Evidence on changes in time varying volatility around bonus and rights issue announcements

Madhuri Malhotra (Madras School of Economics, Chennai, India)
M. Thenmozhi (Department of Management Studies, Indian Institute of Technology, Chennai, India)
G. Arun Kumar (Department of Management Studies, Indian Institute of Technology, Chennai, India)

International Journal of Emerging Markets

ISSN: 1746-8809

Publication date: 5 April 2013

Abstract

Purpose

The purpose of this paper is to examine the short‐term and long‐term stock price volatility changes around bonus and rights issue announcements, using historical volatility estimation and time varying volatility approach.

Design/methodology/approach

Changes in volatility around bonus and rights issues have been examined using the following methodologies. First, to capture historical volatility, change in standard deviation for 20 days and 100 days before and after announcement have been examined. Second, change in time varying volatility and unconditional volatility is examined using GARCH (1, 1) model.

Findings

The results indicate that the historical volatility has increased after bonus and rights issue announcement. The volatility persistence and unconditional variance have increased after the bonus and rights issue announcements. This evidence, extendable to any other type of issue announcement, is consistent with theories stating that volatility increases after the seasoned capital issue announcements.

Originality/value

This study analyses historical volatility, volatility persistence and unconditional volatility around bonus and rights issue announcements, which has not been observed in the previous literature. This study fills the gap in literature by empirically examining the change in short‐ and long‐term volatility before and after bonus and rights issue announcements. Moreover, measuring volatility using GARCH model overcomes the potential problem of heteroscedasticity associated with cross‐sectional data. The change in volatility persistence and unconditional volatility before and after the announcement are also examined. This study is useful for researchers and practitioners specialized in finance, international business and management, and professionals in the area of commercial policy development in emerging markets.

Keywords

Citation

Malhotra, M., Thenmozhi, M. and Arun Kumar, G. (2013), "Evidence on changes in time varying volatility around bonus and rights issue announcements", International Journal of Emerging Markets, Vol. 8 No. 2, pp. 129-143. https://doi.org/10.1108/17468801311307000

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited

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