Christine X. Jiang

Information Content of Earnings Announcements: Evidence from After-Hours Trading

We study after-hours trading (AHT), price contributions, and price discovery following quarterly earnings announcements released outside of the normal trading hours. For Standard & Poor’s (S&P) 500 index stocks from 2004–2008, AHT is heightened on announcement days. A significant portion of the price change and price discovery occurs immediately after the earnings releases. Prices in AHT show a large degree of informational efficiency, further demonstrating the importance of price discovery in AHT. We also provide evidence suggesting that firms prefer after-hours earnings announcements, as trades are mainly from informed traders, and those trades are relied upon to convey information to the general public.

Do foreign exchange risk premiums relate to the volatility in the foreign exchange and equity markets

Empirical tests are performed to examine whether foreign exchange excess returns for the British pound, Canadian dollar, Deutsche mark, and Japanese yen are related to volatility in the currency market and volatility in the stock markets. Our results indicate that volatility (measured by standard deviation and variance) from currency markets is significant in explaining the excess returns, suggesting that the excess returns are indeed reward for risk-taking. In addition, shocks in equity markets are found to have a significant impact on currency risk premium as well. In some cases, we find nonlinearity in the risk premium. Finally, our results emerged from Glosten, Jagannathan, Runkles model (Journal of Finance,48 (5), 1993) suggest that risk premiums for each currency tend to respond to positive and negative shocks differently.

Bid-Ask Spreads, Information Asymmetry, and Abnormal Investor Sentiment: Evidence from Closed-End Funds

Using a sample of closed-end equity funds listed on the NYSE from 1994 to 1999, we investigate differences in spreads and adverse selection costs between the closed-end funds and a matched sample of common stocks. We find that spreads and adverse selection costs for the closed-end funds are significantly lower than those of control stocks. The results are consistent for the subperiods both before and after the minimum tick size change on NYSE on June 24, 1997. The differences of spreads and adverse selection costs cannot be attributed to the differences in the characteristics of the closed-end funds and the matched sample of common stocks. Lastly, we find that abnormal investor sentiment and adverse selection costs of closed-end funds are positively correlated over time.

Conditional Hedging and Portfolio Performance

Simple conditional currency-hedging rules often increase risk-adjusted portfolio returns and are thus of interest to investors. Several researchers have reported successful application of a “forward hedge rule” (FHR) in which one hedges whenever the foreign currency trades at a forward premium. An alternative strategy, a “real-interest-rate hedge rule” (RIR), is based on hedging when the domestic real interest rate exceeds the foreign rate. As an extension, we propose a combination of these rules—a “real forward hedge rule” (RFHR). We evaluate the performance of the rules for various currency, stock, and bond portfolios from the developed countries. In tests of risk-adjusted returns for 1976–1997, the RFHR significantly outperformed standard benchmarks and often beat the FHR and the RIR. Moreover, results of a simple dominance test for rolling 5- and 10-year periods suggest that the RFHR consistently improves portfolio performance for a U.S. investor. Managers of international equity and bond portfolios face added complications from currency fluctuations, so currency hedging is often used to minimize risk. Simple conditional currency-hedging rules may decrease risk, but they also frequently increase risk-adjusted portfolio returns (the Sharpe ratio). We tested the efficacy of a “real forward hedge rule” applied to equally weighted portfolios of currencies, stocks, bonds, and stocks plus bonds from the G–5 countries (France, Germany, Japan, the United Kingdom, and the United States) over a 21-year period. The rule we proposed outperformed both conventional benchmarks and two other conditional hedging rules. These results suggest that U.S. managers could benefit from using this rule. Conditional hedging rules make hedging decisions on the basis of the information available to individuals at the investment decision point. Several researchers have reported successful application of a forward hedge rule (FHR), in which one hedges whenever the foreign currency trades at a forward premium. This strategy is based on an assumption that exchange rates follow roughly a random walk and that managers are rewarded by hedging whenever they can capture the forward premium. Other researchers have reported evidence supporting a real-interest-rate hedge rule (RIR) in which one hedges when the domestic real interest rate exceeds the foreign one. This rule is based on the supposition that purchasing power parity is a better predictor of the subsequent exchange rate than is the forward rate. Recognizing that the RIR might help improve results obtained from applying the FHR (because the RIR links inflation expectations to exchange rates and helps explain the reasons for differences in interest rates), we propose a combination of these rules in a real forward hedge rule (RFHR). The RFHR invokes hedging only when (1) the foreign currency is at a forward premium and (2) the domestic real interest rate exceeds the foreign rate. This combined rule hedged less often than the FHR or RIR (about 34 percent versus 50 percent of the time), but it proved to be correct more frequently (59 percent of the time versus 57–58 percent) during the period of our study. We tested the RFHR against standard unconditional benchmarks (never hedged, always half-hedged, and always fully hedged) and against the FHR and RIR for equally weighted portfolios of G–5 currencies, stocks, bonds, and stocks plus bonds. Monthly observations for 1976–1997 were drawn from Datastream, and hedging transaction costs of 5 bps a month were assumed. We adopted the viewpoint of a U.S. investor throughout. With one exception (fully hedged bonds), the RFHR led to significantly higher Sharpe ratios than did the unconditional benchmarks. Also, although the differences in Sharpe ratios between the RFHR and the FHR or RIR generally were not statistically significant, the RFHR showed clear superiority in a simple dominance test. In this test, we computed Sharpe ratios for rolling 5- and 10-year periods of monthly observations and counted the number of times each strategy had the highest Sharpe ratio. That is, for the 204 overlapping 5-year periods for equity (or bond or bond plus equity) portfolios, the dominance test counted the number of 5-year periods in which application of each of the six strategies resulted in the best Sharpe ratio. The test found that for all but the rolling 5-year bond portfolios (in which the FHR, the RFHR, and the fully hedged strategies were roughly equally successful), use of the RFHR strategy led to the highest Sharpe ratio most often. In fact, in many cases, the number of periods in which the RFHR dominated was greater than that of any three competing approaches combined. Although the dominance test is not a statistical test, it does indicate a high level of consistency in performance. One can conclude from this study that application by U.S. investors of the RFHR to international portfolios often leads to better results. The combined rule is less successful with bonds, which may not benefit from the added information from the RIR because bonds are more highly correlated with interest rates. Use of the RFHR with equity portfolios and with stock plus bond portfolios, however, has the potential to provide strong benefits.

