis, GPH test
No. 2007_17   (Download full text)
Hoa Nguyen, William Dimovski and Robert Brooks
Underpricing, Risk Management, Hot Issue and Crowding out Effects: Evidence from the Australian Resources Sector Initital Public Offerings
In this paper, we provide a comprehensive investigation of 260 initial public offerings (IPOs) in the Australian resource sector for the 1994 – 2004 period. Consistent with the existing IPO literature, we document a 16.13% underpricing return by firms in the sample. Despite the contention that risk management can reduce the uncertainty relating to the new issue and hence alleviates the extent of underpricing, we do not find any evidence in support of such contention. In addition to the conventional variables used to explain IPOs underpricing, we further provide evidence that the demand for resources IPOs is not ‘crowded-out’ by the strength of alternative IPO markets. We also show evidence that the issue price adjusts to both market return in preceding months and the average underpricing of resources IPOs in the 12 month period leading to the float which offers an explanation to the hot issue effect observed in the IPO market.
JEL-Codes: G15
Keywords: initial public offerings, underpricing, risk management, crowding-out effect, hot issue market.
No. 2007_16   (Download full text)
Cheny Chen, Ming-Hua Liu and Hoa Nguyen
The Information Content of Implied Volatility in the Hong Kong and Singapore Covered Warrants Markets
This paper examines the informational content and predictive power of implied volatility over different forecasting horizons in a sample of European covered warrants traded in the Hong Kong and Singapore markets. The empirical results show that time-series-based volatility forecasts outperform implied volatility forecast as a predictor of future volatility. The finding also suggests that implied volatility is biased and informationally inefficient. The results are due to the fact in Hong Kong and Singapore the covered warrants markets are dominated by retail investors, who tend to use covered warrants’ leverage to speculate on the price movements of the underlying rather than to express their view on volatility.
No. 2007_15   (Download full text)
Hoa Nguyen and Robert Faff
Does the Type of Derivative Instrument Used by Companies Impact Firm Value?
We explore the relationship between the type of derivative instrument used and firm value, in a sample of Australian firms. Specifically, we examine the impact of the corporate use of swaps, futures, forwards and options, and the extent of such usage, on firm value. Our findings suggest that a ‘discount’ is most severely imposed on users of swaps.
No. 2007_14   (Download full text)
Hoa Nguyen and Robert Faff
Are Financial Derivates Really Value Enhancing? Australian Evidence
This paper investigates the relationship between the use of financial derivatives and firm value in the Australian setting. Contrary to expectations, we find that the use of derivatives in general, and the use of interest rate derivatives in particular, are negatively related to firm value (as proxied by Tobin’s Q). The existence of this derivative user ‘discount’, combined with strong prior evidence that corporations are primarily motivated by value-enhancing goals, suggests a need for managers to focus serious efforts into explaining their value-driven strategies to the financial market and to do so in a timely manner.
No. 2007_13   (Download full text)
Kannan Thuraisamy, Gerry Gannon and Jonathan A. Batten
Credit Spread Dynamics: Evidence from Latin America
This paper examines the behaviour of credit spreads on key sovereign issuers from the Latin American region, which accounts for more than one third of international bond issues by developing, or emerging, markets. Since the late 1990s, credit spreads on Latin American issues have declined broadly inline with those in other emerging markets. Recent empirical analysis has explained this phenomenon by identifying critical macroeconomic factors, including the reduction in systematic risk in individual markets, although the structural models from the theoretical finance literature also predict the importance of key default and interest rate variables. This contribution adds to the understanding of these issues by investigating the application of structural models to the Latin American setting, one historically characterized by excessive volatility and susceptibility to episodes of default.
JEL-Codes: G15
Keywords: credit spreads, long-run dynamics, Latin America, sovereign bonds, cointegration
 
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