Bart Frijns

On the Role of Cultural Distance in the Decision to Cross-List

This paper examines the role of culture in the choice of the destination market for cross-listing. We argue that firms cross-list in markets that have greater cultural similarities as investors are unwilling to invest in firms from culturally dissimilar markets and managers may seek to avoid potential conflicts with culturally disparate investors and managers. Employing Hofstede’s (2001) Cultural Dimensions, we find strong support for the hypothesis that firms from developed markets show a greater propensity to cross-list in a country with similar values to their home market. These results are robust to a range of alternative cultural measures including modified Hofstede’s scores, societal practices scores from the GLOBE project and World Values Survey scores.

Investor sentiment, mutual fund flows and its impact on returns and volatility

Purpose – The purpose of this paper is to investigate the impact of individual investor sentiment on the return process and conditional volatility of three main US market indices (Dow Jones Industrial Average, S&P500 and Nasdaq100). Individual investor sentiment is measured by aggregate money flows in and out of domestically oriented US mutual funds.Design/methodology/approach – A generalised autoregressive conditional heteroscedasticity (GARCH)‐in‐mean specification is used, where our measure for individual sentiment enters the mean and conditional volatility equation.Findings – For a sample period of six years (February 1998 until December 2004), we find that sentiment has a significant and asymmetric impact on volatility, increasing it more when sentiment is bearish. Using terminology of De Long et al., we find evidence for the “hold more” effect, which states that when noise traders hold more of the asset, they also see their returns increase, and the “create space” effect, which states that noise tra...

The impact of cultural diversity in corporate boards on firm performance

We examine the impact of cultural diversity in corporate boards of directors on firm performance. We construct a measure of cultural diversity by calculating the centroid of cultural distances between each board member using Hofstede’s cultural framework. Our findings indicate that cultural diversity in boards negatively affects firm performance measured with Tobin’s Q and ROA. These results hold after controlling for potential endogeneity using a non-contemporaneous specification and instrumental variables. The results are further robust to a wide range of board and firm characteristics, including various measures of ‘foreignness’ of a firm, and alternative culture frameworks. Further analysis reveals that only extremely high degree of cultural board diversity hurt firm performance. The impact of cultural diversity is also mitigated by the complexity of the firm and the size of foreign sales and operations. In addition, we find that not all aspects of cultural differences are equally important and that it is mainly the diversity in individualism and masculinity that affect effectiveness of boards of

Forecasting daily volatility with intraday data

The aim of this paper is to assess to what extent intraday data can explain and predict end-of-the-day volatility. Using a realized volatility measure as proposed by Andersen, T., T. Bollerslev, F. Diebold, and P. Labys. 2001. The distribution of realized exchange rate volatility. Journal of the American Statistical Association 96: 42–55, we hypothesize that volatility generated at the start of the day is an important predictor of daily volatility either on its own accord or in conjunction with information about the seasonal pattern characterizing intraday volatility. We address the question of how much information needs to arrive to the market before a good predictor can be formed. Using data from a specialist market (NYSE), a dealer market (Nasdaq) and a continuous auction market (Paris Bourse), we investigate how different trading structures may affect intraday volatility formation. As a preview to our results, we find that the explanatory power of first-hour volatility for daily volatility is as high as 68%, whereas the average volatility generated during this first hour is <30%. Comparison to a standard GARCH model shows that the forecasts based on the intraday data are generally highly informative both on their own accord and in combination with the GARCH forecasts.

Institutional Trading and Stock Returns: Evidence from China

Using a unique dataset containing daily institutional ownership information, we examine the relation between daily institutional trading and past, contemporaneous, and future stock returns on the Shanghai Stock Exchange (SSE). We find strong evidence of the price pressure effect induced by institutional trading, causing price impacts of up to 2.12% per day for the most intensively bought stocks. We further find that institutions are informed and momentum traders when buying but not when selling, which may be due to short-selling restrictions in China. Finally, our findings suggest that institutions engage in order splitting and/or herding behavior, as the price pressure effect is observed up to five days before and after the intense trading date.

Learning by doing: the role of financial experience in financial literacy

In this paper, we examine the impact of financial experience on financial literacy. Exploiting a unique feature of New Zealand, whereby domestic students can obtain interest-free student loans and can fully participate in the national retirement scheme while international students cannot, we employ an instrumental variables approach to identify the causal effect of financial experience on financial literacy. We conduct surveys on a sample of 338 business students and find that there is a positive and causal effect of financial experience on financial literacy. Our results have important implications for financial education programmes and may explain why many of these programmes to date have had limited success.

When no news is good news – The decrease in investor fear after the FOMC announcement

We examine the impact of Federal Open Market Committee announcements on the intraday dynamics of the VIX and VIX futures. We find that at the time of the announcement the VIX and VIX futures decline significantly. We observe that the decline in the VIX and VIX futures after the announcement is not instantaneous but gradual, lasting for about 45min. The magnitude of the decline in the VIX and VIX futures is strongly negatively related to an increase in realized volatility at the time of the announcement. Finally, we explore the potential economic profits that could be obtained from the observed reaction of the VIX futures to the announcement, and show that a strategy that goes short in the nearest term VIX future at the start of a trading day and closes out at the end of that day generates an average return of 10% p.a.

Market Timing Ability and Mutual Funds: A Heterogeneous Agent Approach

This paper proposes a novel approach to determine whether mutual funds time the market. The proposed approach builds on a heterogeneous agent model, where investors switch between cash and stocks depending on a certain switching rule. This approach is more flexible, intuitive, and parsimonious than the traditional convexity approach. Applying this model to a sample of 400 US equity mutual funds, we find that 41.5% of the funds in our sample have negative market timing skills and only 3.25% positive skills. Twenty percent of funds apply a forward-looking approach in deciding on market timing, and 13.75% a backward-looking approach. We find that growth funds tend to be more backward-looking and income funds tend to be more forward-looking.

On the Style-Based Feedback Trading of Mutual Fund Managers

This paper examines the style-based feedback trading behavior of mutual fund managers. We provide an empirical version of the model for style-switching behavior of Barberis and Shleifer (2003). We find style-based feedback trading for 77% of the funds, half of which is positive- (negative-) feedback trading. There is evidence for “twin-style” switching, in which capital is channeled between value and growth, and between large-cap and small-cap. Growth (value) funds apply more positive (negative)-feedback trading. Funds that switch more aggressively are younger and have higher expense ratios. Finally, we find that positive (negative) feedback trading yields positive (negative) alpha.

The New Zealand implied volatility index

This paper constructs an implied volatility index, the NZVIX, for the New Zealand stock market. Because there are no equity index options in New Zealand, we propose a new approach that uses stock options to construct an implied volatility index. Specifically, we use implied volatilities from four stock options to construct an implied volatility index for the NZX 15 Index. We find that the NZVIX has predictive power for future NZX 15 volatility and observe a significant negative relationship between NZVIX changes and NZX15 returns. Finally, we find a weak significant relation between lagged NZVIX changes and NZX 15 returns.