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Market Inefficiency (market + inefficiency)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	81%

Selected Abstracts

Algorithmic challenges and current problems in market coupling regimes

EUROPEAN TRANSACTIONS ON ELECTRICAL POWER, Issue 4 2009
Bernd Tersteegen
Abstract Increasing cross-border trade at European borders has lead to the necessity of an efficient allocation of scarce cross-border capacities. Explicit auctions used to be the commonly applied auction method in the past at most borders, but due to the separation of the trade of electrical energy and the allocation of cross-border capacity, market inefficiencies arise. As a consequence, a trend toward a market coupling, which combines the trade of electrical energy with the allocation of cross-border capacity, can be observed across Europe. The most convincing approach to solve the complex optimization task associated with market couplings solves the problem by a maximization of the system-wide welfare based on a closed-form optimization. Practical experience shows that problems remain with such an approach. This paper thoroughly analyzes problems that may occur in market coupling regimes with a closed-form optimization. In this paper an extension of formerly presented formulations of the optimization problem is presented, which avoids the described problems. The extended formulation still assures practically feasible calculation times of far less than 10 minutes even for systems with up to 12 market areas. Further, a fair and transparent approach to determine feasible market clearing prices not neglecting the time and market coupling relationship between prices is shown in this paper and it is demonstrated that this approach does not lead to practically infeasible calculation times. Copyright © 2009 John Wiley & Sons, Ltd. [source]

Small,Scale Entrepreneurship and Access to Capital in Peripheral Locations: An Empirical Analysis

GROWTH AND CHANGE, Issue 2 2002
Daniel Felsenstein
This paper presents an analysis of a public assistance program for small,scale entrepreneurship in peripheral areas. Public assistance compensates for market inefficiencies where the decision rules of financial institutions discriminate against otherwise viable small firms in capital markets. Lending institutions perceive high risk in providing debt capital when little information is present. Using empirical data from Israel, the determinants of this risk are estimated and the role of location in creating this information asymmetry is stressed. These results empirically establish that (1) location matters in determining the risk profile of the firm, (2) locationally targeted programs can reduce the information asymmetries that make peripheral firms unattractive to lenders, and (3) these programs can also generate positive welfare effects. Finally, there is speculation on the potential role of ICT (information and communications technology) in increasing the visibility of small firms in remote locations and creating a more symmetrical flow of information. [source]

Disciplinary Observance and Sanctions on German and Danish Auditors

INTERNATIONAL JOURNAL OF AUDITING, Issue 2 2002
Reiner Quick
This paper presents the results of a comparative study on disciplinary observance systems of the auditing profession within two member states of the European Union: Germany and Denmark. Disciplinary observance is an important factor in reducing the hidden action problem, but could also be used by the profession to signal quality. In Germany, the Wirtschaftsprüferkammer is the supervisory body which oversees compliance with standards and professional duties. It is entitled to sanction the minor violations of duties by auditors. Only more severe types of misbehaviour are dealt with by courts. In Denmark, a special court (Disciplinæernævn) is concerned with disciplinary actions against auditors. The results of this study will demonstrate that audit regulations and in particular disciplinary laws remain basically national, despite efforts to harmonise auditing. This study identifies characteristics of disciplinary systems common to both countries and provides information on the functioning of both systems that may be useful in a number of ways. The results presented might initiate a more systematic comparison of disciplinary systems within member states of the European Union, which would enhance institutional knowledge of the European market for auditing services. This in turn could promote the process of achieving a single European market for auditing services and thus reduce market inefficiencies. [source]

