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1 – 10 of over 113000The purpose of this paper is to present new empirical evidence on global trends in equity‐related transaction costs and trading volume, as well as to highlight recent research in…
Abstract
Purpose
The purpose of this paper is to present new empirical evidence on global trends in equity‐related transaction costs and trading volume, as well as to highlight recent research in international market microstructure.
Design/methodology/approach
Estimates of brokerage commissions, indirect trading costs, and trading volume are obtained from a comprehensive institutional investor database. Quarterly data are used to compute trends in transaction costs and trading volume, as well as shifts in trading between mature and emerging markets.
Findings
The results indicate a steady decline in brokerage commissions around the world but indirect trading costs appear to have reached a plateau. The fastest growth in trading volume can be found in the emerging markets of South America but the USA leads the way in terms of the steepest reductions in transaction costs.
Research limitations/implications
The paper relies on one source of transaction cost estimates over a relatively short period (March 2005‐December 2007).
Originality/value
The paper provides comprehensive and current empirical evidence on important trends in international market microstructure.
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As of March 2021, the National Pension Service (NPS) is the world’s 3rd largest pension fund with 872.5tn won (KRW) in management. Recently, the NPS proposed a policy to gradually…
Abstract
As of March 2021, the National Pension Service (NPS) is the world’s 3rd largest pension fund with 872.5tn won (KRW) in management. Recently, the NPS proposed a policy to gradually reduce the proportion of domestic stocks in the portfolio in the future. This change in the asset allocation strategy is related to the NPS’s exit strategy for domestic stocks. This study aims to examine the market impact cost asymmetry between buys and sells of the NPS and suggest a trading strategy for mitigating the market impact cost. The results are as follows. First, there is an asymmetry between buys and sells in the market impact cost of the NPS. The market impact cost of the NPS is gradually increasing over time. In particular, the market impact cost from selling has increased significantly in recent years. Second, past returns, volatility, liquidity and trading intensity can be found as external factors affecting the asymmetric market impact cost of the NPS. Although there is no difference between the buying and selling ratios of the NPS, the market impact cost from sells is relatively higher than that from buys. Third, after controlling for the order execution size of the NPS, the longer the trade execution period, the lower the market impact cost. This result implies that the strategy of splitting orders as a way to reduce the market impact cost is effective. The trading behavior of the NPS directly or indirectly affects other investors. If the sell of the NPS incurs excessive market impact cost, the negative impact on the stock price will be further exacerbated. Therefore, it is necessary for the NPS to reduce the market impact cost through split trading in executing orders in the domestic stock market. Findings of this study provide implications for countermeasures and long-term management strategies that can minimize the market impact cost of the NPS in the process of reducing the proportion of domestic stocks in the future.
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SHANTARAM P. HEGDE and SANJAY B. VARSHNEY
We argue that uninformed subscribers to an initial public offering (IPO) of common stocks are exposed to greater ex ante risk of trading against informed traders in the secondary…
Abstract
We argue that uninformed subscribers to an initial public offering (IPO) of common stocks are exposed to greater ex ante risk of trading against informed traders in the secondary market because the advent of public trading conveys hitherto private information and thereby mitigates adverse selection. The going‐public firm underprices the new issue to compensate uninformed subscribers for this added secondary market adverse selection risk. We test this market liquidity‐based explanation by investigating the ex‐post consequences of ownership structure choice on the initial pricing and the secondary market liquidity of a sample of initial public offerings on the New York Stock Exchange (NYSE). Consistent with our argument, we find that initial underpricing varies directly with the ex post trading costs in the secondary market. Further, initial underpricing is related positively to the concentration of institutional shareholdings and negatively to the proportional equity ownership retained by the founding shareholders. Finally, the secondary market illiquidity of new issues is positively related to institutional ownership concentration and negatively to ownership retention and underwriter reputation. Thus, the evidence based on our NYSE sample supports the view that the entrepreneurs' choice of ownership structure affects both the initial pricing and the subsequent market liquidity of new issues.
The purpose of this paper is to examine trading costs of both acquiring firms and target firms differentiated by method of payment, mode of acquisition, and deal attitude around…
Abstract
Purpose
The purpose of this paper is to examine trading costs of both acquiring firms and target firms differentiated by method of payment, mode of acquisition, and deal attitude around merger and acquisition (M&A) announcements. The author calculates four spread measures of trading costs: quoted spread, percentage quoted spread, effective spread, and percentage effective spread.
Design/methodology/approach
Differences in spreads differentiated by M&A characteristics are calculated and two‐sample t‐tests applied. A linear regression model is developed to test whether changes in trading costs are related to acquiring firm's post‐merger price performance. The regression is estimated by OLS method.
