Kenneth M. Washer

Are stock prices in the US nonstationary? Evidence from contemporary unit root tests

This article extends the empirical literature on the efficiency of stock markets in the US by applying a battery of unit root tests to empirically ascertain whether stock prices are mean reverting. This article, unlike previous studies, employs a disaggregated approach using the daily closing values of the Dow Jones industrial average, NASDAQ composite and S&P 500 index covering the period 5 February 1971 to 31 December 2009 to investigate the integration properties of the US stock market. The empirical findings reveal that the three major stock price series are nonstationary, indicating that they do not follow a trend path. The primary implication is that trading strategies that simply rely on mean reversion of stock prices are valueless.

Seasonality tests on the Shanghai and Shenzhen stock exchanges: an empirical analysis

This article investigates Day-of-the-Week and January Effects in the Shanghai and Shenzhen stock markets over the period 1990 to 2006 for both the ‘A’ and ‘B’ indices. During this period, these two Chinese stock markets went through the limit period and nonlimit period and then again through a limit period. We examine the seasonality effects both during the different periods and also over the whole period. Our results indicate that the Shanghai A index is prone to higher volatility and also shows some January and Weekend Effects.

Day‐of‐the‐week effect in the Canadian money market

Purpose - The purpose of this paper is to examine the day-of-the-week effect for three primary money market instruments in Canada. The sample period is 1980-2009. Design/methodology/approach - The authors use three approaches. First, a parametric Findings - The traditional Monday effect is prevalent in the 1980s for corporate paper and treasury bills (TB), but not for bankers acceptances (BA). In the 1990s, the Monday effect disappears completely. However, in the 2000s the Monday effect reappears, but is positive (it reverses) for both corporate paper and BA. The authors also find strong support for Wednesday being a high return day, which concurs with related money market studies. Research limitations/implications - While the results are statistically significant, the economic significance is dubious. This study helps market participants in that it shows that they need to allow for distinct day-of-the-week patterns when using yield spreads. Practical implications - One practical implication for practitioners is to time purchases of Canadian money market securities for Monday when returns are low (relying on the results of the full sample period). Issuers should time sales for non-Mondays when returns are higher and yields are lower. Originality/value - This study is original in that it is the first one to analyze day-of-the-week effects in the Canadian money market. The authors compare the results to studies that focus on the US market.

IBBEA Implementation and the Relative Profitablility of Small Banks

The enactment of Riegle‐Neal IBBEA in 1994 encouraged bank mergers and acquisitions. Empirical evidence indicates that large banks benefited from IBBEA enactment. However, there is little, if any, evidence of the impact of the act on small banks’ profitability relative to large banks. This study examines the impact of IBBEA on the performance of small banks in the period preceding and following IBBEA implementation. Evidence is presented that indicates the return on assets of small banks was significantly less than that of larger banks in the post‐IBBEA period. This is contrary to the results of the pre‐IBBEA period when small banks’ profitability was competitive with and in some cases even better than large banks’ profitability. It is concluded that the enactment of IBBEA has placed small banks at a competitive disadvantage which could eventually lead to their demise.

All That’s Gold Does Not Glitter

Spurred by economic uncertainty, interest in precious metals has increased dramatically. Investors target precious-metal funds for two primary reasons: (1) to capture an expected appreciation in precious-metal prices and (2) as a form of portfolio insurance. The authors compare the advantages and disadvantages of traditional funds with those of newer types of funds, including bullion, synthetics, and equity. They find tremendous variation in both fund returns and efficacy in serving the two primary investor motivations. Their findings imply that the success of a commodity investment hinges on the type of fund selected. Disclosure: The authors report no conflicts of interest. Editor’s Note This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Dirk Baur and Claude Erb, CFA, were the reviewers for this article. Submitted 31 January 2017 Accepted 14 August 2017 by Stephen J. Brown

The Increasing Volatility of the Stock Market

This study provides a rigorous examination of historical stock price volatility. We measure changes in the variability of equity returns on a daily and monthly basis and test whether volatility has changed over the period 1926 through 2014. Our results are of importance to practitioners, individual investors, policy makers, and the press and address the widely held perception among market participants and the general public that stock market volatility has increased over time. Our results suggest this belief is accurate, but only when volatility is measured on a daily basis. When measured using monthly increments, there has been no discernable change in return volatility. This is likely good news for both traders and investors. Traders are active on a daily basis and can profit from larger movements in the market, thus the slight increase in daily volatility is likely both important to them and viewed positively. Long-term investors can take comfort that many of the large daily price declines are at least partially offset by similar price increases and that, when measured over longer periods, volatility has not increased.

Santa Claus Rally and firm size

Purpose - Several articles in the popular press have detailed an end-of-year anomaly known as the Santa Claus Rally, a period best defined as the last five trading days of December and the first two trading days of January. This study examines U.S. stock market returns over this period from 1926 through 2014. We find that returns are generally higher during the period and that the effect is considerably stronger for small firm portfolios relative to large capitalization portfolios. We also provide convincing evidence that the three most important trading days (especially for small stock portfolios) are the last trading day in December and the first two trading days in January. Our results are supported by parametric and non-parametric tests. Design/methodology/approach - We examine the Santa Claus Rally by relating it to firm size in the stock markets of the United States. The Santa Claus Rally consists of the last five trading days in December and the first two in January. We use t-tests, non-parametric test and regression analysis to determine if investors in small firms get superior returns over the period 1926-2014. Findings - We find that returns are generally higher during the period and that the effect is considerably stronger for small firm portfolios relative to large capitalization portfolios. We also provide convincing evidence that the three most important trading days (especially for small stock portfolios) are the last trading day in December and the first two trading days in January. Research limitations/implications - We only check the markets in the USA. Market makers can use this to get significantly high returns during the Christmas-New Year period. Our study shows for the first time that there is a size effect as part of the Santa Claus Rally. Practical implications - 1. This is the first study to show that Santa Claus Rally exists for a long time in the USA. 2. It is the first study to show that there is a size effect in Santa Claus Rally - 3. Market participants could get significantly higher returns by investing or being invested in the stock market during this period. Originality/value - This is the first major academic study to examine Santa Claus Rally in this much detail. We not only show that the rally exists, we show that it is based on firm size and has been in existence for nearly ninety years in the US.