Margin requirements and volatility : evidence from Canadian stocks

Margin policy is used by regulators for the purpose of inhibiting exceSSIve volatility and stabilizing the stock market in the long run. The effect of this policy on the stock market is widely tested empirically. However, most prior studies are limited in the sense that they investigate the margin requirement for the overall stock market rather than for individual stocks, and the time periods examined are confined to the pre-1974 period as no change in the margin requirement occurred post-1974 in the U.S. This thesis intends to address the above limitations by providing a direct examination of the effect of margin requirement on return, volume, and volatility of individual companies and by using more recent data in the Canadian stock market. Using the methodologies of variance ratio test and event study with conditional volatility (EGARCH) model, we find no convincing evidence that change in margin requirement affects subsequent stock return volatility. We also find similar results for returns and trading volume. These empirical findings lead us to conclude that the use of margin policy by regulators fails to achieve the goal of inhibiting speculating activities and stabilizing volatility.

The information content of Canadian implied volatility indexes

For predicting future volatility, empirical studies find mixed results regarding two issues: (1) whether model free implied volatility has more information content than Black-Scholes model-based implied volatility; (2) whether implied volatility outperforms historical volatilities. In this thesis, we address these two issues using the Canadian financial data. First, we examine the information content and forecasting power between VIXC - a model free implied volatility, and MVX - a model-based implied volatility. The GARCH in-sample test indicates that VIXC subsumes all information that is reflected in MVX. The out-of-sample examination indicates that VIXC is superior to MVX for predicting the next 1-, 5-, 10-, and 22-trading days' realized volatility. Second, we investigate the predictive power between VIXC and alternative volatility forecasts derived from historical index prices. We find that for time horizons lesser than 10-trading days, VIXC provides more accurate forecasts. However, for longer time horizons, the historical volatilities, particularly the random walk, provide better forecasts. We conclude that VIXC cannot incorporate all information contained in historical index prices for predicting future volatility.

Volume-Synchronized Probability of Informed Trading (VPIN), Market Volatility, and High-Frequency Liquidity

We assess the predictive ability of three VPIN metrics on the basis of two highly volatile market events of China, and examine the association between VPIN and toxic-induced volatility through conditional probability analysis and multiple regression. We examine the dynamic relationship on VPIN and high-frequency liquidity using Vector Auto-Regression models, Granger Causality tests, and impulse response analysis. Our results suggest that Bulk Volume VPIN has the best risk-warning effect among major VPIN metrics. VPIN has a positive association with market volatility induced by toxic information flow. Most importantly, we document a positive feedback effect between VPIN and high-frequency liquidity, where a negative liquidity shock boosts up VPIN, which, in turn, leads to further liquidity drain. Our study provides empirical evidence that reflects an intrinsic game between informed traders and market makers when facing toxic information in the high-frequency trading world.

The significance of volatile antifungal metabolites produced by trichomerma harzianum biotype Th4, in green-mould disease of commercial mushroom crops /

The aggressive mushroom competitor, Trichoderma harzianum biotype Th4, produces volatile antifungal secondary metabolites both in culture and during the disease cycle in compost. Th4 cultures produced one such compound only when cultured in the presence of Agaricus bisporus mycelium or liquid medium made from compost colonised with A. bisporus. This compound has TLC and UVabsorption and characteristics indicating that it belongs to a class of pyrone antibiotics characterised from other T. harzianum biotypes. UV absorption spectra indicated this compound was not 6-pentyl-2H-pyran-one (6PAP), the volatile antifungal metabolite widely described in Th1. Furthermore, this compound was not produced by Th1 under any culture conditions. Mycelial growth of A. bisporus, Botrytis cinerea and Sclerotium cepivorum was inhibited in the presence of this compound through volatility , diffusion and direct application. This indicates that Th4 produces novel, volatile, antifungal metabolites in the presence of A. bisporus that are likely involved in green mould disease of mushroom crops.

