nep-fmk New Economics Papers
on Financial Markets
Issue of 2008‒08‒21
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Zero variance in Markov chain Monte Carlo with an application to credit risk estimation By Tenconi Paolo
  2. The Jump component of S&P 500 volatility and the VIX index By Ralf Becker; Adam Clements; Andrew McClelland
  3. Why Do Foreign Firms Leave U.S. Equity Markets? An Analysis of Deregistrations Under SEC Exchange Act Rule 12h-6 By Craig Doidge; G. Andrew Karolyi; René M. Stulz
  4. Momentum in Australian Stock Returns: An Update By A. S. Hurn; V.Pavlov

  1. By: Tenconi Paolo (Department of Economics, University of Insubria, Italy)
    Abstract: We propose a general purpose variance reduction technique for Markov Chain Monte Carlo estimators based on the Zero-Variance principle introduced in the physics lit- erature by Assaraf and Caarel ( 1999). The potential of the new idea is illustrated with some toy examples and a real application to Bayesian inference for credit risk estimation.
    Keywords: Markov chain Monte Carlo, Metropolis-Hastings algorithm, Variance re- duction, Zero-Variance principle.
    Date: 2008–04
  2. By: Ralf Becker; Adam Clements; Andrew McClelland
    Abstract: Much research has investigated the differences between option implied volatilities and econometric model-based forecasts in terms of forecast accuracy and relative informational content. Implied volatility is a market determined forecast, in contrast to model-based forecasts that employ some degree of smoothing to generate forecasts. Therefore, implied volatility has the potential to reflect information that a model-based forecast could not. Specifically, this paper considers two issues relating to the informational content of the S&P 500 VIX implied volatility index. First, whether it subsumes information on how historical jump activity contributed to the price volatility, followed by whether the VIX reflects any incremental information relative to model based forecasts pertaining to future jumps. It is found that the VIX index both subsumes information relating to past jump contributions to volatility and reflects incremental information pertaining to future jump activity, relative to modelbased forecasts. This is an issue that has not been examined previously in the literature and expands our understanding of how option markets form their volatility forecasts.
    Keywords: Implied volatility, VIX, volatility forecasts, informational efficiency, jumps
    JEL: C12 C22 G00 G14
    Date: 2008–03–17
  3. By: Craig Doidge; G. Andrew Karolyi; René M. Stulz
    Abstract: On March 21, 2007, the Securities and Exchange Commission (SEC) adopted Exchange Act Rule 12h-6 which makes it easier for foreign private issuers to deregister and terminate the reporting obligations associated with a listing on a major U.S. exchange. We examine the characteristics of 59 firms that immediately announced they would deregister under the new rules, their potential motivations for doing so, as well as the economic consequences of their decisions. We find that these firms experienced significantly slower growth and lower stock returns than other U.S. exchange-listed foreign firms in the years preceding the decision. There is weak evidence that firms experience negative stock returns when they announce deregistration and stronger evidence that the stock-price reaction is worse for firms with higher growth. When we examine stock-price reactions around events associated with the passage of the Sarbanes-Oxley Act (SOX), we find negative average stock-price reactions with some specifications but not others. Further, there is no evidence that deregistering firms were affected more negatively by SOX than foreign-listed firms that did not deregister. Our evidence supports the hypothesis that foreign firms list shares in the U.S. in order to raise capital at the lowest possible cost to finance growth opportunities and that, when those opportunities disappear, a listing becomes less valuable to corporate insiders so that firms are more likely to deregister and go home.
    JEL: F30 G15 G34
    Date: 2008–08
  4. By: A. S. Hurn; V.Pavlov
    Abstract: It has been documented that a momentum investment strategy based on buying past well performing stocks while selling past losing stocks, is a profitable one in the Australian context particularly in the 1990s. The aim of this short paper is to investigate whether or not this feature of Australian stock returns is still evident. The paper confirms the presence of a medium-term momentum effect, but also provides some interesting new evidence on the importance of the size effect on momentum.
    Keywords: Stock returns, Momentum portfolios, Size effect
    JEL: G11 G12
    Date: 2008–02–26

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