Intraday Dynamics of International Equity Markets

The increased availability of high frequency data sets have led to important new insights in understanding of financial markets. The use of high frequency data is interesting and persuasive, since it can reveal new information that cannot be seen in lower data aggregation. This dissertation explores some of the many important issues connected with the use, analysis and application of high frequency data. These include the effects of intraday seasonal, the behaviour of time varying volatility, the information content of various market data, and the issue of inter market linkages utilizing high frequency 5 minute observations from major European and the U.S stock indices, namely DAX30 of Germany, CAC40 of France, SMI of Switzerland, FTSE100 of the UK and SP500 of the U.S. The first essay in the dissertation shows that there are remarkable similarities in the intraday behaviour of conditional volatility across European equity markets. Moreover, the U.S macroeconomic news announcements have significant cross border effect on both, European equity returns and volatilities. The second essay reports substantial intraday return and volatility linkages across European stock indices of the UK and Germany. This relationship appears virtually unchanged by the presence or absence of the U.S stock market. However, the return correlation among the U.K and German markets rises significantly following the U.S stock market opening, which could largely be described as a contemporaneous effect. The third essay sheds light on market microstructure issues in which traders and market makers learn from watching market data, and it is this learning process that leads to price adjustments. This study concludes that trading volume plays an important role in explaining international return and volatility transmissions. The examination concerning asymmetry reveals that the impact of the positive volume changes is larger on foreign stock market volatility than the negative changes. The fourth and the final essay documents number of regularities in the pattern of intraday return volatility, trading volume and bid-ask spreads. This study also reports a contemporaneous and positive relationship between the intraday return volatility, bid ask spread and unexpected trading volume. These results verify the role of trading volume and bid ask quotes as proxies for information arrival in producing contemporaneous and subsequent intraday return volatility. Moreover, asymmetric effect of trading volume on conditional volatility is also confirmed. Overall, this dissertation explores the role of information in explaining the intraday return and volatility dynamics in international stock markets. The process through which the information is incorporated in stock prices is central to all information-based models. The intraday data facilitates the investigation that how information gets incorporated into security prices as a result of the trading behavior of informed and uninformed traders. Thus high frequency data appears critical in enhancing our understanding of intraday behavior of various stock markets’ variables as it has important implications for market participants, regulators and academic researchers.

Corporate Governance in China (summary section only)

The negative relationship between economic growth and stock market return is not an anomaly according to evidence documented in many economies. It is argued that future economic growth is largely irrelevant for predicting future equity returns, since long-run equity returns depend mainly on dividend yields and the growth of per share dividends. The economic growth does result in a higher standard of living for consumers, but does not necessarily translate into higher returns for owners of the capital. The divergence in performance between the real sector and stock markets appears to support the above argument. However, this thesis strives to offer an alternative explanation to the apparent divergence within the framework of corporate governance. It argues that weak corporate governance standards in Chinese listed firms exacerbated by poor inventor protection results into a marginalized capital market. Each of the three essays in the thesis addresses one particular aspect of corporate governance on the Chinese stock market in a sequential way through gathering empirical evidence on three distinctive stock market activities. The first essay questions whether significant agency conflicts do exist by building a game on rights issues. It documents significant divergence in interests among shareholders holding different classes of shares. The second essay investigates the level of agency costs by examining value of control through constructing a sample of block transactions. It finds that block transactions that transfer ultimate control entail higher premiums. The third essay looks into possible avenues through which corporate governance standards could be improved by investigating the economic consequences of cross-listing on the Chinese stock market. It finds that, by adopting a higher disclosure standard through cross-listings, firms voluntarily commit themselves to reducing information asymmetry, and consequently command higher valuation than their counterparts.

Short-term Price Behavior and the Effect of Foreign Investors in Finnish Equity Markets (summary section only)

As globalization and capital free movement has increased, so has interest in the effects of that global money flow, especially during financial crises. The concern has been that large global money flows will affect the pricing of small local markets by causing, in particular, overreaction. The purpose of this thesis is to contribute to the body of work concerning short-term under- and overreaction and the short-term effects of foreign investment flow in the small Finnish equity markets. This thesis also compares foreign execution return to domestic execution return. This study’s results indicate that short-term under- and overreaction occurs in domestic-buy portfolios (domestic net buying) rather than in foreign-buy portfolios. This under- and overreaction, however, is not economically meaningful after controlling for the bid-ask bounce effect. Based on this finding, one can conclude that foreign investors do not have a destabilizing effect in the short-term in the Finnish markets. Foreign activity affects short-term returns. When foreign investors are net buyers (sellers) there are positive (negative) market adjusted returns. Literature related to nationality and institutional effect leads us to expect these kind of results. These foreign flows are persistent at a 5 % to 21 % level and the persistence of foreign buy flow is higher than the foreign sell flow. Foreign daily trading execution is worse than domestic execution. Literature which quantifies foreign investors as liquidity demanders and literature related to front-running leads us to expect poorer foreign execution than domestic execution.

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.

