A new method for estimating liquidity risk: Insights from a liquidity-adjusted CAPM framework

This paper proposes a new non-parametric method for estimating model-free, time-varying liquidity betas which builds on realized covariance and volatility theory. Working under a liquidity-adjusted CAPM framework we provide evidence that liquidity risk is a factor priced in the Greek stock market, mainly arising from the covariation of individual liquidity with local market liquidity, however, the level of liquidity seems to be an irrelevant variable in asset pricing. Our findings provide support to the notion that liquidity shocks transmitted across securities can cause market-wide effects and can have important implications for portfolio diversification strategies. ©2012 Elsevier B.V. All rights reserved.

Happy hour followed by hangover: financing the UK brewery industry, 1880-1913

In the last 15 years of the nineteenth century c.300 British brewers incorporated and floated securities on the stock market. Subsequently, in the 1900s, the industry suffered a long-lived hangover. In this paper, we establish the stylised facts of this transformation and estimate the gains enjoyed by brewery investors during the boom as well as the losses suffered by investors during the bust of the 1900s. However, not all brewery equity shares suffered alike. We find that post-1900 performance correlates positively with capital-market discipline and good corporate governance and negatively with family control, but does not correlate with indebtedness.

Mining Money: the generative capacities of scientific and legal knowledge practices in the making of resource economies

In 1997 a scandal associated with Bre-X, a junior mining firm, and its prospecting activities in Indonesia, exposed to public scrutiny the ways in which mineral exploration firms acquire, assess and report on scientific claims about the natural environment. At stake here was not just how investors understood the provisional nature of scientific knowledge, but also evidence of fraud. Contemporaneous mining scandals not only included the salting of cores, but also unreliable proprietary sample preparation and assay methods, mis-representations of visual field estimates as drilling results and ‘overly optimistic’ geological reports. This paper reports on initiatives taken in the wake of these scandals and prompted by the Mining Standards Task Force (TSE/OSC 1999). For regulators, mandated to increase investor confidence in Canada’s leading role within the global mining industry, efforts focused first and foremost upon identifying and removing sources of error and wilfulness within the production and circulation of scientific knowledge claims. A common goal cross-cutting these initiatives was ‘a faithful representation of nature’ (Daston and Galison 2010), however, as the paper argues, this was manifest in an assemblage of practices governed by distinct and rival regulative visions of science and the making of markets in claims about ‘nature’. These ‘practices of fidelity’, it is argued, can be consequential in shaping the spatial and temporal dynamics of the marketization of nature.

Much Ado About Nothing: The Limitation of Liability and the Market for 19th century Irish Bank Stock

Abstract Limited liability is widely believed to be a prerequisite for the emergence of an active and liquid securities market because the transactions costs associated with trading ownership of unlimited liability firms are viewed as prohibitive. In this article, we examine the trading of shares in an Irish bank, which limited its liability in 1883. Using this bank’s archives, we assemble a time series of trading data, which we test for structural breaks. Our results suggest that the move to limited liability had a negligible impact upon the trading of this bank’s shares.

Technology and the architecture of markets: re-configuring the Canadian equity market

This paper examines the relation between technical possibilities, liberal logics, and the concrete reconfiguration of markets. It focuses on the enrolling of innovations in communication and information technologies into the markets traditionally dominated by stock exchanges. With the development of capacities to trade on-screen, the power of incumbent market makers has been challenged as a less stable array of competing quasi-public and private marketplaces emerges. Developing a case study of the Toronto Stock Exchange, I argue that narrative emphasis on the performative power of sociotechnical innovations, the deterritorialisation of financial relations, and the erosion of state capacities needs qualification. A case is made for the importance of developing an understanding of: the spaces of encounter between emerging social technologies and property rights, rules of exchange, and structures of governance; and the interplay of orderings of different institutional composition and spatial reach in the reconfiguration of market architectures. Only then can a better grasp be gained of the evolving dynamics between making markets, the regulatory powers of the state, and their delimitations.

Do Low-Priced Stocks Drive Long-Term Contrarian Performance on the London Stock Exchange?

We investigate whether low-priced stocks drive long-term contrarian performance on the U.K. market. We find that contrarian performance at low, middle, and high price levels is positive. On the Fama-French risk adjusted basis, we find both low-priced and middle-priced losers have significantly positive returns. When we adjust returns by market and liquidity risk, only middle-priced losers maintain their positive returns. Our results reveal that low-priced stocks are not fully responsible for contrarian performance. Our empirical evidence is generally consistent with the overreaction hypothesis and behavioral models of value investing.

Momentum Trading in New York Stock Exchange (NYSE) Energy Stocks

This paper investigates whether the momentum effect exists in the NYSE energy sector. Momentum is defined as the strategy that buys (sells) these stocks that are best (worst) performers, over a pre-specified past period of time (the 'look-back' period), by constructing equally weighted portfolios. Different momentum strategies are obtained by changing the number of stocks included in these portfolios, as well as the look-back period. Next, their performance is compared against two benchmarks: the equally weighted portfolio consisting of most stocks in the NYSE energy index and the market portfolio, and the S&P500 index. The results indicate that the momentum effect is strongly present in the energy sector, and leads to highly profitable portfolios, improving the risk-reward measures and easily outperforming both benchmarks.

Trading Activity in Options and Stock Around Price-Sensitive News Announcements

This study investigates the trading activity in options and stock markets around informed events with extreme daily stock price movements. We find that informed agents are more likely to trade options prior to negative news and stocks ahead of positive news. We also show that optioned stocks overreact to the arrival of negative news, but react efficiently to positive news. However, the overreaction patterns are unique to the subsample of stocks with the lowest pre-event abnormal option/stock volume ratio (O/S). This finding suggests that the incremental benefit of option listing is related to the level of option trading activity, over and beyond the presence of an options market on the firm's stock. Finally, we find that the pre-event abnormal O/S is a better predictor of stock price patterns following a negative shock than is the pre-event O/S, implying that the former may contain more information about the future value of stocks than the latter.

Identifying the relative importance of stock characteristics

There is no consensus in the literature as to which stock characteristic best explains returns. In this study, we employ a novel econometric approach better suited than the traditional characteristic sorting method to answer this question for the UK market. We evaluate the relative explanatory power of market, size, momentum, volatility, liquidity and book-to-market factors in a semiparametric characteristic-based factor model which does not require constructing characteristic portfolios. We find that momentum is the most important factor and liquidity is the least important based on their relative contribution to the fit of the model and the proportion of sample months for which factor returns are significant. Overall, this study provides strong evidence to support that the momentum characteristic can best explain stock returns in the UK market. The econometric approach employed in this study is a novel way to assess relevant investment risk in international financial markets outside U.S. Moreover, multinational institutions and investors can use this approach to identify regional factors in order to diversify their portfolios.

Integration between the London and New York Stock Exchanges, 1825-1925

The integration between the London and New York Stock Exchanges is analyzed during the era when they were still developing as asset markets. The domestic securities on both exchanges showed little sustained integration, even when controlling for the different characteristics of stocks, implying that the pricing of securities in the US and UK were still being driven by local factors. However, there was considerable integration between New York and those listings on London which operated internationally. These results place a limit on the view that pre-World War I was the first era of globalization in terms of capital markets, and suggest that the listing of foreign securities may be one of the primary mechanisms driving asset market integration.