This study assesses trade execution costs and market quality for NYSE and Nasdaq stocks before and after the 2001 change to decimal pricing. Several theoretical predictions are confirmed. Quoted ...bid-ask spreads declined substantially on each market, with the largest declines for heavily traded stocks. The percentage of shares receiving price improvement increased on the NYSE, but not on Nasdaq. However, those trades completed at prices within or outside the quotes were improved or disimproved by smaller amounts after decimalization, and trades completed outside the quotes saw the largest reductions in trade execution costs, as a class. Effective bid-ask spreads as a percentage of share price, arguably the most relevant measure of execution costs for smaller trades, averaged 0.33% on a volume-weighted basis after decimalization for both NYSE and Nasdaq stocks. There is no evidence of systematic intraday reversals of quote changes on either market, as would be expected if decimalization had damaged liquidity supply.
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Spot power prices are volatile and since electricity cannot be economically stored, familiar arbitrage-based methods are not applicable for pricing power derivative contracts. This paper presents an ...equilibrium model implying that the forward power price is a downward biased predictor of the future spot price if expected power demand is low and demand risk is moderate. However, the equilibrium forward premium increases when either expected demand or demand variance is high, because of positive skewness in the spot power price distribution. Preliminary empirical evidence indicates that the premium in forward power prices is greatest during the summer months.
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3.
The "Roll Yield" Myth Bessembinder, Hendrik
Financial analysts journal,
01/2018, Volume:
74, Issue:
2
Journal Article
Peer reviewed
Futures investors are frequently said to periodically pay or receive the difference in
futures prices across contracts with different delivery dates. But this "roll
yield" is mythical: No such cash ...flow occurs-at the time of roll trades or on
any other date. However, although the term is a misnomer, the roll yield does contain
useful information. It explains when futures gains exceed or fall short of spot-price
changes, and for storable assets, it provides information regarding benefits to the
marginal holder of a spot position. This article clarifies the actual role of the roll
yield.
Disclosure: The author reports no conflicts of interest.
Editor's Note
This article was externally reviewed using our double-blind peer-review process. When
the article was accepted for publication, the author thanked the reviewers in the
acknowledgments. Hilary Till was one of the reviewers for this article.
Submitted 21 September 2017
Accepted 6 February 2018 by Stephen J. Brown
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We study trading costs and dealer behavior in U.S. corporate bond markets from 2006 to 2016. Despite a temporary spike during the financial crisis, average trade execution costs have not increased ...notably over time. However, dealer capital commitment, turnover, block trade frequency, and average trade size decreased during the financial crisis and thereafter. These declines are attributable to bank-affiliated dealers, as nonbank dealers have increased their market commitment. Our evidence indicates that liquidity provision in the corporate bond markets is evolving away from the commitment of bank-affiliated dealer capital to absorb customer imbalances, and that postcrisis banking regulations likely contribute.
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The well-documented abnormal long-run buy-and-hold returns to firms issuing equity in initial public offerings and seasoned equity offerings, firms bidding in mergers, and firms initiating dividends ...can be attributed to imperfect control-firm matching. In addition to firm size and market-to-book ratio, event firms on average differ from control firms in terms of idiosyncratic volatility, liquidity, return momentum, and capital investment, each of which also explains returns. We propose a simple regression-based approach to control for differences in firm characteristics across event and control firms, and we show that long-run abnormal returns do not differ significantly from zero for event firms in the 1980 to 2005 period. The returns to event firms are, therefore, consistent with patterns known to exist for the broad stock market and do not require event-specific explanations.
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6.
Noisy Prices and Inference Regarding Returns ASPAROUHOVA, ELENA; BESSEMBINDER, HENDRIK; KALCHEVA, IVALINA
The Journal of finance (New York),
April 2013, Volume:
68, Issue:
2
Journal Article
Peer reviewed
Temporary deviations of trade prices from fundamental values impart bias to estimates of mean returns to individual securities, to differences in mean returns across portfolios, and to parameters ...estimated in return regressions. We consider a number of corrections, and show them to be effective under reasonable assumptions. In an application to the Center for Research in Security Prices monthly returns, the corrections indicate significant biases in uncorrected return premium estimates associated with an array of firm characteristics. The bias can be large in economic terms, for example, equal to 50% or more of the corrected estimate for firm size and share price.
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This report quantifies long-run stock market outcomes in terms of the increases or decreases (relative to a T-bill benchmark) in shareholder wealth, when considering the full history of both net cash ...distributions and capital appreciation. The study includes all of the 26,168 firms with publicly traded US common stock since 1926. Although investments in the majority (57.8%) of stocks led to reduced rather than increased shareholder wealth, US stock market investments increased shareholder wealth on net by $47.4 trillion between 1926 and 2019. Technology firms accounted for the largest share—$9.0 trillion—of the total, but telecommunications, energy, and healthcare/pharmaceutical stocks created wealth disproportionate to the numbers of firms in the industries. The degree to which stock market wealth creation is concentrated in a few top-performing firms has increased over time and was particularly strong during the most recent 3 years, when five firms accounted for 22% of net wealth creation. These results should be of interest to any long-term investor assessing the relative merits of broad diversification versus narrow portfolio selection. TOPICS: Security analysis and valuation, performance measurement, wealth management, portfolio construction Key Findings ▪ Shareholders who took on the risk of investing in the public US stock markets between 1926 and 2019 were rewarded by an aggregate wealth increase of more than $47 trillion, as compared with a T-bill benchmark. ▪ The majority of individual stock investments led to decreased rather than increased wealth in the long run. Aggregate shareholder wealth creation is concentrated in a relatively few high-performing stocks. ▪ The degree to which stock market wealth creation is concentrated in a few firms has increased over time, and it was particularly strong during the most recent 3 years.
We study lending agreements and derivative positions of U.S. oil and gas producers, showing that loan covenants are important determinants of hedging policies. Hedging covenants appear in more than ...85% of sample loan agreements, with explicit minimum hedging requirements in more than half. Covenants are more common when expected default costs are larger. The well-documented positive relation between borrowing and hedging is largely attributable in our sample to binding covenants, as the relation is much weaker in their absence. These results suggest that understanding firms’ hedging choices requires the consideration of lender interests along with those of owners and managers.
This paper was accepted by Lukas Schmid, finance.
Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01616 .
Corporate managers frequently announce corporate distributions, including stock splits, stock dividends, special dividends, and increases in regular dividends, on the anniversary of a like ...announcement at the same firm. The market appears to not fully appreciate the implications of current distributions for future distributions and stock returns, as a simple strategy that involves purchasing firms with high predicted probabilities of distribution announcements earns significant abnormal monthly returns. These results are distinct from previously documented return regularities related to regular earnings and dividend announcements and return seasonality.
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10.
Mutual fund performance at long horizons Bessembinder, Hendrik; Cooper, Michael J.; Zhang, Feng
Journal of financial economics,
January 2023, 2023-01-00, Volume:
147, Issue:
1
Journal Article
Peer reviewed
The percentage of U.S. equity mutual funds that outperform the SPY ETF over the last 30 years decreases substantially as the horizon over which returns are measured is increased. Further, some funds ...with positive monthly alpha estimates have negative long-horizon abnormal returns. These results reflect positive skewness in the distribution of fund returns that increases with horizon, and highlight the limitations of conditional arithmetic means of short-horizon returns (e.g., alpha) for long-horizon investors. We tabulate an aggregate wealth loss of $1.02 trillion to mutual fund investors over our 30-year sample, when opportunity costs are based on beta-adjusted SPY returns.
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