Testing for Stock Market Integration in a Developing Economy: Colombia

This paper examines the linkage between two parallel stock exchanges trading the same shares in Colombia, namely the Bogotá Stock Exchange and the Medellín Stock Exchange. We provide empirical evidence to support the hypothesis that these two markets can be best described as fully integrated over a period of almost four decades, which is consistent with the view that arbitrage opportunities are only possible in the short but not in the long run. In addition, we find evide

Time-varying price discovery in the eighteenth century: empirical evidence from the London and Amsterdam stock markets

This paper examines the time-varying nature of price discovery in eighteenth century cross-listed stocks. Specifically, we investigate how quickly news is reflected in prices for two of the great moneyed com- panies, the Bank of England and the East India Company, over the period 1723 to 1794. These British companies were cross-listed on the London and Amsterdam stock exchange and news between the capitals flowed mainly via the use of boats that transported mail. We examine in detail the historical context sur- rounding the defining events of the period, and use these as a guide to how the data should be analysed. We show that both trading venues contributed to price discovery, and although the London venue was more important for these stocks, its importance varies over time.

Toward convergence? The brazilian stock market concentration and the role of private equity in its diversification

Using quantitative data obtained from public available database, this paper discusses the difference between of the Brazilian GDP and the Brazilian Stock Exchange industry breakdown. I examined if, and to what extent, the industry breakdowns are similar. First, I found out that the Stock Exchange industry breakdown is overwhelming different from the GDP, which may present a potential problem to asset allocation and portfolio diversification in Brazil. Second, I identified an important evidence of a convergence between the GDP and the Stock Exchange in the last 9 years. Third, it became clear that the Privatizations in the late 90’s and IPO market from 2004 to 2008 change the dynamics of the Brazilian Stock Exchange. And fourth, I identified that Private Equity and Venture Capital industry may play an important role on the portfolio diversification in Brazil.

A view from the Royal Exchange

Karikierende Darstellung von N. M. Rothschild

A Pillar of the Exchange

Karikierende Darstellung von N. M. Rothschild

Market quality changes in the London Stock Market

This paper examines the impact that the introduction of a closing call auction had on market quality at the London Stock Exchange. Using estimates from the partial adjustment with noise model of Amihud and Mendelson [Amihud, Y., Mendelson, H., 1987. Trading mechanisms and stock returns: An empirical investigation. Journal of Finance 42, 533–553] we show that opening and closing market quality improved for participating stocks. When we stratify our sample securities into five groups based on trading activity we find that the least active securities experience the greatest improvements to market quality. A control sample of stocks are not characterized by discernable changes to market quality.

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.

Exchange-traded funds and information asymmetry

This thesis focuses on three main questions. The first uses ExchangeTraded Funds (ETFs) to evaluate estimated adverse selection costs obtained spread decomposition models. The second compares the Probability of Informed Trading (PIN) in Exchange-Traded Funds to control securities. The third examines the intra-day ETF trading patterns. These spread decomposition models evaluated are Glosten and Harris (1988); George, Kaul, and Nimalendran (1991); Lin, Sanger, and Booth (1995); Madhavan, Richardson, and Roomans (1997); Huang and Stoll (1997). Using the characteristics of ETFs it is shown that only the Glosten and Harris (1988) and Madhavan, et al (1997) models provide theoretically consistent results. When the PIN measure is employed ETFs are shown to have greater PINs than control securities. The investigation of the intra-day trading patterns shows that return volatility and trading volume have a U-shaped intra-day pattern. A study of trading systems shows that ETFs on the American Stock Exchange (AMEX) have a U-shaped intra-day pattern of bid-ask spreads, while ETFs on NASDAQ do not. Specifically, ETFs on NASDAQ have higher bid-ask spreads at the market opening, then the lowest bid-ask spread in the middle of the day. At the close of the market, the bid-ask spread of ETFs on NASDAQ slightly elevated when compared to mid-day.

Intraday trading patterns in London listed exchange traded funds

In this paper we examine the intraday trading patterns of Exchange Traded Funds (ETFs) listed on the London Stock Exchange. ETFs have been shown to be characterised by much lower bid–ask spread costs and by lower levels of information asymmetry than individual securities. One possible explanation for intraday trading patterns is that concentration of trading arises at the start of the trading day because informed traders have private information that quickly diminishes in value as trading progresses. Since ETFs have lower trading costs and lower levels of information asymmetry we would expect these securities to display less pronounced intraday patterns than individual securities. We fail to find that ETFs are characterised by concentrated trading bouts during the day and therefore find support for the argument that information asymmetry is the cause of intraday volume patterns in stock markets. We find that ETF bid–ask spreads and volatility are elevated at the open but not at the close. This lends support to the “accumulation of information” explanation that sees high spreads and volatility at the open as a consequence of information accumulating during a market closure and impacting on the market when it next opens.

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.

