Nhut H. Nguyen

Liquidity Commonality in Commodities

We examine liquidity commonality in commodity futures markets. Using data from 16 agricultural, energy, industrial metal, precious metal, and livestock commodities, we show there is a strong systematic liquidity factor in commodities. Liquidity commonality was present in 1997–2003 when commodity prices were relatively stable and during the recent boom. There is some support for both “supply-side” and “demand-side” explanations for this commonality. We find no evidence of a consistent link between stock and commodity liquidity in general. Energy commodities appear to provide a better hedge against equity market liquidity risk than the other commodity families.

Liquidity Measurement in Frontier Markets

Frontier markets which are countries that have not yet reached emerging market status, have been shown to provide diversification benefits for international investors. However, many stocks in these markets are thinly traded so liquidity is an important consideration. We investigate which liquidity proxies best measure the actual cost of trading in 19 frontier markets that can be accessed by foreign investors. We find the Gibbs, Amihud, and Amivest proxies have the largest correlation with liquidity benchmarks, while the FHT measure provides the best measure of the magnitude of actual transaction costs.

Stock Dividends in China: Signalling or Liquidity Explanations?

We test alternative hypotheses on a sample of Chinese stock dividends. The inverse Mills ratio, a signal about future performance, is positively related to announcement returns but does not predict higher future performance. Analysts do not revise their earnings forecasts after the announcement date. Our results are more consistent with liquidity‐based theories. We find that managers choose higher stock dividend ratios if share prices deviate more from the industry‐wide average. Increases in proportional spreads, depth, and the number of trades and decreases in average trade size, and price impact suggest greater participation of liquidity and small investors following stock dividends.

Frontier market transaction costs and diversification

Frontier markets, sometimes referred to as “emerging emerging markets,” have high transaction costs so investors who rebalance their portfolios monthly do not receive diversification benefits. Rebalancing every three months or longer, however, leads to diversification gains. Diversification benefits are larger in time periods with lower transaction costs and this is linked to risk aversion. Higher risk aversion results in larger transaction costs and larger return correlations between the United States and frontier markets. There is no cross-country relation between diversification benefits and transaction costs or development. Our results are based on comprehensive measures of transaction costs for 19 frontier markets.

Time series momentum and moving average trading rules

We compare and contrast time series momentum (TSMOM) and moving average (MA) trading rules so as to better understand the sources of their profitability. These rules are closely related; however, there are important differences. TSMOM signals occur at points that coincide with a MA direction change, whereas MA buy (sell) signals only require price to move above (below) a MA. Our empirical results show MA rules frequently give earlier signals leading to meaningful return gains. Both rules perform best outside of large stock series which may explain the puzzle of their popularity with investors, yet lack of supportive evidence in academic studies.

The introduction of broker anonymity on the New Zealand Exchange

Purpose – The purpose of this paper is to examine the impact of the introduction of anonymous trading on the liquidity of New Zealand Stock Exchange (NZX)‐listed stocks.Design/methodology/approach – The paper examines the impact of the switch to anonymous trading on effective spreads and adverse selection costs using both univariate and multivariate approaches and data spanning a 240‐day event window period. The paper also compares the NZXs share of trading in cross‐listed stocks before and after the switch to anonymous trading to determine if the change in market architecture improved the NZXs competitiveness vis‐a‐vis the Australian Stock Exchange (ASX).Findings – The paper finds that effective spreads and adverse selection costs increased following the switch to anonymous trading across the broad range of NZX50 stocks, consistent with an increase in information risk in the post‐event period. However, the paper also finds that the switch to anonymous trading improved the NZXs market share in trading ...

Time-Series Momentum versus Moving Average Trading Rules

Time-series momentum (TSMOM) and moving average (MA) trading rules are closely related; however there are important differences. TSMOM signals occur at points that coincide with a MA direction change, whereas MA buy (sell) signals only require price to move above (below) a MA. Our empirical results show MA rules frequently give earlier signals leading to meaningful return gains. Both rules perform best outside of large stock series which may explain the puzzle of their popularity with investors yet lack of supportive evidence in academic studies.

Country Governance and International Equity Returns

Monthly equity returns in countries with strong governance lead monthly equity returns in countries with weak governance. This predictability is robust to alternative ways of measuring country governance, and holds in and out-of-sample at both the group and individual country levels. Strong governance country equities react more quickly to global innovations, which contain value-relevant information for all countries. Information gradually diffuses from strong to weak governance countries, with the predictability being stronger when there is higher information asymmetry and opacity in weak governance countries. Other factors such as market segmentation, short-selling constraints, and trade linkages do not explain the predictability.

Investor Protection and the Transfer of Corporate Control: A Cross-Country Analysis

In this paper, I use a sample of completed control transfers for listed firms from 1990 through 2003 to examine the relation between investor protection and the choice of acquisition form across 49 countries. I find that the proportion of partial acquisitions (as opposed to full acquisitions) is negatively correlated with the degree of investor protection in the target country. That is, acquirers are more likely to bid for a fraction of the targets equity if legal protection of investor rights is poor in the target country. My results hold for all deals and deals that involve foreign acquirers. In addition, I find that foreign acquirers are more likely to be involved in partial acquisitions than in mergers of domestic targets if they are from countries with weak investor protection. Finally, my results show that given the degree of investor protection in the target country, a deal is more likely a partial acquisition if the target firms corporate governance is poor.

Do Liquidity Proxies Measure Liquidity Accurately in ETFs

We document the performance of liquidity proxies in ETFs. Most proxies are developed for use in equities. However, ETFs have lower asymmetric information, more algorithmic trading, and an active primary market where units are frequently created and redeemed. Using a comprehensive database of over 600 ETFs, we find that despite the differences between ETF and stock liquidity, proxies such as Daily Spread, High-Low, Close-High-Low, and Amihud all do a good job of capturing changes in effective and quoted spread transaction costs. However, no proxies accurately reflect movements in price impact or the level of actual transaction costs.