Research

8 pages, 1026 KiB

Open AccessArticle

A Procedure to Set Prices and Select Inventory in Thinly Traded Markets Using Data from eBay

by Xinbo Hu and Paul J. Zak

J. Risk Financial Manag. 2022, 15(7), 297; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm15070297 - 05 Jul 2022

Viewed by 1401

Prices respond to equate supply and demand. However, price-setting in low-volume or “thin” markets is a challenge as is determining which items to carry. We present an algorithm that takes into account a store’s fixed costs, the cost of goods sold, prices, and [...] Read more.

Prices respond to equate supply and demand. However, price-setting in low-volume or “thin” markets is a challenge as is determining which items to carry. We present an algorithm that takes into account a store’s fixed costs, the cost of goods sold, prices, and listing duration to determine the portfolio of items to maximize profits. Prices can then be assigned as a mark-up over cost. The usefulness of this approach is demonstrated by applying it to a store on eBay in which the seller needs to meet a profit threshold. The findings identify how sellers of unusual items can effectively determine which items to list and how to set price to reach profit goals. Full article

(This article belongs to the Special Issue Frontiers of Asset Pricing)

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20 pages, 1135 KiB

Open AccessArticle

Mean Reversions in Major Developed Stock Markets: Recent Evidence from Unit Root, Spectral and Abnormal Return Studies

by James Nguyen, Wei-Xuan Li and Clara Chia-Sheng Chen

J. Risk Financial Manag. 2022, 15(4), 162; https://doi.org/10.3390/jrfm15040162 - 01 Apr 2022

Cited by 2 | Viewed by 1941

Abstract

We revisited the issue of return predictability in three major developed markets (USA, UK and Japan) using a unique dataset from the Wharton Research Data Services database and a comprehensive set of traditional and recent statistical methods. We specifically employed a variety of [...] Read more.

We revisited the issue of return predictability in three major developed markets (USA, UK and Japan) using a unique dataset from the Wharton Research Data Services database and a comprehensive set of traditional and recent statistical methods. We specifically employed a variety of traditional linear and nonlinear tests, latest multiple-break unit root tests and spectral analysis to test the efficient market hypothesis. Our results show that these stock markets generally are inefficient. We further explored whether the departure from market efficiency can be used to generate profitable trades and found that abnormal returns exist in all three markets. We found evidence of abnormal returns associated with the break dates identified in the models which are correlated with major historical events around the world. Our findings have important implications for investors and policymakers. Full article

(This article belongs to the Special Issue Frontiers of Asset Pricing)

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26 pages, 394 KiB

Open AccessArticle

Multifactor Market Indexes

by Wei Liu and James W. Kolari

J. Risk Financial Manag. 2022, 15(4), 155; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm15040155 - 30 Mar 2022

Viewed by 1606

Abstract

This paper combines the CRSP market index with multiple factors to create a single multifactor market index. Empirical tests of different multifactor market indexes indicate that: (1) Sharpe ratios substantially increase and GRS test statistics decrease as multifactors are incrementally added to the [...] Read more.

This paper combines the CRSP market index with multiple factors to create a single multifactor market index. Empirical tests of different multifactor market indexes indicate that: (1) Sharpe ratios substantially increase and GRS test statistics decrease as multifactors are incrementally added to the CRSP index; and (2) the resultant multifactor market indexes are significantly priced in cross-sectional tests of associated beta loadings with t-values exceeding 3.0 in most cases. Full article

(This article belongs to the Special Issue Frontiers of Asset Pricing)

14 pages, 332 KiB

Open AccessArticle

Non-Parametric Statistic for Testing Cumulative Abnormal Stock Returns

by Seppo Pynnonen

J. Risk Financial Manag. 2022, 15(4), 149; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm15040149 - 23 Mar 2022

Cited by 1 | Viewed by 2299

Abstract

Due to the non-normality of stock returns, nonparametric rank tests are gaining accceptance relative to parametric tests in financial economics event studies. In rank tests, financial assets’ multiple day cumulative abnormal returns (CARs) are replaced by cumulated ranks. This paper proposes modifications to [...] Read more.

