Abstracts of Volume 44, Number 3, August 2009
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An Analysis of
Individual NYSE Specialist Portfolios and Execution
Quality
Jerry W. Liu
Higher Order
Systematic Co-moments and Asset Pricing: New Evidence
Duong Nguyen and Tribhuvan N. Puri
The Forex Forward
Puzzle: The Career Risk Hypothesis
Fang Liu and Piet Sercu
Ehud I. Ronn, Akin Sayrak and
Stathis Tompaidis
The Halloween Effect
in US Sectors
Ben Jacobsen and Nuttawat
Visaltanachoti
An Analysis of
Individual NYSE Specialist Portfolios and Execution
Quality
Jerry W. Liu
The value of specialist assistance to the trading of
low-volume stocks has important implications in exchange
design. We study the relation between the structure of
individual specialist portfolios and the transitory
volatility of low-volume stocks in these portfolios
under the traditional NYSE auction-dealer market
structure. We find that the trading quality for inactive
stocks is positively related to the trading volume of
active stocks in the same specialist portfolios. These
results are consistent with specialist subsidization of
low-volume stocks in their portfolios and suggest that
specialists provide important support to the trading of
inactive stocks if they have the resources.
Keywords: Subsidization,
individual specialist, portfolio, NYSE
Higher Order
Systematic Co-moments and Asset Pricing: New Evidence
Duong Nguyen and Tribhuvan N. Puri
We provide evidence supporting Rubinstein’s (1973) model that
if returns are not normal, measuring risk requires more
than just measuring covariance. Higher order systematic
co-moments should be important to risk-averse investors
who are concerned about the extreme outcomes of their
investments. Our paper shows that the Fama-French
factors (SMB, HML) as well as the momentum and market
liquidity factors can be explained by the higher order
systematic co-moments, and it lends support to the
traditional covariance risk-based theory without having
to resort to behavior assumptions.
Keywords: Higher order co-moments,
Fama-French, momentum, market liquidity factors
The Forex Forward
Puzzle: The Career Risk Hypothesis
Fang Liu and Piet Sercu
We conjecture that the forward puzzle may reflect career
risks: when professional investors observe public danger
signals about a currency, they require a premium for
holding it. We find evidence of this in ERM rates. As
deep discounts do signal danger, we next specify
nonlinear variants of the Fama regression to capture
this risk. We also decompose the forward premium into a
long-memory trend and short-term component. We find
empirical evidence for a career risk premium; risk is in
fact dominant in the trend component while the
short-term component loads more on expectations. All
confidence intervals are calculated via Monte Carlo.
Keywords: Forward puzzle,
uncovered interest parity, risk premium
Ehud I. Ronn, Akin Sayrak and
Stathis Tompaidis
We consider the impact of “large” changes in asset prices on
intra-market correlations in domestic and international
markets. Assuming normally distributed asset returns, we
show that the absolute magnitude of the correlation,
conditional on a change greater than or equal to a given
absolute size of one of the variables, is monotonically
increasing in the magnitude of that absolute change.
Empirical tests using domestic and international-market
data support this theoretical result. These results have
significant implications for portfolio management,
hedging interest rate risk, tests of asset pricing
models, Roll’s concern with asset pricing models’
explanatory power, and implementation of Value-at-Risk.
Keywords: Conditional correlation,
Roll’s R2, Value-at-Risk
The Halloween Effect
in US Sectors
Ben Jacobsen and Nuttawat
Visaltanachoti
All US stock market sectors and industries perform better
during winter than during summer in our sample from
1926-2005. In more than two-third of all sectors and
industries this difference in summer and winter returns,
known as the Halloween effect, is statistically
significant and in half of all sectors and industries
risk premiums are negative during summer. However, while
all sectors and industries show this effect, there are
large differences across sectors and industries. The
effect is almost absent in sectors related to consumer
consumption but strong in production sectors. We
illustrate how these differences between sectors might
be used to improve the risk return trade off using
sector rotation based on Fidelity sector funds and show
how an investor might have benefited from such a trading
strategy.
Keywords: Sectors, industries,
stock markets, Halloween effect, sell in May, sector
rotation
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