Thomas Henker

Do investors herd intraday in Australian equities

Purpose – The purpose of this research is to consider whether market wide herding occurs intraday. Design/methodology/approach – Using the 1995 Christie and Huang and the 2000 Chang et al. models, the paper tests whether market wide and industry sector herding occurs intraday in the Australian equities market. Findings – Neither market wide nor industry sector herding occurs intraday. Research limitations/implications – Both herding measures focus on one specific type of herding, herding evidenced by changes in the cross-sectional return distribution. Therefore the herding measures are ill suited to capture the effects of period specific abnormally high or low market returns and they can also capture herding of market participants or groups of market participants only in as far as it manifests itself in security specific returns. Originality/value – No previous studies have considered the possibility of intraday herding in equities markets. Even if there is little evidence of herding over longer time periods, market frictions and inefficiencies continue to be exploited at least anecdotally by traders with very short time horizons to the detriment of longer term investors.

Naive Diversification for Hedge Funds

THOMAS HENKER is a Ph.D. candidate at the University of Massachusetts at Amherst. N Ž umerous studies Henker and Martin 1998 ; Park and Staum 1998 ; Billingsley and Chance . 1996 have focused on the advantages of holding commodity trading Ž . advisors CTAs or hedge funds in addition to traditional asset classes in a portfolio. Sources of these advantages are relatively high returns over commonly used time periods in the 1990s and a low correlation of hedge fund and CTA index returns with traditional stock and bond portfolios. Because hedge fund indexes are usually not tradable, this article evaluates the reduction of the considerable idiosyncratic risk of individual hedge funds when they are held in portfolios. This reduction of risk achieved in hedge fund portfolios is due to the heterogeneous return characteristics of the hedge funds comprising a hedge fund portfolio. This article uses individual hedge fund performance of funds included in the Evaluation Associates CapŽ . ital Management EACM 100 index over 69 months to assess the diversification benefits. Monte Carlo simulation is used to randomly select funds from the fund sector population without replacement. The diversification results rely on the assumption that sample fund performances and covariances are representative for the larger population of hedge funds. DATA

Naive and Optimal Diversification for Managed Futures

he past decade has witnessed a dramatic increase in the use of alternative investment vehicles T such as hedge funds and managed futures products as additions to traditional stock and bond portfolios. Academic and practitioner literature (Chance [1994]; Schneeweis [ 19961) shows that the returns of hedge funds and managed futures have a low correlation with traditional investment vehicles such as stocks and bonds. This low correlation is due to the wide variety of markets traded by such alternative investment vehicles as well as their different trading methods (e.g., the ability to go long and short or use high leverage), and it provides a major reason for the use of these investments. Specifically, the differing investment styles and investment areas enable commodity trading advisors (CTAS) of managed futures to create portfolios that offer risk and return tradeoffs that are not available through traditional stock, bond, or even hedge fund investments. Unfortunately, the differences in investment styles and markets traded between CTAs and traditional investment vehicles often hide the extent to which managed futures offer risk characteristics similar to traditional stock and bond investments and the degree to which investment management concepts that work for stock and bond portfolios are also true for CTA-based asset portfolios. In this article, results are presented, first, on the number of randomly or naively” selected and equally weighted CTAs that must be included in a portfolio for that portfolio to accurately track a variety of benchmark CTA and asset indexes [ e.g., S & P 500 and Goldman Sachs commodity index (GSCI)]. Second, because historical managed futures performance is often used to determine ex post optimal CTA selections and weightings in investor portfolios, the robustness of the level of inclusion of managed futures in mean-variance optimal multiasset class portfolios is tested. Results show the potential benefits of managed futures investments in both naive and optimal portfolio determination.’ It is shown that the impact of random diversification on naively constructed (randomly chosen and equal weighted) CTA portfolios and the impact of CTA investment in mixed stock or bond portfolios are, as expected, similar to that shown to exist for traditional stock and bond investment. That is, depending on the homogeneity of the sample, between five and fifteen CTAs generally are required for the CTA portfolio to achieve a lower variance bound and to track 6 6

Are retail investors the culprits? Evidence from Australian individual stock price bubbles

We address the question of whether the trading of retail investors causes stock price anomalies. Our intent is to study settings in which retail investors are most likely to have influence on market prices. Previous research suggests that retail investors have more influence in small capitalization stocks, and argues that retail investors are most likely to be irrational. Most theories of stock price anomalies hypothesize the presence of irrational traders. Consequently, we focus on stock price anomalies in primarily small capitalization stocks. Our data are from the Australian Stock Exchange Clearinghouse. The Australian stock market is characterized by a high level of direct stock holdings by individual investors, further enhancing the likelihood of retail investors’ influence. We investigate the Granger causality between investor category trading and stock prices, and display the relative trading volume of the investor categories. We conclude that retail investors are not responsible for stock mispricing. Since retail investors do not affect prices in this carefully selected environment, we infer that their trading is unlikely to influence stock market prices. Our conclusion has important implications for theories, particularly behavioral finance theories, that are dependent on the influence of retail investor trading in stock markets.

