Lorne N. Switzer

Common stock returns and international listing announcements: Conditional tests of the mild segmentation hypothesis

Recent theoretical work on mild segmentation suggests that tests of dual listing should be conducted as joint tests: (a) a test of changes in market integration that may aAect asset returns through investors portfolio reallocations as the choice set changes, and (b) a test of changing risk premium/information eAects. Previous empirical studies on common stocks have been unable to identify significant positive abnormal returns associated with international listing. However, such studies have not formally tested for changes in market integration through time. In addition, they have not examined announcement dates, which should be the focal point in testing for valuation eAects. Unlike previous studies, our analysis concentrates on both the period surrounding the earliest public announcements by Canadian companies of their intentions to seek a US listing for their common shares on the NYSE, AMEX, or NASDAQ as well as the date of US listing during the period 1985‐96. This period encompasses significant changes in the regulatory environment which might be perceived to enhance the integration of the two markets. Relying on a conditional asset pricing model subject to time-varying volatility, the results

The effects of R&D tax credits and allowances in Canada

Abstract In Canada, as in many other countries that have adopted R&D tax credits and allowances, there has been considerable controversy over their effectiveness in increasing company-financed research and development. This study seems to be one of the first systematic attempts to estimate the effects of Canadas R&D tax credits and allowances. The results present a very consistent picture. The survey results, the econometric results, and some simple calculations based on rough measures of the price elasticity of demand for R&D all suggest that the special research allowance increased R&D expenditures by about 1 percent and that the investment tax credit increased them by about 2 percent. These increases seem to be appreciably less than the revenue losses to the government.

Standard and Poor’s depository receipts and the performance of the S&P 500 index futures market

In response to the need for a simple financial instrument that enables retail investors to participate easily and quickly in the U.S. equity market and that facilitates basket trading by institutions, the American Stock Exchange introduced Standard and Poor’s Depository Receipts (SPDRs) on January 29, 1993. The purpose of this study is to determine the effects of the introduction of SPDRs on the pricing efficiency of the S&P futures market. Using a measure of efficiency that is based on the difference between the observed futures price and the theoretical futures price based on the Cost of Carry Model, as well as daily and intradaily data for the period January 2, 1990 through June 3, 1996, we found that some positive mispricing was reduced when SPDR’s were introduced. While dividend yield and time‐to‐maturity biases remained, SPDRs trading was shown to mitigate the extent of pricing errors that prevailed, and reduced the effects of dividend yield and time‐to‐maturity biases found for these contracts.

How does human capital affect the performance of small and mid‐cap mutual funds?

Purpose – This study sets out to examine whether small and mid‐cap fund performance is related to fund manager human capital characteristics including tenure, investment experience, education (MBA designation), professional training (CFA), and gender.Design/methodology/approach – Based on a sample of 1,004 small and mid‐cap equity funds identified on the Morningstar database as of 31 December 2005, several statistical tests were applied which consider fund performance, risk, expenses, and turnover simultaneously.Findings – Depending on the benchmark, an optimal size of managed mutual funds is determined that ranges between

Macroeconomic news effects on conditional volatilities in the bond and stock markets

US1.43 billion and

Default Risk Estimation, Bank Credit Risk, and Corporate Governance

US3.89 billion.Originality/value – The results suggest that there are some systematic cross‐sectional differences in fund performance that can be attributed to differences in managerial human capital characteristics.

Spanning Tests for Replicable Small-Cap Indexes as Separate Asset Classes

This paper investigates the sources of time-varying risk for the US stock and bond markets. The model captures the change in the risk premium due to each markets own volatility risk and the covariance risk. We test for the effects of macroeconomic news on time-varying volatility as well as time-varying covariance, and whether such news induces time-varying risk premia in either of the markets. We find that stocks and bonds have higher volatility on the day of macroeconomic announcements. This higher volatility is transitory but because it can be anticipated, it induces increases in the risk premium in both markets.

The interactions between trading volume and volatility: evidence from the equity options markets

This study explores the relationship between credit risks of banks and the corporate governance structures of these banks from the perspective of creditors. The cumulative default probabilities are estimated for a sample of US commercial and savings banks to measure their risk taking behavior. The results show that one year and five year cumulative default probabilities are time-varying, with a significant jump observed in the year prior to the financial crisis of 2008–09. Generally speaking, corporate governance structures have a greater impact on US commercial banks than on savings institutions. We provide evidence that, after controlling for firm specific characteristics, commercial banks with larger boards and older CFOs are associated with significantly lower credit risk levels. Lower ownership by institutional investors and more independent boards also have lower credit risk levels, although these effects are somewhat less significant. For all the banks in our sample, large board size, older CFO, and less busy directors are associated with lower credit risk levels. When we restrict the sample to consider the joint effects of the governance variables, the results on board size and busy directors are maintained.

Forecasting interest rates and yield spreads: the informational content of implied futures yields and best-fitting forward rate models

Empirical tests of different asset combinations show that the composition of a benchmark portfolio determines whether a replicable G–7 small-cap portfolio can expand the original efficient frontier. Interaction among all assets in a portfolio is key to the effectiveness of a small-cap index in efficient portfolios, and constraints do not always reduce diversification benefits of the small-cap assets. Only a few small-cap portfolios of G-7 countries appear to behave as separate asset classes with portfolio performance-enhancing characteristics when an investor benchmarks these portfolios against the U.S. equity market or an international large-cap portfolio.

Market Efficiency and Returns from Convertible Bond Hedging and Arbitrage Strategies

This study examines the relation between trading activity of equity options and the volatilities of the underlying equities. A sample of 45 companies with the most actively traded equity options at the Chicago Board of Options Exchange is selected and, for each company, equity price variability is compared with related stock and option trading volume. The significance of options trading activity in explaining the conditional volatilities of the underlying equities is comparable to that of stock trading activity, indicating a high degree of integration of the equity and the options markets. We also find that unexpected options trading activity contributes to enhanced volatility of the underlying equity returns. Finally, the analysis indicates that expected options trading activity significantly affects equity volatility in only a minority of firms. This is consistent with the contention that trading in the equity options market does not systematically lead to price destabilization in the underlying equity market.