Paul D. Koch

Evolution in dynamic linkages across daily national stock indexes

Abstract This article investigates how dynamic linkages among the daily rates of return of eight national stock indexes have evolved since 1972. A dynamic simultaneous equations model is estimated to describe the contemporaneous and lead/lag relationships across national equity markets over three different years: 1972, 1980, and 1987. Results reveal growing market interdependence within the same geographical region over time. While there are many significant intermarket relationships within the same 24-hour period, there are few significant lagged responses across markets beyond 24 hours. This suggests a high degree of international market efficiency. Furthermore, Japans market influence has been growing to rival that of the USA.

Economic determinants of evolution in international stock market integration

Abstract This study investigates how and why different pairs of national equity markets display differing degrees of co-movement over time. We interpret a greater degree of co-movement to reflect greater stock market integration. We hypothesize the extent of stock market integration may depend upon certain macroeconomic variables that characterize and influence the degree of economic integration between two countries. As the degree of economic integration varies over time for a given pair of countries, we may expect the extent of equity market integration to vary systematically. We empirically investigate this hypothesis by employing a two-step procedure to explore first, how the degree of co-movement for a given pair of markets varies over time and second, why this interdependence varies over time. First, we employ daily data for nine national equity markets over 22 yearly samples to estimate annual Geweke [J. Am. Statist. Assoc. 77 (1982) 304–313] measures of feedback for different pairs of markets. For each pair of markets, the time series of 22 annual Geweke measures reveals the evolution in how co-movement in daily returns varies over time. Second, we specify a set of macroeconomic variables that characterize and influence the degree of economic integration for each pair of countries. Finally, we incorporate these variables in a pooled time series regression model across all possible pairs of these nine markets to estimate the influence of macroeconomic determinants on evolution in stock market integration.

Economic Determinants of the Correlation Structure Across International Equity Markets

Abstract This study investigates whether, how, and why the matrix of correlations across international equity markets changes over time. A theoretical model is proposed to specify potential economic determinants of this correlation structure. The empirical validity of this economic model is investigated by employing daily returns for different national stock indexes, from 1972 through 1993, to construct a quarterly time series of the correlation matrix. This quarterly time series is used to investigate the stability of the correlation matrix over time, and to estimate the economic model. The model is then applied to generate out-of-sample forecasts of the correlation structure. Keywords: International market integration JEL classification: F36, G15.

Intraday relationships between volatility in S&P 500 futures prices and volatility in the S&P 500 index☆

Abstract This paper examines the intraday relationships between the volatility of S&P 500 futures prices and the volatility of the S&P 500 index. We calculate variance measures for minute-to-minute price changes on a daily basis and across 30-minute intervals. The empirical results indicate that: (i) futures volatility is greater than index volatility, (ii) volatility increased for both futures prices and the index in absolute terms from 1984 through 1986, (iii) both futures and index volatility increased directly with futures trading volume, and (iv) index volatility was systematically greater during the first 30 minutes of trading each day than at other times. Granger tests, however, reveal no systematic pattern of futures volatility leading index volatility, or index volatility leading futures volatility.

The Information Content of Dividend and Capital Structure Policies

Dividend and capital structure policies interact to provide significant predictive information about the firms future cash flow. This study furnishes empirical evidence that supports the free-cash flow hypothesis concerning the agency effects of dividend and capital structure changes.

The firm's leverage-cash flow relationship

Abstract Two separate strands of the literature on capital structure under asymmetric information consider the relationship between a firms financial leverage and cash flow. Signalling theory suggests a positive relationship, while pecking order behavior implies a negative relationship. These contrasting theoretical implications appear contradictory. However, both are supported in different bodies of empirical literature. Leverage-changing event studies tend to support a positive relationship while cross-sectional studies typically reveal a negative relationship. This paper proposes that the appropriate pecking order relationship is contemporaneous — between current leverage and current cash flow, while the relevant signalling relationship is intertemporal-between current leverage and future cash flow. A dynamic simultaneous equations model is built which allows the firms leverage, cash flow, and risk to interact jointly in the same period, as well as across time. Empirical results reveal that, in the same time period, leverage and cash flow tend to be negatively related, while across time leverage is positively related to future cash flow. Thus the apparent contradictions in the theoretical and empirical literature may be reconciled by considering both the contemporaneous and dynamic aspects of the firms leverage/cash flow relationship.

Paying Attention: Overnight Returns and the Hidden Cost of Buying at the Open

Using 13 years of intraday data for U.S. stocks, we find a strong tendency for positive returns during the overnight period followed by reversals during the trading day. This behavior is driven by an opening price that is high relative to intraday prices. We find this temporary price inflation at the open is concentrated among stocks that have recently attracted the attention of retail investors, and these high attention stocks have high levels of net retail buying at the start of the trading day. In addition, we document that the sensitivity of opening prices to retail investor attention is more pronounced for stocks that are difficult to value and costly to arbitrage, and is greater during periods of high overall retail investor sentiment. The additional implicit transaction costs for retail traders who buy high attention stocks near the open frequently exceed the effective half spread.

Meeting the "Highly Effective Expectation" Criterion for Hedge Accounting

The continual attempts of FASB to revise and regularize the accounting treatment of derivatives positions in a firms accounting statements has led to the recent Financial Accounting Standard No. 133. The use of hedge accounting procedures, which is generally highly desired by firms engaged in hedging with derivatives, may now require that the hedge be “highly effective.” the meaning of this term, however, is not fully specified. And, given both the versatility of derivatives and the “noise” (or “basis risk”) that can affect the relationship between the market for a derivative instrument and its underlying, it is not surprising that difficult cases can be found. Kawaller describes the “highly effective” criterion of the new rule and considers how it should best be applied.

Reexamining intraday simultaneity in stock index futures markets

Abstract This note examines three empirical examples involving intraday dynamic relationships associated with stock index futures markets. Researchers often employ a vector autoregressive ( var ) model to analyze such high frequency transactions data. While such a model can provide useful information regarding the nature of causal priority inherent in the data, it is not the proper model to investigate the structural relationships of interest, because it omits the contemporaneous interaction. On the other hand, a VAR model specification which is altered to incorporate simultaneity may enable the data to reveal the structural relationships of interest.

The dynamic relationship between the dollar and US prices: An intensive empirical investigation

Abstract The empirical, bivariate relationships between the dollar and US prices during the recent floating rate period are analyzed using time series methodology. Results indicate a long distributed lag from the dollar to the CPI, but no relationship in the opposite direction, and that a permanent 10 per cent decline in the dollar was ultimately followed by a CPI rise of 4.85 per cent. Similar results are obtained for various components of the CPI, including services, while substantially smaller price responses are reported in other studies that typically employ shorter lag structures in the context of structural econometric models.