A study of stock market fluctuations and their relation to business conditions

Most research on stock prices is based on the present value model or the more general consumption-based model. When applied to real economic data, both of them are found unable to account for both the stock price level and its volatility. Three essays here attempt to both build a more realistic model, and to check whether there is still room for bubbles in explaining fluctuations in stock prices. In the second chapter, several innovations are simultaneously incorporated into the traditional present value model in order to produce more accurate model-based fundamental prices. These innovations comprise replacing with broad dividends the more narrow traditional dividends that are more commonly used, a nonlinear artificial neural network (ANN) forecasting procedure for these broad dividends instead of the more common linear forecasting models for narrow traditional dividends, and a stochastic discount rate in place of the constant discount rate. Empirical results show that the model described above predicts fundamental prices better, compared with alternative models using linear forecasting process, narrow dividends, or a constant discount factor. Nonetheless, actual prices are still largely detached from fundamental prices. The bubblelike deviations are found to coincide with business cycles. The third chapter examines possible cointegration of stock prices with fundamentals and non-fundamentals. The output gap is introduced to form the nonfundamental part of stock prices. I use a trivariate Vector Autoregression (TVAR) model and a single equation model to run cointegration tests between these three variables. Neither of the cointegration tests shows strong evidence of explosive behavior in the DJIA and S&P 500 data. Then, I applied a sup augmented Dickey-Fuller test to check for the existence of periodically collapsing bubbles in stock prices. Such bubbles are found in S&P data during the late 1990s. Employing econometric tests from the third chapter, I continue in the fourth chapter to examine whether bubbles exist in stock prices of conventional economic sectors on the New York Stock Exchange. The ‘old economy’ as a whole is not found to have bubbles. But, periodically collapsing bubbles are found in Material and Telecommunication Services sectors, and the Real Estate industry group.

Three essays on the microstructure of exchange traded funds

Exchange traded funds (ETFs) have increased significantly in popularity since they were first introduced in 1993. However, there is still much that is unknown about ETFs in the extant literature. This dissertation attempts to fill gaps in the ETF literature by using three related essays. In these three essays, we compare ETFs to closed ended mutual funds (CEFs) by decomposing the bid-ask spread into its three components; we look at the intraday shape of ETFs and compare it to the intraday shape of equities as well as examine the co-integration factor between ETFs on the London Stock Exchange and the New York Stock Exchange; we also examine the differences between leveraged ETFs and unleveraged ETFs by analyzing the impact of liquidity and volatility. These three essays are presented in Chapters 1, 2, and 3, respectively. ^ Chapter one uses the Huang and Stoll (1997) model to decompose the bid-ask spread in CEFs and ETFs for two distinct periods—a normal and a volatile period. We show a higher adverse selection component for CEFs than for ETFs without regard to volatility. However, both ETFs and CEFs increased in magnitude of the adverse selection component in the period of high volatility. Chapter two uses a mix of the Werner and Kleidon (1993) and the Hupperets and Menkveld (2002) methods to get the intraday shape of ETFs and analyze co-integration between London and New York trading. We find two different shapes for New York and London ETFs. There also appears to be evidence of co-integration in the overlapping two-hour trading period but not over the entire trading day for the two locations. The third chapter discusses the new class of ETFs called leveraged ETFs. We examine the liquidity and depth differences between unleveraged and leveraged ETFs at the aggregate level and when the leveraged ETFs are classified by the leveraged multiples of -3, -2, -1, 2, and 3, both for a normal and a volatile period. We find distinct differences between leveraged and unleveraged ETFs at the aggregate level, with leveraged ETFs having larger spreads than unleveraged ETFs. Furthermore, while both leveraged and unleveraged ETFs have larger spreads in high volatility, for the leveraged ETFs the change in magnitude is significantly larger than for the unleveraged ETFs. Among the multiples, the -2 leveraged ETF is the most pronounced in its liquidity characteristics, more so in volatile times. ^

A Study of Stock Market Fluctuations and their Relations to Business Conditions

Most research on stock prices is based on the present value model or the more general consumption-based model. When applied to real economic data, both of them are found unable to account for both the stock price level and its volatility. Three essays here attempt to both build a more realistic model, and to check whether there is still room for bubbles in explaining fluctuations in stock prices. In the second chapter, several innovations are simultaneously incorporated into the traditional present value model in order to produce more accurate model-based fundamental prices. These innovations comprise replacing with broad dividends the more narrow traditional dividends that are more commonly used, a nonlinear artificial neural network (ANN) forecasting procedure for these broad dividends instead of the more common linear forecasting models for narrow traditional dividends, and a stochastic discount rate in place of the constant discount rate. Empirical results show that the model described above predicts fundamental prices better, compared with alternative models using linear forecasting process, narrow dividends, or a constant discount factor. Nonetheless, actual prices are still largely detached from fundamental prices. The bubble-like deviations are found to coincide with business cycles. The third chapter examines possible cointegration of stock prices with fundamentals and non-fundamentals. The output gap is introduced to form the non-fundamental part of stock prices. I use a trivariate Vector Autoregression (TVAR) model and a single equation model to run cointegration tests between these three variables. Neither of the cointegration tests shows strong evidence of explosive behavior in the DJIA and S&P 500 data. Then, I applied a sup augmented Dickey-Fuller test to check for the existence of periodically collapsing bubbles in stock prices. Such bubbles are found in S&P data during the late 1990s. Employing econometric tests from the third chapter, I continue in the fourth chapter to examine whether bubbles exist in stock prices of conventional economic sectors on the New York Stock Exchange. The ‘old economy’ as a whole is not found to have bubbles. But, periodically collapsing bubbles are found in Material and Telecommunication Services sectors, and the Real Estate industry group.

What Moved Share Prices in the Nineteenth-Century London Stock Market?

Using a new weekly blue-chip index, this paper investigates the causes of stock price movements on the London market between 1823 and 1870. We find that economic fundamentals explain about 15 per cent of weekly and 34 per cent of monthly variation in share prices. Contemporary press reporting from the London Stock Exchange is used to ascertain what market participants thought were causing the largest movements on the market. The vast majority of large movements were attributed by the press to geopolitical, monetary, railway-sector, and financial-crisis news. Investigating the stock price changes on an independent list of events reaffirms these findings, suggesting that the most important specific events which moved markets were wars involving European powers.