Mahendrarajah Nimalendran

Price reversals: Bid-ask errors or market overreaction?

Abstract We show that bid-ask errors in transaction prices are the predominant source of apparent price reversals in the short run for NASDAQ firms. Once we extract measurement errors in prices caused by the bid-ask spread, we find little evidence of market overreaction. On the contrary, we find that security returns are positively, and not negatively, autocorrelated. We also show that bid-ask errors lead to substantial spurious volatility in transaction returns; about half of measured daily return variances can be induced by the bid-ask effect.

Market Structure and Trader Anonymity: An Analysis of Insider Trading

This paper examines the degree of anonymity—the extent to which a trader is recognized as informed—on alternative market structures. We find evidence that is consistent with less anonymity on the NYSE specialist system compared to the NASDAQ dealer system. Specifically, when corporate insiders trade medium-sized quantities (500–9,999 shares inclusive), NYSE listed stocks exhibit larger changes in proportional effective spreads than NASDAQ stocks. Taken together, these findings are consistent with Barclay and Warners (1993) contention that stealth (medium-sized) trades are more likely based on private information and insider trades are more transparent on the NYSE specialist system relative to the NASDAQ dealer system. The results support the hypothesis by Benveniste, Marcus, and Wilhelm (1992) that the unique relationship between specialists and floor brokers on the NYSE leads to less anonymity.

Components of short-horizon individual security returns

Abstract In this paper, we present a simple model which relates security returns to three components: an expected return, a bid-ask error, and white noise. The relative importance of the various components is empirically assessed, and the models ability to explain the various time-series properties of individual security and portfolio returns is tested. Time-varying expected returns and bid-ask errors are found to explain substantial proportions (up to 24%) of the variance of security returns. We also reconcile the typically negative autocorrelation in security returns with the strong positive autocorrelation in portfolio returns.

Time Variation of Ex-Dividend Day Stock Returns and Corporate Dividend Capture: A Reexamination

This paper documents some empirical facts about ex-day abnormal returns to high dividend yield stocks that are potentially subject to corporate dividend capture. We find that average abnormal ex-dividend day returns are uniformly negative in each year after the introduction of negotiated commission rates and that time variation in ex-day returns during the negotiated commission rates era is consistent with corporate tax-based dividend capture. Ex-day returns are more negative when the tax advantage to corporate dividend capture is greatest and more positive when increases in transaction costs and risk reduce incentives to engage in corporate tax-based dividend capture. Copyright The American Finance Association 2000.

Informational Linkages Between Dark and Lit Trading Venues

We examine the informational linkages between dark venues (crossing networks) and lit venues (quoting exchanges) using a proprietary high frequency data set. We find that less liquid stock transactions on the crossing network against members of the crossing network lead to increased spreads, higher price impact, and correlated trading volume on the quoting exchanges. Signed trades (by motivated traders willing to pay for priority) on the crossing networks for this particular subset of firms also show the highest momentum going forward over the next 15 to 120 minutes. In contrast, trades for liquid stocks, trades by the crossing network brokerage desk, and members trading large blocks in negotiated crosses transmit less information to the quoting exchanges. These results suggest that while crossing networks provide a venue for large block trades to transact with little price impact, they also provide an additional venue for informed traders to trade strategically on both the dark and lit venues and facilitate the price discovery process. JEL Classifications: D53, G12, G28

The Effect of Fiduciary Standards on Institutions' Preference for Dividend‐Paying Stocks

Many researchers apparently believe that some institutional investors prefer dividend-paying stocks because they are subject to the “prudent man” (PM) standard of fiduciary responsibility, under which dividend payments provide prima facie evidence that an investment is prudent. Although this was once accurate for many institutions, during the 1990s most states replaced the PM standard with the less-stringent “prudent investor” (PI) rule, which evaluates the appropriateness of each investment in a portfolio context. Controlling for the general decline in dividend-paying stocks, we find that institutions reduced their holdings of dividend-paying stocks by 2% to 3% as the PI standard spread during the 1990s. Studies of asset pricing and corporate governance should no longer consider dividend payments when evaluating the actions of institutional investors.

Estimating Returns on Commercial Real Estate: A New Methodology Using Latent-Variable Models

Despite their widespreao use as benchmarks of U.S. commercial real estate returns, indexes produced by the National Council of Real Estate Investment Fiduciaries (NCREIF) are subject to measurement problems that severely impair their ability to capture the true risk-return characteristics-especially volatility-of privately held commercial real estate. We utilize latent-variable statistical methods to estimate an alternative index of privately held (unsecuritized) commercial real estate returns. Latent-variable methods have been extensively applied in the behavioral sciences and, more recently, in finance and economics. Unlike factor analysis or other unconditional statistical approaches, latent variable models allow us to extract interpretable common information about unobserved private real estate returns using the information contained in various competing measures of returns that are measured with error. We find that our latent-variable real estate return series is approximately twice as volatile as the aggregate NCREIF total return index, but less than half as volatile as the NAREIT equity index. Overall, our results strongly support the use of latent-variable statistical models in the construction of return series for commercial real estate. Copyright American Real Estate and Urban Economics Association.