Gary A. Patterson

Evidence of predictability in the cross-section of bank stock returns

In this paper, we examine the predictability of the cross-section of bank stock returns by taking advantage of the unique set of industry characteristics that prevail in the financial services sector. We examine predictability in the cross-section of bank stock returns using information contained in individual bank fundamental variables such as income from derivative usage, previous loan commitments, loan-loss reserves, earnings, and leverage. We find that variables related to non-interest income, loan-loss reserves, earnings, leverage, and standby letters of credit are all univariately important in forecasting the cross-section of bank stock returns. Surprisingly, neither book-to-market nor firm size is important in our sample. We examine whether this cross-sectional predictability is due to increased risk, or another explanation, such as investor under or overreaction. Our results suggest that this predictability is not due to increased risk, but rather is consistent with investor underreaction to changes in banks fundamental variables. Furthermore, out-of-sample testing demonstrates this underreaction appears to be exploitable using simple cross-sectional trading strategies. 2003 Elsevier Science B.V. All rights reserved.

The dynamic relationship of volatility, volume, and market depth in currency futures markets

Abstract This study examines the dynamic interactions among return volatilities, volume, and market depth for five currency futures markets. We use vector autoregressive analysis (VAR) to identify not only the nature of these relations but also the direction and speed of the information flow between variables. We find that return volatility is subject to strong reversal effects from trading volume and market depth. The results also indicate that the volatility appears to have predictive power on volume but not on market depth. Furthermore, this study finds that volume and depth are not endogenously determined, as their lead–lag relationship is asymmetrical. We also observe an increasing trend of integration between offshore and domestic information that affects the movement of currency futures prices.

Underwriting Cycles in Property and Liability Insurance: An Empirical Analysis of Industry and By- Line Data

Using industry and by-line data, we examine the causes of insurance cycles in a vector autoregressive model. Some of the important findings are summarized below. First, the uncertainty variable explains significant portions of forecast errors of premiums. Second, the significant factors that determine premiums are different for different lines. Third, investment incomes in general are more important for long-tail lines than short-tail lines. Evidence on the response of premiums to shocks suggests that all one-time shocks to variables tend to be relatively permanent. The overall results seem to imply that no single hypothesis is able to explain the insurance cycle.

Volatility, global information, and market conditions: a study in futures markets

This study examined the behavior of return volatility in relation to the timing of information flow under different market conditions influenced by trading volume and market depth. We emphasized information flow during trading and nontrading periods that may represent domestic and offshore information in the global trading of currencies. Test results show that volatility was negatively related to market depth; that is, deeper markets had relatively less return volatility. Additionally, the effect that market depth had on volatility was superseded by information within trading volume. Test results focusing on the timing of information flow reveal that in low‐volume markets, the volatility of nontrading‐period returns exceeded the volatility of trading‐period returns. However, when trading volume was high, this pattern was reversed and conformed to the observations of earlier articles. Our findings proved to be robust across time, different currency markets, and different measures of return volatility. We also observed a trend toward greater integration between foreign and U.S. financial markets; the U.S. market increasingly emphasized information from nontrading periods to supplement information arriving during trading periods.

Capital Distribution Policy and Information Asymmetry: A Real Estate Market Perspective

This article examines the relation between the distribution of capital to real estate investors and a market-based measure of information asymmetry. Previous research suggests that information asymmetries decrease as capital is distributed to outside investors. However, little attention has been given to those firms for which the marginal benefit of increased distributions may be small. Our analyses are based on a sample of real estate investment trusts (REITs), which are popularly characterized as high yield investments due to the regulation of a minimum distribution policy. The extent to which information asymmetry is influenced by these regulations, as well as by the opaque nature of the underlying assets, is an interesting empirical question. The results based on several years of data indicate that the perception of asymmetric information is lower for REITs that distribute more capital to their shareholders. A decomposition of yield into income and return-of-capital components reveals no differential effect in information relevance. The insights drawn from the results may be useful in determining the efficacy of real estate capital distribution policies and regulations.

The Information Content of REIT Short Interest: Investment Focus and Heterogeneous Beliefs

This article examines real estate investment trusts (REITs) to determine the correspondence between short interest and subsequent prices. The theoretical basis for our tests comes from the overvaluation conditions created by a combination of costly short selling and heterogeneous beliefs. This article exploits the unique characteristics of REITS as they are similar with respect to high dividend payouts and differentiated by underlying real asset investments. An innovative aspect of the methodology involves partitioning firms based on investment focus as a proxy for transparency and as a determinant of heterogeneous beliefs regarding valuation. The findings (i) affirm the information content of REIT short interest and (ii) highlight the importance of investment focus in resolving the divergence in investor opinions of value. Overvaluation conditions exist among REITs with greater short interest and less transparency, whereas such valuation conditions do not appear among transparent REITs, regardless of the level of short selling.

Volatility linkage among currency futures markets during US trading and non-trading periods

Abstract This paper examines the volatility transmission across different currency markets during trading and non-trading periods. Using vector autoregressive analysis (VAR), we find similar patterns between information flows during trading and non-trading hours of the US currency futures exchange. The results indicate that trading-hour information and non-trading-hour information have similar effects on currency prices and that the markets do not differentiate information based upon the timing of its release. Our study observes that currencies exhibit different levels of global linkage and appear to play different informational roles in the currency market. Additionally, this study observes a trend toward increased integration among the currency futures markets.

The linkage of REIT income-and price-returns with fundamental economic variables.

This article examines the relation between changes in macroeconomic variables and returns of Real Estate Investment Trusts (REITs). Previous studies show that stock prices quickly absorb news from changes in macro-economic variables. This study examines the components of REIT total returns, income- and pricereturns, to gain a more detailed understanding of how macroeconomic variables affect the movement of these returns. Results using monthly data show that changes in macroeconomic variables have a significant impact on the volatility of the income portion of REIT returns and the news shocks from these variables impact income return volatility for more than one month in duration. These findings may assist REIT investors in their approaches to risk-management.