Stock price reaction following large one-day price changes: UK evidence

We examine the short-term price reaction of 424 UK stocks to large one-day price changes. Using the GJR-GARCH(1,1), we find no statistical difference amongst the cumulative abnormal returns (CARs) of the Single Index, the Fama–French and the Carhart–Fama–French models. Shocks bigger or equal to 5% are followed by a significant one-day CAR of 1% for all the models. Whilst shocks smaller or equal to -5% are followed by a significant one-day CAR of -0.43% for the Single Index, the CARs are around -0.34% for the other two models. Positive shocks of all sizes and negative shocks maller or equal to -5% are followed by return continuations, whilst the market is efficient following larger negative shocks. The price reaction to shocks is unaffected when we estimate the CARs using the conditional covariances of the pricing variables.

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.

Stock price and volume effects associated with changes in the composition of the FTSE Bursa Malaysian KLCI

We examine the stock price and volume effects associated with changes in the composition of the FTSE Bursa Malaysia Kuala Lumpur Composite Index (KLCI), over the time period of 2005–2012. We find evidence to support the price pressure hypothesis for both additions to and deletions from the KLCI. This is because significant stock price and trading volume effects in the pre index revision period are entirely reversed after the announcement of the news. Our empirical findings can be explained by the market microstructure literature. Significant changes in liquidity cause trading volume and stock prices to reverse back to their original level before the index revisions took place.

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.

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.

The role of national culture in advertising's sensitivity to business cycles:an investigation across continents

The authors conduct a systematic investigation into the cyclical sensitivity of advertising expenditures in 37 countries, covering four key media: magazines, newspapers, radio, and television. They show that advertising is considerably more sensitive to business-cycle fluctuations than the economy as a whole. Advertising behaves less cyclically in countries high in long-term orientation and power distance, but it is more cyclical in countries high in uncertainty avoidance. Furthermore, advertising is more sensitive to the business cycle in countries characterized by significant stock market pressure and few foreign-owned multinational corporations. The authors provide initial evidence on the long-term social and managerial losses incurred when companies tie ad spending too tightly to business cycles. Countries in which advertising behaves more cyclically exhibit slower growth of the advertising industry. Moreover, private-label growth is higher in countries characterized by more cyclical advertising spending, implying significant losses for brand manufacturers. Finally, an examination of 26 global companies shows that stock price performance is lower for companies that exhibit stronger procyclical advertising spending patterns.

The effect of universal futures on opening and closing stock market price discovery

Purpose – On 29 January 2001, Euronext LIFFE introduced single security futures contracts on a range of global companies. The purpose of this paper is to examine the impact that the introduction of these futures contracts had on the behaviour of opening and closing UK equity returns. Design/methodology/approach – The paper models the price discovery process using the Amihud and Mendelson partial adjustment model which can be estimated using a Kalman filter. Findings – Empirical results show that during the pre-futures period both opening and closing returns under-react to new information. After the introduction of futures contracts opening returns over-react. A rise in the partial adjustment coefficient also takes place for closing returns but this is not large enough to cause over-reaction. Originality/value – This is the first study to examine the impact of a single security futures contract on the speed of spot market price discovery.

Stock repurchases and treasury share sales: Do they stabilize price and enhance liquidity?

The article studies the impact of a firm’s trading in its own shares on the volatility and market liquidity of the firm’s stock in the Italian stock market. In the study, both stock repurchases and treasury share sales executed on the open market are defined as trading in own shares. The study finds that Italian firms can reduce the volatility of their stock and boost market liquidity by trading their own shares.

Stock index reaction to large price changes:evidence frommajor Asian stock indexes

We examine the short-term price behavior of ten Asian stock market indexes following large price changes or “shocks”. Under the standard OLS regression, there is stronger support for return continuations particularly following positive and negative price shocks of less than 10% in absolute size. The results under the GJR-GARCH method provide stronger support for market efficiency, especially for large price shocks. For example, for the Hong Kong stock index, negative shocks of less than -5% but more than -10% generate a significant one day cumulative abnormal return (CAR) of-0.754% under the OLS method, but an insignificant CAR of 0.022% under the GJR-GARCH. We find no support for the uncertainty information hypothesis. Furthermore, the CARs following the period after the Asian financial crisis adjust more quickly to price shocks.

Price synchronicity:the closing call auction and the London Stock Market

In this paper, we consider the impact of the introduction of a closing call auction on market quality of the London Stock Exchange. We employ the market model, RDD and MEC metrics of market quality. These signify substantial improvements to market quality at both the close and open for migrating stocks.We note that these improvements are larger at the open than the close. An important contribution of our paper is that we show that changes to market quality are stronger in those securities that have the lowest liquidity in the pre-call period. In contrast, market quality changes following the introduction of a closing call auction are approximately neutral for high-liquidity securities. We conclude that the implementation of a closing call auction, for high-liquidity securities may not enhance market quality.

Stock repurchases and treasury share sales:do they stabilize price and enhance liquidity?

Can companies reduce the volatility and increase the liquidity of their stocks by trading them? In the context of the Italian stock market, where companies have far more leeway to sell as well as buy their own stocks than in the U.S., the answer is yes. We examine the effects of trading (open-market share repurchases and treasury shares sales) on liquidity (bid–ask spread) and volatility (return variance). Further, we examine the impact of shareholder approvals of repurchase programs on liquidity and volatility. We find clear evidence that trading increases liquidity and reduces volatility. These results are consistent with our analysis of the motives Italian companies give for making share repurchases.

Price discovery for Chinese shares cross-listed in multiple markets

In this article we study the relationship between security returns cross-listed on the A share market of China and the H share market at the Stock Exchange of Hong Kong (SEHK). Most of these securities are also cross-listed on other markets. An important feature of this article is that we focus on the multilateral relationships between all cross-listed markets rather than concentrating only on the bi-lateral relationship between A and Hong Kong H shares. Using the impulse response functions and the variance decompositions from a Vector Autoregressive (VAR) process we show that the returns to the A share market are almost exclusively determined by domestic factors. In contrast, we find that the H share market is influenced by both the A share market within China and foreign stock markets elsewhere in the world. Impulse response functions suggest that innovations to the A share market and the Hong Kong H share market are partly transmitted to each other and to stock markets outside China. We show that liquidity has an important role to play in determining the impact that the home market has on cross-listed variance decompositions. © 2012 Copyright Taylor and Francis Group, LLC.

Momentum profits in alternative stock market structures

The aim of this study is to examine the relationship between momentum profitability and the stock market trading mechanism and is motivated by recent changes to the trading systems that have taken place on the London Stock Exchange. Since 1975 the London stock market has employed three different trading systems: a floor based system, a computerized dealer system called SEAQ and the automated auction system SETS. Since each new trading system has reduced the level of execution costs, one might expect, a priori, the magnitude of momentum profits to decline with each amendment to the trading system. However, the opposite empirical result is found showing that shares trading on the automated system generate higher momentum profits than those trading on the floor system and companies trading on the SETS system display greater momentum profitability than those trading on SEAQ. Our empirical results concur with the theoretical findings of the trader’s hesitation model of Du [Du, J., 2002. Heterogeneity in investor confidence and asset market under- and overreaction. Working paper] and the empirical findings of Arena et al. [Arena, M., Haggard, S., Yan, X., Price momentum and idiosyncratic volatility. Financial Review, in press].

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.