Richard Priestley

The effects of stock index futures trading on stock index volatility: An analysis of the asymmetric response of volatility to news

The asymmetric response of volatility to news has been attributed to leverage effects, but the authors show that noise trading is an important contributor to asymmetric effects. Contrary to the traditional view, introducing futures trading has no detrimental impact on the underlying markets. Futures trading improves market dynamics in processing news by transferring noise trading from spot to futures markets.

Dividend Smoothing and Predictability

The relative predictability of returns and dividends is a central issue because it forms the paradigm to interpret asset price variation. A little studied question is how dividend smoothing, as a choice of corporate policy, affects predictability. We show that even if dividends are supposed to be predictable without smoothing, dividend smoothing can bury this predictability. Because aggregate dividends are dramatically more smoothed in the postwar period than before, the lack of dividend growth predictability in the postwar period does not necessarily mean that there is no cash flow news in stock price variations; rather, a more plausible interpretation is that dividends are smoothed. Using two alternative measures that are less subject to dividend smoothing---net payout and earnings---we reach the consistent conclusion that cash flow news plays a more important role than discount rate news in price variations in the postwar period. This paper was accepted by Wei Xiong, finance.

The arbitrage pricing theory, macroeconomic and financial factors, and expectations generating processes

Abstract Empirical tests of the arbitrage pricing theory (APT) using prespecified observed variables rely on the construction of unexpected components of the variables. In this paper we show that traditional techniques employed in this area may lead to false inferences regarding the statistical significance or otherwise of estimated risk premia. We put forth an alternative methodology to generate the unexpected components which treats expectations formation as a learning process. In the light of given criteria that the unexpected components should satisfy this technique leads to more reliable inferences regarding tests and applications of the APT.

Dividend Behaviour and Dividend Signaling

We analyze the dividend behaviour of the aggregate stock market. We propose a model that assumes managers minimize the costs of adjustment associated with being away from their target dividend payout. The target is expressed as a function of lagged stock prices and permanent earnings, generalizing previous models of dividend behaviour. We present a new method for measuring unobserved permanent earning based on the Kalman filter. Our specification of dividend behaviour is strongly supported by the data relative to both alternative models and over time. We find significant evidence of dividends conveying information regarding unexpected positive changes in current permanent earnigs. We also find that both the speed of adjustment of dividends to target dividends and tests of signaling are sensitive to the specification of the model.

Macroeconomic variables as common pervasive risk factors and the empirical content of the arbitrage pricing theory

Abstract In this paper we investigate the performance of the APT for securities traded on the London Stock Exchange. We analyze performance in terms of the presence of common pervasive factors across two different samples allowing for the fact that returns exhibit an approximate factor structure. Unlike most previous studies, we find that for two subsamples of assets it is possible to arrive at a unique return generating process in the sense that three factors relating to the money supply, inflation and excess returns on the stock market are priced and carry the same prices of risk in both samples.

Mean reversion in Southeast Asian stock markets

Abstract This paper assesses the predictable component of South East Asian stock markets using a bootstrap resampling method to estimate the small sample distributions of variance ratio statistics. We find evidence of mean reversion in long horizon dollar adjusted excess returns. The robustness of the results is assessed by adjusting stock returns for potential time-varying expected returns and partial integration of these emerging markets into world capital markets. In all but one case, mean reversion is shown to be due to either time-variation of risk exposure and prices of risk or partial integration of the local market into world stock markets. These results clearly illustrate the dangers of testing market efficiency without carefully adjusting stock returns for time variation in expected returns and the partial integration of local markets into world markets.

Reports of beta's death are premature: Evidence from the UK

A number of authors have found that firm size and book-to-market-value capture the cross-sectional variation in average stock returns. More importantly, these variables have been shown to out-perform the CAPMs ? coefficient in explaining the cross-section of US stock returns. However, these studies all employ variants of the two-step estimator due to Fama and MacBeth (Fama, E.F., MacBeth, J.D., 1973. Risk, return and equilibrium: Empirical tests. Journal of Political Economy 71, 607–636), which impose implicitly the restriction that idiosyncratic returns are uncorrelated. In this paper we use a one-step estimator due to McElroy et al. (McElroy, M.B., Burmeister, E., Wall, K.D., 1985. Two estimators for the APT model when factors are measured. Economics Letters 19, 271–275) and find a highly significant role for ? risk in the UK stock market when we allow for correlation amongst idiosyncratic returns.

Technical analysis, trading volume and market efficiency: evidence from an emerging market

Although there is a widespread belief that stock markets are weak-form efficient, technical analysis is a pervasive activity. The extent is examined to which this apparent paradox can be explained by conditioning the past sequence of prices on the past sequence of volume. A unique data set from an emerging market reveals that, for a number of companies in the sample, returns appear to conform to the weak-form version of the efficient markets hypothesis. However, when returns are conditioned on past levels of volume, current returns on over half of these companies exhibit predictability. This is particularly true from companies with low trading volumes.

Risk factors in the Malaysian stock market

Abstract Using factors similar to those used by Chen et al. (1986), we use the APT to describe the risk-return relationship of the Malaysian stock market. We find however that a proxy for international risk can be used to augment the domestic version of the APT for the Malaysian market. These results are important for corporate managers undertaking cost of capital calculations, for fund managers making investment decisions and, amongst others, for investors who wish to assess the performance of managed funds.

Calculating the probability of failure of the Norwegian banking sector

Abstract We calculate the probability of failure of the Norwegian banking sector both before and after the Norwegian banking crisis. Thus unlike previous studies of this kind we choose a sample period and banking sector where there were significant numbers of bank failures. This approach therefore gives us a better indication of the quality of the calculated risk measure. Our results indicate evidence of a steep increase in the risk inherent in this sector beginning in 1984 following the deregulation of Norwegian banks in the mid 1980s. We also find that risk levels in the sector fall after 1992 and continue to fall to pre-1982 levels by the end of our sample in December 1995.