Mike Buckle

The determinants of corporate financial performance in the Bermuda insurance market

Drawing a framework from the organizational economics literature this study examines the determinants of corporate (i.e. underwriting and investment related) financial performance in the Bermuda insurance market. Using panel data for 1993–1997, it was found that, as expected, highly leveraged, lowly liquid companies and reinsurers have better operational performance than lowly leveraged, highly liquid companies and direct insurers. Contrary to what was hypothesized, performance was positively related to underwriting risk. However, the size of companies and the scope of their activities were not found to be important explanatory factors.

Corporate Risks and Property Insurance: Evidence From the People's Republic of China

Using panel data (1997-1999) for 235 publicly listed companies in the Peoples Republic of China, this study empirically tests the linkage between corporate risks and the decision to purchase property insurance and its financial extent. To achieve these objectives, we first estimate a probit insurance participation decision model and then a fixed-effects insurance volume decision model with Heckmans sample selection correction. Our results indicate that the managerial decision to purchase property insurance is positively related to company size and insolvency risks. By contrast, the amount of property insurance purchased is positively related to systematic risks but negatively related to insolvency and unsystematic risks and company size. We find that the amount of property insurance used by Chinese companies can also be affected by other factors (e.g., the cash flow constraints). In addition, the decision to purchase property insurance and the financial extent to which it is used varies among Chinese companies according to their geographical location. However, state ownership does not appear to be an important determinant of the purchase of property insurance by Chinese publicly listed companies. Copyright 2003 The Journal of Risk and Insurance.

The lead-lag relationship between the FTSE100 stock index and its derivative contracts

This paper examines the lead/lag relationships between the FTSE100 stock market index and its related futures and options contracts, and also the interrelation between the derivatives markets. Both the index futures and index options contracts are found to lead the cash index as predicted. However, the call option market appears to marginally lead both the index futures and the put option market. In the only previous paper to examine the inter-market relationships between a stock index and related futures and options contracts, Fleming et al (Journal of Futures Markets, 16, 353-387, 1996) maintain that relative trading costs determine which market leads. As the trading costs of calls and puts are similar, other factors must be driving the relationships observed in this paper. We hypothesize that informed traders with bullish expectations wishing to gain leverage from the options market will buy calls or, with greater risk, sell puts. As market sentiment was bullish for most of the sample period examined, this could explain the call market leads reported.

Volatility forecasting in the framework of the option expiry cycle

The paper presents new UK evidence on the relative predictive performance of several implied and historical volatilities. The Datastream combination of historical and implied volatilities is also tested empirically for the first time. Daily observations are used to increase the power of the tests, and particular attention is paid to forecasting over the life of options. A further contribution of the paper is to examine relative accuracy for several different horizons, and matching the amount of past data to the forecast horizon is found to be effective when forecasting over longer horizons. Historical volatility estimators are found to have greater forecast accuracy than implied volatilities. Although implied volatility is a biased estimator of realized volatility, regression tests show that it contains more information than historical volatility. Also, a simple trading rule using historical volatility estimators is unable to exploit the forecast improvements since it fails to earn abnormal profits after transactions costs.

The efficiency of stock and options markets: tests based on 1992 UK election opinion polls

The efficiency of stock and options markets in London during the 1992 election is examined. The study updates Gemmills 1992 study of the efficiency of the London stock and options markets during the 1987 election. A close relationship is found between the opinion polls and the FTSE100 share index, while the prices of FTSE100 index options do not follow the polls as closely. The results indicate that the stock market was semi-strong efficient at this time. The level of inefficiency in the options market, however, was found to be insufficient to allow a profitable riskless arbitrage, after allowing for transactions costs. Our results demonstrate that the FTSE100 index options market was markedly more efficient in 1992 than 1987. A possible reason for this may be the increased liquidity resulting from higher trading volumes in index options.

