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Abstracts of Articles in
The Financial Review
Vol. 34, No. 1 - February 1999

"The Influence of Information Arrival on Market Infrastructure:
Evidence from Three Related Markets"

Chun I. Lee and Ike Mathur
Volume 34, No. 1, pp. 1-26

· Abstract: This study examines the influence of information arrival on market microstructure for the MMI, NYSE, and S&P 500 stock index futures markets, with special emphasis on the effects of opening and closing of trading and expiration of contracts on price movements and trading activities. The results of the examination show that although the opening of the (MMI) futures market is associated with higher volatility, it is when the spot market opens that volatility reaches its highest level. Similarly, the closing of the futures markets, though more volatile, is not as volatile as the closing of the spot markets. Trading patterns, on the other hand, are distinct from volatility. For MMI, trading declines consistently after the close of the spot market. In contrast, the NYSE and S&P 500 continue to trade and reach a peak at the close of the futures markets. Expiration effects are evidenced by the increase in volatility and trading near the closing of the MMI and the spillover to the NYSE and S&P 500. In sharp contrast, the expirations of the NYSE and S&P 500 are only associated with decrease in trading, suggesting that efforts to dampen volatility by changing expiration days from Friday to Thursday and shifting settlement price from Friday close to Friday open, have been successful.

"Market Making and Trading in Nasdaq Stocks"

Michael Goldstein and Edward F. Nelling
Volume 34, No. 1, pp. 27-44

· Abstract: In examining the industry-wide implications of dividend omission and initiation announcements, this study finds distinct industry responses for these two events. Specifically, dividend omission announcements have a significantly negative impact on the valuations of industry-related firms. Factors influencing this industry reaction include the Herfindahl index of the announcing firm's industry, the two-day abnormal return of the announcing firm, and its trading status (NASDAQ or NYSE/AMEX). Unlike dividend omissions, dividend initiations evoke a competitive (or negative) response from industry-related firms. The degree of homogeneity in the announcing firm's industry, the announcing firm's abnormal return and its size affect this industry response.

"Filter Tests in Nasdaq Stocks"

Andrew N. Szakmary, Wallace N. Davidson III, and Thomas V. Schwarz
Volume 34, No. 1, pp. 45-70

· Abstract: This study examines the performance of filter and dual moving-average crossover trading rules applied to Nasdaq stocks. We find that trading rules conditioned on a stock's past price history perform poorly, but those based on past movements in the overall Nasdaq Index tend to earn statistically significant abnormal returns. Since there is a high level of transaction costs in this market, these abnormal returns are generally not economically significant. However, there are indications that pursuing some of these strategies can be worthwhile in carefully selected subsets of stocks.

"Do Beta Pricing Models Explain January Mean Reversion in Stock Returns?"

Partha Gangopadhyay and Jishnu Sen
Volume 34, No. 1, pp. 71-90

· Abstract: Jegadeesh (1991) finds evidence of January mean reversion in stock returns. In this paper we attempt to distinguish between two competing economic explanations of January mean reversion in returns: (1) mispricing in irrational markets versus (2) predictable time variation in security risk premia. Excess portfolio returns are decomposed into "explained" and "unexplained" components using the Fama-French (1993) pricing model. The explained excess returns exhibit January mean reversion. The unexplained excess returns are not mean reverting. Mean reversion is therefore consistent with rational pricing in the framework of the Fama-French model. Mean reversion can be attributed to the component of return related to a relative distress factor (SMB). A comparison with the Chen, Roll, and Ross (1986) macroeconomic factors reveals that mean reversion is due to the components related to SMB and bond default premium.

"Long Memory in Futures Prices"

John T. Barkoulas, Walter C. Labys, and Joseph I. Onochie
Volume 34, No. 1, pp. 91-100

· Abstract: This paper tests for fractional roots in the futures prices for selected commodities, foreign currencies, and stock indexes. The fractional testing method is the spectral regression method suggested by Geweke and Porter-Hudak (1983). The empirical results suggest the presence of a fractional exponent in the differencing process for several commodity and foreign currency futures prices. The returns series for these commodities and currencies exhibit long range positive dependence. However, differencing of exact order one is sufficient for the stock index futures prices. Implications are drawn concerning theoretical and econometric modeling and price forecasting.

"Explicit versus Implicit Contracts: The Case of DIFF and CROSS Futures"

Ahmet K. Karagozoglu
Volume 34, No. 1, pp. 101-118

· Abstract: This paper investigates the potential success of an explicit futures contract when an implicit one, which can duplicate it, exists. It is hypothesized that the success of the explicit futures contract depends on its value-added being greater than that of its implicit counterpart given that sufficient hedging demand exists for it. Following a discussion of value-added analysis, hedging effectiveness of the Euro-rate Differential (DIFF), the Currency Cross-rate (CROSS) futures contracts, and their implicit counterparts are calculated and tests of relative hedging effectiveness of these contracts are performed. Test results support the hypothesis of the paper and their implications for new futures contract development are discussed.

"Managerial Ownership and Conflicts: A Nonlinear Simultaneous Equation Analysis of Managerial Ownership, Risk Taking, and Dividend Policy"

Carl R. Chen and Thomas L. Steiner
Volume 34, No. 1, pp. 119-136

· Abstract: This paper uses a nonlinear simultaneous equation methodology to examine how managerial ownership relates to risk taking, debt policy, and dividend policy. The results have implications for our understanding of agency costs. We find risk to be a significant and positive determinant of the level of managerial ownership while managerial ownership is also a significant and positive determinant of the level of risk. The result supports the argument that managerial ownership helps to resolve the agency conflicts between external stockholders and managers but at the expense of exacerbating the agency conflict between stockholders and bondholders. We further observe evidence of substitution-monitoring effects between managerial ownership and debt policy, between managerial ownership and dividend policy, and between managerial ownership and institutional ownership.

"The Industry-Wide Implications of Dividend Omission and Initiation Announcements and the Determinants of Information Transfer"

Ninon Kohers
Volume 34, No. 1, pp. 137-158

· Abstract: In examining the industry-wide implications of dividend omission and initiation announcements, this study finds distinct industry responses for these two events. Specifically, dividend omission announcements have a significantly negative impact on the valuations of industry-related firms. Factors influencing this industry reaction include the Herfindahl index of the announcing firm's industry, the two-day abnormal return of the announcing firm, and its trading status (NASDAQ or NYSE/AMEX). Unlike dividend omissions, dividend initiations evoke a competitive (or negative) response from industry-related firms. The degree of homogeneity in the announcing firm's industry, the announcing firm's abnormal return and its size affect this industry response.

"Who moves the Asia-Pacific Stock Markets: U.S. or Japan? Empirical Evidence Based on the Theory of Cointegration"

Asim Ghosh, Reza Saidi, and Keith H. Johnson
Volume 34, No. 1, pp. 159-170

· Abstract: This study examines the recent debacle of the Asian-Pacific stock markets by utilizing the theory of cointegration to investigate which developing markets are moved by the markets of Japan and the United States. The empirical evidence suggests that some countries are dominated by the US, some are dominated by Japan, and the remaining countries are dominated by neither during the time period investigated. The appropriate error correction model is estimated and is used to perform out-of-sample forecasting.