handbook of trading strategies - gregoriou 2010

His academic publications have appeared in the Journal of Finance, the Journal of Financial Economics, the Journal of Financial and Quantitative Analysis, the Journal of Banking and Fina

H ANDBOOK

of

Other McGraw-Hill Books Edited by Greg N Gregoriou

The Credit Derivatives Handbook: Global Perspectives, Innovations, and Market Drivers (2008, with Paul U Ali)

The Handbook of Credit Portfolio Management (2008, with Christian Hoppe) The Risk Modeling Evaluation Handbook (2010, with Christian Hoppe and

Carsten S Wehn)

The VaR Implementation Handbook (2009)

The VaR Modeling Handbook: Practical Applications in Alternative Investing, Banking, Insurance, and Portfolio Management (2009)

Milan New Delhi San Juan Seoul

Singapore Sydney Toronto

STRATEGIES FOR NAVIGATING AND PROFITING FROM CURRENCY, BOND, AND STOCK MARKETS

Greg N Gregoriou

Editor

Copyright © 2010 by The McGraw-Hill Companies, Inc All rights reserved Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, futures/securities trading, or other professional service If legal advice or other expert assistance is required, the services of a competent professional person should be sought

—From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers

TERMS OF USE

This is a copyrighted work and The McGraw-Hill Companies, Inc (“McGrawHill”) and its licensors reserve all rights in and to the work Use of this work is subject to these terms Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw- Hill’s prior consent You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited Your right to use the work may be terminated if you fail to comply with these terms.

THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETE- NESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUD- ING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE McGraw-Hill and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted

or error free Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom McGraw-Hill has no responsibility for the content of any information accessed through the work Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise.

EDITOR xvii

Discounts on the Toronto

Lawrence Kryzanowski and Skander Lazrak

Measures of Performance Leakage and Value Discounts 5

Auction and Dealer Markets:

The Case of the London

v

Tim A Herberger and Daniel M Kohlert

Juan Ayora and Hipòlit Torró

vi

Different Market Structures:

Giovanni Petrella

Vlad Pavlov and Stan Hurn

Increase the Probability of Winning? Empirical Evidence from the Foreign Exchange

Turbulent Financial Markets:

Mohamed El Hedi Arouri, Fredj Jawadi, and Duc Khuong Nguyen

Average Crossover with

Camillo Lento

viii

Futility, Director Independence, and Business

C H A P T E R 14 On the Impact of

Exchange-Traded Funds over Noise Trading: Evidence from

Vasileios Kallinterakis and Sarvinjit Kaur

Models for the Day-of-the-WeekEffect: An Application to the

P A R T IV FOREIGN EXCHANGE MARKETS,

Interest Rates in Hong Kong and Singapore: Is There Any

Michael C S Wong and Wilson F Chan

Through Prices Under Climate

Trading Models on the

Information, and Market

Mark D Flood, Kees G Koedijk, Mathijs A van Dijk, and

Irma W van Leeuwen

xii

Experimental Design and Terminology 323

G Geoffrey Booth and Umit G Gurun

Information on Trading Volume:

Evidence from Management

Anti-Bubbles in Bear Markets:

Log-Periodic Models: A Review 367Empirical Analysis with World Stock Market Indexes 372

Analysis, and Trading in Primary and Secondary

André F Gygax

Ryan Garvey and Fei Wu

xiv

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Greg N Gregoriou has published 38 books, 60 refereed publications in

peer-reviewed journals, and 20 book chapters since his arrival at SUNY(Plattsburgh) in August 2003 Professor Gregoriou’s books have been pub-lished by John Wiley & Sons, McGraw-Hill, Elsevier-Butterworth/Heinemann, Taylor and Francis/CRC Press, and Palgrave-Macmillan His

articles have appeared in the Journal of Portfolio Management, Journal

of Futures Markets, European Journal of Operational Research, Annals of Operations Research, Computers and Operations Research, and elsewhere Pro-

fessor Gregoriou is hedge fund editor and an editorial board member for

the Journal of Derivatives and Hedge Funds, as well as an editorial board member for the Journal of Wealth Management, the Journal of Risk Manage-

ment in Financial Institutions, and the Brazilian Business Review He is also a

member of the curriculum committee at Chartered Alternative Investment

Analyst (CAIA) Association based in Amherst, Massachusetts A native of

Montreal, Professor Gregoriou obtained his joint Ph.D in finance at theUniversity of Quebec at Montreal, which merges with the resources ofMontreal’s three other major universities (McGill University, ConcordiaUniversity, and HEC-Montreal) Professor Gregoriou’s interests focus onhedge funds and CTAs

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Mohamed El Hedi Arouri is an associate professor of finance at the

University of Orleans, France and a researcher at EDHEC Business School

in France He holds a master’s degree in economics and a Ph.D in financefrom the University of Paris X Nanterre His research focuses on the cost

of capital, stock market integration, and international portfolio choice He

has published articles in refereed journals such as the International Journal

of Business and Finance Research, Frontiers of Finance and Economics, the Annals of Economics and Statistics, Finance, and Economics Bulletin.