Noise and Efficient Variance in the Indonesia Stock Exchange

In this study we applied the realized variance based estimator to extract the information from noise and efficient variance from the Indonesia Stock Exchange (IDX). The stocks in the sample are stratified by trading frequency every six months from 2000 to 2007. The standard deviation of noise variance has changed to a lower level after the first half of 2004 implying an improvement of market quality in the Indonesia Stock Exchange. Using Bandi and Russells (2006) method, it is found that the average optimal sampling frequency to estimate the efficient realized variance is 9-minute. The relation between the standard deviation of the noise variance and the square root of the efficient realized variance is positive and significant. From the information asymmetry hypothesis, the positive and significant relationship implies that the higher uncertainty about the fundamental value of asset increases the risk of transacting with traders with superior information. Furthermore, the variance ratio of the average daily efficient realized variance to the daily open-to-close variance reveals that the private information is a significant trading component in the Indonesia Stock Exchange.

Effect of the ban on short selling on market prices and volatility

We examine the effects of the short-selling ban, imposed by Australian regulators in the wake of the global financial crisis, on the trading of financial stocks. Our findings argue against commonly stated reasons for imposing short-sale bans. We find no evidence that short-sale restrictions provide support for stock prices or that they reduce volatility. Moreover, stocks subject to the short-selling ban suffered a severe degradation in market quality. Controlling for the adverse effects of the financial crisis on markets, we show that short-selling restrictions increase intraday volatility, reduce trading activity and increase bid–ask spreads.

How the Australian Ban on Short Selling During the GFC Affected Market Quality and Volatility

We examine the effects of the short selling ban, imposed by Australian regulators in the wake of the global financial crisis, on trading of financial stocks. Unlike other developed markets, where regulators imposed short-selling restrictions for brief periods of time at the height of the financial crisis, the ban on short selling of financial stocks on the Australian Stock Exchange lasted eight months, including both the tumultuous end of 2008 and the calmer period up to May 2009. Our control group consists of matched Canadian financial institutions which were unaffected by a short selling ban. We analyze the impact of the imposed short selling constraints on measures of market quality and on stock prices using univariate and multivariate fixed effects panel regressions. As predicted by previous theoretical work, we find that stocks subject to the short selling ban suffered a severe degradation in market quality. Controlling for the adverse effects of the financial crisis on financial markets, we show that imposing constraints on short-selling reduced trading activity, increased bid and ask spreads and increased intraday volatility. Moreover, there appears to be no evidence for lasting price support from the restrictions.

Intraday Speed of Price Adjustment in the Jakarta Stock Exchange

High frequency study at individual level in the Jakarta Stock Exchange is conducted in this research to reveal the dynamics at intraday level. Several apparent patterns emerge from analyzing the relation among the speed of adjustment coefficients, noise, and noise variance. It is found that the noise and noise variance are at a low level when the speed of adjustment coefficients achieves a fair level. The speed of adjustment coefficients, both at market and individual level show a periodic adjustment pattern at a daily interval. This justifies the importance of studying the dynamics of the price discovery as estimated in the speed of adjustment coefficient. Another important finding is that there is a positive relationship between the uncertainty of asset fundamental values and the corresponding bid-ask spreads. This reflects higher uncertainty about the fundamental value of the asset increases the risk of transacting with traders with superior information.

Intraday Speed of Adjustment and the Realized Variance in the Indonesia Stock Exchange

We examine the intraday trading and price dynamics for frequently traded stocks at the Indonesian Stock Exchange. Using trade price, time series generated at one, two, three, five, ten, fifteen, thirty and sixty-minute intervals, we estimate the speed of adjustment and the corresponding realized variance of these series. The objective of the estimation is to infer the noise impact to the deviation of observed prices from their fundamental value. The result from the speed of adjustment estimate is consistent with the realized variance estimator. Both conclude that the 50 most frequently traded stocks in the Indonesia Stock Exchange adjust to new information within 30 minutes. At the interval, the coefficient of the speed of price adjustment is insignificantly different from zero implying negligible noise impact to the observed price. Concurrently, the realized variance starts to stabilize at 30-minute interval purporting fading impact of noise to the realized variance estimate. The evidence justifies the use of realized variance at various intervals as a reliable indicator of price discovery rate in the Indonesia Stock Exchange.

Spread decomposition with common spread components

Purpose - This paper aims to incorporate a market wide buying and selling pressure cost component into a spread decomposition model as spread cost component. Design/methodology/approach - The paper extends a commonly used trade indicator spread decomposition model to include a component common to all stocks of a specialist firm and a market wide component common to all stocks. Findings - Strong evidence is found that specialists consider this common factor cost component when they set bid and ask quotes. Some specialist firms also take the next logical step and specifically manage their firm wide stock inventories. The common factor is in percentage terms largest for securities with the highest trade frequencies. Research limitations/implications - The relative importance of the common factor spread component decreases as the pricing grid becomes finer, but remains highly significant under the decimal trading regime. Originality/value - This is the first study to document not-security-specific spread cost components that are common to all stocks for which a specialist firm makes markets and to all stocks in the market. Using the model it is shown that market wide uncertainty translates into spreads of individual securities.