Shantaram P. Hegde

The liquidity effects of revisions to the S&P 500 index: an empirical analysis ☆

Abstract We study liquidity effects following S&P 500 index revisions. Using a recent sample of S&P 500 additions, we find a sustained increase in the liquidity of the added stocks. Further, the improvement in the liquidity of added stocks is due primarily to a decrease in the direct cost of transacting and a smaller decline in the asymmetric information component. Finally, the event period cumulative abnormal returns for additions are significantly associated with the decrease in the effective spread, particularly the decline in the direct cost of transacting. In contrast, the liquidity of deleted stocks declines over the three months following deletion.

The market liquidity of DIAMONDS, Q's, and their underlying stocks

Abstract We investigate the market liquidity effects of the introduction of index-tracking stocks for the Dow Jones Industrial Average (DIAMONDS) and the NASDAQ 100 index (Qs). Our main finding is liquidity of the underlying DJIA 30 index stocks improves after the introduction of the exchange-traded fund, largely because of a decline in the cost of informed trading. Further, we find the DIAMONDS has significantly lower liquidity costs over the first 50 days of trading as compared to the portfolio of its component stocks, again primarily because of lower adverse selection costs. Finally, we find weaker but qualitatively similar results for the Qs.

Conditional Price Trends in the Aftermarket for Initial Public Offerings

We document that the risk-adjusted returns on initial public offerings (IPOs) in the short-term aftermarket are in the same direction as their initial mispricing. The initially underpriced issues earn 2.46% (6.40%) more, on average, than similar sized firms over the first month (first three months) of trading. In contrast, overpriced IPOs underperform size-matched firms, on average, by 4.42% (1.31%) over a similar period. Subsequently, both groups of IPOs earn similar negative abnormal returns, which is consistent with the long-term underperformance of IPOs reported in previous studies. Further scrutiny indicates that the observed condition price trends cannot be satisfactorily explained by underwriter price stabilization.

The Effect of the Trading System on the Underpricing of Initial Public Offerings

Several studies have documented significant average underpricing for initial public offerings (IPOs) of common stock on the NASDAQ system - that is, the closing price on the first day of trading is significantly higher on average than the offer price. In our paper, we examine whether IPOs on the exchanges (NYSE and AMEX) display similar underpricing. In addition, we test whether differences in the initial and continued listing standards imposed by the exchanges and NASDAQ impact the level of underpricing of IPOs.

Market-Making in Initial Public Offerings of Common Stocks:An Empirical Analysis

In this paper, we examine the behavior of the bid-ask spreads of initial public offerings of common stocks (IPOs) in the over-the-counter market. We find that, in the initial aftermarket, the quoted percentage bid-ask spreads for IPOs are, on average, about threefourths as large as those for seasoned stocks. A cross-sectional and time-series simultaneous equations analysis indicates that significant differences in the IPO and seasoned spreads persist for eight weeks in the aftermarket. Further, we find that the lower IPO spreads stem from their differential elasticities with respect to the determinants of bid-ask spreads and volume as well as from significant differences in the levels of these determinants.

An empirical analysis of implicit delivery options in the treasury bond futures contract

Abstract Assuming perfect, frictionless and efficient markets, this paper develops a framework to estimate the composite value of the quality, wild card and end-of-month options implicit in the T-bond futures contract. The value of delivery options is shown to be the excess of forward price of the cheapest bond over its conversion factor times the exercise price of futures contract. Empirical results indicate that the option values over the last quarter of the nearby contract are on average less than 0.5 percent of the mean futures price, which is substantially lower than the value reported by previous studies. Further scrutiny reveals that although the empirical estimates are contaminated by non-synchronous bond data, they are consistent with certain known theoretical properties of option values.

Corporate Governance and Risk-Taking in Pension Plans: Evidence from Defined Benefit Asset Allocations

Based on theoretical advice and empirical evidence suggesting that risk taking in asset allocation enhances pension returns, we evaluate empirically whether good corporate governance leads to a larger allocation of pension assets to risky securities as compared to safe investments. Our findings suggest that firms with good external and internal corporate governance take more risk by investing heavily in equities and allocating a smaller share of the plan assets to cash, government debt, and insurance company accounts. The main underlying mechanisms appear to be higher investment returns and better pension funding status associated with higher equity and lower safe asset allocations.

An ex post valuation of the quality option implicit in the treasury bond futures contract

Abstract This paper develops three empirical estimates of the value of the quality delivery option implicit in the Treasury bond futures contract: (a) an ex ante value as given by the excess of forward price of the cheapest-to-deliver bond over its conversion factor times the futures price; (b) an ex post value equal to the payoffs to a strategy of buying and holding a short-futures long-forward position at the start and delivering the cheapest bond at the expiration of futures contract, and (c) another ex post value equal to the sum of payoffs to a continuous rollover strategy involving a short-futures long-forward position in the cheapest-to-deliver bonds. Three months prior to delivery the average values of the three estimates are

Pension Contributions and Firm Performance: Evidence from Frozen Defined Benefit Plans

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Hedging multiple price and quantity exposures

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