Grant Richard McQueen

Bubbles, Stock Returns, and Duration Dependence

A new testable implication is derived from the rational speculative bubbles model stating that the presence of bubbles implies positive duration dependence in runs of high returns. Specifically, the probability of observing an end to a run of high returns declines with the length of the run. Traditional duration dependence tests are adapted for use with discrete stock runs data and, consistent with the existence of bubbles, evidence of duration dependence in monthly real stock returns is found.

Asymmetric business cycle turning points

Abstract This paper presents evidence that business cycles are characterized by ‘sharp’ troughs and ‘round’ peaks. Changes in growth rates surrounding NBER troughs are found to be larger than changes surrounding peaks, and the probability of a direct contraction to recovery transition is found to be higher than the probability of a direct recovery to contraction transition. These findings suggest caution in interpreting empirical tests of economic series that assume symmetry and motivate theoretic models in which additions to capacity, production, and employment at the end of a recession are not mirror images of the cutbacks at the end of an expansion.

Long-Horizon Mean-Reverting Stock Prices Revisited

This paper reexamines long-horizon stock returns and finds that previous work overstates the evidence of mean reversion. The overstatement is largely due to the implicit weighting of ordinary least-squares tests, which place more weight on the Depression and World War II observations, which have both large error variances and stronger mean-reverting tendencies. Additionally, the reliance on asymptotic statistics and the improper focus on only the most negative estimates of mean reversion contribute to the overstatement. Using generalized least-squares randomization tests on the 1926 to 1987 period, the random walk cannot be rejected for value- or equally-weighted real returns at any of 10 return horizons or by joint tests over all 10 horizons simultaneously. Additionally, the random walk cannot be rejected for the extended 1871 to 1987 period.

Are there rational speculative bubbles in Asian stock markets

Abstract Six Asian stock markets (Hong Kong, Japan, Korea, Malaysia, Thailand and Taiwan) and the U.S. stock market are evaluated for evidence of rational speculative bubbles using two types of tests. First, the duration dependence and conditional skewness tests of McQueen and Thorley (1994) are used on the complete time series of returns. Second, explosiveness tests are applied to specific episodes of apparent bubbles. In general, the Asian stock returns exhibit some unusual characteristics, but these characteristics do not conform to the predictions of the rational speculative bubbles model.

Cross-autocorrelation in Asian stock markets

Five Asian stock markets (Hong Kong, Japan, South Korea, Taiwan, and Thailand) and the U.S. stock market are evaluated for evidence of cross-autocorrelation. We find evidence of Lo and MacKinlays (1990a) cross-autocorrelation in each of the five Asian markets. Specifically, within each country, monthly returns on a portfolio of small stocks are correlated with the lagged returns on a portfolio of large stocks. We also find weak evidence of across-ocean and inter-Asian cross-autocorrelation; in several countries, monthly returns on portfolios of small Asian stocks are correlated with the lagged return on a portfolio of large U.S. stocks and large stocks in other Asian countries. We also confirm McQueen, Pinegar, and Thorleys (1996) finding of directional asymmetry in the U.S., with small stocks responding to lagged good, but not bad, news. However, the directional asymmetry is not universal and is significant only in the U.S. and Taiwan. Similarly, after correcting for small stock autocorrelation, large stocks retain their predictive power in some, but not all, of the markets. We also find that the degree of cross-autocorrelation has not weakened since the market correction of 1987. Our findings help shed light on existing explanations of the cross-autocorrelation puzzle and give direction for further research.

REITs, real estate, and inflation: Lessons from the gold market

This studyindirectly tests whether equity Real Estate Investment Trusts (REITs) proxy for real estate when examining real estates inflation hedging ability. The hedging properties of gold, an underlying asset, are compared against those of gold stocks, a securitized form of the asset, and gold is shown to perform well as an inflation hedge, while gold stocks do not. This divergence between an asset and its securitized form suggests caution in drawing conclusions about real estates ability to hedge inflation from equity REIT studies.

Estimating Hazard Functions for Discrete Lifetimes

ABSTRACT Frequently in inference, the observed data are modeled as a sample from a continuous probability model, implying the observed data are precisely measured. Usually, the actual data available to the investigator are discrete–-either because they are rounded, meaning the exact measurement is within an interval defined by some small measurement unit related to the precision of the measuring device, or because the data are discrete, meaning the time periods until the event of interest are countable instead of continuous. This article is motivated by the common practice of testing for duration dependence (non constant hazard function) in economic and financial data using the continuous Weibull distribution when the data are discrete. A simulation study shows that biased parameter estimates and distorted hypothesis tests result when the degree of discretization is severe. When observations are rounded, as in measuring the time between stock trades, it is proper to treat them as interval-censored. When observations are discrete, as in measuring the length of stock runs, a discrete hazard function must be specified. Both cases are examined in simulation studies and demonstrated on financial data.

Right on Schedule: CEO Option Grants and Opportunism

In the wake of the backdating scandal, many firms began awarding options at scheduled times each year. Scheduling option grants eliminates backdating, but creates other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to obtain options with lower strike prices. We provide evidence that in recent years some CEOs manipulate stock prices to increase option compensation. We document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are explained by measures of a CEOs incentive and ability to influence stock price. We document several mechanisms CEOs use to lower the strike price, including changing the substance and timing of the firms disclosures.

Soft Strategic Information and IPO Underpricing

Using content analysis we measure the impact of soft information, derived from words in IPO registration documents, on IPO pricing efficiency. First, using 2,298 U.S. IPOs from 1996 to 2008, we find that an IPO document’s strategic tone correlates positively with the stock’s first-day return; more frequent usage of positive and/or less frequent usage of negative strategic words lead to more IPO underpricing. Second, we find that an IPO document’s strategic tone is negatively correlated with the stock’s long-run return. Together, these findings imply that investors initially misprice soft information in registration statements, which mispricing is eventually corrected. Additionally, we create new content-analysis libraries for strategic words and introduce a survey-based library creation method and word-weighting system.