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.

Pricing-to-market and the volatility of UK export prices

This empirical study examines the Pricing-To-Market (PTM) behaviour of 20 UK export sectors. Using both Exponential General Autoregressive Conditional Heteroscedasticity (EGARCH) and Threshold GARCH (TGARCH) estimation methods, we find evidence of PTM that is accompanied by strong conditional volatility and weak asymmetry effects. The PTM estimates suggest that when the currency of exporters appreciates in the current period, exporters pass-on between 31% and 94% of the Foreign Exchange (FX) rate increase to importers. However, both export price changes and producers' prices are sluggish, perhaps being driven by coordination failure and menu driven costs, amongst others. Furthermore, export prices contain strong time varying effects which impact on PTM strategy. Exporters do not typically appear to put much more weight on negative news of (say) an FX rate appreciation compared to positive news of an FX rate depreciation. Much depends on the export sector. © 2010 Taylor & Francis.

Derivatív pénzügyi termékek árdinamikája és az új típusú kamatlábmodellek (Interest rate models and the price processes of financial derivatives)

Ennek a cikknek az a célja, hogy áttekintést adjon annak a folyamatnak néhány főbb állomásáról, amit Black, Scholes és Merton opcióárazásról írt cikkei indítottak el a 70-es évek elején, és ami egyszerre forradalmasította a fejlett nyugati pénzügyi piacokat és a pénzügyi elméletet. / === / This review article compares the development of financial theory within and outside Hungary in the last three decades starting with the Black-Scholes revolution. Problems like the term structure of interest rate volatilities which is in the focus of many research internationally has not received the proper attention among the Hungarian economists. The article gives an overview of no-arbitrage pricing, the partial differential equation approach and the related numerical techniques, like the lattice methods in pricing financial derivatives. The relevant concepts of the martingal approach are overviewed. There is a special focus on the HJM framework of the interest rate development. The idea that the volatility and the correlation can be traded is a new horizon to the Hungarian capital market.

Volt-e likviditási válság? Volatilitás és likviditás kapcsolatának vizsgálata (Was there a liquidity crisis? Analysis the relationship between volatility and liquidity)

Széleskörűen alátámasztott, empirikus tény, hogy önmagában a nagyobb volatilitás csökkenti a piac likviditását, vagyis változékonyabb piacokon várhatóan nagyobb lesz egy-egy tranzakció áreltérítő hatása. Kutatásomban azt a kérdést vizsgáltam, hogy a Budapesti Értéktőzsdén az OTP-részvény piacán a 2007/2008-as válságban tapasztalható, átmeneti likviditáscsökkenés betudható volt-e egyszerűen a megnövekedett volatilitásnak, vagy ezen túl abban más tényezők (pl. a szereplők körének és viselkedésének drasztikus megváltozása, általános forráscsökkenés stb.) is szerepet játszhattak-e. A volatilitást a loghozamok szórásával, illetve a tényleges ársávval, míg az illikviditást a Budapesti Likviditási Mértékkel (BLM) reprezentáltam. Egyrészt azt állapítottam meg, hogy az OTP esetében a tényleges ársáv szorosabban korrelál a BLM-mel, mint a szórás. Másrészt az is egyértelmű, hogy a válság előtti kapcsolat a volatilitás és a likviditás között a válságban és azután már jelentősen megváltozott. Válságban az illikviditás jóval nagyobb volt, mint amit a volatilitás növekedése alapján vártunk, a válság lecsengése után azonban megfordult ez a reláció. _________ It is a widely supported empirical fact, that the greater volatility in itself decreases the liquidity of the market, namely more volatile a market is, the higher a transaction’s price impact will be. I have examined in my paper the question, whether the decrease of liquidity during the crisis of 2007/2008 in case of the OTP stock – traded on the Budapest Stock Exchange – was the consequence of the increased volatility, or other factors had an effect on the illiquidity as well (e.g.: the drastic change of market participants’ behaviour; reduction of fi nancing sources; etc.). I have represented volatility with the standard deviation of the logreturns, and with the true range, while the illiquidity with the Budapest Liquidity Measure (BLM). On one hand I have identifi ed, that in case of the OTP, the true range has a stronger relationship with the BLM than the standard deviation has. On the other hand it was clear, that the relationship between volatility and liquidity has changed notably during and after the crisis. During crisis the illiquidity was greater than what I have estimated based on the volatility increase, but after the crisis this relation has changed.

