Ivan Indriawan

Behavioural heterogeneity in the New Zealand stock market

ABSTRACT We examine the dynamics of the New Zealand stock market using an asset pricing model with heterogeneous agents. Applying the model to historical data from 1899 to 2015, we identify both fundamentalist and trend-following (chartist) behaviours of investors. In addition, we document that investors switch between fundamentalist and chartist rules when either of these rules has been more profitable in the recent past. Both behaviours contribute to large fluctuations of stock prices relative to their fundamental value and can explain some of the dynamics around bubbles and crashes.

Turn of the Month effect in the New Zealand stock market

ABSTRACT We examine the Turn of the Month effect in the New Zealand stock market and find that returns on the last three days of the calendar month are, on average, positive and significantly higher than on other days of the month. This Turn of the Month effect is robust to various stock characteristics, such as company size, trading activity, year- and firm-level fixed effects, and is robust over time, i.e. before and after the Global Financial Crisis. We examine various explanations for the Turn of the Month effect, such as dividend payments, price pressures, and window dressing, but none of these explain the observed Turn of the Month effect. Hence, this effect remains a puzzle that can potentially be exploited in a trading strategy.

Trading Cost Decomposition During Federal Funds Rate Announcements

We investigate the behaviour of bid-ask spread components around the U.S. Federal Funds Rate announcements for a sample of cross-listed firms in Canada and in the U.S. We use transaction level data to decompose the spread into its three components, namely, information asymmetry, order persistence, and order processing costs. We observe that during news announcements, the information asymmetry component increases more in Canada than in the U.S., indicating that trades in Canada are more information-driven than trades in the U.S. Next, we find that the order persistence component increases more in the U.S. than in Canada, indicating that there is a temporary price pressure surrounding news announcement period in the U.S. These differences may be due to the fact that small individual investors dominate the trading of Canadian stocks in the U.S. while larger investors dominate the trading in Canada. Finally, following the implementation of Regulation National Market System, we observe that liquidity in the U.S. has increased, and subsequently more informed traders are now present in the market, particularly during news announcement period.

Market Quality around Macroeconomic News Announcements: Evidence from the US and Canadian Markets

We investigate changes in market quality in the United States and Canada during macroeconomic news announcements. We measure market quality in terms of the cost of trading, pricing errors, and returns dependence. Using a sample of cross-listed stocks and stock index futures, we provide robust evidence that market quality is higher in the United States than in Canada. We observe that, around announcement periods, transaction costs increase more in Canada than in the United States, suggesting that the US market offers better liquidity. More information is also incorporated into the US market. The pattern of intraday serial dependence in returns reveals that it takes investors about five minutes less to react to order imbalances in the United States than in Canada. The differences between the US and Canadian results using index futures are generally more significant than those based on cross-listed stocks, indicating that index futures are better than stocks at providing market-wide information.

Quote Dynamics of Cross-Listed Stocks

We develop a model to assess the quote dynamics of stocks listed in multiple markets. This model allows us to explain the price formation mechanism and the degree of information spillover. We show that this model can be transformed to assess the dynamics of the spreads, the efficient price, and the markets relative premium for cross-listed stocks. Applying our model to a sample of 64 Canadian companies listed in the U.S. and Canada, we document strong intermarket competition among liquidity providers; prices mainly adjust to trades in their respective market, suggesting some degree of informational frictions; and U.S. trades have a greater price impact than Canadian trades. We further find that the U.S. market is informationally dominant due to its more competitive quote-setting behavior and larger incorporation of informational shocks.