Findings
It is found that various methods of payment affect the spreads of target firm differently on certain days around M&A announcement. For acquiring firms, significant differences are found in spreads between cash offers and stock offers, and between stock offers and mix offers. Significant difference was not found in spreads between cash offers and mix offers. The mode of acquisition affects the bid‐ask spreads of target firms only, but not those of acquiring firms. Deal attitudes affect the spreads of target firms on and after M&A announcements. It was also found that all four spread measures are significantly linked to acquiring firms’ post‐merger daily returns.
Research limitations/implications
Further study can be done on mechanisms through which M&A characteristics impact trading costs.
Practical implications
This study suggests that M&A characteristics affect firms’ spreads and that changes in spreads need to be accounted for in explaining acquiring firms’ post‐merger daily returns.
Originality/value
The paper fills in an important gap in existing literature by examining trading costs of acquiring firms around M&A announcements. It provides additional evidence on the anomaly of acquiring firm's negative post‐merger returns. The paper is intended to help improve the understanding of trading costs and the behavior of the market participants in response to a major corporate event.
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The purpose of this study is to examine the impact of position adjusted turnover ratio on mutual fund performance.
Abstract
Purpose
The purpose of this study is to examine the impact of position adjusted turnover ratio on mutual fund performance.
Design/methodology/approach
The author calculates position adjusted turnover ratio in the same three steps as Edelen et al. (2013). Position adjusted turnover ratio is intended to be a trading cost proxy that captures both fund trading volume and per-trade costs. A metric of eight Morningstar performance measures is utilized.
Findings
Results show that funds with a higher position adjusted turnover ratio tend to have a lower risk-adjusted performance, such as indicated by both Sharpe and Sortino ratios, and even though these funds may have a higher annualized return.
Research limitations/implications
The sample selection process is subject to a survival bias. Also, this study utilizes Morningstar performance measures rather than the widely used factors models.
Practical implications
This study examines the impact of invisible costs from fund trading. These findings encourage fund managers to take strategic steps to reduce the overall invisible cost impact to improve fund performance.
Originality/value
Few studies have investigated fund trading cost measured by position adjusted turnover ratio and its impact on fund performance. Further, this study contributes to current literature by using eight Morningstar fund performance variables, which are practitioner-oriented and are accessible by investors.
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Massoud Metghalchi, Jianjun Du and Yixi Ning
This paper tests two moving average technical trading rules for four Asian markets. Our results indicate that moving average rules do indeed have predictive power and can discern…
Abstract
This paper tests two moving average technical trading rules for four Asian markets. Our results indicate that moving average rules do indeed have predictive power and can discern recurring price patterns for profitable trading. Moreover, our results support the hypothesis that technical trading rules can outperform the buy‐and‐hold strategy. Break‐even one‐way trading costs are estimated to be high for all four markets. To confirm the test outcome, robust tests based on bootstrap and the related t‐tests among the markets are also carried out. We conclude from the statistical results that moving average rules are valid and indeed have predictive power. It is implied that the trading rules may be used to design a trading strategy that will beat the buy‐and‐hold strategy in the Hong Kong, Singapore, South Korea, and Taiwan markets. The contribution of the current study is that this is the first validation test of trading rules using four markets at a similar development stage and culture tradition; and in the tests, we use most current and longer periods than the periods used in previous literature. Our robust tests are unique and considered distribution‐free.
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Richard F. Kosobud, Houston H. Stokes and Carol D. Tallarico
A new financial asset (Allotment Trading Unit or ATU) that allows a firm to pollute was issued to a number of Chicago firms in 2000 as part of a cap‐and‐trade model to reduce…
Abstract
A new financial asset (Allotment Trading Unit or ATU) that allows a firm to pollute was issued to a number of Chicago firms in 2000 as part of a cap‐and‐trade model to reduce emissions in the Chicago area. A model of this market was developed to enable us to: 1.) Estimate equilibrium tradable credit prices and quantities and calculate compliance costs for comparison with traditional environmental regulation; 2.) Estimate the consequences for prices and quantities of introducing changing emitter costs; and 3.) Estimate the impacts on prices and quantities of changing market features such as auctioning tradable credits instead of a free allocation, introducing spatial constraints, and changing the emissions cap. The model's results on the price determination of this new financial asset are of interest to accountants and financial analysts. A dated bankable ATU credit has a one‐year life expectancy, but future tradable credits can be bought or sold for use at the appropriate future date. It is an intangible asset that should be disclosed, measured and valued. The valuation to place on this asset is an important research topic in finance and accounting and various valuation approaches are discussed to handle the short‐term and long‐term price paths.