Juan Ayora is an investment manager He obtained a degree in actuarial

and financial Studies (2006) and the MSc in banking and quantitativefinance (2008), both with honors from the University of Valencia, Spain.His areas of interest focus on portfolio management and trading rules

G Geoffrey Booth holds the Frederick S Addy Distinguished Chair in

Finance, serves as the Department of Finance Chairperson, and is the Acting Associate Dean for Academic Affairs and Research at MichiganState University He received his Ph.D from the University of Michigan

in 1971 Professor Booth’s research focuses on the behavior of financialmarkets He serves on several editorial boards and is the editor of the

Journal of International Financial Markets, Institutions & Money.

Paul Brockman is the Joseph R Perella and Amy M Perella Chair of

Finance at Lehigh University He holds a bachelor’s degree in internationalstudies from Ohio State University (summa cum laude), an MBA fromNova Southeastern University (accounting minor), and a Ph.D in finance (economics minor) from Louisiana State University He received his Certi-fied Public Accountant (CPA) designation (Florida, 1990) and worked forseveral years as an accountant, cash manager, and futures and options

trader His academic publications have appeared in the Journal of Finance, the Journal of Financial Economics, the Journal of Financial and Quantitative

Analysis, the Journal of Banking and Finance, the Journal of Corporate Finance, the Journal of Empirical Finance, the Journal of Financial Research, Financial Review, Review of Quantitative Finance and Accounting, and Finan- cial Markets, Institutions and Instruments, among others Professor Brock-

man has served as a member of the editorial board for the Journal of

Multinational Financial Management and the Hong Kong Securities

Insti-tute’s Securities Journal.

Wilson F Chan is an assistant general manager of Shanghai Commercial

Bank, a former assistant general manager and head of Treasury & Markets

of Industrial and Commercial Bank of China (Asia), and a former director

of Citi Private Bank He has 20 years’ experience in currency and interestrate trading, and holds the degrees MA, MSocSci, and MBA Mr Chan hadserved as the secretary of ACI–Hong Kong Financial Markets Associationfor more than 10 years In 2005, the association was merged into TreasuryMarkets Association, where he leads its education subcommittee

Narat Charupat is an associate professor of finance at the DeGroote

School of Business, McMaster University He has conducted research in theareas of financial innovation, security designs, annuity and insurance prod-ucts, commodity investment, and behavioral finance His research has been

published in various journals such as the Journal of Economic Theory, the

Journal of Banking and Finance, the Journal of Risk and Insurance, and the Journal of Financial and Quantitative Analysis (forthcoming) He has taught

courses in financial derivatives, international finance, and personal finance.Prior to joining McMaster University, he worked for an investment bankand a risk management software company

James Cicon holds a law degree ( JD) and an MBA from the University of

Missouri Prior to returning to school for his joint JD/MBA he was an trical and computer engineer (Brigham Young University) and worked manyyears modeling, simulating, and designing new products for companies,such as Hewlett Packard and Fluke Mr Cicon has written hundreds ofthousands of lines of code and debugged codebases with millions of lines.Some of the new products he developed include drivers and hardware forinkjet printers, ATM and Frame Relay wide area network analyzers, andindustrial/automotive monitoring and protection systems He has writtenneural network software enabling Pepsico to place Taco Bell restaurant sitesand he has designed adaptive controllers which learn how to best controlbrain slice chambers used in biomedical research Mr Cicon served fouryears in the U.S Military Intelligence Corp and worked live missions in theiron curtain in Germany gathering and processing information from East-ern bloc countries At the time of this writing, Mr Cicon is a Ph.D candi-date in the finance department of the Universit y of Missouri He haspresented twice at FMA and has several working papers based on latentsemantic analysis and textual analysis of corporate documents

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Ariadna Dumitrescu holds a Ph.D in economics from IDEA (Universitat

Autònoma de Barcelona), and a bachelor’s degree in mathematics from theUniversity of Bucharest She is an assistant professor of finance at ESADEBusiness School, France Her research interests include asset pricing andstrategic behavior in financial markets, with applications to market microstruc-ture and valuation of corporate debt Her research results have been published

in leading field journals such as the Journal of Corporate Finance, the Journal of

Banking and Finance, and European Financial Management.

Dean Fantazzini is an associate professor in econometrics and finance at

the Moscow School of Economics–Moscow State University (MSU), atrainer at the Academy of Business–Ernst & Young in Moscow and, sinceSeptember 2009, a visiting professor in econometrics and finance at theHigher School of Economics, Moscow He graduated with honors from theDepartment of Economics at the University of Bologna (Italy) in 2000 Heobtained the master in financial and insurance investments from theDepartment of Statistics–University of Bologna (Italy) in 2000 and a Ph.D

in economics in 2006 from the Department of Economics and QuantitativeMethods, University of Pavia (Italy) Before joining the Moscow School ofEconomics, he was a research fellow at the Chair for Economics andEconometrics, University of Konstanz (Germany) and at the Department ofStatistics and Applied Economics, University of Pavia (Italy) A specialist intime-series analysis, financial econometrics, multivariate dependence infinance and economics, Professor Fantazzini has to his credit more than 20publications, including three monographs In 2009 he was awarded forfruitful scientific research and teaching activities by the former USSR Pres-ident and Nobel Peace Prize winner Mikhail S Gorbachev and by the MSURector Professor Viktor A Sadovnichy

