Frank M. Song

Intraday periodicity, long memory volatility, and macroeconomic announcement effects in the US Treasury bond market

Abstract In this paper, we provide a detailed characterization of the return volatility in US Treasury bond futures contracts using a sample of 5-min returns from 1994 to 1997. We find that public information in the form of regularly scheduled macroeconomic announcements is an important source of volatility at the intraday level. Among the various announcements, we identify the Humphrey–Hawkins testimony, the employment report, the producer price index (PPI), the employment cost, retail sales, and the NAPM survey as having the greatest impact. Our analysis also uncovers striking long-memory volatility dependencies in the fixed income market, a finding with important implications for the pricing of long-term options and other related instruments.

On the Comovement of Commodity Prices

We present strong evidence against the excess-comovement hypothesis—that the prices of commodities move together beyond what can be explained by fundamentals. Prior studies employ broad macroeconomic indicators to explain common price movements, and potentially correlated fundamentals are not controlled for. We use inventory and harvest data to fit a partial equilibrium model that more effectively captures the variation in individual prices. The model explains the majority of the comovements among commodities with high price correlation, and all of the comovements among those with marginal price correlation. Common movements in supply factors appear to play an important role in the observed comovements in commodity prices. Copyright 2006, Oxford University Press.

Hysteresis in Unemployment: Evidence from OECD Countries

Existing studies using standard unit-root tests generally cannot reject the null hypothesis of a unit root in unemployment rates. These findings have been interpreted as support for the hysteresis hypothesis. In this paper, we analyze a panel of unemployment rates of fifteen OECD countries by using a panel-based test. The test exploits the cross-section variations of the constituent series and is more powerful. The critical values are simulated based on our specific panel sizes and time periods. It is found that the null hypothesis of a unit root in unemployment rates can be rejected in general. This casts some doubt on the hysteresis hypothesis and provides limited support for the natural-rate hypothesis of unemployment for these countries.

Are Survey Forecasts of Macroeconomic Variables Rational

This article examines the rationality of forecasts of 11 macroeconomic variables. Among the nonstationary series, only surveys of housing starts, the unemployment rate, and the trade balance are rational forecasts. Among the stationary series, survey forecasts for only consumer prices and personal income are consistent with rational expectations. Lack of rationality in forecasts of durable goods, industrial production, leading indicators, money supply, and retail sales suggests that such forecasts do not fully exploit public information. Indeed, survey forecasts for industrial production and retail sales can be improved significantly with past information. Copyright 1995 by University of Chicago Press.

A Two-Factor ARCH Model for Deposit-Institution Stock Returns

This paper specifies a two-factor model for a sample of deposit institutions. The factors are the market return and an interest rate factor. The two-factor model is specified with Autoregressive Conditional Heteroskedacity (ARCH) modeling strategy and is estimated by Generalized Method of Moments (GMM). The market and interest rate risks are measured by their time-varying betas. The results suggest that the market risks have been volatile over the sample period 1977-87 and they increased and became more volatile after 1982. The interest rate risks were more stable and they did not respond to the Feds regime change in monetary policy in 1979 and 1982. Specification tests suggest the usefulness of my two-factor ARCH model in the study of deposit-institution stock returns. Copyright 1994 by Ohio State University Press.

Sources of business-cycle volatility: An exploratory study on a sample of OECD countries

Abstract This paper investigates the sources of output volatility in twenty-four OECD economies using annual data from the 1960 to 1990 period. The paper finds that output volatility is positively related to the volatility of the money supply and the variance of the Solow residual, but negatively related to government size. The degree of openness of the economy and the exchange rate flexibility are also positively related to the size of business fluctuations, while price flexibility and industrial structure have no effect on output volatility. These results shed some light on the issue of the sources of business cycles.

Stock prices, inflation and output: evidence from India

A negative relationship between stock market returns and inflationary trends has been widely documented for developed economies in Europe and North America. This study provides similar evidence for India. This relationship is investigated in light of Famas explanation that centres around linkages between inflation and real activity, and between stock returns and real activity. Specifically, the study tests whether the negative stock return-inflation relationship is explained by a negative relationship between inflation and real economic activity, and a positive relationship between real activity and stock returns. The results from the heteroscedasticity and autocorrelation corrected models provide only partial support for Famas hypothesis. The relationship between real activity and inflation does not account for the negative relationship between real stock returns and the unexpected component of inflation.

Board structure, corporate governance and firm value: evidence from Hong Kong

This article investigates the effects of board structure and internal Corporate-Governance (CG) mechanisms on firm value in an emerging market with concentrated ownership and family involvement. Using a unique Hong Kong (HK) panel dataset from 2001 to 2009, we create a board-structure index that captures board independence, balance of power and conflicts of interest. We also construct other major CG mechanisms to correctly specify our model. We combine the 13 CG attributes, which consist of binary and continuous variables, with four CG mechanisms, using Principal Component Analysis (PCA). In contrast with prior evidence from developed markets, our results indicate that firms with independent board structure are associated with higher firm value and are both statistically and economically significant. The results also suggest that board structure is the most important among the major internal CG mechanisms.

Stock prices, inflation and output: Evidence from India

A negative relationship between stock market returns and inflationary trends has been widely documented for developed economies in Europe and North America. This study provides similar evidence for India. This relationship is investigated in light of Famas explanation that centres around linkages between inflation and real activity, and between stock returns and real activity. Specifically, the study tests whether the negative stock return-inflation relationship is explained by a negative relationship between inflation and real economic activity, and a positive relationship between real activity and stock returns. The results from the heteroscedasticity and autocorrelation corrected models provide only partial support for Famas hypothesis. The relationship between real activity and inflation does not account for the negative relationship between real stock returns and the unexpected component of inflation.(This abstract was borrowed from another version of this item.)

Futures trading activity and stock price volatility: some extensions

An earlier investigation by Bessembinder and Seguin employed open interest data to demonstrate that heavy (unexpected) trading activity in stock index futures is destabilizing. This article re-examines the issue in the framework of the commitments of four groups of traders in the S&P 500 index futures market: hedgers (institutional traders), large speculators, small traders and spreaders. Finding that surges in institutional commitments in index futures are followed by increased levels of price variability. The results are not conclusive on whether portfolio insurance strategies contribute to this relationship. Moreover, there is no evidence that the participation of other futures traders, notably large speculators and small traders, is destabilizing. An implication is that the current margins structure that favours institutional traders is ill-suited to the goal of volatility-control. The release of the commitment of trader data which provides open interest information on an ex post basis is found to have no impact on stock market volatility. Thus, the positive relationship between surges in institutional futures activity and volatility seems to stem from trading mechanisms, rather than from the formal disclosure of commitment of traders.