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Open Access
Article
Publication date: 9 July 2021

K. Dhananjaya

This study aims to examine the impact of stock market valuation on corporate investment. Specifically, it attempts to understand the influence of both the fundamental and…

1436

Abstract

Purpose

This study aims to examine the impact of stock market valuation on corporate investment. Specifically, it attempts to understand the influence of both the fundamental and non-fundamental components of stock price on firms’ investment decisions.

Design/methodology/approach

The study decomposes the market-to-book (MB) ratio into three components, namely, firm-level mispricing, industry mispricing and growth component to examine the effect of each of these components on corporate investment decisions. Based on the literature review, four testable hypotheses concerning the relationship between market valuation and corporate investment have been generated. These hypotheses have been tested on the panel data of 1,311 Indian Public Limited Manufacturing Firms using a pooled data regression model.

Findings

The study finds that both the fundamental and non-fundamental components of stock price influence the investment decisions along with the cash flow variable. The market valuation–investment nexus is more pronounced in the case of equity-dependent firms, which shows that stock valuation affects corporate investment predominantly through the equity transaction channel. Further, the positive relationship between industry mispricing and corporate investment demonstrates that the market sentiment also affects firms’ investment decisions.

Originality/value

The relationship between the different components of market value and corporate investment decisions has not been explored in India. Hence, the present study is unique because it breaks the MB ratio down into growth and mispricing components and examines the impact of each of these components on corporate investment.

Details

Vilakshan - XIMB Journal of Management, vol. 20 no. 1
Type: Research Article
ISSN: 0973-1954

Keywords

Open Access
Article
Publication date: 17 March 2022

Zhuo (June) Cheng and Jing (Bob) Fang

This study aims to examine what underlies the estimated relation between idiosyncratic volatility and realized return.

1042

Abstract

Purpose

This study aims to examine what underlies the estimated relation between idiosyncratic volatility and realized return.

Design/methodology/approach

Idiosyncratic volatility has a dual effect on stock pricing: it not only affects investors' expected return but also affects the efficiency of stock price in reflecting its value. Therefore, the estimated relation between idiosyncratic volatility and realized return captures its relations with both expected return and the mispricing-related component due to its dual effect on stock pricing. The sign of its relation with the mispricing-related component is indeterminate.

Findings

The estimated relation between idiosyncratic volatility and realized return decreases and switches from positive to negative as the estimation sample consists of proportionately more ex ante overvalued observations; it increases and switches from negative to positive as the estimation sample consists of proportionately more ex post overvalued observations. In sum, the relation of idiosyncratic volatility with the mispricing-related component dominates its relation with expected return in its estimated relation with realized return. Moreover, its estimated relation with realized return varies with research design choices and even switches sign due to their effects on its relation with the mispricing-related component.

Originality/value

The novelty of the study is evident in the implication of its findings that one cannot infer the sign of the relation of idiosyncratic volatility with expected return from its estimated relation with realized return.

Details

China Accounting and Finance Review, vol. 24 no. 2
Type: Research Article
ISSN: 1029-807X

Keywords

Open Access
Article
Publication date: 28 February 2013

Suhkyong Kim

We investigate intraday data for KOSPI 200 index and KOSPI 200 index futures. Hourly theoretical futures prices are calculated based on cost of carry model. we compare hourly…

26

Abstract

We investigate intraday data for KOSPI 200 index and KOSPI 200 index futures. Hourly theoretical futures prices are calculated based on cost of carry model. we compare hourly index futures prices with their theoretical prices. Consistent with a large body of previous researches in this area, we find the persistent deviation of futures prices from their theoretical prices. Futures prices are undervalued relative to their theoretical prices. The data indicate that the difference between futures price and its theoretical price exhibits U-shaped pattern over the trading hours. The differences are higher at open and at 15:00 and are lower over intraday trading hours, implying that previous studies using daily closing prices overstate this mispricing.

We also examine the effect of intraday spot return on the behavior of the difference between the hourly futures price and its theoretical price. The finding indicates that the intraday momentum generates U-shaped pattern of this mispricing. This contrasts with Kim and Park (2011)'s finding that the difference also increases as the prior 60 day spot return increases. Our finding invalidates their explanation the activities of arbitrageurs bring monotonic increasing pattern of the magnitude of this mispricing in their daily data.

