Intraday Seasonalities and Macroeconomic News Announcements

Using a data set consisting of three years of 5-minute intraday stock index returns for major European stock indices and U.S. macroeconomic surprises, the conditional mean and volatility behaviors in European market were investigated. The findings suggested that the opening of the U.S market significantly raised the level of volatility in Europe, and that all markets respond in an identical fashion. Furthermore, the U.S. macroeconomic surprises exerted an immediate and major impact on both European stock markets’ returns and volatilities. Thus, high frequency data appear to be critical for the identification of news that impacted the markets.

Monetary Policy, Stock Price Misalignments and Macroeconomic Instability

Perhaps the most fundamental prediction of financial theory is that the expected returns on financial assets are determined by the amount of risk contained in their payoffs. Assets with a riskier payoff pattern should provide higher expected returns than assets that are otherwise similar but provide payoffs that contain less risk. Financial theory also predicts that not all types of risks should be compensated with higher expected returns. It is well-known that the asset-specific risk can be diversified away, whereas the systematic component of risk that affects all assets remains even in large portfolios. Thus, the asset-specific risk that the investor can easily get rid of by diversification should not lead to higher expected returns, and only the shared movement of individual asset returns – the sensitivity of these assets to a set of systematic risk factors – should matter for asset pricing. It is within this framework that this thesis is situated. The first essay proposes a new systematic risk factor, hypothesized to be correlated with changes in investor risk aversion, which manages to explain a large fraction of the return variation in the cross-section of stock returns. The second and third essays investigate the pricing of asset-specific risk, uncorrelated with commonly used risk factors, in the cross-section of stock returns. The three essays mentioned above use stock market data from the U.S. The fourth essay presents a new total return stock market index for the Finnish stock market beginning from the opening of the Helsinki Stock Exchange in 1912 and ending in 1969 when other total return indices become available. Because a total return stock market index for the period prior to 1970 has not been available before, academics and stock market participants have not known the historical return that stock market investors in Finland could have achieved on their investments. The new stock market index presented in essay 4 makes it possible, for the first time, to calculate the historical average return on the Finnish stock market and to conduct further studies that require long time-series of data.

Do Analysts Leak Information to Preferred Customers?

Inspired by the recent debate in the financial press, we set out to investigate if financial analysts warn their preferred customers of possible earnings forecast revisions. The issue is explored by monitoring investors’ trading behavior during the weeks prior to analyst earnings forecast revisions, using the unique official stock transactions data set from Finland. In summary, we do not find evidence of large investors systematically being warned of earnings forecast revisions. However, the results indicate that the very largest investors show trading behavior partly consistent with being informed of future earnings forecast revisions.

Cobreaking of Stock Prices and Contagion

Financial crises have shown that dramatic movements in one financial market can have a powerful impact on other markets. The paper proposes to use cobreaking to model comovements between financial markets during crises and to test for conta-gion. It finds evidence of cobreaking between stock returns in developed markets. Finding cobreaking has implications for the diversification of international investments. For emerging mar-ket stock returns the evidence of cobreaking is mainly due to the non-financial event of the 9/11 terrorist attacks in 2001. Fi-nancial crises originating in one emerging market do not spread to other markets, i.e., no contagion.

Examining and Modeling the Dynamics of the Volatility Surface

The objective of this paper is to investigate and model the characteristics of the prevailing volatility smiles and surfaces on the DAX- and ESX-index options markets. Continuing on the trend of Implied Volatility Functions, the Standardized Log-Moneyness model is introduced and fitted to historical data. The model replaces the constant volatility parameter of the Black & Scholes pricing model with a matrix of volatilities with respect to moneyness and maturity and is tested out-of-sample. Considering the dynamics, the results show support for the hypotheses put forward in this study, implying that the smile increases in magnitude when maturity and ATM volatility decreases and that there is a negative/positive correlation between a change in the underlying asset/time to maturity and implied ATM volatility. Further, the Standardized Log-Moneyness model indicates an improvement to pricing accuracy compared to previous Implied Volatility Function models, however indicating that the parameters of the models are to be re-estimated continuously for the models to fully capture the changing dynamics of the volatility smiles.

