Frontiers in Finance and Economics is a UGC APPROVED International Journal of Research

The Effect of Price Limits on Unconditional Volatility:The Case of CASE

Medhat Hassanein  Eskandar A. Tooma
This nonparametric policy-shift event study examines the relationship between symmetric price limit mechanisms and stock market volatility. We investigate price dynamics on the Cairo and Alexandria Stock Exchange (CASE), where three different limit regimes were in place between 1994 and 2004. We find when price limits are made tighter (looser) by regulators stock market volatility is usually not lower (higher).    These results contradict the widely held view among regulators that restrictive price limits can moderate volatility.  We attribute the source of higher volatility that the CASE experienced, during the tightest limit regime, to volatility on subsequent trading days increasing as limits prevent large one-day price changes. Previous research has referred to this phenomenon as the “volatility spillover” of daily price limits.
Keywords: Price Limits, Circuit Breakers, Stock Market Volatility, Egyptian Stock Exchange.
JEL Classifications: G14, G15, G18

The Information Content of Cross-sectional Volatility for Future Market Volatility: Evidence from Australian Equity Returns

Md. Arifur Rahman
This paper presents research into the information content of firm-level and industry-level cross-sectional volatility (CSV) of daily equity returns for future market-level volatility in Australia. Using a conditional volatility framework that allows for commonly observed excess kurtosis in asset returns, we find that CSV does contain information beyond what is already contained in the lagged market-level return shocks and has a significant positive relationship with the conditional market volatility. Our analysis gives new empirical evidence that the effect of CSV is stronger in relatively stable market conditions than in more volatile market conditions. We also examine how the information content of stock turnover and aggregate company announcements compares with that of CSV, and take a novel data-driven approach to verify whether CSV captures any information about multiple common factor shocks in asset returns. The explanatory power of CSV for future market volatility remains robust even after controlling for the effects of stock turnover, company announcements and omitted factor shocks in returns.
Keywords: Incremental information, Conditional market volatility, Cross-sectional volatility, Stock turnover, Multiple common factor shocks
JEL Classification: G12, G14

Multicriteria Framework for the Prediction of Corporate Failure in the UK

Constantin Zopounidis Michael Doumpos,Fotios Pasiouras
This study investigates the efficiency of two multicriteria decision aid methods, namely UTADIS and MHDIS in the development of business failure prediction models in the UK, as opposed to models developed with discriminant analysis and logistic regression. The dataset consists of 200 manufacturing UK firms out of which 100 failed during the period 2001-2003. The models are developed and validated using 10-fold cross validation. The results show that UTADIS and MHDIS achieve satisfactory classification accuracies, while both outperform logistic regression and discriminant analysis. Thus, the developed MCDA models could be of particular interest to creditors, investors, auditors and regulators in the UK
Keywords: Bankruptcy, Failure, Multicriteria decision aid, Prediction, UK. 
JEL codes: G33, C63

Call and Put Implied Volatilities and the Derivation of Option Implied Trees

  1. Moriggia S. Muzzioli C. Torricelli
Resting on the stylized fact that call and put prices imply different volatilities, the present paper proposes a methodology for the derivation of  an arbitrage free implied tree that takes into account the information in both option classes. Specifically, we derive an implied tree that is characterised by interval values for the stock prices and we endogenously imply the corresponding artificial probabilities based on the risk neutral valuation argument. The implied tree obtained is then calibrated to market option prices by means of a non-linear optimisation routine. The methodology proposed is tested both in and out of sample using DAX index options data. Numerical results are benchmarked to the Derman and Kani’s approach. The comparison suggests that the methodology proposed in this paper, by taking into account the informational content of both call and put prices, highly improves both the in sample fitting and the out of sample performance.
Keywords: Implied Binomial Tree, Smile Effect, Interval Tree.
JEL classification: G13, G14.

Marginal Conditional Stochastic Dominance between Value and Growth

  1. Victor Chow, Bih-Shuang Huang, Ou Hu
Marginal Conditional Stochastic Dominance (MCSD) is an extension of the second order stochastic dominance that considers the joint nature of return distributions. It is a useful tool for examining marginal dominance of one asset to another conditionally to a given market return distribution for all risk-averse investors.  MCSD is superior to conventional market models in that it requires no modeling specification and is distributional free.  Although the size and value effect of equity portfolio performance has been well documented, most of analysis relies on statistical regression description and/or linear factor models.  This manuscript applies MCSD to re-exanimate the size/value effects for international equity markets.  The empirical MCSD test reveals that U.S. value stocks outperformed the market and dominated growth stocks for the post 1975 period.  However, the phenomenon of value over growth is generally insignificant in markets around the world, and it varies with different valuation criteria.
Keywords:  Value, Size, Stochastic Dominance, and Portfolio Selection.
JEL Classification:  G11, G14