Rodrigo Hernandez

Reverse weekend effect, trading volume, and illiquidity

Purpose - The purpose of this paper is to examine whether the seasonal anomaly known as the reverse weekend effect detected at index level can also be observed at individual stock level. Design/methodology/approach - This papers methodology is based on the model first developed by Connolly and then employed by Chang, Pinegar, and Ravichandran in which returns are regressed against the dummy variable for Monday. In addition, the conditional variance is also included into the mean equation following Engle, Lilien, and Robins. Given the increasing evidence that equity returns are conditionally heteroskedastic, the paper includes in the conditional variance the lag of the squared residual from the mean equation (i.e. autoregressive conditional heteroskedasticity term introduced by Engle) and the previous periods forecast variance (i.e. the generalized autoregressive conditional heteroskedasticity term introduced by Bollerslev). Also, the paper controls for the different impact of good and bad news on the conditional variance following Glosten, Jaganathan, and Runkle. Findings - It is found that the anomaly is widely distributed among large firms, not just confined to a few firms. The finding suggests that the anomaly at the index level is not driven by the extreme returns of a few firms. The paper also finds that the anomaly at the firm level is not evenly distributed across the weeks of the month. Furthermore, trading volume and illiquidity of individual firms can only partially explain the seasonal anomaly. Originality/value - This paper extends the study of the reverse weekend effect in individual firms.

An economic analysis of bank-issued market-indexed certificate of deposit – an option pricing approach

In this paper, we develop valuation models for market-indexed certificate of deposits (market-indexed CD) based on option pricing model. We show that the payoff of an uncapped market-indexed CD can be duplicated by the combination of a zero coupon bond and a call option on the index. Furthermore, we find that the profit of issuing a non-callable market-indexed CD is negative and it is equivalent to the value of a put option on the underlying index with an exercise price equal to the initial index value. Based on the findings in the paper, we conclude that in order to make a profit, a market-indexed CD must have at least one of the following features: a call provision, a guaranteed payoff lower than par value, a cap on the return, or a participation ratio less than 100%.

The design of bank-issued market-indexed certificates of deposit – survey, pricing and empirical test

In this paper we make a survey of market-indexed CDs and list 11 factors that must be taken into account in the design of market-indexed CDs. We extend the pricing model developed by Hernandez et al. (2011), which was a non-coupon paying market-indexed CD model, into a model in which the market-indexed CD pays coupons. Moreover, we apply the models developed in Hernandez et al. (2011) to market-indexed CDs to calculate the costs and profits for issuing market-indexed CDs. The results of the empirical tests indicate that the model can estimate the pricing of market-indexed CDs accurately.