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.

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.

Money never sleeps – overnight returns in equity markets

The present research analyses overnight returns’ outperformance in relation to daytime returns. In a first stage, it will be assessed whether these returns are robust throughout time, markets and across different scopes of analysis (e.g. weekdays, months, states of the economy). In a second stage, several hypothesis will be empirically tested, in an attempt to understand what drives non-trading period returns (e.g. liquidity, market volatility). Even though several authors have analysed overnight returns and suggested several explanatory factors, there seems to be no consensus in the literature regarding its drivers.

The impact of equity markets and corporate governance on labour market flexibility

Drawing from various literatures, this article explores links between equity markets and labour market flexibility. Various data sources are used to test relationships for a set of OECD countries, controlling for other likely influences on flexibility such as government and industrial relations institutions. The results are generally supportive as regards employment flexibility: equity market trading activity is associated with shorter job tenure, higher activity rates, and greater employment change over the cycle. However, the relationship between equity markets and pay flexibility is less statistically robust to the addition of controls.

Equity market price interactions between China and the other markets within the Chinese states equity markets

This study examines the cointegrating and long-term causal relationships of equity market prices in equity markets of Chinese states namely, Shanghai, Shenzhen, Hong Kong, Taiwan and Singapore. I cover the period between October 5, 1992 and March 20, 2006, taking into account both the Asian financial crisis and the opening-up of China’s equity markets in recent years. First, I analysis the cointegration by utilizing Johansen’s (1988) cointegration tests. I find that a long-term equilibrium relationship measured by cointegration has been established among Shanghai, Shenzhen, Hong Kong and Taiwanese markets and, to a lesser degree, between these markets and the Singapore market since 1998. Secondly, this study examines causality by exploring the bootstrapped Toda-Yamamoto non-causality tests. I find that there is strong evidence of a bi-directional causality between Shanghai and Shenzhen markets after 1998. Furthermore, I also find that there are more causal linkages between the Chinese states equity markets: two mainland Chinese markets, Hong Kong, Taiwan, and Singapore became more dependent on each other. The robustness of the above findings is confirmed by the use of a bootstrap test employed to test the validity of my results.

Interdependence of international equity market volatility

This paper investigates whether equity market volatility in one major market is related to volatility elsewhere. This paper models the daily conditional volatility of equity market wide returns as a GARCH-(1,1) process. Such a model will capture the changing nature of the conditional variance through time. It is found that the correlation between the conditional variances of major equity markets has increased substantially over the last two decades. This supports work which has been undertaken on conditional mean returns which indicates there has been an increase in equity market integration.

Are European equity markets efficient? New evidence from fractal analysis

We report an empirical analysis of long-range dependence in the returns of eight stock market indices, using the Rescaled Range Analysis (RRA) to estimate the Hurst exponent. Monte Carlo and bootstrap simulations are used to construct critical values for the null hypothesis of no long-range dependence. The issue of disentangling short-range and long-range dependence is examined. Pre-filtering by fitting a (short-range) autoregressive model eliminates part of the long-range dependence when the latter is present, while failure to pre-filter leaves open the possibility of conflating short-range and long-range dependence. There is a strong evidence of long-range dependence for the small central European Czech stock market index PX-glob, and a weaker evidence for two smaller western European stock market indices, MSE (Spain) and SWX (Switzerland). There is little or no evidence of long-range dependence for the other five indices, including those with the largest capitalizations among those considered, DJIA (US) and FTSE350 (UK). These results are generally consistent with prior expectations concerning the relative efficiency of the stock markets examined. © 2011 Elsevier Inc.

Reviewing the impact of the 2008/2009 global financial crisis (GFC) on international property markets and property professions

The global financial crisis that impacted on all world economies throughout 2008 and 2009. This impact has not been confined to the finance industries but has had a direct and indirect impact on the property industry worldwide from both an ownership and investment perspective. Property markets have experienced various levels of impact from this event, but universally the greatest impact has been on the traditional commercial and industrial property sectors from the investor perspective, with investment and superannuation funds reporting significant declines in the reported value of these investments. Despite the very direct impact of these declining property markets, the GFC has also had a very significant indirect impact on the various property professions and how these professions are now operating in this declining property market. Of particular interest is the comparison of the property market forecasts in late 2007 to the actual results in 2008/2009.

Foreign Capital and Finland : Central government's first period of reliance on international financial markets, 1862-1938

The main objective of the study is to evaluate the Finnish central government s foreign borrowing between the years 1862 and 1938. Most of this period was characterised by deep capital market integration that bears resemblance to the liberal world financial order at the turn of the millennium. The main aim is to analyse the credit risk associated with the state and its determination by evaluating the world financial market centres perception of Finland. By doing this, the study is also expected to provide an additional dimension to Finland s political and economic history by incorporating into the research the assessments of international capital markets regarding Finland during a period that witnessed profound political and economic changes in Finnish society. The evaluation of the credit risk mainly relies on exchange-rate risk free time series of the state s foreign bonds. They have been collected from quotations in the stock exchanges in Helsinki, Hamburg, Paris and London. In addition, it investigates Finland s exposure to short-term debt and Moody s credit ratings assigned to Finland. The study emphasises the importance of the political risk. It suggests that the hey-day of the state s reliance on foreign capital markets took place during last few decades of the 19th century when Finland enjoyed a wide autonomy in the Russian Empire and prudently managed its economy, highlighted in Finland s adherence to the international gold standard. Political confrontations in Finland and, in particular, in Russia and the turbulence of the world financial system prevented the return of this beneficial position again. Through its issuance of foreign bonds the state was able to import substantial amounts of foreign capital, which was sorely needed to foster economic development in Finland. Moreover, the study argues that the state s presence in the western capital markets not only had economic benefits, but it also increased the international awareness of Finland s distinct and separate status in the Russian Empire and later underlined its position as an independent republic.

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.

Diversification when it hurts? The joint distributions of real estate and equity markets

Much of the literature on the construction of mixed asset portfolios and the case for property as a risk diversifier rests on correlations measured over the whole of a given time series. Recent developments in finance, however, focuses on dependence in the tails of the distribution. Does property offer diversification from equity markets when it is most needed - when equity returns are poor. The paper uses an empirical copula approach to test tail dependence between property and equity for the UK and for a global portfolio. Results show strong tail dependence: in the UK, the dependence in the lower tail is stronger than in the upper tail, casting doubt on the defensive properties of real estate stocks.