Due to the non-normality of stock returns, nonparametric rank tests are gaining accceptance relative to parametric tests in financial economics event studies. In rank tests, financial assets’ multiple day cumulative abnormal returns (CARs) are replaced by cumulated ranks. This paper proposes modifications to the existing approaches to improve robustness to cross-sectional correlation of returns arising from calendar time overlapping event windows. Simulations show that the proposed rank test is well specified in testing CARs and is robust towards both complete and partial overlapping event windows. Full article

(This article belongs to the Special Issue Frontiers of Asset Pricing)

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23 pages, 1531 KiB

Open AccessArticle

A Singular Stochastic Control Approach for Optimal Pairs Trading with Proportional Transaction Costs

by Haipeng Xing

J. Risk Financial Manag. 2022, 15(4), 147; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm15040147 - 23 Mar 2022

Viewed by 2026

Abstract

Optimal trading strategies for pairs trading have been studied by models that try to find either optimal shares of stocks by assuming no transaction costs or optimal timing of trading fixed numbers of shares of stocks with transaction costs. To find optimal strategies [...] Read more.

Optimal trading strategies for pairs trading have been studied by models that try to find either optimal shares of stocks by assuming no transaction costs or optimal timing of trading fixed numbers of shares of stocks with transaction costs. To find optimal strategies that determine optimally both trade times and number of shares in a pairs trading process, we use a singular stochastic control approach to study an optimal pairs trading problem with proportional transaction costs. Assuming a cointegrated relationship for a pair of stock log-prices, we consider a portfolio optimization problem that involves dynamic trading strategies with proportional transaction costs. We show that the value function of the control problem is the unique viscosity solution of a nonlinear quasi-variational inequality, which is equivalent to a free boundary problem for the singular stochastic control value function. We then develop a discrete time dynamic programming algorithm to compute the transaction regions, and show the convergence of the discretization scheme. We illustrate our approach with numerical examples and discuss the impact of different parameters on transaction regions. We study the out-of-sample performance in an empirical study that consists of six pairs of U.S. stocks selected from different industry sectors, and demonstrate the efficiency of the optimal strategy. Full article

(This article belongs to the Special Issue Frontiers of Asset Pricing)

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23 pages, 794 KiB

Open AccessArticle

Further Tests of the ZCAPM Asset Pricing Model

by James W. Kolari, Jianhua Z. Huang, Wei Liu and Huiling Liao

J. Risk Financial Manag. 2022, 15(3), 137; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm15030137 - 15 Mar 2022

Cited by 1 | Viewed by 2351

Abstract

In a recent book, Kolari et al. developed a new theoretical capital asset pricing model dubbed the ZCAPM. Based on out-of-sample cross-sectional tests using U.S. stocks, the ZCAPM consistently outperformed well-known multifactor models popular in the finance literature. This paper presents further [...] Read more.

In a recent book, Kolari et al. developed a new theoretical capital asset pricing model dubbed the ZCAPM. Based on out-of-sample cross-sectional tests using U.S. stocks, the ZCAPM consistently outperformed well-known multifactor models popular in the finance literature. This paper presents further evidence that expands their sample period from 1927 to 2020. Results are provided for the subperiods 1927 to 1964 and 1965 to 2020. Our results corroborate those of KLH. In cross-sectional tests, the ZCAPM outperforms the CAPM as well as the Fama and French three-factor model and Carhart four-factor model. Outperformance is found in terms of both higher goodness of fit and the statistical significance of factor loadings. Interestingly, the earlier subperiod results highlight problems with the endogeneity of test assets in cross-sectional tests of multifactor models. Full article

(This article belongs to the Special Issue Frontiers of Asset Pricing)

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7 pages, 292 KiB

Open AccessCommunication

Outliers and Time-Varying Jumps in the Cryptocurrency Markets

by Anupam Dutta and Elie Bouri

J. Risk Financial Manag. 2022, 15(3), 128; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm15030128 - 08 Mar 2022

Cited by 15 | Viewed by 2491

Abstract

We examine the presence of outliers and time-varying jumps in the returns of four major cryptocurrencies (Bitcoin, Ethereum, Ripple, Dogecoin, Litecoin), and a broad cryptocurrency index (CCI30). The results indicate that only Bitcoin returns are contaminated with outliers. Time-varying jumps are present in [...] Read more.

We examine the presence of outliers and time-varying jumps in the returns of four major cryptocurrencies (Bitcoin, Ethereum, Ripple, Dogecoin, Litecoin), and a broad cryptocurrency index (CCI30). The results indicate that only Bitcoin returns are contaminated with outliers. Time-varying jumps are present in Bitcoin, Litecoin, Ripple, and the cryptocurrency index. Notably, the presence of jumps in Bitcoin is significant after correcting for outliers. The main findings point to a price instability in some major cryptocurrencies and thereby the importance of accounting for large shocks and time-varying jumps in modelling volatility in the debatable cryptocurrency markets. Full article

(This article belongs to the Special Issue Frontiers of Asset Pricing)

24 pages, 1931 KiB

Open AccessArticle

On Survivor Stocks in the S&P 500 Stock Index

by Klaus Grobys

J. Risk Financial Manag. 2022, 15(2), 95; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm15020095 - 21 Feb 2022

Cited by 2 | Viewed by 4080

Abstract

This paper investigates the performance and characteristics of survivor stocks in the S&P 500 index. Using both in-sample and out-of-sample comparisons, survivor stocks outperformed this market index by a considerable margin. Relative to other S&P 500 index companies, survivor stocks tend to be [...] Read more.

