Russell Poskitt

An empirical analysis of the NZX's price query system

Purpose – The purpose of this paper is to examine the proposition that unexplained price and volume movements detected by the New Zealand Exchanges (“NZX”) surveillance staff reflect speculative trading.Design/methodology/approach – The paper examines a sample of 98 price queries issued by the NZX between 1996 and 2004 where the company responded with a “no news” announcement to the NZX query. The sample is partitioned between queries of price increases and queries of price decreases. A market model is employed to estimate abnormal returns over the event window period [−30, 30] where day 0 is the date the price query is issued.Findings – The paper finds evidence of large abnormal returns in the immediate pre‐query period but only a partial reversal in the post‐query period following the “no news” announcements.Research limitations/implications – The absence of a full reversal of the pre‐query abnormal return is interpreted as evidence that prices are being set by informed traders rather than by uninforme...

What drives issue spreads on commercial paper?: Evidence from New Zealand commercial paper tenders

Purpose – This paper aims to examine how issue spreads are determined in the New Zealand commercial paper market both before and after the onset of the global financial crisis. Design/methodology/approach – This paper uses regression analysis on data from 1,340 commercial paper tenders conducted by 26 issuers between mid-2003 and mid-2011 to explore how credit risk and liquidity factors impact on issue spreads. Findings – Prior to March 2008, issue spreads are higher when issuers have a weaker credit rating, risk aversion is high and investor appetite for the issue is low. There is no term premium in issue spreads. After March 2008, credit ratings have no influence on issue spreads, while the influence of risk aversion is weaker. Issue spreads are more sensitive to the investor appetite and the term of the issue. Investors assign higher spreads to issues made by securitisation conduits despite these entities retaining the highest possible short-term credit rating, reflecting the erosion of confidence in c...

Why is US Dollar Bond Funding for International Banks More Expensive

This paper decomposes issue spreads on USD-denominated bonds issued during the period between mid-2005 and mid-2010 into credit risk and liquidity premium components. Regression analysis shows that the behaviour of the credit risk component is well-explained by a structural model of default, consistent with prior research. However the sensitivity of the credit risk component to the structural model variables is nullified by the introduction of government guarantees. We also find that the liquidity premium component can be partially explained by the bid/ask spread in the secondary market, consistent with the liquidity premium impounding future illiquidity, and with the issue size, consistent with the price pressure hypothesis. Government guarantees reduce the liquidity component of the issue spread, consistent with the notion that government guarantees enhance the marketability of bonds during times of financial stress. We attribute the increase in long-term funding costs experienced by international banks raising funds in the US bond market to the investor perception that banks are less creditworthy than in the past.

How Mature is the AUD/NZD Market?

We use a high frequency data set to examine information flows between the direct AUD/NZD market and the indirect AUD/USD and NZD/USD markets for the Australian dollar/New Zealand dollar cross-rate. Our results show that information flows are dominated by the contemporaneous information flow during the most active part of the trading day and by the lagged flow of information from the indirect to the direct market when trading activity is low. The lagged flow of information from the direct market to the indirect market is never the dominant channel. These results show that the US dollar markets for the Australasian currency pair remain the locus of price discovery and suggest that the direct AUD/NZD market is still relatively immature, despite the recent growth in trading activity. Knowledge of the leading role played by lagged information flows from the indirect market cannot, however, be exploited profitably.