Groundwater Management in India:Physical, Institutional and Policy Alternatives

Groundwater constitutes a vital natural resource for sustaining India’s agricultural economy and meeting the country’s social, ecological and environmental goals. It is a unique resource, widely available, providing security against droughts and yet it is closely linked to surface-water resources and the hydrological cycle. Its availability depends on geo-hydrological conditions and characteristics of aquifers, from deep to alluvium, sediment crystalline rocks to basalt formations; and agro-climate from humid to subhumid and semi-arid to arid. Its reliable supply, uniform quality and temperature, relative turbidity, pollution-safe, minimal evaporation losses, and low cost of development are attributes making groundwater more attractive compared to other resources. It plays a key role in the provision of safe drinking water to rural populations. For example, already almost 80% of domestic water use in rural areas in India is groundwater-supplied, and much of it is being supplied to farms, villages and small towns. Inadequate control of the use of groundwater, indiscriminate application of agrochemicals and unrestrained pollution of the rural environment by other human activities make groundwater usage unsustainable, necessitating proper management in the face of the twin demand for water of good quality for domestic supply and adequate supply for irrigation, ensuring equity, efficiency and sustainability of the resource. Groundwater irrigation has overtaken surface irrigation in the early 1980s, supported by well energization. It is estimated that there are about 24 million energised wells and tube wells now and it is driven by demand rather than availability, evident through the greater occurrence of wells in districts with high population densities. Apart from aquifer characteristics, land fragmentation and landholding size are the factors that decide the density of wells. The ‘rise and fall’ of local economies dependent on groundwater can be summarized as: the green revolution of 1980s, groundwaterbased agrarian boom, early symptoms of groundwater overdraft, and decline of the groundwater socio-ecology. The social characteristics and policy interventions typical of each stage provide a fascinating insight into the human-resource dynamics. This book is a compilation of nine research papers discussing various aspects of groundwater management. It attempts to integrate knowledge about the physical system, the socio-economic system, the institutional set-up and the policy environment to come out with a more realistic analysis of the situation with regard to the nature, characteristics and intensity of resource use, the size of the economy the use generates, and the negative socioeconomic consequences. Complex variables addressed in this regard focusing on northern Gujarat are the stock of groundwater available in the region, its hydrodynamics, its net outflows against inflows, the economics of its intensive use (particularly irrigation in semi-arid and arid regions), its criticality in the regional hydroecological regime, ethical aspects and social aspects of its use. The first chapter by Dinesh Kumar and Singh, dwells on complex groundwater socio-ecology of India, while emphasizing the need for policy measures to address indiscriminate over-exploitation of dwindling resources. The chapter also explores the nature of groundwater economy and the role of electricity prices on it. The next chapter on groundwater issue in north Gujarat provides a description of groundwater resource characteristics followed by a detailed analysis of the groundwater depletion and quality deterioration problems in the region and their undesirable consequences on the economy, ecosystem health and the society. Considering water-buyers and wellowning farmers individually, a methodology for economic valuation of groundwater in regions where its primary usage is in agriculture, and as assessment of the groundwater economy based on case studies from north Gujarat is presented in the fourth chapter. The next chapter focuses on the extent of dependency of milk production on groundwater, which includes the water embedded in green and dry fodder and animal feed. The study made a realistic estimate of irrigation water productivity in terms of the physics and economics of milk production. The sixth chapter analyses the extent of reduction in water usage, increase in yield and overall increase in physical productivity of alfalfa with the use of the drip irrigation system. The chapter also provides a detailed synthesis of the costs and benefits associated with the use of drip irrigation systems. A linear programmingbased optimization model with the objective to minimize groundwater use taking into account the interaction between two distinct components – farming and dairying under the constraints of food security and income stability for different scenarios, including shift in cropping pattern, introduction of water-efficient crops, water- saving technologies in addition to the ‘business as usual’ scenario is presented in the seventh chapter. The results show that sustaining dairy production in the region with reduced groundwater draft requires crop shifts and adoption of water-saving technologies. The eighth chapter provides evidences to prove that the presence of adequate economic incentive would encourage farmers to adopt water-saving irrigation devices, based on the findings of market research with reference to the level of awareness among farmers of technologies and the factors that decide the adoption of water-saving technologies. However, now the marginal cost of using electricity for agricultural pumping is almost zero. The economic incentives are strong and visible only when the farmers are either water-buyers or have to manage irrigation with limited water from tube-well partnerships. The ninth chapter explores the socio-economic viability of increasing the power tariff and inducing groundwater rationing as a tool for managing energy and groundwater demand, considering the current estimate of the country’s annual economic loss of Rs 320 billion towards electricity subsidy in the farm sector. The tenth chapter suggests private tradable property rights and development of water markets as the institutional tool for achieving equity, efficiency and sustainability of groundwater use. It identifies the externalities for local groundwater management and emphasizes the need for managing groundwater by local user groups, supported by a thorough analysis of groundwater socio-ecology in India. An institutional framework for managing the resource based on participatory approach that is capable of internalizing the externalities, comprising implementation of institutional and technical alternatives for resource management is also presented. Major findings of the analyses and key arguments in each chapter are summarized in the concluding chapter. Case studies of the social and economic benefits of groundwater use, where that use could be described as unsustainable, are interesting. The benefits of groundwater use are outlined and described with examples of social and economic impacts of groundwater and the negative aspects of groundwater development with the compilation of environmental problems based on up-to-date research results. This publication with a well-edited compilation of case studies is informative and constitutes a useful publication for students and professionals.