This paper investigates the performance and characteristics of survivor stocks in the S&P 500 index. Using both in-sample and out-of-sample comparisons, survivor stocks outperformed this market index by a considerable margin. Relative to other S&P 500 index companies, survivor stocks tend to be small-value stocks that exhibit high profitability and invest conservatively. Surprisingly, survivor stocks tend to be loser stocks with negative exposure to the momentum factor. Further analyses show that the volatility of the survivor stocks portfolio is less exposed to tail risks and responds less to shocks in the innovation process. Full article

(This article belongs to the Special Issue Frontiers of Asset Pricing)

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9 pages, 240 KiB

Open AccessArticle

Net Buying Pressure and Informed Trading in the Options Market: Evidence from Earnings Announcements

by Ihsan Badshah and Hardjo Koerniadi

J. Risk Financial Manag. 2022, 15(2), 53; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm15020053 - 24 Jan 2022

Viewed by 1917

Abstract

By employing the modified net buying pressure as a measure of informed option trading, this study tested whether option trading around quarterly earnings announcements is either directionally motivated and/or volatility motivated. We found evidence that is consistent with the idea that option investors [...] Read more.

By employing the modified net buying pressure as a measure of informed option trading, this study tested whether option trading around quarterly earnings announcements is either directionally motivated and/or volatility motivated. We found evidence that is consistent with the idea that option investors have private information prior to positive earnings announcements and use at-the-money options to exploit their informational advantage. In the post-event period, however, informed option investors trade by using deep-out-of-the-money and out-of-the-money options. We documented limited evidence on the volatility-motivated option trading, and our results suggest that this type of option trading could be motivated by hedging purposes only. Full article

(This article belongs to the Special Issue Frontiers of Asset Pricing)

17 pages, 298 KiB

Open AccessArticle

Dynamic Conditional Bias-Adjusted Carry Cost Rate Futures Hedge Ratios

by Dean Leistikow, Yi Tang and Wei Zhang

J. Risk Financial Manag. 2022, 15(1), 12; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm15010012 - 03 Jan 2022

Viewed by 1309

Abstract

This paper proposes new dynamic conditional futures hedge ratios and compares their hedging performances along with those of common benchmark hedge ratios across three broad asset classes. Three of the hedge ratios are based on the upward-biased carry cost rate hedge ratio, where [...] Read more.

This paper proposes new dynamic conditional futures hedge ratios and compares their hedging performances along with those of common benchmark hedge ratios across three broad asset classes. Three of the hedge ratios are based on the upward-biased carry cost rate hedge ratio, where each is augmented in a different bias-mitigating way. The carry cost rate hedge ratio augmented with the dynamic conditional correlation between spot and futures price changes generally: (1) provides the highest hedging effectiveness and (2) has a statistically significantly higher hedging effectiveness than the other hedge ratios across assets, sub-periods, and rolling window sizes. Full article

(This article belongs to the Special Issue Frontiers of Asset Pricing)

39 pages, 1048 KiB

Open AccessArticle

Forecasting Commodity Prices Using the Term Structure

by Yasmeen Idilbi-Bayaa and Mahmoud Qadan

J. Risk Financial Manag. 2021, 14(12), 585; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14120585 - 04 Dec 2021

Cited by 9 | Viewed by 3157

Abstract

The aim of this study is to test the ability of the yield curve on US government bonds to forecast the future evolution in the prices of commodities often used in as raw materials. We consider the monthly prices of nine commodities for [...] Read more.

The aim of this study is to test the ability of the yield curve on US government bonds to forecast the future evolution in the prices of commodities often used in as raw materials. We consider the monthly prices of nine commodities for more than 30 years. Our findings, confirmed by several parametric and non-parametric tests, are robust and indicate that the ability to forecast future performance changes over time. Specifically, between 1986 and the early 2000s the yield curve was quite successful in forecasting monthly changes in commodity prices, but that success diminished in the period following. One possible explanation for this outcome is the increased flow of capital into the commodity market resulting in stronger correlations with the equity markets and a breakdown of the obvious relationship between commodities and business cycle. Our findings are important for asset pricing, commodity traders and policy makers. Full article

(This article belongs to the Special Issue Frontiers of Asset Pricing)

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