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on Financial Markets |
| By: | Otavio Ribeiro De Medeiros (Universidade de Brasilia, Brazil); Alberto Shigueru Matsumoto (Fundacao Visconde de Cairu, Brazil) |
| Abstract: | We perform an event study to investigate stock returns associated to the announcement of equity issues by Brazilian firms between 1992 and 2003 aiming to determine the market reaction before, during, and after the issue announcement. After measuring abnormal returns by OLS, we used ARCH and GARCH models over 70% of the sample. The results show signs of insider information, negative abnormal returns around the announcement, and persistent negative abnormal returns in the long-term after the issue. The results are consistent with the extant empirical literature and show that ARCH/GARCH estimation of abnormal returns is superior to OLS estimation. |
| Keywords: | Brazilian stock market, event study, market reaction, GARCH |
| JEL: | G |
| Date: | 2004–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0412020&r=fmk |
| By: | Asquith, Paul; Mikhail, Michael; Au, Andrea |
| Abstract: | This paper catalogs the complete text of a large sample of All-American Analyst reports and examines the market reaction to the information released. It shows that the text of the report, which provides the justifications supporting an analyst's summary opinion, provides information beyond that contained in earnings forecasts, recommendation levels, and price targets. Including the strength of the analyst's justifications, reduces, and in some models eliminates, the significance of the information available in earnings forecasts and recommendation revisions. By controlling for the simultaneous release of other information, we show that analyst reports do not merely repeat firm releases of information, but also provide both new information and/or interpretation of previously released information to the market. By examining whether the market's reaction differs by report type (i.e. upgrade, reiteration, or downgrade), we demonstrate that information in a report is most important for downgrades and that target prices and the strength of the justifications are the only elements that matter for reiterations. Finally, we find no correlation between the valuation methodology used by analysts and either the market's reaction to a report's release or the analyst's accuracy. Our adjusted R2 of nearly 26% is three or four times larger than that of other studies using only partial content from analyst reports. |
| Keywords: | Stock recommendations, price targets, earnings forecasts, security analysts, |
| Date: | 2004–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:mit:sloanp:7345&r=fmk |
| By: | Pavlova, Anna; Rigobon, Roberto |
| Abstract: | This paper develops a simple two-country, two-good model, in which the real exchange rate, stock and bond prices are jointly determined. The model predicts that stock market prices are correlated internationally even though their dividend processes are independent, providing a theoretical argument in favor of financial contagion. The foreign exchange market serves as a propagation channel from one stock market to the other. The model identifies interconnections among stock, bond and foreign exchange markets and characterizes their joint dynamics as a three-factor model. Contemporaneous responses of each market to changes in the factors are shown to have unambiguous signs. These implications enjoy strong empirical support. Estimation of various versions of the model reveals that most of the signs predicted by the model indeed obtain in the data, and the point estimates are in line with the implications of our theory. Moreover, the factors we extract from daily data on stock indexes and exchange rates explain a sizable fraction of the variation in a number of macroeconomic variables, and the estimated signs on the factors are consistent with our model's implications. We also derive agents' portfolio holdings and identify economic environments under which they exhibit a home bias, and demonstrate that an international CAPM obtaining in our model has two additional factors. |
| Keywords: | Asset Pricing, Exchange Rate, Contagion, International Finance, Open Economy Macroeconomics, |
| Date: | 2004–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:mit:sloanp:7349&r=fmk |
| By: | David J. Bolder; Grahame Johnson; Adam Metzler |
| Abstract: | Zero-coupon interest rates are the fundamental building block of fixed-income mathematics, and as such have an extensive number of applications in both finance and economics. The risk-free government zero-coupon term structure is, however, not directly observable and needs to be generated from the prices of marketable, coupon-bearing bonds. The authors introduce the first public-domain database of constant-maturity zero-coupon yield curves for the Government of Canada bond market. They first outline the mechanics of the curve-fitting algorithm that underlie the model, and then perform some preliminary statistical analysis on the resulting yield curves. The full sample period extends from January 1986 to May 2003; it is broken down into two subsamples, reflecting the structural and macroeconomic changes that impacted the Canadian fixed-income markets over that time. The authors examine the evolution of a number of key interest rates and yield-curve measures over the period, perform a principal-components analysis of the common factors that have influenced yield changes over time, and compare holding-period returns over the sample for assets of various maturities. |
| Keywords: | Financial markets; Interest rates; Econometric and statistical methods |
| JEL: | C0 C6 E4 G1 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:04-48&r=fmk |
| By: | Gregory H. Bauer; Clara Vega |
| Abstract: | Existing studies using low-frequency data show that macroeconomic shocks contribute little to international stock market covariation. Those studies, however, do not account for the presence of asymmetric information, where sophisticated investors generate private information about the fundamentals that drive returns in many countries. In this paper, the authors use a new microstructure data set to better identify the effects of private and public information shocks about U.S. interest rates and equity returns. High-frequency private and public information shocks help forecast domestic money and equity returns over daily and weekly intervals. In addition, these shocks are components of factors that are priced in a model of the cross-section of international returns. Linking private information to U.S. macroeconomic factors is useful for many domestic and international asset-pricing tests. |
| Keywords: | Financial markets; International topics; Market structure and pricing |
| JEL: | F30 G12 G14 G15 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:04-47&r=fmk |
| By: | Anthony W. Lynch; Sinan Tan |
| Abstract: | The seminal work of Constantinides (1986) documents how, when the risky return is calibrated to the U.S. market return, the impact of transaction costs on per-annum liquidity premia is an order of magnitude smaller than the cost rate itself. A number of recent papers have formed portfolios sorted on liquidity measures and found a spread in expected per-annum return that is definitely not an order of magnitude smaller than the transaction cost spread: the expected per-annum return spread is found to be around 6-7% per annum. Our paper bridges the gap between Constantinides' theoretical result and the empirical magnitude of the liquidity premium by examining dynamic portfolio choice with transaction costs in a variety of more elaborate settings that move the problem closer to the one solved by real-world investors. In particular, we allow returns to be predictable and transaction costs to be stochastic, and we introduce wealth shocks, both stationary multiplicative and labor income. With predictable returns, we also allow the wealth shocks and transaction costs to be state dependent. We find that adding these real world complications to the canonical problem can cause transactions costs to produce per-annum liquidity premia that are no longer an order of magnitude smaller than the rate, but are instead the same order of magnitude. For example, predictable returns and i.i.d. labor income growth causes the liquidity premium for an agent with a wealth to monthly labor income ratio of 0 or 10 to be 1.68\% and 1.20\% respectively; these are 21-fold and 15-fold increases, respectively, relative to that in the standard i.i.d. return case. We conclude that the effect of proportional transaction costs on the standard consumption and portfolio allocation problem with i.i.d. returns can be materially altered by reasonable perturbations that bring the problem closer to the one investors are actually solving. |
| JEL: | G11 G12 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:10994&r=fmk |
| By: | Kannai,Y.; Rosenmueller,J. (University of Bielefeld, Institute of Mathematical Economics) |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:att:bielme:2004351&r=fmk |