The leverage effect in the UK stock market

This study seeks to explain the leverage in UK stock returns by reference to the return volatility, leverage and size characteristics of UK companies. A leverage effect is found that is stronger for smaller companies and has greater explanatory power over the returns of smaller companies. The properties of a theoretical model that predicts that companies with higher leverage ratios will experience greater leverage effects are explored. On examining leverage ratio data, it is found that there is a propensity for smaller companies to have higher leverage ratios. The transmission of volatility shocks between the companies is also examined and it is found that the volatility of larger firm returns is important in determining both the volatility and returns of smaller firms, but not the reverse. Moreover, it is found that where volatility spillovers are important, they improve out-of-sample volatility forecasts. © 2005 Taylor & Francis Group Ltd.

A note on information seasonality and the disappearance of the weekend effect in the UK stock market

The weekend effect in UK stock prices has disappeared in the 1990s. Beneath the surface however there remain systematic day-of-the-week effects only visible when returns are partitioned by the direction of the market. A systematic pattern of market-wide news arrivals into the UK stock market is discovered and found to provide an explanation for these day-of-the-week effects.

On the existence of visual technical patterns in the UK stock market

The aim in this paper is to replicate and extend the analysis of visual technical patterns by Lo et al. (2000) using data on the UK market. A non-parametric smoother is used to model a nonlinear trend in stock price series. Technical patterns, such as the 'head-and-shoulders' pattern, that are characterised by a sequence of turning points are identified in the smoothed data. Statistical tests are used to determine whether returns conditioned on the technical patterns are different from random returns and, in an extension to the analysis of Lo et al. (2000), whether they can outperform a market benchmark return. For the stocks in the FTSE 100 and FTSE 250 indices over the period 1986 to 2001, we find that technical patterns occur with different frequencies to each other and in different relativities to the frequencies found in the US market. Our extended statistical testing indicates that UK stock returns are less influenced by technical patterns than was the case for US stock returns.

Volatility transmission between stock and bond markets

A two-factor no-arbitrage model is used to provide a theoretical link between stock and bond market volatility. While this model suggests that short-term interest rate volatility may, at least in part, drive both stock and bond market volatility, the empirical evidence suggests that past bond market volatility affects both markets and feeds back into short-term yield volatility. The empirical modelling goes on to examine the (time-varying) correlation structure between volatility in the stock and bond markets and finds that the sign of this correlation has reversed over the last 20 years. This has important implications far portfolio selection in financial markets. © 2005 Elsevier B.V. All rights reserved.

Stock price distributions and news:evidence from index options

We estimate the shape of the distribution of stock prices using data from options on the underlying asset, and test whether this distribution is distorted in a systematic manner each time a particular news event occurs. In particular we look at the response of the FTSE100 index to market wide announcements of key macroeconomic indicators and policy variables. We show that the whole distribution of stock prices can be distorted on an event day. The shift in distributional shape happens whether the event is characterized as an announcement occurrence or as a measured surprise. We find that larger surprises have proportionately greater impact, and that higher moments are more sensitive to events however characterised.

Exchange controls and European stock market integration

This paper examines the impact on stock price predictability that the removal of exchange controls had on major European countries during the late 1970s and 1980s. It is found that for Germany, Switzerland and France, the removal of exchange controls led to an increase in the interdependence between these and other markets. In contrast, there is little evidence of an increase in interdependence for the UK and Italy.

Stock market efficiency, the small firm effect and cointegration

The cointegration methodology commonly used for testing the efficiency of the foreign exchange market is applied to a sample of UK share prices. Specifically we test for static market efficiency in the share prices of small and large firms, using monthly data from January 1975 to December 1989. The empirical findings provide evidence of market efficiency for portfolios of large firms but of inefficiency for small firm portfolios. These results are indicative of a small firm effect in the UK stock market.

Risk, seasonality and the asymmetric behaviour of stock returns

For some time there has been a puzzle surrounding the seasonal behaviour of stock returns. This paper demonstrates that there is an asymmetric relationship between systematic risk and return across the different months of the year for both large and small firms. In the case of both large and small firms systematic risk appears to be priced in only two months of the year, January and April. During the other months no persistent relationship between systematic risk and return appears to exist. The paper also shows that when systematic risk is priced, the size of the systematic risk premium is higher for large firms than for small firms and varies significantly across the months of the year.

