ContentsMeasuring True Stock Index Value in the Presence of Infrequent TradingEsa Jokivuolle
Numerical Valuation of High Dimensional Multivariate
American Securities
Signaling with Convertible Debt
Dividend Payout and the Valuation Effects of Bond
Announcements
Open-Market Share Repurchase Programs and Bid/Ask
Spreads on the NYSE: Implications for Corporate Payout Policy
A Bias in Closing Prices: The Case of the
When-Issued Pricing Anomaly
On Equilibrium Pricing under Parameter
Uncertainty
The Intraday Behavior of Bid-Ask Spreads for NYSE
Stocks and CBOE Options
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AbstractsMeasuring True Stock Index Value in the Presence of Infrequent TradingEsa Jokivuolle Based on the Beveridge-Nelson (1981) decomposition of an ARIMA process we present a measure of true stock index value which is not directly observable due to infrequent trading of stocks. The technique is illustrated with daily observations of the Russell 2000 index. This new measure might well prove useful in studies of, say, lead-lag relationships between index derivatives and spot market and futures basis measurements.
Numerical Valuation of High Dimensional
Multivariate American Securities We consider the problem of pricing an American contingent claim whose payoff depends on several sources of uncertainty. Several efficient numerical lattice-based techniques exist for pricing American securities depending on one or few (up to 3) risk sources. However, these methods cannot be used for high-dimensional problems, since their memory requirement is exponential in the number of risk sources. In this paper, we present an efficient numerical technique that combines Monte Carlo simulation with a particular partitioning method of the underlying assets space, which we call Stratified State Aggregation (SSA). Using this technique we can compute accurate approximations of prices of American securities with an arbitrary number of underlying assets. Our numerical experiments show that the method is practical for pricing American claims depending on up to 400 risk sources.
Signaling with Convertible Debt We test whether the conversion price (ratio) is viewed by the stock market as a credible signal of the firm's future earnings prospects (Kim, 1990) and subsequently whether convertible debt serves as backdoor equity financing (Stein, 1992). Examining the conversion price in relation to current stock prices and a priori growth expectation produces an average expected time for convertible bonds to be at-the-money of less than 1.5 years. Thus, as Stein suggests, convertibles appear to be a method of drawing equity into a firm's capital structure. We also find that the size of the firm's announcement period abnormal returns is positively related to the expected time for the convertible to become at-the-money. Given these relationships, we conclude that convertible debt issue announcements, on average, send an equity-like signal to the market.
Dividend Payout and the Valuation Effects of Bond
Announcements Recent theoretical models suggest debt and dividends can serve as substitute free cash flow control or signaling devices. I examine share price responses to announcements of straight debt issues and test whether there are systematic differences between low and high dividend payout firms. Share price response is significantly positive for low growth-low dividend payout firms, and is negatively related to cross-sectional dividend payout. The results support arguments that debt and dividends are substitutes. The results also support arguments that debt provides free cash flow or signaling benefits, but suggest the benefits are significant only for firms with low levels of substitutes. I also document that low growth-low dividend payout firms enter capital markets less frequently, but find no relation between share price response and this frequency.
Open-Market Share Repurchase Programs and Bid/Ask
Spreads on the NYSE: Implications for Corporate Payout Policy This study analyzes bid/ask spreads surrounding announcements of open-market share repurchase programs for a sample of 248 announcements of repurchase programs by NYSE firms over the period January 1984 through June 1988. The sample includes 158 announcements of new programs and 90 announcements regarding continuations of already existing programs. Contrary to the theory that spreads increase surrounding the announcement of open-market share repurchase programs, with both univariate and multivariate tests that control for changes in volume, changes in stock price volatility, and changes in the level of stock price, we find no evidence of an increase in spread surrounding announcement of open-market share repurchase programs.
A Bias in Closing Prices: The Case of the
When-Issued Pricing Anomaly Financial studies examining stock price behavior have principally relied on end of day data. This paper illustrates a bias in closing prices by reexamining the when-issue pricing anomaly with intraday data. With intraday data, major portions of the pricing anomaly can be explained by four factors: 1) a nonsynchronous matching of trades, 2) a difference in the settlement procedures (labeled time value of money in Choi and Strong (1983)), 3) a mismatching of market purchases with market sales (first proposed by Lamoureux and Wansley (1989)), and 4) a higher frequency of market purchases relative to market sales. In addition, the small remaining portion of the anomaly cannot be arbitraged. The remaining premium is attributed to a lower level of limit order competition and an order imbalance in the when-issued shares.
On Equilibrium Pricing under Parameter
Uncertainty Prior theoretical work on estimation risk generally has been restricted to single-period, returns-based models in which the investor must estimate the vector of expected returns but the covariance matrix is known. This paper extends the literature on parameter uncertainty in several ways. First, we analyze asymmetric parameter uncertainty in a model based on payoffs. Second, we explore the effects of both symmetric and asymmetric estimation risk on equilibrium asset prices when the covariance matrix for payoffs must also be estimated. Finally, we investigate the effects on equilibrium of asymmetric parameter uncertainty in a simple multi period model.
The Intraday Behavior of Bid-Ask Spreads for NYSE
Stocks and CBOE Options We study the intraday behavior of bid-ask spreads for actively traded CBOE options and for their NYSE-traded underlying stocks. We confirm previous findings that stocks have a U-shaped spread pattern; however, the options display a very different intraday pattern--one that declines sharply after the open, and then levels off. Our results suggest that both the degree of competition in market making and the extent of informed trading are important for understanding the intraday behavior of spreads.
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