John B. McDermott

The liquidity effects of revisions to the S&P 500 index: an empirical analysis ☆

Abstract We study liquidity effects following S&P 500 index revisions. Using a recent sample of S&P 500 additions, we find a sustained increase in the liquidity of the added stocks. Further, the improvement in the liquidity of added stocks is due primarily to a decrease in the direct cost of transacting and a smaller decline in the asymmetric information component. Finally, the event period cumulative abnormal returns for additions are significantly associated with the decrease in the effective spread, particularly the decline in the direct cost of transacting. In contrast, the liquidity of deleted stocks declines over the three months following deletion.

The market liquidity of DIAMONDS, Q's, and their underlying stocks

Abstract We investigate the market liquidity effects of the introduction of index-tracking stocks for the Dow Jones Industrial Average (DIAMONDS) and the NASDAQ 100 index (Qs). Our main finding is liquidity of the underlying DJIA 30 index stocks improves after the introduction of the exchange-traded fund, largely because of a decline in the cost of informed trading. Further, we find the DIAMONDS has significantly lower liquidity costs over the first 50 days of trading as compared to the portfolio of its component stocks, again primarily because of lower adverse selection costs. Finally, we find weaker but qualitatively similar results for the Qs.

Stock Market Volatility in an Emerging Market: Further Evidence from the Athens Stock Exchange

We investigate the time series properties of the daily and weekly returns from the Athens Stock Exchange (ASE) index for the years 1987 to 1997. We investigate whether important time-series characteristics have changed significantly over time. The Greek market has recently undergone major changes including complete capital flow liberalization, the implementation of computerized trading, as well as significant increases in market volume and capitalization; we thus contrast the 1987-90 and 1991-97 periods. Our findings suggest the dynamics of the ASE composite index returns have changed as the market has developed. Copyright Blackwell Publishers Ltd 2000.

Hedging multiple price and quantity exposures

We examined the general hedging problem faced by a global portfolio manager or a pure exporting multinational firm. Most hedging models assume that these economic agents hold only a single asset in the spot market and are exposed only to a single source of price–quantity uncertainty. Such models are less relevant to many financial and exporting firms that face multiple sources of risk. In this study, we developed a general hedging model that explicitly recognizes that these hedgers are faced with multiple price and quantity uncertainties. Our model takes advantage of the full correlation structure of changes in spot prices, quantities, and forward prices. We performed simulations of the hedging model for a firm with two pairs of price and quantity exposures to demonstrate potential gains in hedging efficiency and effectiveness.

Returns-Based Style Analysis: An Excel-Based Classroom Exercise

W. Sharpes (1988, 1992) returns-based style analysis provides an excellent opportunity to use a sophisticated portfolio-analysis tool in the classroom to help illustrate important topics in investment and operations research courses. Students can perform classic returns-based style analysis by creating a spreadsheet model and using the Solver add-in in Microsoft Excel. The technique can also be used to supplement classroom units on performance measurement and style drift in investment courses or to illustrate a finance application in an introductory operations research course. An example analysis using a popular mutual fund is provided as well as the accompanying Excel model.

U.S. Low and Minimum Volatility Indexes: An EmpiricalAnalysis of Factor Exposure

This study investigates the major low and minimum volatility indexes used as benchmarks for the largest ETFs in the space. The authors contend that the findings on low and minimum volatility investing in the academic literature are captured by the indexes. Specifically, they find that the indexes examined provide superior risk-adjusted performance relative to a market capitalization benchmark. They also find that factor exposures are significant, on average, and explain away the significant alphas in the large-/mid-cap but not small-cap indexes examined. Further, they find that factor exposures, particularly value and momentum, are time-varying and can be of either sign, whereas investment and profitability exposure are generally positive and consistent. Smart-beta and factor investors should be aware of the nature of the factor exposures that low and minimum volatility strategies contribute to a portfolio.

Does Auditor Compensation Lower Market Liquidity

Previous studies have focused on accounting measures, such as earnings management and discretionary accruals, in evaluating the effects of auditor compensation on disclosure quality. In contrast, we investigate the impact of fees paid for audit and non-audit services on a market-based measure of disclosure quality and stock market liquidity. Based on a large sample of NYSE-traded S&P 1500 stocks, we find only weak evidence to support the argument that auditor compensation lowers disclosure quality and market liquidity. This finding is robust to alternative measures of bid-ask spreads and asymmetric information costs of trading. We do find, however, some evidence to suggest that corporate governance characteristics play a role in the relationship between auditor compensation and quoted liquidity. Our findings underscore the need to revisit the rationale behind restrictions on non-audit services imposed recently by the Sarbanes-Oxley Act.