The Intraday Behavior of Bid-Ask Spreads, Returns, and Volatility for FTSE-100 Stock Index Options

The microstructure of stock markets and futures markets has attracted considerable recent attention, but the evidence relating to options markets is sparse, especially for the U.K. This article addresses this void in the literature by presenting evidence on the intraday behavior of bid-ask spreads, returns, volatility, and volume. Both clear differences and similarities are found with the previous results for other markets. Spreads are found to be wide near the market open and narrow near the close. Although this contrasts with some previous evidence in U.S. stock and futures markets of a U-shaped pattern in intraday spreads, it is consistent with other recent research, and the differences may be explained by differing market structures. No clear pattern emerges in options returns, but there is a U-shape across the day in returns volatility and in volume. The results help to differentiate between the competing theories of the intraday behavior of these key variables.

Developing a Trading Rule from the FTSE-100 Stock Index Futures Contract: Evidence in Support of the EMH

An extensive literature documents the predictability of both short and long horizon returns, over a wide range of sample periods, frequencies and markets. This predictability may represent weak form inefficiency, or it may be caused by a failure to account for a time-variation in risk. We develop statistically reliable ex ante models of the returns on the FTSE-100 stock index futures contract and test a simple trading rule based on the out-of-sample predictions from these models. We interpret the failure of our ex ante model to produce abnormal returns for a risk neutral investor as evidence in favour of the EMH. Our trading rule results clearly suggest that we should be careful in interpreting such ex ante models as evidence of financial market inefficiency. Copyright Blackwell Publishers Ltd 1999.

The Intraday Behavior of European Bond Futures

STEPHEN THOMAS is professor of finance at the European Business Management School. ntraday regularities in U.S. financial markets are by now well accepted, and any number of theories try to explain them. To develop more evidence to disI criminate among competing theories, we examine the behavior of returns, returns volatility, traded volume, and autocorrelations of transaction returns using data on government bond futures contracts traded on the London International Financial Futures and Options Exchange (LIFFE). Our examination of a European market provides an independent test and validation of evidence in U.S. markets. U.S. data show that stock returns and returns variance follow a U-shaped intraday pattern (Wood, McInish, and Ord [1985] and Harris [1986]). Returns on stock indexes tend to be positive near both the open and the close of trading, although Harris [1986] finds Monday returns to be negative near the open. Jain and Joh [1988] find a U-shaped pattern in hourly returns and returns volatihty for the S&P 500 index. Both Neal [1988] and Jordan et al. [1988] report the same pattern for volatility and volume in their analyses of soybean futures contracts. Ekman [1992] extends the analysis to S&P 500 index futures, and finds that returns follow the pattern for the underlying index described by Harris [1986]. He reports a U-shaped intraday pattern in volatility and number of recorded trades (a proxy for volume). Ederington and Lee [ 19931, however, find an L-shaped intraday pattern in volatility for U.S. interest rate and currency futures. The theories that seek to explain such intraday patterns focus on the interaction of privately informed traders, liquidity traders, and market makers. Admati and Pfleiderer [1988] explain intraday regularities using

The strategic use of corporate insurance in China

We use the agency theory to conduct a novel test of the strategic use of property insurance in Chinas corporate sector. With regard to our main test hypotheses, we find that the incidence of property insurance purchased is directly related to the degree of product–market competitiveness, and positively related to market liquidity and firms’ growth opportunities. However, the homogeneity of market operations is not statistically significant. In our second-stage Cragg regression, market liquidity becomes insignificant while firms’ growth opportunities are now inversely related to the amount of insurance purchased. Additionally, the homogeneity of market operations becomes significantly related to the corporate purchase of property insurance. Therefore, different factors (e.g. cost considerations) may influence the decisions to purchase property insurance and subsequently, the level of coverage provided. We argue that our results are relevant for companies in other emerging markets such as Eastern Europe and companies operating in more developed Western economies such as the European Union (EU).

Realised higher moments: theory and practice

This paper examines the incorporation of higher moments in portfolio selection problems utilising high-frequency data. Our approach combines innovations from the realised volatility literature with a portfolio selection methodology utilising higher moments. We provide an empirical study of the measurement of higher moments from tick by tick data and implement the model for a selection of stocks from the DOW 30 over the time period 2005–2011. We demonstrate a novel estimator for moments and co-moments in the presence of microstructure noise.