The Extreme Future Stock Returns Following I/B/E/S Earnings Surprises

JOURNAL OF ACCOUNTING RESEARCH, Issue 5 2006
JEFFREY T. DOYLE
ABSTRACT We investigate the stock returns subsequent to quarterly earnings surprises, where the benchmark for an earnings surprise is the consensus analyst forecast. By defining the surprise relative to an analyst forecast rather than a time-series model of expected earnings, we document returns subsequent to earnings announcements that are much larger, persist for much longer, and are more heavily concentrated in the long portion of the hedge portfolio than shown in previous studies. We show that our results hold after controlling for risk and previously documented anomalies, and are positive for every quarter between 1988 and 2000. Finally, we explore the financial results and information environment of firms with extreme earnings surprises and find that they tend to be "neglected" stocks with relatively high book-to-market ratios, low analyst coverage, and high analyst forecast dispersion. In the three subsequent years, firms with extreme positive earnings surprises tend to have persistent earnings surprises in the same direction, strong growth in cash flows and earnings, and large increases in analyst coverage, relative to firms with extreme negative earnings surprises. We also show that the returns to the earnings surprise strategy are highest in the quartile of firms where transaction costs are highest and institutional investor interest is lowest, consistent with the idea that market inefficiencies are more prevalent when frictions make it difficult for large, sophisticated investors to exploit the inefficiencies. [source]

Spanish mutual fund fees and less sophisticated investors: examination and ethical implications

BUSINESS ETHICS: A EUROPEAN REVIEW, Issue 3 2009
Rocío Marco Crespo
Some mutual funds not only apply the usual asset management and custodial fees, but also front loads and redemption fees as a kind of ,toll charge' payable on entering and/or leaving the fund. The aim of this work is to examine the implications of the different loads and fees applied to mutual fund investors in the Spanish market. The results show that there is a relationship between the various charges and fees. The fact that load fund companies charge higher management and custody fees proves the potential of the fund companies to impose higher fees on a segment of the clientele. The investors in load funds, which tend to be large in number of shareholders and belonging to banks and savings banks, are small investors who show a low cost sensitivity. A lower level of financial sophistication may be the reason for the apparent lower price awareness. The problem is that the investors in load funds are not financially compensated for the extra cost represented by the front-load and redemption fees. The only beneficiary seems to be the financial institution itself. On this view, the survival of load funds seems to depend on the lack of financial sophistication of their clientele, combined with market inefficiencies. It is worth asking about the ethics of a situation of market segmentation that allows managing institutions to benefit from the segment of the least sophisticated investors. [source]

Indexing, cointegration and equity market regimes

INTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 3 2005
Carol Alexander
Abstract This paper examines, from a market efficiency perspective, the performance of a simple dynamic equity indexing strategy based on cointegration. A consistent ,abnormal' return in excess of the benchmark is demonstrated over different time horizons and in different real world and simulated stock markets. A measure of stock price dispersion is shown to be a leading indicator for the abnormal return and their relationship is modelled as a Markov switching process of two market regimes. We find that the entire abnormal return is associated with the high volatility regime as the indexing model implicitly adopts a strategic position that pays off during market crashes, whilst effectively tracking the benchmark in normal market circumstances. Therefore we find no evidence of market inefficiency. Nevertheless our results have implications for equity fund managers: we show how, without any stock selection, solely through a smart optimization that has an implicit element of market timing, the benchmark performance can be significantly enhanced. Copyright © 2005 John Wiley & Sons, Ltd. [source]

Causes and Consequences of the Relation Between Split-Adjusted Share Prices and Subsequent Stock Returns

JOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 1-2 2007
William D. Brown Jr
Abstract:, In this manuscript, we document and explain an empirical artifact , a persistent and substantial negative relation between split-adjusted share prices and subsequent stock returns , that has potentially important ramifications for capital markets research design. This relation pervades all commonly-used commercial databases and is insensitive to the choice of database used for either prices or returns. We investigate four potential causes of the empirical regularity: survivorship bias, asymmetric returns to low-priced stocks, extreme returns, and the effects of stock-split adjustments on portfolio classifications. We find that survivorship bias accounts for approximately half of the returns documented to a share-price-based hedge strategy and that re-classifications caused by stock split adjustments account for substantially all of the remaining returns. We do not find that controlling for either low-priced stocks or extreme returns is effective in purging the data of the empirical price artifact. These findings and our explanations thereof are important, as they show that there are potentially troublesome consequences of using share price as a deflator in markets-based research. In particular, we note and illustrate cause for concern when interpreting associations between share-price-scaled variables and subsequent returns as evidence of market inefficiency. [source]

