Trevor W. Chamberlain

Option volume and stock price behavior: Some evidence from the Chicago board options exchange

This study examines the relationship between selected Chicago Board Options Exchange option volume and underlying stock prices using intraday data for the period January 3, 1989 to January 31, 1989. The data were prefiltered and aggregated into 15-minute intervals. Causality tests were performed using Grangers method. The test results indicate that the option volume-stock price relationship is largely characterized by feedback, with option volume causing stock price changes and vice versa. The evidence also suggests that the relationship only persists for very short time periods, with little or no opportunity for market participants to devise profitable trading strategies utilizing one markets information in the other market.

The investment decisions of individuals and firms

Abstract This paper presents a model of investment in which it is assumed that both individuals and firms maximize the probability of long-run survival (PLRS). For individuals, the decision variable is the fraction of wealth placed in risky securities, whereas, for firms, it is the rate of investment in real assets. For both, a high mean rate of growth in net worth is a necessary condition for a high probability of long-run survival.

International investment and currency risk

Abstract A normative model for selecting optimal international portfolios is presented. The model allows investors to pursue an active portfolio strategy while obtaining the benefits of international diversification. Because currency risk is explicitly recognized, its importance can be assessed by investors in making investment decisions.

Testing the Excess Return Hypothesis: The Canadian Case Web Appendix

This study examines the relationship between stock returns and the term structure of interest rates in a Canadian setting. Following 132 The BRC Academy Journal of Business Vol. 6, No. 1 Zhou’s study of the US market (Federal Reserve Board, 1996), the hypothesis tested is the excess return hypothesis, which states that expected returns move one-for-one with interest rates. This relationship is explored using nominal and real return data for Canadian stocks and bonds. In addition, given the close relationship between the Canadian and US economies, the study examines the ability of US interest rates to predict Canadian stock returns. Using first differenced returns, the study finds that nominal Canadian interest rates have predictive power vis-à-vis nominal Canadian stock returns, but, unlike Zhou’s (1996) results for the US, the relationship is negative. This is also true when real returns are used. As for US interest rates and Canadian stock returns, the relationship is of mixed sign and mainly insignificant for both nominal and real stock returns and interest rates. The only evidence supporting the excess return hypothesis occurs when two-stage least squares, using the short-term interest rate as an instrumental variable, are used to regress real Canadian stock returns on real US interest rates. Finally, tests to determine whether the results are dependent on the period studied indicate that they are not sample-dependent. JEL Classification: G10

Taxation Changes and the Cross-Border Pricing of REITs Web Appendix

On November 21, 2005 the Canadian government announced a reduction in the tax on dividends in an effort to neutralize the tax system’s bias in favour of income trusts. Eleven months later, on October 31, 2006, a new government changed direction and eliminated the tax deductibility of income trust distributions altogether. Exempted from this change in policy was the real estate investment trust (REIT) sector. 116 The BRC Academy Journal of Business Vol. 6, No. 1 This present study examines the return behaviour of both Canadian and U.S. REITs around the time of these announcements in an effort to inform the ongoing discussion about REIT taxation design in the United States and abroad. Ordinary least squares with dummy variables are used to estimate Canadian REIT returns using a variant of the market model on the event date and the day after. Both equally-weighted and value-weighted portfolios are created in order to check the robustness of the results. In addition, the relationships between Canadian REIT returns and U.S. REIT returns are examined for each event. Test results indicate statistically significant abnormal returns for the Canadian REITs relative to their U.S. counterparts on both dates.

Market Effects of SEC Regulation of Short-Term Borrowing Disclosure

This study uses equal-weighted portfolios of financial and non-financial SEC registrants to examine the market reaction to proposed SEC short-term borrowing disclosure regulation. Using event study methodology and two event dates -- that is, announcement and voting dates -- we find that the market reaction is positive and significant at the announcement date and negative and significant at the voting date. Overall, the paper documents a positive market reaction, indicating the usefulness of the disclosure from the vantage point of users. The results for various subsets, including commercial banks and saving institutions, bank holding companies, size quartiles, and exchange-listed and OTC registrants, were also examined and compared. In general, they confirm expectations and are robust to alternate specifications using value-weighted portfolios. The study also provides evidence that a “one-size-fits-all” approach to regulation is undesirable.

Accruals and Real Earnings Management: Testing the Debt Covenant Hypothesis

This paper examines earnings management activities around debt covenant violations. We focus on accruals management and real activities manipulation behavior of managers in the quarters around the covenant violation. We expect covenant restrictions to influence these activities in the quarters surrounding and the quarter of the violation. The evidence is consistent with managers manipulating earnings using accrual-based and real earnings management activities and provides evidence for the debt covenant hypothesis. Cross-sectional analyses reveal that managers appear to manipulate accruals in successive quarters in order to increase reported earnings. The evidence on the use of real activities suggests that while managers increase reported earnings in the violation quarter, they have limited discretion over the use of real earnings management techniques in the quarters surrounding the violation.