Travis L. Jones

Endogenous examination of underwriter reputation and IPO returns

Purpose - The purpose of this paper is to examine the relationship between underwriter reputation and initial public offerings (IPOs) initial returns over a 24-year period, from 1980 to 2003. Design/methodology/approach - Two-stage least-squares regression analysis on data from IPOs offered from 1980 to 2003 is used to determine how the choice of IPO underwriter is related to initial returns when considering reputation as an endogenous variable. Findings - This study shows, consistent with prior literature, that underwriter reputation is statistically significantly negatively related to initial returns from 1980 to 1991 and statistically significantly positively related to initial returns from 1992 to 2003, when reputation is taken as an exogenous variable. When considering the choice of the reputation of underwriter as endogenous to characteristics of the firm, the reputation of an underwriter is significantly positively related to IPO initial returns for 1980 to 2003 and 1992 to 2003 and insignificantly related, for 1980 to 1991. Originality/value - This study adds value to finance literature in that it extends the research on the relationship between IPO initial returns and underwriter reputation. It also furthers the existing research on IPO anomalies and notes characteristics in this field of financial markets that may be important to both issuers and investment banks.

A Look at the Use of VIX Futures in Investment Portfolios: Buy-and-Hold versus Tactical Allocations

This article demonstrates the general relationship of VIX futures, which trade on the CBOE Futures Exchange, to the underlying VIX index, as compiled by the CBOE, and how VIX futures might diversify and enhance a standard portfolio of equity and fixed income. The authors examine the use of VIX futures in a number of portfolio allocations over the period 2005-2009 and show that using VIX futures in a buy-and-hold strategy is not likely to be prudent in most scenarios. That does not indicate, however, that VIX futures should be disregarded completely. One beneficial use, examined here, uses VIX futures in a tactical manner that takes advantage of both the trend of the VIX futures as well as their tendency to increase when stocks decline. The key to these contracts is to understand how they trade, analyze them independently from the VIX index, and closely monitor their performance within any portfolio in which they are used.

Investing in IT Security: How to Determine the Maximum Threshold

Investing in information technology IT security is a critical decision in the digital age. And, in most organizations, it is wise to allocate a significant amount of resources to IT infrastructure. However, it is difficult to determine how much to invest in IT as well as quantifying the maximum threshold where the rate of return of this investment is diminishing. The main research question in this paper is: how much and what financial resources should be allocated to IT security? This paper analyzes different practices and techniques used to determine the calculation for investments in IT security and analyzes and recommend some suitable methods for deciding how much should be invested in IT security.

A Note on the Premiums and Discounts Embedded in VIX Futures Prices

This article illustrates the volatile nature of the premiums and discounts embedded in the prices of VIX (Chicago Board Options Exchange Market Volatility Index) futures contracts. The fact that the underlying VIX index cannot be traded leads VIX futures to be priced more on expectations of market participants than on a typical cost-of-carry relationship. As they near expiration, VIX futures, in the aggregate, tend to trade at an increased premium, when trading in contango, and at an increased discount, when trading in backwardation. In addition, the premium in these contracts tends to peak as the VIX index nears a low, and the discount in the contracts tends to bottom as the index nears a high.

Is a VIX ETP an Investment in the VIX

This paper examines VIX-based ETPs (exchange traded products) and illustrates that both the return and risk of these products are not related to the return and risk of the VIX index. The authors note that VIX ETPs do not correlate well to the VIX index. In fact, these funds are not even designed to have a high correlation to the VIX index. Individual investors can often mistake VIX ETPs for an investment in the VIX index itself, which is incorrect and may lead to a costly mistake.

Integrating Asset-Liability Risk Management with Portfolio Optimization for Individual Investors

A majority of private client practitioners rely on mean-variance optimization (MVO), rules of thumb, or model portfolios for making asset allocation recommendations. Considerations for income levels and other constraints figure into the typical approach. However, not enough attention is given to the nature of an investor’s multiple time horizons and implications for cash flows. These are the future demands placed upon the portfolio. The risks that these demands will not be met need to be clearly understood in order to validate any asset allocation decision. This article presents an approach incorporating MVO within a multi-horizon asset-liability management risk model. This approach allows for cash-flow matching of a portion of an investor’s portfolio within the optimization framework. This combined approach allows an individual’s portfolio to provide short-term cash flow, as needed, while also considering the longer-term demands on the portfolio.

Day‐of‐the‐week effect in the seasoned equity offering discount

Purpose - The purpose of this paper is to examine whether or not a calendar time anomaly exists in the number and discount of seasoned equity offerings (SEOs) from 1980-2004. Design/methodology/approach - Regression analysis was used on data from SEOs offered from 1980 to 2004 to determine the significance of the SEO discount over days-of-the-week and the significance of factors relating to SEOs offered on a Monday. The characteristics of Monday SEOs were compared to those offered on other days of the week. Findings - Monday has the fewest number of SEOs with a statistically significant larger offer price discount, on average, than issues done on other days of the week. This has been attributed to the Monday effect, in part to the implementation of Rule 10b-21, which led to reduced short-selling pressure and reduced the uncertainty associated with the weekend effect on the part of the issuing firm. Originality/value - This paper adds value to the finance literature in that it extends the research on calendar-time anomalies in financial markets. It also adds to the existing research on SEOs and notes characteristics in this particular section of the markets that may be important to both issuers and investors.

Valuation of Chinese Equity Based on Implied Growth Rates

This article introduces a valuation method that can be used to back out the short-term expected growth rate implied in the prices of Chinese stocks. The proposed methodology involves reverse-engineering the traditional DCF models, which is then applied to a sample of 467 listed Chinese companies. Our findings show that the implied growth rate generally is much higher than its actual realization, with all median estimation errors larger than 90%. This study has practical applications for investors and traders, since it does not require access to private information or analysts’ estimations and provides a useful tool to critically evaluate Chinese stock prices.

Time Decay Anomalies in S&P 500 Index Options

In this article, the authors examine price patterns of stock index options to observe how time decay affects the time, or extrinsic, portion of the option price. Option pricing theory states that the rate of time decay, known as theta, should increase as the option approaches expiration. The results indicate that the rate of decay in the option price is less than theory predicts for both in- and out-of-the-money options.

Investor Type, Transaction Fees, and Single-Stock Futures

This study, using a dataset from the Options Clearing Corporation, examines the type of investor that aided in the development of single-stock futures. In March 2005, OneChicago instituted a discounted trading fee program for its member firms that is attributed as a primary reason that the depth and breadth of single-stock futures trading by institutions has increased so dramatically above the trading volume of individuals, who were primarily responsible for the markets initial growth.