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Luc Chavalle and Luis Chavez-Bedoya
This paper aims to analyze the impact of transaction costs in portfolio optimization in Peru. The study aims to compare the transaction costs structure applied in Peru with…
Abstract
Purpose
This paper aims to analyze the impact of transaction costs in portfolio optimization in Peru. The study aims to compare the transaction costs structure applied in Peru with respect to the ones applied in the USA, and over a few dimensions.
Design/methodology/approach
The paper opted for an empirical study analyzing the cost of rebalancing portfolios over a set period and dimensions. Stocks have been carefully selected using Bloomberg terminals, and portfolio designed then rebalanced using VBA programming. Over a few dimensions as type and number of stocks, holding period and trading strategy, the behavior of these different transaction costs has been compared. The analysis has been done for four different portfolios.
Findings
The paper provides empirical insights about how a retail investor actively trading in Peru can pay up to 14 times more in transaction costs than trading the same portfolio in the USA. These comparatively high transaction costs prevent retail investors to trade in the Peruvian stock market while fueling illiquidity to this market.
Research limitations/implications
The paper deals with a limited amount of Peruvian stocks. Researchers are encouraged to test the proposition further, including other dimensions.
Practical implications
The paper includes implications for any retail investor that wants to invest in Peruvian stocks, giving an insight about how expensive it is to actively rebalance a portfolio in Peru.
Originality/value
This paper fulfils an identified need to study how much it costs to actively invest on the stock market in Peru.
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Yvonne Kreis and Johannes W. Licht
Prior literature has shown deviations between ETF prices and their net-asset-value (NAV) to exist. Fulkerson and Jordan (2013, p. 31) question “if there exists a true tradeable…
Abstract
Purpose
Prior literature has shown deviations between ETF prices and their net-asset-value (NAV) to exist. Fulkerson and Jordan (2013, p. 31) question “if there exists a true tradeable strategy” to exploit these inefficiencies. The purpose of this paper is to implement a profitable daily long-short trading strategy based on price/NAV information and explicitly accounting for trading costs.
Design/methodology/approach
For a sample of European sector ETFs, the authors analyze gross and net returns of a long-short trading strategy in the capital asset pricing model and Fama-French three-factor model.
Findings
The authors document positive gross excess return for the long-short trading strategy in all sample periods, but net excess returns to be positive only between 2008 and 2010.
Research limitations/implications
The results document a profitable long-short trading strategy exploiting deviations between ETF prices and NAV and highlight the impact of trading costs in ETF markets. Due to the limited availability of historic trading cost data, the research uses a comparatively small sample size.
Practical implications
The net profitability of long-short trading in ETFs is only found in times of high uncertainty in the stock market.
Originality/value
The inclusion of trading costs enables a detailed comparison between gross and net returns in ETF trading, addressing potential limits to arbitrage.
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Qin Lei, Murli Rajan and Xuewu Wang
The purpose of this paper is to investigate how insiders’ trades are executed and whether and how outside investors can mimic outperforming insiders and reap substantial portfolio…
Abstract
Purpose
The purpose of this paper is to investigate how insiders’ trades are executed and whether and how outside investors can mimic outperforming insiders and reap substantial portfolio returns that withstand the erosion from adjustments for both the standard factors and stock characteristics in the asset pricing literature.
Design/methodology/approach
The authors design a metric for measuring insiders’ trade execution quality: the trading alpha. The authors run regression analysis to control for trade difficulty, insider reputations and the corporate role ranks of insiders and document the existence of the abnormal trading alpha. The authors further form portfolios based on the abnormal trading alpha and document a significant abnormal return that is robust to both standard asset pricing factors model and the stock characteristics adjustments.
Findings
Outperforming insiders at the aggregate level resemble value investors who trade on long-term fundamental information, trade patiently and earn rents from providing liquidity. Outside investors can mimic the outperforming insiders and reap significant abnormal portfolio returns.
Research limitations/implications
Data limitations on insider trades and their association/interaction with their brokers prevent us from having a conclusive investigation of the trading skill hypothesis. The authors hope to further research along the lines of the trading skill hypothesis as compared to investment style hypothesis with more detailed data about the brokers used by insiders.
Practical implications
The findings can be applied for money management profession in that outsider investors can monitor the trading execution and construct portfolios based on the adjusted abnormal trading alpha. The resulting portfolio has been documented to be highly profitable after risk adjustments using standard asset pricing factors as well as stock characteristics.
Social implications
Professional money managers and outsider investors should be able to benefit from the findings in this paper and use the proposed trading alpha metric to construct and rebalance real-time investment portfolios.
Originality/value
Outperforming insiders at the aggregate level resemble value investors who act on long-term fundamental information, trade patiently and earn rents from providing liquidity. From the perspective of investment implications, outside investors can mimic the outperforming insiders and reap substantial portfolio returns that withstand the erosion from adjustments for both the standard factors and stock characteristics in the asset pricing literature.
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