Effect of executive compensation on firm performance

The paper finds evidence that the equity-based CEO pay is positively related to firm performance and risk-taking. Both stock price and operating performance as well as firm's riskiness increase in the pay-performance sensitivities (PPS) provided by CEO stock options and stock holdings. PPS can explain stock returns better as an additional factor to the Fama-French 3-factor model. When CEOs are compensated with higher PPS, firms experience higher return on asset (ROA). The higher PPS also leads to the higher risk-taking. While CEO incentive compensation has been perceived mixed on its effectiveness, this study provides support to the equity-based CEO compensation in reducing agency conflicts between CEOs and shareholders.

Are Idiosyncratic Skewness and Idiosyncratic Kurtosis Priced?

This thesis investigates the pricing effects of idiosyncratic moments. We document that idiosyncratic moments, namely idiosyncratic skewness and idiosyncratic kurtosis vary over time. If a factor/characteristic is priced, it must show minimum variation to be correlated with stock returns. Moreover, we can identify two structural breaks in the time series of idiosyncratic kurtosis. Using a sample of US stocks traded on NYSE, AMEX and NASDAQ markets from January 1970 to December 2013, we run Fama-MacBeth test at the individual stock level. We document a negative and significant pricing effect of idiosyncratic skewness, consistent with the finding of Boyer et al. (2010). We also report that neither idiosyncratic volatility nor idiosyncratic kurtosis are consistently priced. We run robustness tests using different model specifications and period sub-samples. Our results are robust to the different factors and characteristics usually included in the Fama-MacBeth pricing tests. We also split first our sample using endogenously determined structural breaks. Second, we divide our sample into three equal sub-periods. The results are consistent with our main findings suggesting that expected returns of individual stocks are explained by idiosyncratic skewness. Both idiosyncratic volatility and idiosyncratic kurtosis are irrelevant to asset prices at the individual stock level. As an alternative method, we run Fama-MacBeth tests at the portfolio level. We find that idiosyncratic skewness is not significantly related to returns on idiosyncratic skewness-sorted portfolios. However, it is significant when tested against idiosyncratic kurtosis sorted portfolios.

Are Idiosyncratic Skewness and Idiosyncratic Kurtosis Priced?

This thesis investigates the pricing effects of idiosyncratic moments. We document that idiosyncratic moments, namely idiosyncratic skewness and idiosyncratic kurtosis vary over time. If a factor/characteristic is priced, it must show minimum variation to be correlated with stock returns. Moreover, we can identify two structural breaks in the time series of idiosyncratic kurtosis. Using a sample of US stocks traded on NYSE, AMEX and NASDAQ markets from January 1970 to December 2013, we run Fama-MacBeth test at the individual stock level. We document a negative and significant pricing effect of idiosyncratic skewness, consistent with the finding of Boyer et al. (2010). We also report that neither idiosyncratic volatility nor idiosyncratic kurtosis are consistently priced. We run robustness tests using different model specifications and period sub-samples. Our results are robust to the different factors and characteristics usually included in the Fama-MacBeth pricing tests. We also split first our sample using endogenously determined structural breaks. Second, we divide our sample into three equal sub-periods. The results are consistent with our main findings suggesting that expected returns of individual stocks are explained by idiosyncratic skewness. Both idiosyncratic volatility and idiosyncratic kurtosis are irrelevant to asset prices at the individual stock level. As an alternative method, we run Fama-MacBeth tests at the portfolio level. We find that idiosyncratic skewness is not significantly related to returns on idiosyncratic skewness-sorted portfolios. However, it is significant when tested against idiosyncratic kurtosis sorted portfolios.

Macroeconomic News and LOB in Foreign Exchange ECN Market

We investigate the macroeconomic news effect on the dynamics of the limit order books (LOB) for euro-dollar ECN market in different economic states between Jan. 2006 to Dec. 2009. Using a VAR-STR model on the news surprise, pure news, aggregated good and bad news, we show that news effects on the LOB dynamics vary in different states of economy. The LOB dynamics are measured by depth, spread, slope and volatility. In contract to slope and volatility, depth and spread strongly respond to news surprise and pure news during recession and expansion. These characteristics are more affected by aggregated good and bad news during expansion. News effects are robust to alternative characteristic measures, the different sides of the LOB and the different levels in the LOB.