Essays on the determinants of private investment: The effects of relative price uncertainty and political instability

The objective of this study was to provide empirical evidence on the effects of relative price uncertainty and political instability on private investment. My effort is expressed in a single-equation model using macroeconomic and socio-political data from eight Latin American countries for the period 1970–1996. Relative price uncertainty is measured by the implied volatility of the exchange rate and political instability is measured by using indicators of social unrest and political violence. ^ I found that, after controlling for other variables, relative price uncertainty and political instability are negatively associated with private investment. Macroeconomic and political stability are key ingredients for the achievement of a strong investment response. This highlights the need to develop the state and build a civil society in which citizens can participate in decision-making and express consent without generating social turmoil. At the same time the government needs to implement structural policies along with relative price adjustments to eliminate excess volatility in price movements in order to provide a stable environment for investment. ^

An autoregressive conditional filtering process to remove intraday seasonal volatility and its application to testing the noisy rational expectations model

We develop a new autoregressive conditional process to capture both the changes and the persistency of the intraday seasonal (U-shape) pattern of volatility in essay 1. Unlike other procedures, this approach allows for the intraday volatility pattern to change over time without the filtering process injecting a spurious pattern of noise into the filtered series. We show that prior deterministic filtering procedures are special cases of the autoregressive conditional filtering process presented here. Lagrange multiplier tests prove that the stochastic seasonal variance component is statistically significant. Specification tests using the correlogram and cross-spectral analyses prove the reliability of the autoregressive conditional filtering process. In essay 2 we develop a new methodology to decompose return variance in order to examine the informativeness embedded in the return series. The variance is decomposed into the information arrival component and the noise factor component. This decomposition methodology differs from previous studies in that both the informational variance and the noise variance are time-varying. Furthermore, the covariance of the informational component and the noisy component is no longer restricted to be zero. The resultant measure of price informativeness is defined as the informational variance divided by the total variance of the returns. The noisy rational expectations model predicts that uninformed traders react to price changes more than informed traders, since uninformed traders cannot distinguish between price changes caused by information arrivals and price changes caused by noise. This hypothesis is tested in essay 3 using intraday data with the intraday seasonal volatility component removed, as based on the procedure in the first essay. The resultant seasonally adjusted variance series is decomposed into components caused by unexpected information arrivals and by noise in order to examine informativeness.

Three essays on market depth in futures markets

Liquidity is an important market characteristic for participants in every financial market. One of the three components of liquidity is market depth. Prior literature lacks a comprehensive analysis of depth in U.S. futures markets due to past limitations on the availability of data. However, recent innovations in data collection and dissemination provide new opportunities to investigate the depth dimension of liquidity. In this dissertation, the Chicago Mercantile Exchange (CME) Group proprietary database on depth is employed to study the dynamics of depth in the U.S. futures markets. This database allows for the analysis of depth along the entire limit order book rather than just at the first level. The first essay examines the characteristics of depth within the context of the five-deep limit order book. Results show that a large amount of depth is present in the book beyond the best level. Furthermore, the findings show that the characteristics of five-deep depth between day and night trading vary and that depth is unequal across levels within the limit order book. The second essay examines the link between the five-deep market depth and the bid-ask spread. The results suggest an inverse relation between the spread and the depth after adjusting for control factors. The third essay explores transitory volatility in relation to depth in the limit order book. Evidence supports the relation between an increase in volatility and a subsequent decrease in market depth. Overall, the results of this dissertation are consistent with limit order traders actively managing depth along the limit order book in electronic U.S. futures markets.

An Autoregressive Conditional Filtering Process to remove Intraday Seasonal Volatility and its Application to Testing the Noisy Rational Expectations Model

We develop a new autoregressive conditional process to capture both the changes and the persistency of the intraday seasonal (U-shape) pattern of volatility in essay 1. Unlike other procedures, this approach allows for the intraday volatility pattern to change over time without the filtering process injecting a spurious pattern of noise into the filtered series. We show that prior deterministic filtering procedures are special cases of the autoregressive conditional filtering process presented here. Lagrange multiplier tests prove that the stochastic seasonal variance component is statistically significant. Specification tests using the correlogram and cross-spectral analyses prove the reliability of the autoregressive conditional filtering process. In essay 2 we develop a new methodology to decompose return variance in order to examine the informativeness embedded in the return series. The variance is decomposed into the information arrival component and the noise factor component. This decomposition methodology differs from previous studies in that both the informational variance and the noise variance are time-varying. Furthermore, the covariance of the informational component and the noisy component is no longer restricted to be zero. The resultant measure of price informativeness is defined as the informational variance divided by the total variance of the returns. The noisy rational expectations model predicts that uninformed traders react to price changes more than informed traders, since uninformed traders cannot distinguish between price changes caused by information arrivals and price changes caused by noise. This hypothesis is tested in essay 3 using intraday data with the intraday seasonal volatility component removed, as based on the procedure in the first essay. The resultant seasonally adjusted variance series is decomposed into components caused by unexpected information arrivals and by noise in order to examine informativeness.