An empirical investigation of the effect of rights issue announcements on share returns and the determinants of abnormal returns on the Kuala Lumpur Stock Exchange

This thesis examines the effect of rights issue announcements on stock prices by companies listed on the Kuala Lumpur Stock Exchange (KLSE) between 1987 to 1996. The emphasis is to report whether the KLSE is semi strongly efficient with respect to the announcement of rights issues and to check whether the implications of corporate finance theories on the effect of an event can be supported in the context of an emerging market. Once the effect is established, potential determinants of abnormal returns identified by previous empirical work and corporate financial theory are analysed. By examining 70 companies making clean rights issue announcements, this thesis will hopefully shed light on some important issues in long term corporate financing. Event study analysis is used to check on the efficiency of the Malaysian stock market; while cross-sectional regression analysis is executed to identify possible explanators of the rights issue announcements' effect. To ensure the results presented are not contaminated, econometric and statistical issues raised in both analyses have been taken into account. Given the small amount of empirical research conducted in this part of the world, the results of this study will hopefully be of use to investors, security analysts, corporate financial managements, regulators and policy makers as well as those who are interested in capital market based research of an emerging market. It is found that the Malaysian stock market is not semi strongly efficient since there exists a persistent non-zero abnormal return. This finding is not consistent with the hypothesis that security returns adjust rapidly to reflect new information. It may be possible that the result is influenced by the sample, consisting mainly of below average size companies which tend to be thinly traded. Nevertheless, these issues have been addressed. Another important issue which has emerged from the study is that there is some evidence to suggest that insider trading activity existed in this market. In addition to these findings, when the rights issue announcements' effect is compared to the implications of corporate finance theories in predicting the sign of abnormal returns, the signalling model, asymmetric information model, perfect substitution hypothesis and Scholes' information hypothesis cannot be supported.

Hand in hand:privatising five star hotels in Egypt through the stock market will enhance the latter's role as well as set an example of the benefits that could be gained from privatisation

This thesis examines the possibility of privatising public owned five star hotels in Egypt through its stock market in order to give a boost to the Egyptian privatisation programme and to help activate its stock market. To explore these aspects, two main technical exercises were executed. First the writer constructed, for the first time in Egypt, a daily price index for Cairo Stock Exchange and an index for the tourism sector, in order to analyze the efficiency of the capital market. This technical analysis showed that Cairo stock exchange is inefficient, stagnant and undergoes minimal fluctuations, especially when compared to other developed and emerging markets. Second, given the importance and complexity of the valuation of SOEs prior to their privatisation, a sample of three five star hotels that could be prime candidates for privatisation via the stock market in Egypt were selected and a detailed financial analysis for the three hotels was concluded. The result was a valuation range for the three hotels using various valuation methods. Nevertheless it was found out that the final value of hotels will be determined by the market itself. Depite the inefficiency of Cairo Stock Exchange, the thesis did not rule out privatisation through the stock market. On the contrary it cited several examples of developing countries that were able to successfully privatise some of their SOEs via their rudimentary capital markets. Finally, the thesis recommended that five star hotels could be pefect candidates for privatisation via the stock market in Egypt. This is because five star hotels are profitable, privately managed, non strategic and not highly capital intensive businesses. In addition, they do not suffer from overstaffing and the industry in which they operate i.e. tourism sector, has high growth prospects and is of an international nature. Therefore it is anticipated that privatisation of five star hotels can attract a lot of investors because of the relatively high returns. This in turn will help activate and popularize the capital market in Egypt. At the same time the benefits of privatisation would be more visible which will give more momentum to the privatisation programme and make it more politically acceptable.

Mechanics of rolling continuously cast stock

A review of published literature was made to establish the fundamental aspects of rolling and allow an experimental programme to be planned. Simulated hot rolling tests, using pure lead as a model material, were performed on a laboratory mill to obtain data on load and torque when rolling square section stock. Billet metallurgy and consolidation of representative defects was studied when modelling the rolling of continuously cast square stock with a view to determining optimal reduction schedules that would result in a product having properties to the high level found in fully wrought billets manufactured from large ingots. It is difficult to characterize sufficiently the complexity of the porous central region in a continuously cast billet for accurate modelling. However, holes drilled into a lead billet prior to rolling was found to be a good means of assessing central void consolidation in the laboratory. A rolling schedule of 30% (1.429:1) per pass to a total of 60% (2.5:1) will give a homogeneous, fully recrystallized product. To achieve central consolidation, a total reduction of approximately 70% (3.333:1) is necessary. At the reduction necessary to achieve consolidation, full recrystallization is assured. A theoretical analysis using a simplified variational principle with experimentally derived spread data has been developed for a homogeneous material. An upper bound analysis of a single, centrally situated void has been shown to give good predictions of void closure with reduction and the reduction required for void closure for initial void area fractions 0.45%. A limited number of tests in the works has indicated compliance with the results for void closure obtained in the laboratory.