Relationships between Australian real estate and stock market prices,a case of market inefficiency

JOURNAL OF FORECASTING, Issue 3 2002
John Okunev
Abstract This paper explores the relationship between the Australian real estate and equity market between 1980 and 1999. The results from this study show three specific outcomes that extend the current literature on real estate finance. First, it is shown that structural shifts in stock and property markets can lead to the emergence of an unstable linear relationship between these markets. That is, full-sample results support bi-directional Granger causality between equity and real estate returns, whereas when sub-samples are chosen that account for structural shifts the results generally show that changes within stock market prices influence real estate market returns, but not vice versa. Second, the results also indicate that non-linear causality tests show a strong unidirectional relationship running from the stock market to the real estate market. Finally, from this empirical evidence a trading strategy is developed which offers superior performance when compared to adopting a passive strategy for investing in Australian securitized property. These results appear to have important implications for managing property assets in the funds management industry and also for the pricing efficiency within the Australian property market. Copyright © 2002 John Wiley & Sons, Ltd. [source]

Market Efficiency and Return Statistics: Evidence from Real Estate and Stock Markets Using a Present-Value Approach

REAL ESTATE ECONOMICS, Issue 2 2001
Yuming Fu
This paper develops a methodology to identify asset price response to news in the framework of the Campbell,Shiller log-linear present-value equation. We further show that a slow price adjustment in real estate markets not only induces a high serial autocorrelation in excess returns, but also dampens the return volatility and the correlation with excess returns in other asset markets. Using Hong Kong real estate and stock market data, we find that the quarterly real estate price assimilates only about half the effect of market news, whereas the quarterly stock price incorporates the news fully. Our analysis identifies a cumulative price adjustment that recovers lost information in real estate returns due to market inefficiency and thereby restores the real estate return volatility and the correlation between real estate and stock markets. [source]

An empirical examination of the relation between futures spreads volatility, volume, and open interest

THE JOURNAL OF FUTURES MARKETS, Issue 11 2002
Paul Berhanu Girma
This study investigates the relation between petroleum futures spread variability, trading volume, and open interest in an attempt to uncover the source(s) of variability in futures spreads. The study finds that contemporaneous (lagged) volume and open interest provide significant explanation for futures spreads volatility when entered separately. The study also shows that lagged volume and lagged open interest, when entered in the conditional variance equation simultaneously, have greater effect on volatility and substantially reduce the persistence of volatility. This finding seems to support the sequential information arrival hypothesis of Copeland (1976). Finally, the findings of this study also suggest a degree of market inefficiency in petroleum futures spreads. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1083,1102, 2002 [source]

Strip Bonds and Arbitrage Bounds

CANADIAN JOURNAL OF ADMINISTRATIVE SCIENCES, Issue 2 2000
Paul Halpern
If the price of a coupon bond is sufficiently different from the sum of the prices of its stripped components, arbitrage trades between the two will be profitable. We estimate the size of the price difference between the prices of a coupon bond and a replicating package of strip bonds. When the price of a coupon bond exceeds the value of the replicating package of strips, the difference between the coupon bond price and the price of the package of strips is much greater than when the price of the coupon bond is below the price of the package of replicating strip bonds. This difference persists under a variety of assumptions about taxation and transaction costs, and appears to indicate market inefficiency. Résumé Si le prix d'une obligation à coupons est suffisamment différent de la somme de ses éléments détachés, un échange à l'arbitrage entre les deux sera profitable. Nous estimons l'importance de la différence de prix entre le coǒt d'une obligation à coupons et celui d'un bloc reproductif d'obligations coupons détachés. Quand le prix d'une obligation à coupons dépasse la valeur du bloc reproductif de coupures, la différence entre le prix de l'obligation à coupons et celui du bloc de coupures est beaucoup plus importante que lorsque le prix de l'obligation à coupons est sous le prix du bloc reproductif d'obligations coupons détachés. Cette différence persiste sous une variété de suppositions basées sur les coǒts d'imposition et de transaction, et semble indiquer un manque de rendement du marché. [source]