We propose a new explanation the U shaped patttern of the difference between the futures price and its theoretical price generated by the intraday spot return's moment. We introduce risk-seeking trader in our new explanation. The trader's risk-seeking behavior is based on prospect theory (Kahneman and Tversky (1979)). We argue that the risk-seeking traders cause intraday momentum effect to generate the U-shaped pattern of this mispricing. We add speculator's variables to Kim and Park (2011)'s regression equation and estimate it. The results from the regression analysis lend support to our new explanation as well as theirs, implying that speculators and arbitrageurs are present and active in the spot and futures markets and generate different pattern of the mispricing.

Details

Journal of Derivatives and Quantitative Studies, vol. 21 no. 1
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 15 August 2022

Zhuo (June) Cheng and Jing (Bob) Fang

This study examines the effect of stock liquidity on the magnitude of the accrual anomaly.

1078

Abstract

Purpose

This study examines the effect of stock liquidity on the magnitude of the accrual anomaly.

Design/methodology/approach

This paper examines the relation—both time-series and cross-sectional—between stock liquidity and the magnitude of the accrual anomaly and use the 2001 minimum tick size decimalization as a quasi-experiment to establish causality.

Findings

There is both cross-sectional and time-series evidence that stock liquidity is negatively related to the magnitude of the accrual anomaly. Moreover, the extent to which investors overestimate the persistence of accruals decreases with stock liquidity. Results from a difference-in-differences analysis conducted using the 2001 minimum tick size decimalization as a quasi-experiment suggest that the effect of stock liquidity on the accrual anomaly is causal. The findings of this study are consistent with the enhancing effect of stock liquidity on pricing efficiency.

Originality/value

The study's findings are well aligned with the mispricing-based explanation for the accrual anomaly, suggesting that the improvement in market-wide stock liquidity drives the contemporaneous decline in the magnitude of the accrual anomaly, at least to a great extent.

Details

China Accounting and Finance Review, vol. 25 no. 1
Type: Research Article
ISSN: 1029-807X

Keywords

Content available
Article
Publication date: 23 January 2007

39

Abstract

Details

Strategic Direction, vol. 23 no. 2
Type: Research Article
ISSN: 0258-0543

Open Access
Article
Publication date: 30 November 2003

Bae Gi Hong and Su Jae Jang

This paper examines the information efficiency of KOSDAQ50 and KOSPI200 index futures markets. The study analyzes and compares both markets in three respects : 1) price discovery…

13

Abstract

This paper examines the information efficiency of KOSDAQ50 and KOSPI200 index futures markets. The study analyzes and compares both markets in three respects : 1) price discovery (lead-lag relationship between spot and futures markets.), 2) volatility-volume relationship, and 3) mispricings between spot and futures prices. The first, analysis shows the in the KOSPI200 market, futures price leads spot price. While spot price leads futures price in the KOSDAQ50 market. The second analysis shows that the volatility-volume relation is positive in the KOSPI200 futures market, supporting the hypothesis of mixture of distribution. In contrast, there is little relation between volume and volatility in the KOSDAQ50 futures market. This result casts doubt that the futures market price reflects information. The last analysis shows that the magnitude of mispricing becomes smaller with more volume in the KOSPI200 futures market, while it becomes larger with more volume in the KOSDAQ50 futures market. The overall results imply that the KOSDAQ50 futures market is less informationally efficient that the KOSPI200 market. The inefficiency appears due to the lack of institutional investor participation, especially securities firms, in making up the market.

Details

Journal of Derivatives and Quantitative Studies, vol. 11 no. 2
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 8 April 2020

David Seth Jones

The aim of the paper is to examine the various aspects of the 1MDB scandal including the extent and types of corruption that occurred and the action taken to deal with them. In…

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Abstract

Purpose

The aim of the paper is to examine the various aspects of the 1MDB scandal including the extent and types of corruption that occurred and the action taken to deal with them. In doing this, the paper seeks to identify the reasons for the scandal and the lessons that can be learnt to avoid such a scandal in Malaysia and elsewhere in the future.

Design/methodology/approach

The research for the paper is based on evidence from court hearings, reports of watchdog and regulatory agencies, media reports, and various articles and books written about 1MDB.