An Empirical Study of the Mixture of Time and Movements in Prices

This paper investigates the persistent pattern in the Helsinki Exchanges. The persistent pattern is analyzed using a time and a price approach. It is hypothesized that arrival times are related to movements in prices. Thus, the arrival times are defined as durations and formulated as an Autoregressive Conditional Duration (ACD) model as in Engle and Russell (1998). The prices are defined as price changes and formulated as a GARCH process including duration measures. The research question follows from market microstructure predictions about price intensities defined as time between price changes. The microstructure theory states that long transaction durations might be associated with both no news and bad news. Accordingly, short durations would be related to high volatility and long durations to low volatility. As a result, the spread will tend to be larger under intensive moments. The main findings of this study are 1) arrival times are positively autocorrelated and 2) long durations are associated with low volatility in the market.

Intraday Linkages across International Equity Markets

Utilizing concurrent 5-minute returns, the intraday dynamics and inter-market dependencies in international equity markets were investigated. A strong intraday cyclical autocorrelation structure in the volatility process was observed to be caused by the diurnal pattern. A major rise in contemporaneous cross correlation among European stock markets was also noticed to follow the opening of the New York Stock Exchange. Furthermore, the results indicated that the returns for UK and Germany responded to each other’s innovations, both in terms of the first and second moment dependencies. In contrast to earlier research, the US stock market did not cause significant volatility spillover to the European markets.

Intraday and Weekend Volatility Patterns- Implications for Option Pricing

This study examines the intraday and weekend volatility on the German DAX. The intraday volatility is partitioned into smaller intervals and compared to a whole day’s volatility. The estimated intraday variance is U-shaped and the weekend variance is estimated to 19 % of a normal trading day. The patterns in the intraday and weekend volatility are used to develop an extension to the Black and Scholes formula to form a new time basis. Calendar or trading days are commonly used for measuring time in option pricing. The Continuous Time using Discrete Approximations model (CTDA) developed in this study uses a measure of time with smaller intervals, approaching continuous time. The model presented accounts for the lapse of time during trading only. Arbitrage pricing suggests that the option price equals the expected cost of hedging volatility during the option’s remaining life. In this model, time is allowed to lapse as volatility occurs on an intraday basis. The measure of time is modified in CTDA to correct for the non-constant volatility and to account for the patterns in volatility.

Overconfidence and investor size

Recent research documents that institutional or large investors act as antagonists to other investors by showing opposite behavior following disclosure of new information. Using an extremely comprehensive official transactions data set from Finland, we set out to explore the interrelation between investor size and behavior. More specifically, we test whether investor size is positively (negatively) correlated with investor reaction following positive (negative) news. We document robust evidence of that investor size affects investor behavior under new information, as larger investors on average react more positively (negatively) to good (bad) news than smaller investors. In the light of this study it seems increasingly feasible that several recent findings of heterogeneous investor behavior are functions of differences in overconfidence.

On the Importance of Mutual Fund Families in Emerging Markets

This study contributes to the mutual fund literature by looking at performance persistence on a fund family level, allowing for individual equity, bond and balanced funds to be included under single family umbrellas. The study is conducted on the emerging Finnish mutual fund market, an environment in which the importance of superior fund family teams is likely to be accentuated. Using both non–parametric and parametric tests we find robust evidence of performance persistence for the fund families. Persistence is particularly strong in the first half of the investigation period, which highlights the importance of fund families at early stages of market development.

Owners' Way or the Highway: Short-term Expectations and Owner Impatience

Increased media exposure to layoffs and corporate quarterly financial reporting have created arguable a common perception – especially favored by the media itself – that the companies have been forced to improve their financial performance from quarter to quarter. Academically the relevant question is whether the companies themselves feel that they are exposed to short-term pressure to perform even if it means that they have to compromise company’s long-term future. This paper studies this issue using results from a survey conducted among the 500 largest companies in Finland. The results show that companies in general feel moderate short-term pressure, with reasonable dispersion across firms. There seems to be a link between the degree of pressure felt, and the firm’s ownership structure, i.e. we find support for the existence of short-term versus long-term owners. We also find significant ownership related differences, in line with expectations, in how such short-term pressure is reflected in actual decision variables such as the investment criteria used.