How do Small Players Deduce Beliefs about Uncertainty? A Look at Texas Shale Oil Investments

Thesis (Ph.D.)--University of Washington, 2016-08

The parallel solution of early-exercise Asian options with stochastic volatility

This paper describes an parallel semi-Lagrangian finite difference approach to the pricing of early exercise Asian Options on assets with a stochastic volatility. A multigrid procedure is described for the fast iterative solution of the discrete linear complementarity problems that result. The accuracy and performance of this approach is improved considerably by a strike-price related analytic transformation of asset prices. Asian options are contingent claims with payoffs that depend on the average price of an asset over some time interval. The payoff may depend on this average and a fixed strike price (Fixed Strike Asians) or it may depend on the average and the asset price (Floating Strike Asians). The option may also permit early exercise (American contract) or confine the holder to a fixed exercise date (European contract). The Fixed Strike Asian with early exercise is considered here where continuous arithmetic averaging has been used. Pricing such an option where the asset price has a stochastic volatility leads to the requirement to solve a tri-variate partial differential inequation in the three state variables of asset price, average price and volatility (or equivalently, variance). The similarity transformations [6] used with Floating Strike Asian options to reduce the dimensionality of the problem are not applicable to Fixed Strikes and so the numerical solution of a tri-variate problem is necessary. The computational challenge is to provide accurate solutions sufficiently quickly to support realtime trading activities at a reasonable cost in terms of hardware requirements.

Contratos futuros sobre o petróleo: um estudo sobre a assimetria na volatilidade

Mestrado em Contabilidade e Análise Financeira

The meaning of implied volatility in pricing stock options traded in options markets

Ph.D. in the Faculty of Business Administration

Three Essays on Market Depth in Futures Markets

Liquidity is an important market characteristic for participants in every financial market. One of the three components of liquidity is market depth. Prior literature lacks a comprehensive analysis of depth in U.S. futures markets due to past limitations on the availability of data. However, recent innovations in data collection and dissemination provide new opportunities to investigate the depth dimension of liquidity. In this dissertation, the Chicago Mercantile Exchange (CME) Group proprietary database on depth is employed to study the dynamics of depth in the U.S. futures markets. This database allows for the analysis of depth along the entire limit order book rather than just at the first level. The first essay examines the characteristics of depth within the context of the five-deep limit order book. Results show that a large amount of depth is present in the book beyond the best level. Furthermore, the findings show that the characteristics of five-deep depth between day and night trading vary and that depth is unequal across levels within the limit order book. The second essay examines the link between the five-deep market depth and the bid-ask spread. The results suggest an inverse relation between the spread and the depth after adjusting for control factors. The third essay explores transitory volatility in relation to depth in the limit order book. Evidence supports the relation between an increase in volatility and a subsequent decrease in market depth. Overall, the results of this dissertation are consistent with limit order traders actively managing depth along the limit order book in electronic U.S. futures markets.

Intraday return predictability, portfolio maximisation, and hedging

We examine whether intraday Chinese return predictability is linked to optimal portfolio holding and hedging. We find that: (1) S&P500 futures returns only predict Chinese spot market returns in up to 5-minute of trading with predictability disappearing at higher frequencies of trade; (2) the portfolio weight is maximised at the 5-minute trading frequency, when predictability is the strongest; and (3) when predictability is the strongest, significantly less shorting of the futures is required to minimise risk when a long position is taken in the Chinese market.

Synthetic portfolio for event studies: Estimating the effects of volatility call auctions

We propose a method denoted as synthetic portfolio for event studies in market microstructure that is particularly interesting to use with high frequency data and thinly traded markets. The method is based on Synthetic Control Method and provides a robust data driven method to build a counterfactual for evaluating the effects of the volatility call auctions. We find that SMC could be used if the loss function is defined as the difference between the returns of the asset and the returns of a synthetic portfolio. We apply SCM to test the performance of the volatility call auction as a circuit breaker in the context of an event study. We find that for Colombian Stock Market securities, the asynchronicity of intraday data reduces the analysis to a selected group of stocks, however it is possible to build a tracking portfolio. The realized volatility increases after the auction, indicating that the mechanism is not enhancing the price discovery process.