Findings

The paper shows that most of the scandal involved embezzlement, bribery, false declarations and bond mispricing relating to extensive borrowing by 1MDB, and entailed a global network of shell companies and individuals through which the illicit money was passed. It also shows weak governance in 1MDB, poor internal controls within banks, the failure of watchdog and enforcement bodies to take the necessary action partly due to political control over them, and overall the lack of political will to deal with the scandal.

Originality/value

The paper builds on the findings of other papers and books written on the 1MDB scandal. It does this by linking the corruption to the borrowings of 1MDB, the international network of money-laundering and bribery through which illicit money flowed, and the poor internal controls in the organisation. It also builds on previous research by highlighting the failure of banks to identify money-laundering and of watchdog and enforcement bodies to deal with the corruption. A further value of the paper is to identify the lessons that can be learnt about combatting corruption on such a scale.

Details

Public Administration and Policy, vol. 23 no. 1
Type: Research Article
ISSN: 1727-2645

Keywords

Open Access
Article
Publication date: 31 August 2015

Byungwook Choi

This study examines put-call-futures parity in KOSPI 200 index futures and options markets for the sampling period between January of 2011 and December of 2013 in order to…

37

Abstract

This study examines put-call-futures parity in KOSPI 200 index futures and options markets for the sampling period between January of 2011 and December of 2013 in order to investigate whether option multiplier increasing affects on the arbitragee efficiency of an index option market and permanent relationship between futures and options markets by analyzing minute by minute historical index option and future intraday trading data.

What we find is that the arbitrage opportunities associated with put-call-futures parity increase to 5.16% from 1.75% after increasing option multiplier. Although there is no significant change of discrepancies in ATM options, a slight decrease of mispricing is found in the moneyness where call option is OTM. It turns out, however, that the arbitrage opportunities increase by 3.4 times in the moneyness below 0.97 or above 1.03, after increasing multiplier. Also ex-ante analysis shows that most of arbitrage opportunities disappear within one minute, but the speed of dissipation becomes to decrease in the moneyness where the liquidity of ITM options declines to be a very low level. Overall our results suggest that the arbitrage efficiency in the KOSPI 200 index option markets might be deteriorated after an increasing of option multiplier.

Details

Journal of Derivatives and Quantitative Studies, vol. 23 no. 3
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 31 May 2006

Jae Ha Lee and Sun Chan Kwon

This study explores the arbitrage profitability of the KOSPI200 futures spread, using intraday data during 10 days prior to the expiration day of each contract for the 9/3/2001 ∅

16

Abstract

This study explores the arbitrage profitability of the KOSPI200 futures spread, using intraday data during 10 days prior to the expiration day of each contract for the 9/3/2001 ∼ 6/912005 period. The theoretical frameworks for arbitrage strategies were developed for the analysis. Our results show that 97.36% of the total 8.633 observations were fairly priced. 1.46% (126 observations) were underpriced, and 1.18% (102 observations) were overpriced, in the ex post arbitrage profitability analysis between the futures spread and the calendar spread. Also, in the arbitrage profitability analysis based on the mispricing of the KOSPI200 futures spread against the theoretical price. 90.39% of the total 10.054 observations were fairly priced and 9.61 % (966 observations) were underpriced. There was no overpriced observation. The ajority of those underpriced observations were concentrated in the 3rd Quarter of 2001 and the 1st quarter of 2003. Overall, there were very few arbitrage opportunities except for the introductory period and some contracts with high uncertainty, implying that the KOSPI200 futures spread market has been generally efficient.

Details

Journal of Derivatives and Quantitative Studies, vol. 14 no. 1
Type: Research Article
ISSN: 2713-6647

Keywords

Open Access
Article
Publication date: 13 March 2018

Teik-Kheong Tan and Merouane Lakehal-Ayat

The impact of volatility crush can be devastating to an option buyer and results in a substantial capital loss, even with a directionally correct strategy. As a result, most…

1986

Abstract

Purpose

The impact of volatility crush can be devastating to an option buyer and results in a substantial capital loss, even with a directionally correct strategy. As a result, most volatility plays are for option sellers, but the profit they can achieve is limited and the sellers carry unlimited risk. This paper aims to demonstrate the dynamics of implied volatility (IV) as being influenced by effects of persistence, leverage, market sentiment and liquidity. From the exploratory factor analysis (EFA), they extract four constructs and the results from the confirmatory factor analysis (CFA) indicated a good model fit for the constructs.

Design/methodology/approach

This section describes the methodology used for conducting the study. This includes the study area, study approach, sources of data, sampling technique and the method of data analysis.

