Avraham Kamara

New Evidence on the Monday Seasonal in Stock Returns

Equity derivatives and the institutionalization of equity markets affect the Monday seasonal. The seasonal in the Standard and Poors 500 (S&P) declines significantly over 1962-93. This decline is positively related to the ratio of institutional to individual trading volume. In contrast, the seasonal for small stocks does not decline and is unaffected by institutional versus individual trading. Higher trading costs sustain the seasonal in small stocks and, unlike the S&P, these costs are not lower for institutions than for individuals. Futures minus spot S&P returns exhibit a reverse seasonal. Informed traders use the less costly market to exploit the seasonal. Copyright 1997 by University of Chicago Press.

Daily and Intradaily Tests of European Put-Call Parity

Existing empirical studies of the put-call parity condition report frequent, substantial violations. An important problem in interpreting these results is that these studies all investigate American options. While some of these studies attempt to reduce the effects of possible early exercise on their tests, they cannot fully account for the effect of early exercise. Therefore, it is not possible to conclude from these studies whether, or to what extent, observed put-call parity violations are due to market inefficiency or due to the value of early exercise. We avoid the early exercise problem by testing put-call parity using European options. We find violations that are much less frequent and smaller than the studies using American options. Moreover, these violations reflect premia for liquidity (immediacy) risk.

Volatility, autocorrelations, and trading activity after stock splits ☆

Abstract We examine the relation between trading activity, return volatility, and autocorrelations around stock splits. Prior research shows substantial increases in volatility and number of small trades after splits. We show that these two effects are significantly positively related, and find evidence of bi-directional Granger causality. We also show that first-order serial autocorrelations decline significantly after splits. The decline in autocorrelations is significantly related to the change in the number of small trades. In contrast, for control samples of non-splitting firms, changes in volatility and autocorrelations are not associated with changes in small trades.

Conditional Time-Varying Interest Rate Risk Premium: Evidence from the Treasury Bill Futures Market

Existing studies of the term structure of interest rates often use spot Treasury rates to represent default-free interest rates. However, part of the premium in Treasury rates is compensation for the risk that short-sellers may default. Since Treasury bill futures are default-free, they provide cleaner data to estimate the interest rate risk premium. The mean excess return in defaultfree Treasury bill futures is zero. This suggests that the interest rate risk premium could be economically negligible. We find that although the mean unconditional premium is zero, futures returns contain economically and statistically significant time-varying conditional interest rate risk premiums. The conditional premium depends significantly positively on its own conditional variance and its conditional covariance with the equity premium. The conditional premium is large in the volatile 1979–82 period, but small afterwards.

Delivery Uncertainty and the Efficiency of Futures Markets

This paper examines the effects of the delivery basis risk embedded in nearly all futures contracts on efficiency tests of these markets. Examining soybean futures contracts, we show that delivery basis risk has important implications for market efficiency tests. As? suming no delivery basis risk, the market efficiency hypothesis is rejected. However, fu? tures prices contain signiflcant time-varying expected delivery basis and time-varying ex? pected delivery risk premiums. Once these expected delivery basis and delivery risk premiums are accounted for, the apparent inefficiency is eliminated. Equilibrium spot prices also contain signiflcant time-varying expected delivery risk premiums.

Has the U.S. Stock Market Become More Vulnerable Over Time

This paper demonstrates that the cross-sectional variation of systematic risk and systematic liquidity have increased over the period 1963-2008. Both have increased signi ficantly for large-cap firms, but declined signifi cantly for small-cap fi rms. Several implications for investment managers are discussed, such as the declining ability to diversify return volatilities and liquidity shocks by holding liquid, large-cap stocks. The evidence suggests that the vulnerability of the US equity market to unanticipated events has increased over the past few decades.

Operating Leverage, Profitability and Capital Structure

Operating leverage crowds-out financial leverage while also increasing profitability. Thus, operating leverage generates the negative relation between profitability and financial leverage that appears to be inconsistent with the trade-off theory, but is commonly observed in the data. We find empirically that, by removing the effect of operating leverage from profitability, the negative association between the profitability and financial leverage decreases by about 70%, confirming the channel. We demonstrate the effect of operating leverage on firms’ financial leverage decisions during the financial crisis.

The Structure of Information Release and the Factor Structure of Returns

We model how firms releasing information on different dates causes the CAPM to fail, requiring an additional factor based on the information structure to price assets. We exemplify this mechanism’s empirical relevance using quarterly earnings announcements, which cluster across months along size and book-to-market. Seventy percent of the alpha reduction from including SMB and HML occurs in the four main earnings announcement months. The information structure factor accounts for all of SMB and HML’s seasonal alpha reduction and one third of their overall alpha reduction. Controlling for size and book-tomarket, exposures to SMB and HML vary with firms’ earnings announcement month.