Differences between theoretical predictions and operational performance in a stock control application

Over the past decade, several experienced Operational Researchers have advanced the view that the theoretical aspects of model building have raced ahead of the ability of people to use them. Consequently, the impact of Operational Research on commercial organisations and the public sector is limited, and many systems fail to achieve their anticipated benefits in full. The primary objective of this study is to examine a complex interactive Stock Control system, and identify the reasons for the differences between the theoretical expectations and the operational performance. The methodology used is to hypothesise all the possible factors which could cause a divergence between theory and practice, and to evaluate numerically the effect each of these factors has on two main control indices - Service Level and Average Stock Value. Both analytical and empirical methods are used, and simulation is employed extensively. The factors are divided into two main categories for analysis - theoretical imperfections in the model, and the usage of the system by Buyers. No evidence could be found in the literature of any previous attempts to place the differences between theory and practice in a system in quantitative perspective nor, more specifically, to study the effects of Buyer/computer interaction in a Stock Control system. The study reveals that, in general, the human factors influencing performance are of a much higher order of magnitude than the theoretical factors, thus providing objective evidence to support the original premise. The most important finding is that, by judicious intervention into an automatic stock control algorithm, it is possible for Buyers to produce results which not only attain but surpass the algorithmic predictions. However, the complexity and behavioural recalcitrance of these systems are such that an innately numerate, enquiring type of Buyer needs to be inducted to realise the performance potential of the overall man/computer system.

Design of a stock control methodology for use within an oil blending company

The thesis deals with the background, development and description of a mathematical stock control methodology for use within an oil and chemical blending company, where demand and replenishment lead-times are generally non-stationary. The stock control model proper relies on, as input, adaptive forecasts of demand determined for an economical forecast/replenishment period precalculated on an individual stock-item basis. The control procedure is principally that of the continuous review, reorder level type, where the reorder level and reorder quantity 'float', that is, each changes in accordance with changes in demand. Two versions of the Methodology are presented; a cost minimisation version and a service level version. Realising the importance of demand forecasts, four recognised variations of the Trigg and Leach adaptive forecasting routine are examined. A fifth variation, developed, is proposed as part of the stock control methodology. The results of testing the cost minimisation version of the Methodology with historical data, by means of a computerised simulation, are presented together with a description of the simulation used. The performance of the Methodology is in addition compared favourably to a rule-of-thumb approach considered by the Company as an interim solution for reducing stack levels. The contribution of the work to the field of scientific stock control is felt to be significant for the following reasons:- (I) The Methodology is designed specifically for use with non-stationary demand and for this reason alone appears to be unique. (2) The Methodology is unique in its approach and the cost-minimisation version is shown to work successfully with the demand data presented. (3) The Methodology and the thesis as a whole fill an important gap between complex mathematical stock control theory and practical application. A brief description of a computerised order processing/stock monitoring system, designed and implemented as a pre-requisite for the Methodology's practical operation, is presented as an appendix.

Stock selection with full-scale optimization and differential evolution

When composing stock portfolios, managers frequently choose among hundreds of stocks. The stocks' risk properties are analyzed with statistical tools, and managers try to combine these to meet the investors' risk profiles. A recently developed tool for performing such optimization is called full-scale optimization (FSO). This methodology is very flexible for investor preferences, but because of computational limitations it has until now been infeasible to use when many stocks are considered. We apply the artificial intelligence technique of differential evolution to solve FSO-type stock selection problems of 97 assets. Differential evolution finds the optimal solutions by self-learning from randomly drawn candidate solutions. We show that this search technique makes large scale problem computationally feasible and that the solutions retrieved are stable. The study also gives further merit to the FSO technique, as it shows that the solutions suit investor risk profiles better than portfolios retrieved from traditional methods.