Findings

Although there is extensive literature on methods for estimating IV dynamics during earnings announcement, few researchers have looked at the impact of expected market maker move, IV differential and IV Rank on the IV path after the earnings announcement. One reason for this research gap is because of the recent introduction of weekly options for equities by the Chicago Board of Options Exchange (CBOE) back in late 2010. Even then, the CBOE only released weekly options four individual equities – Bank of America (BAC.N), Apple (AAPL.O), Citigroup (C.N) and US-listed shares of BP (BP.L) (BP.N). The introduction of weekly options provided more trading flexibility and precision timing from shorter durations. This automatically expanded expiration choices, which in turned offered greater access and flexibility from the perspective of trading volatility during earnings announcement. This study has demonstrated the impact of including market sentiment and liquidity into the forecasting model for IV during earnings. This understanding in turn helps traders to formulate strategies that can circumvent the undefined risk associated with trading options strategies such as writing strangles.

Research limitations/implications

The first limitation of the study is that the firms included in the study are relatively large, and the results of the study can therefore not be generalized to medium sized and small firms. The second limitation lies in the current sample size, which in many cases was not enough to be able to draw reliable conclusions on. Scaling the sample size up is only a function of time and effort. This is easily overcome and should not be a limitation in the future. The third limitation concerns the measurement of the variables. Under the assumption of a normal distribution of returns (i.e. stock prices follow a random walk process), which means that the distribution of returns is symmetrical, one can estimate the probabilities of potential gains or losses associated with each amount. This means the standard deviation of securities returns, which is called historical volatility and is usually calculated as a moving average, can be used as a risk indicator. The prices used for the calculations are usually the closing prices, but Parkinson (1980) suggests that the day’s high and low prices would provide a better estimate of real volatility. One can also refine the analysis with high-frequency data. Such data enable the avoidance of the bias stemming from the use of closing (or opening) prices, but they have only been available for a relatively short time. The length of the observation period is another topic that is still under debate. There are no criteria that enable one to conclude that volatility calculated in relation to mean returns over 20 trading days (or one month) and then annualized is any more or less representative than volatility calculated over 130 trading days (or six months) and then annualized, or even than volatility measured directly over 260 trading days (one year). Nonetheless, the guidelines adopted in this study represent the best practices of researchers thus far.

Practical implications

This study has indicated that an earnings announcement can provide a volatility mispricing opportunity to allow an investor to profit from a sudden, sharp drop in IV. More specifically, the methodology developed by Tan and Bing is now well supported both empirically and theoretically in terms of qualifying opportunities that can be profitable because of the volatility crush. Conventionally, the option strategy of shorting strangles carries unlimited theoretical risk; however, the methodology has demonstrated that this risk can be substantially reduced if followed judiciously. This profitable strategy relies on a set of qualifying parameters including liquidity, premium collection, volatility differential, expected market move and market sentiment. Building upon this framework, the understanding of the effects of persistence and leverage resulted in further reducing the risk associated with trading options during earnings announcements. As a guideline, the sentiment and liquidity variables help to qualify a trade and the effects of persistence and leverage help to close the qualified trade.

Social implications

The authors find a positive association between the effects of market sentiment, liquidity, persistence and leverage in the dynamics of IV during earnings announcement. These findings substantiate further the four factors that influence IV dynamics during earnings announcement and conclude that just looking at persistence and leverage alone will not generate profitable trading opportunities.

Originality/value

The impact of volatility crush can be devastating to the option buyer with substantial capital loss, even for a directionally correct strategy. As a result, most volatility plays are for option sellers; however, the profit is limited and the sellers carry unlimited risk. The authors demonstrate the dynamics of IV as being influenced by effects of persistence, leverage, market sentiment and liquidity. From the EFA, they extracted four constructs and the results from the CFA indicated a good model fit for the constructs. Using EFA, CFA and Bayesian analysis, how this model can help investors formulate the right strategy to achieve the best risk/reward mix is demonstrated. Using Bayesian estimation and IV differential to proxy for differences of opinion about term structures in option pricing, the authors find a positive association among the effects of market sentiment, liquidity, persistence and leverage in the dynamics of IV during earnings announcement.

Details

PSU Research Review, vol. 2 no. 1
Type: Research Article
ISSN: 2399-1747

Keywords

1 – 10 of 97