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Abstracts of Articles in
The Financial Review
Vol. 36, No. 3 - August 2001
“Stochastic Properties of Time-Averaged Financial Data: Explanation and Empirical Demonstration Using Monthly Stock Prices”
Jack W. Wilson, Charles P. Jones, and Leonard L. Lundstrum“A Comparison of Reverse Leveraged Buyouts and Original Initial Public Offers: Factors Impacting their Issuance in the IPO Market”
Karen M. Hogan, Gerard T. Olson, and Richard J. Kish“Motivation and Performance of Seasoned Offerings by Closed-End Funds”
Aigbe Akhigbe and Jeff Madura“An Improved Approach to Computing Implied Volatility”
Donald R. Chambers and Sanjay K. Nawalkha“Factors Influencing Dividend Policy Decisions of Nasdaq Firms”
H. Kent Baker and E. Theodore Veit“The Dynamic Relation Between Stock Returns, Trading Volume, and Volatility”
Gong-meng Chen, Michael Firth, and Oliver Rui“The Lead-Lag Relation Between Spot and Futures Markets Under Different Short-Selling Regimes”
Joseph K.W. Fung, Li Jiang, and Louis T.W. Cheng
“Stochastic Properties of Time-Averaged Financial Data: Explanation and Empirical Demonstration Using Monthly Stock Prices”
Jack W. Wilson, Charles P. Jones, and Leonard L. Lundstrum
Volume 37, No. 3, pp. 175-190This article considers the potential statistical problems resulting from the use of averaged rather than end-of-period data in financial research. Averaged data are widely employed throughout the literature without explicit recognition that the use of such data results in biased estimates of the variance, covariance and autocorrelation of the first as well as higher order changes. We illustrate the magnitude of the biases, using the S&P 500 end-of-month series over the period March 1957 to February 2001. Results confirm the predictions of Working and of Schwert. In addition, an analysis of the properties of higher-order lags indicates that the bias persists, a result not previously suggested in the literature. We also find that these statistical biases are time varying--which has significant implications for empirical financial research.
“A Comparison of Reverse Leveraged Buyouts and Original Initial Public Offers: Factors Impacting their Issuance in the IPO Market”
Karen M. Hogan, Gerard T. Olson, and Richard J. Kish
Volume 37, No. 3, pp. 1-18The purpose of this paper is to assess the factors that affect the returns earned by investors in early trading of reverse LBOs and compare those results to factors affecting original IPOs which are matched by size, industry, and issue date. A mean excess return of 7.64% is observed for the sample of reverse LBOs during the period 1987 to 1998. This return is uniformly lower than returns earned by investing in original IPOs. These results support the information asymmetry hypothesis. The results also show that factors such as number of months the LBO was privately held, the over-allotment, or greenshoe option, the size of the issue, insider ownership, and gross spread impact the returns earned by investors in reverse LBOs. We find that the level of insider participation and the over-allotment option are more important to original IPOs than to reverse LBOs in explaining the excess returns earned by shareholders in early trading. We find, however, that the size of the offering has more impact on excess returns for reverse LBOs than for original IPOs.
“Motivation and Performance of Seasoned Offerings by Closed-End Funds”
Aigbe Akhigbe and Jeff Madura
Volume 37, No. 3, pp. 101-122We examine the motivation and performance of closed-end funds that engage in seasoned public or rights offerings. We find that closed-end funds are more motivated to engage in seasoned offerings when their shares exhibit a relatively high premium (compared to their corresponding NAV) and have a high degree of liquidity. We also find a significant negative valuation effect on average in response to seasoned offerings by closed-end funds. Our cross-sectional analysis reveals that the valuation effect at the time of the seasoned offering is more unfavorable for funds that have relatively high expense ratios and are relatively large. Furthermore, we find that the closed-end funds experience significant negative valuation effects over the three-year period subsequent to the seasoned offering, implying poor post-offering performance.
“An Improved Approach to Computing Implied Volatility”
Donald R. Chambers and Sanjay K. Nawalkha
Volume 37, No. 3, pp. 89-100A well-known problem in finance is the absence of a closed form solution for volatility in common option pricing models. Several approaches have been developed to provide closed form approximations to volatility. This paper examines Chance's (1993, 1996) model, Corrado and Miller's (1996) model and Bharadia, Christofides and Salkin’s (1996) model for approximating implied volatility. We develop a simplified extension of Chance’s model that has greater accuracy than previous models. Our tests indicate dramatically improved results.
“Factors Influencing Dividend Policy Decisions of Nasdaq Firms”
H. Kent Baker, E. Theodore Veit, and Gary E. Powell
Volume 37, No. 3, pp. 19-38This study reports the results of a 1999 survey of Nasdaq-listed firms. Respondents provided information about the importance of 22 different factors that influence their dividend policy. Our results suggest that many managers of Nasdaq firms make dividend decisions consistent with Lintner’s (1956) survey results and model. The results also show significant differences between the manager responses of financial and non-financial firms on nine of the 22 factors. This finding implies the presence of industry effects on dividend policy decisions. In general, the same factors that are important to Nasdaq firms are also important to NYSE firms.
“The Dynamic Relation Between Stock Returns, Trading Volume, and Volatility”
Gong-meng Chen, Michael Firth, and Oliver Rui
Volume 37, No. 3, pp. 153-174We examine the dynamic relation between returns, volume, and volatility of stock indexes. The data come from nine national markets and cover the period from 1973 to 2000. The results show a positive correlation between trading volume and the absolute value of the stock price change. Granger causality tests demonstrate that for some countries, returns cause volume and volume causes returns. Our results indicate that trading volume contributes some information to the returns process. The results also show persistence in volatility even after we incorporate contemporaneous and lagged volume effects. The results are robust across the nine national markets.
“The Lead-Lag Relation Between Spot and Futures Markets Under Different Short-Selling Regimes”
Joseph K.W. Fung, Li Jiang, and Louis T.W. Cheng
Volume 37, No. 3, pp. 65-88We examine the lead-lag relation between index futures and the underlying index under three types of short-selling restrictions on stocks in Hong Kong. Our results indicate that lifting short-selling restrictions can enhance the informational efficiency of the stock market relative to the index futures. We also investigate the impact of two market characteristics, market conditions and the magnitude of mispricing on the lead-lag relations under different short-selling regimes. Our findings suggest that if we remove restrictions, the contemporaneous price relation between the futures and cash markets becomes stronger particularly in the falling market and when the cash market is relatively overpriced.