Volatility Smile Dynamics in Scenario Analysis

The objective of this paper is to suggest a method that accounts for the impact of the volatility smile dynamics when performing scenario analysis for a portfolio consisting of vanilla options. As the volatility smile is documented to change at least with the level of implied at-the-money volatility, a suitable model is here included in the calculation process of the simulated market scenarios. By constructing simple portfolios of index options and comparing the ex ante risk exposure measured using different pricing methods to realized market values, ex post, the improvements of the incorporation of the model are monitored. The analyzed examples in the study generate results that statistically support that the most accurate scenarios are those calculated using the model accounting for the dynamics of the smile. Thus, we show that the differences emanating from the volatility smile are apparent and should be accounted for and that the methodology presented herein is one suitable alternative for doing so.

Swedish Premium Pension Funds: Attributes and Performance

This study investigates the relationship between fund attributes and performance. The focus is on funds available in the Swedish Premium Pension system (PPM-funds). The aim has been to investigate whether administration fees, manager tenure or past performance are of importance for pension savers when they pick their PPM-funds. The results indicate that high fees are a disadvantage to pension savers investing in bond funds but not to those investing in stock funds. Manager tenure has no relationship with performance. There is evidence of performance persistency in most of the investigated fund categories.

Hyvät pahat pörssiyhtiöt?