Foreign exchange returns over short and long horizons

Abstract This paper examines foreign exchange return behavior over short and long time horizons for six major currencies. The evidence indicates strong positive correlations for intervals from 12 to 52 weeks, inconsistent with the random walk behavior documented by Meese and Rogoff (1983). When returns are measured over three to four year horizons, the coefficients on first-order autoregression are negative, supporting a mean reversion hypothesis. The mean reverting behavior, which is consistent with the variance ratio being less than unity, implies that the foreign exchange markets are more stable and investment over long horizons is less risky than it appears to be.

A comparison of volatility and bid–ask spread for NASDAQ and NYSE after decimalization

We compare volatility and transaction costs for National Association of Securities Dealers Automated Quotations (NASDAQ) and New York Stock Exchange (NYSE) firms after decimalization. Using the data of May 2001, our study includes several large samples are matched based on key determinants of volatility and transaction costs. Our findings suggest that volatility on NASDAQ is much higher than on NYSE even after the recent market reforms and decimalization. Transaction costs measured by quoted and effective spreads remain significantly higher on NASDAQ than on NYSE, and these differences cannot be attributed to the differences in the characteristics of the stocks traded in the two markets. In addition, the frequency of small (large) trades inside the quotes is significantly greater (lower) on NYSE than on NASDAQ.

The volatility impact of the European monetary system on member and non-member currencies

The objective of the European Monetary System (EMS) is to increase the coherence of its member economies and to facilitate the process towards the European Monetary Union. One major element in the process has been the coordinated effort in reducing the volatility of the member currencies through the Exchange Rate Mechanism (ERM). To the same end, the Basle-Nyborg agreement of the European Union (EU) central bankers aims at strengthening the credibility of the EMS through providing credit facilities for intramarginal interventions. In this paper, the impact that the establishment of the EMS and the ratification of the Basle–Nyborg agreement had on the exchange rates of all EU currencies is studied. A multivariate GARCH(1,1) model is applied to all EU exchange rates in three subperiods: from January 1975 to the establishment of the EMS (March 1979); from March 1979 to the Basle–Nyborg agreement (September 1987); and from September 1987 to October 1991. Comparisons of the estimated parameters are performed across subperiods and between EMS and non-EMS currencies. The characteristics of the estimated conditional variances across subperiods are further examined with nonparametric tests. The findings suggest that the EMS and, especially, the Basle–Nyborg agreement have stabilized the European currencies.

The change in trading activity on volatility and adverse selection component: evidence from ADR splits

Abstract We examine the change in volatility, adverse selection cost, and trading activity for all American Depository Receipts stock splits over the period of 1994–1999. We find higher return volatility, more trading activity (mainly small trades), and lower adverse selection cost post a split. Furthermore, our regression results suggest that the increase in volatility is mainly due to heightened trading activity, while the lower adverse selection cost is primarily the result of higher percentage of noise trading on split-up stocks.

The Impact of Earnings Guidance Cessation on Information Asymmetry: THE IMPACT OF EARNINGS GUIDANCE CESSATION

This paper studies the impact of quarterly earnings guidance cessation on information asymmetry using a large sample of firms during the years 2002–11. After earnings guidance cessation, information asymmetry may increase because less information is provided to the market. Alternatively, information asymmetry may decrease if managers have less pressure to manage reported earnings to meet guidance numbers. Our study shows guidance cessation significantly reduces information asymmetry compared to matched non-guiders and guidance maintainers. We also find that firms engage in less earnings management after guidance cessation, especially for firms that had provided guidance on a persistent basis.

Price clustering on the Shanghai Stock Exchange

ABSTRACT We investigate price clustering of intraday trades and negotiated block trades on the Shanghai Stock Exchange (SSE) from 2003 to 2009. Prices of traded assets tend to cluster on certain final digits, such as 0 and 5. In Chinese culture, 8 is associated with good luck and 4 with death so these numbers may be attractive or avoided. We find that price clustering on the final digit of 0 is significantly higher during the morning call auction and early in the trading day. We find no evidence of price clustering for the digit 8, but there is a significant dearth of prices ending in the inauspicious number 4. Price clustering is significantly higher for negotiated block trades, for which about 28% end with 0. Multivariate analysis shows that price clustering is lower for more liquid firms, but higher for firms with higher return volatility, a higher price level, or when the market is volatile. Our evidence supports the costly negotiation hypothesis. Our results also support the attraction hypothesis in that we document significant price clustering at round numbers and even numbers even after controlling for factors that are associated with price uncertainty.