Jedrzej Pawel Bialkowski

Improving VWAP strategies: A dynamic volume approach☆

In this paper, we present a new methodology for modelling intraday volume, which allows for a reduction of the execution risk in VWAP (Volume Weighted Average Price) orders. The results are obtained for all the stocks included in the CAC40 index at the beginning of September 2004. The idea of considered models is based on the decomposition of traded volume into two parts: one reflects volume changes due to market evolution; the second describes the stock specific volume pattern. The dynamic of the specific volume part is depicted by ARMA and SETAR models. The implementation of VWAP strategies allows some dynamic adjustments during the day in order to improve tracking of the end-of-day VWAP.

Piety and Profits: Stock Market Anomaly During the Muslim Holy Month

Observed by more than 1.5 billion Muslims, Ramadan is one of the most celebrated religious rituals in the world. We investigate stock returns during Ramadan for 14 predominantly Muslim countries over the years 1989-2007. The results show that stock returns during Ramadan are almost nine times higher and less volatile than during the rest of the year. No discernible difference in trading volume is recorded. We find these results consistent with a notion that Ramadan positively affects investor psychology, as it promotes feelings of solidarity and social identity among Muslims world-wide, leading to optimistic beliefs that extend to investment decisions.

Political orientation of government and stock market returns

Prior research documented that the US stock prices tend to grow faster during the Democratic than the Republican administrations. This article examines whether stock returns in other countries also depend on the political orientation of the incumbents. An analysis of 24 stock markets and 173 different governments reveals that there are no statistically significant differences in returns between left-wing and right-wing executives. Consequently, international investment strategies based on the political orientation of countries’ leadership are likely to be futile.

Determinants of Trading Activity on the Single-Stock Futures Market:Evidence from the Eurex Exchange

Futures contracts on stock indexes, both broad and narrow, have been traded for a long time in many countries, but single-stock futures (SSFs) were more controversial, and their introduction was delayed by regulatory authorities. SSFs did not begin trading until 2002 in the U.S. and 2005 at the Eurex. As is normal for new contracts, success in the marketplace has differed across names. In this article, the authors examine what factors contribute to open interest and trading volume for 420 single-stock futures contracts. Important variables contributing to high trading activity include factors relating to the market for the underlying stock, such as trading volume, market capitalization, and volatility; characteristics of the futures contract, including tick and contract size; characteristics of the firm’s home country; and such other factors as the degree of institutional ownership of the underlying stock and the extent of arbitrage opportunities due to futures mispricing. The results confirm the importance of most of the hypothesized relationships. In addition, the authors look closely at a specific dividend capture strategy using SSFs that should be especially attractive to German investors. They find that the behavior of SSFs around ex-dividend days shows clear evidence that a substantial volume of trading activity appears to be generated by traders implementing this strategy.

Optimal VWAP Tracking

We consider the problem of finding a strategy that tracks the volume weighted average price (VWAP) of a stock, a key measure of execution quality for large orders used by institutional investors. We obtain the optimal, dynamic, VWAP tracking strategy in closed form in a model with general price and volume dynamics and show that it can be extended to incorporate proportional transaction costs. We build a model of intraday volume using the Trade and Quote dataset to empirically test the strategy, both without trading costs and when trading has temporary effects that include the bid-ask spread and depth of the order book, and permanent effects that reflect the potential information content of trades. We find that the implementation cost of the strategy we propose is lower than the cost charged by brokerage houses.

Financial Markets in the Face of the Apocalypse

This paper brings together two strands of the literature: Quantifying the impact of apocalyptic risk on capital markets, and the correct computation of the equity risk premium. For the former, we use events in four countries during the Second World War to discern markets’ incorporation of information regarding the probability of an Armageddon for each country. We argue that past computations of the equity risk premium did not properly account for the financial implications of political collapse on property/civil/human rights. Accordingly, we show that past calculations overstated the equity risk premium. We provide an estimate of the equity risk premium that is corrected for lack of basic rights, demonstrating the important changes in this estimate over time.

Does the Tail Wag the Dog? Evidence from Fund Flow to VIX ETFs and ETNs

Modern derivatives pricing models develop pricing relationships from the principle of no-arbitrage, assuming that if an arbitrage opportunity were to arise in the market, it would be immediately eliminated by active arbitrageurs. With this assumption, the supply curve for the derivative security is infinitely elastic at the model price, so that effects of fluctuation in supply and demand from non-arbitrageurs are suppressed. In particular, flows of funds into and out of mutual funds and ETFs should not affect market prices for the underlying securities. This article explores whether that assumption holds in the real world for ETFs based on the VIX volatility index, and finds that it doesn’t. Examining 13 volatility funds separated into four groups according to whether the focus is on nearby or longer horizons and whether volatility exposure is long or short, the authors show that fund flows respond to observed market volatility, flowing into long (short) exposure funds when the market is calm (volatile). Moreover, the VIX responds to fund flows, rising (falling) when money is flowing into long (short) exposure funds. But the evidence shows that this effect is no stronger, i.e., not unusually destabilizing, in periods of high volatility.