International Journal of Managerial Finance

A cross-section analysis of financial market integration in North America using a four factor model : Table of Contents

Marie-Claude Beaulieu, Marie-Hélène Gagnon, Lynda Khalaf — Sun Jun 21 14:15:05 BST 2009

Abstract:
Purpose – The purpose of this paper is to examine financial integration across North American stock markets from January 1984 to December 2003. Design/methodology/approach – The paper uses an arbitrage pricing theory framework. The risk factors considered are the three Fama and French factors augmented with momentum for both countries as well as their international counterparts. Both the domestic and international four factor models in cross section and test for partial, mild, and strong financial integration are estimated. The domestic and international model are estimated on domestic portfolios and on a subset of Canadian cross listings matched with American stocks. Findings – Results can be summarized as follows: first, results show stronger evidence of mild rather than partial or strong integration in both domestic portfolios and interlisted stocks. Second, interlisted stocks appear at first glance to be more integrated than the domestic portfolios, but this result can be attributed to the poor explanatory power of the models applied to interlisted stocks. Once the authors rule out the case where the model does not generate statistically important risk premiums for both countries, the evidence of integration is similar in both domestic and interlisted stocks. Third, the domestic and international models have similar explanatory power, although the domestic model performs better with the Canadian interlisted stocks are found. Originality/value – The results suggest that, in an international context, a portfolio manager is better off using the four factor model as a benchmark in cross sections rather than the single market. Furthermore, if the agency problem described in Karolyi is ignored, Canadian interlisted stocks and Canadian domestic portfolios have the same diversification potential.

The lead-lag relationship between stock index options and the stock index market: Model, moneyness, and news : Table of Contents

Sol Kim, In Joon Kim, Seung Oh Nam — Sun Jun 21 14:15:05 BST 2009

Abstract:
Purpose – The purpose of this paper is to examine the price discovery role of the Korea Composite Stock Price Index 200 (KOSPI 200) stock index options market in contrast to other developed options markets. Design/methodology/approach – The price discovery roles of the stock and options markets using the error-correction model derived from the co-integration relationship are examined. Various analyses are conducted. First, Heston's stochastic volatility option pricing model is employed to confirm its usefulness, and compare the results with the Black and Scholes (BS) model. Second, whether the out of the money (OTM) options purchased by individual investors have a stronger price discovery role than options with other moneyness is examined. Finally, whether options have a stronger price discovery role in bullish or bearish markets than in normal markets is tested. Findings – It is found that stock index prices lead implied index prices estimated from option prices using both BS and Heston models. In regards to the OTM options, the lead-effect of real stock index to implied index prices holds. Also it is shown that there is a weak rise in the lead effect of the options to the stock index, but the lead effect of stock index market rules over that of the options market. Originality/value – The paper examines the price discovery role of the KOSPI 200 stock index options market in contrast to other developed options markets and the results indicate that the consensus on the Korean financial markets may be incorrect.

An empirical analysis of the efficiency of online auction IPO processes and traditional IPO processes : Table of Contents

Nayantara Hensel — Sun Jun 21 14:15:05 BST 2009

Abstract:
Purpose – The purpose of this paper is to examine whether the online auction mechanism in the USA is more effective at pricing initial public offerings (IPOs) than the traditional book building process. Design/methodology/approach – The analysis compares the performance of online auction IPOs with traditional IPOs issued in the same industry area and in the same year to assess the differences in first day mispricing and its persistence. The paper compares the characteristics of firms choosing the auction process relative to the traditional process. It also uses regression models to examine whether online auction IPOs had a significantly lower first day price increase than traditional IPOs. Findings – The results indicate that for 60 percent of the auction IPOs, over 40 percent of the traditional IPOs issued in that year and in that three-digit Standard Industry Classification (SIC) area had greater mispricing. The mispricing of online auction IPOs relative to traditional IPOs persist over time for 50-80 percent of online auction IPOs. Regression analyses controlling for industry effects, year effects, size of the issue, and type of traditional underwriter (low, medium, and high volume underwriters) suggest that the auction's first day price surges are not significantly lower than those of traditional underwriters. Moreover, high volume traditional underwriters have statistically significantly higher first day price surges than low volume traditional underwriters, supporting the theory that they intentionally misprice to benefit their preferred clients. Firms choosing the auction process tend to be smaller in terms of the number of shares of their IPO and their annual sales than firms choosing the traditional IPO process. There is some overlap in industry sector and age, although this varies by year. Originality/value – This paper suggests that the auction process may not be as efficient in pricing IPOs as was initially intended and that there are opportunities for further innovation and improvement.

Lucent Technologies, Inc.: using structural models to value debt (and equity) : Table of Contents

Jack Camiolo, Salvatore Cantale, Michael Purcell — Sun Jun 21 14:15:05 BST 2009

Abstract:
Purpose – The purpose of this paper is to show how contingent claim valuation and, more precisely, structural models, can be used to value the debt and the equity of a corporation. The objective is to provide a general and unified valuation framework. Design/methodology/approach – A discrete version of the Geske model in a binomial-like environment is implemented. To make the analysis more applied, real data of a corporation – Lucent Technologies, Inc. are used – and the valuation is attempted. Findings – Structural models can be used as a practical valuation tool. The results that are obtained are close to market data. Additionally, the authors are able to determine the price of some non-traded claims (debt). Research limitations/implications – While the more direct implication is that structural models can be used as a practical valuation tool, more applied research is needed to better calibrate the models. Originality/value – To the applied finance literature is contributed by presenting a way of estimating the value of corporate debt and equity by calibrating a discrete version of Geske model. It is believed that this approach is not only interesting from the academic point of view, but can also serve as a useful tool for practitioners.