Pörssiyhtiöihin liitetään julkisessa keskustelussa usein väitteitä, että pörssiyhtiöt palvelevat osakkeenomistajien lyhytaikaisia etuja muiden sidosryhmien ja myös pitkän aikavälin tuottavuuden kustannuksella. Keskitymme tässä selonteossa tutkimaan onko pörssiyhtiöiden julkisuudessa osalleen saama kritiikki ansaittua. Erityisesti tarkastelemme pörssiyhtiöiden roolia työnantajina ja investoijina 2000- luvulla verrattuna noteeraamattomien yritysten rooliin. Selvitämme myös listattujen ja listaamattomien yritysten eroja sijoituskohteina sekä tutkimme, onko pörssissä ololla vaikutusta yrityksen rahoitusrakenteeseen. Olemme jättäneet vertailun ulkopuolelle nopeasti kasvaneet ja kannattavat tietotekniikka-alan yritykset, joille ei ole olemassa noteeraamattomia vertailukohteita. Lisäksi vertailustamme olemme jättäneet pois yritykset, jotka eivät ole olleet listattuina koko tarkasteluperiodimme aikana. Pois jättämämme kasvuyritykset todennäköisesti parantaisivat pörssiyhtiöiden suhteellista asemaa ainakin kasvu- ja tulosnäkökulmista. Osakkeenomistajien edun lyhytnäköisen valvonnan tulisi johtaa työntekijöiden hyväksikäyttöön ja pitkäaikaisinvestointien karttamiseen. Tuloksemme kuitenkin kertovat päinvastaista. Pörssiyhtiöiden työntekijäkohtaiset henkilökulut ovat selvästi samoilla aloilla toimivia noteeraamattomia yrityksiä korkeammat. Erot ovat huomattavat: pörssiyhtiöiden vuosittaiset henkilökulut ovat noin 3000–4000 euroa suuremmat per henkilö. Lisäksi pörssiyhtiöt ovat kasvattaneet työntekijämääräänsä huomattavasti, toisin kuin noteeraamattomat vertailuyritykset. Otantamme pörssiyhtiöiden kokonaistyöllisyys on 2000-luvulla kasvanut keskimäärin noin 3 % vuodessa. Pörssiyhtiöt työllistivät vuonna 2007 lähes 87.000 työntekijää enemmän kuin vuonna 2001, kun taas yksityisen vertailuryhmän osalta työpaikat olivat samaan aikaan vähentyneet noin 2 500:lla. Pörssiyhtiöiden investoinnit ovat useina vuosina olleet listaamattomia yrityksiä suuremmat, joskin erot kahden ryhmän välillä eivät tyypillisesti ole tilastollisesti merkittäviä. Sidosryhmien hyväksikäytölle tai lyhytjänteisyydelle ei siis tältä osin löydy minkäänlaisia todisteita. Investointituotoissa ei ole järjestelmällisiä eroja kahden ryhmän välillä, lukuunottamatta aivan viime vuosia, jolloin pörssiyhtiöiden oman pääoman tuotto on ollut selvästi korkeampi kuin noteeraamattomien yritysten. Pörssiyhtiöillä ja noteeraamattomilla vertailuyrityksillä on merkittäviä eroja osingonmaksussa. Pörssiyhtiöt maksavat selvästi korkeampia osinkoja kuin vertailuryhmään kuuluvat yritykset. Pörssiyhtiöt maksavat omistajilleen noin puolet nettotuloksistaan osinkoina, kun taas noteeraamattomat yritykset maksavat ainoastaan 20–30 %. Erot pörssiyhtiöiden hyväksi ovat vielä suurempia, kun mittarina käytetään osinkojen suhdetta liikevaihtoon. Tulostemme mukaan pörssiyhtiöt käyttävät velkarahoitusta vastaavia noteeraamattomia yrityksiä enemmän. Tämä voi johtua kahdesta syystä. Ensinnäkin, koska osakkeen julkinen kauppa mahdollistaa omistuspohjan laajenemisen ja alkuperäisyrittäjien sijoitusten paremman hajauttamisen, pörssiyrityksellä on suurempi halukkuus riskinottoon lisäämällä velkarahoitusta. Toisaalta pörssilistaus voi toimia signaalina yrityksen laadusta siten, että rahoittajat tarjoavat velkarahoitusta auliimmin ja paremmilla ehdoilla. Pörssiyhtiöiden suurempi velkaisuus ei ole ollenkaan negatiivinen asia, koska velkarahoitus on verohyötyineen tyypillisesti huomattavasti osakerahoitusta edullisempaa. Tämä taas mahdollistaa lisäinvestointeja, joita ei rahoituksen puutteessa muuten tehtäisi. Yleisemmin rahoitusrakenteiden eroja tarkastellessamme huomaamme viitteitä siitä, että koska pörssiyhtiöillä on mahdollisuus saada osakepääomaa helpommin kuin listaamattomien yhtiöiden, ne pystyvät reagoimaan sekä tuote-, että rahoitusmarkkinoiden 3 mahdollisuuksiin. Listaamattomien yritysten rahoitusrakenne ja myös investoinnit sen sijaan näyttäisivät olevan pitkälle sidonnaisia tulorahoituksen tarjoamiin kassavirtoihin. Pörssiyhtiöt investoivat vähintään yhtä paljon kuin vastaavat noteeraamattomat yritykset ja investointien tuottavuus on vähintään yhtä hyvä. Pörssiyhtiöt ovat parempia palkanmaksajia ja työllistäjiä kuin vastaavat yksityiset yritykset. Pörssiyhtiöt pystyvät maksaamaan selkeästi parempia osinkoja investointien ja muun toiminnan siitä kärsimättä, koska velkarahoituksen parempi saatavuus tai pörssiyhtiöiden suurempi halukkuus käyttää velkarahoitusta tuovat rahoitusrakenteeseen tarvittavaa joustavuutta. Tulostemme valossa arvostelu osakkeenomistajien lyhytaikaisten etujen suosimisesta muiden sidosryhmien tai pitkän aikavälin tuottavuuden kustannuksella ei ole perusteltavissa.

Pricing Index Options with Stochastic Volatility

The objective of this paper is to investigate the pricing accuracy under stochastic volatility where the volatility follows a square root process. The theoretical prices are compared with market price data (the German DAX index options market) by using two different techniques of parameter estimation, the method of moments and implicit estimation by inversion. Standard Black & Scholes pricing is used as a benchmark. The results indicate that the stochastic volatility model with parameters estimated by inversion using the available prices on the preceding day, is the most accurate pricing method of the three in this study and can be considered satisfactory. However, as the same model with parameters estimated using a rolling window (the method of moments) proved to be inferior to the benchmark, the importance of stable and correct estimation of the parameters is evident.