Mark D Flood completed his undergraduate work at Indiana University

in Bloomington, where he majored in finance (B.S., 1982) and German andeconomics (B.A., 1983) In 1990, he received his Ph.D in finance from theGraduate School of Business at the University of North Carolina at ChapelHill He was a visiting scholar and economist in the research department ofthe Federal Reserve Bank of St Louis from 1989 to 1993 From 1993 to

2003, he served as an assistant professor of finance at Concordia University

in Montreal, a visiting assistant professor of finance at the University ofNorth Carolina at Charlotte, and a senior financial economist in the Divi-sion of Risk Management at the Office of Thrift Supervision He is a seniorfinancial economist at the Federal Housing Finance Agency in Washington,DC; a partner with R iskTec Currency Management, which markets

currency funds; and the co-founder of ProBanker Simulations, which sellseducational simulations of a banking market His research interests includefinancial markets and institutions, data integration technologies, securitiesmarket microstructure, and bank market structure and regulatory policy.His research has appeared in a number of scholarly journals, including the

Review of Financial Studies, Quantitative Finance, the Journal of International Money and Finance, and the St Louis Fed’s Review.

Emmanuel Fragnière is a Certified Internal Auditor and a professor of

service management at the Haute École de Gestion in Geneva, Switzerland

He is also a lecturer at the Management School of the University of Bath,

UK He specializes in energy, environmental, and financial risk He has

published several papers in academic journals such as the Annals of

Opera-tions Research, Environmental Modeling and Assessment, Interfaces, the national Journal of Enterprise Information Systems, and Management Science.

Inter-Ryan Garvey is an associate professor in finance and chair of the

Depart-ment of Finance at Duquesne University, Pittsburgh, PA Professor Garvey’s

research has been published in the Journal of Financial Markets, Financial

Analysts Journal, Journal of Portfolio Management, Journal of Empirical Finance, and many other journals He has devised intraday trading models

implemented by a U.S broker-dealer

Laurent Germain is a professor of finance and the head of the Finance

Group at Toulouse Business School, France His research interests includemarket microstructure, behavioral finance, and corporate finance He grad-uated from Toulouse Business School, Toulouse School of Economics, NewYork University, and the University Paris Dauphine After a post-doctoratefrom London Business School in 1996 financed by the European Commis-sion, he attained a position of assistant professor of finance at London Busi-ness School He left LBS in 2000 to join Toulouse Business School He isone of the directors of the European Financial Management Association

and has published articles in leading journals such as the Review of Financial

Studies, the Journal of Financial and Quantitative Analysis, and the Journal of Financial Intermediation.

Eleftherios Giovanis studied economics at the University of Thessaly

(Volos-Greece) and graduated in July 2003 He went on to graduate with anMSc in applied economics and finance at the University of Macedonia(Thessaloniki-Greece) in 2009 Mr Giovanis complete a second MSc inquality assurance at the Hellenic Open University in Patra, Greece, at the

xxii

School of Technology & Science His dissertation is on reliability andmaintenance analysis He also works as a statistician for a well-knownGreek firm.

Umit G Gurun joined the University of Texas at Dallas as an assistant

professor of accounting in August 2004, after receiving his Ph.D in financefrom Michigan State University Professor Gurun also holds an MBA fromKoc University of Turkey, and a bachelor’s degree in industrial engineeringfrom Bilkent University of Turkey His research interests are in the areas ofasset pricing, market microstructure, and investments

André F Gygax (lic.oec.HSG St.Gallen; MS, MBA Colorado; Ph.D

Mel-bourne) is a faculty member at the University of Melbourne in Australia

He has published research articles in the areas of corporate finance, preneurial finance, and asset pricing Professor Gygax has worked for theUniversity of Colorado and the University of Technology in Sydney Hehas also worked in the corporate sector for Swiss Bank Corporation, BusagVentures, Mercis, the World Trade Center, and Micrel

entre-Tim A Herberger is a Ph.D candidate as well as a research and teaching

assistant in finance at the department of management, business tion, and economics at Bamberg University (Germany) He studied businessadministration at the University of Erlangen-Nuernberg (Germany), and atthe University of St Gallen (Switzerland) He received his MSc in 2007.His major fields of research are behavioral and empirical finance as well asinvestments in human capital

administra-A Stan Hurn graduated with a D.Phil in economics from Oxford in

1992 He worked as a lecturer in the Department of Political Economy atthe University of Glasgow from 1988 to 1995 and was appointed OfficialFellow in Economics at Brasenose College, Oxford in 1996 In 1998 hejoined the Queensland Universit y of Technology as a professor in theSchool of Economics and Finance His main research interests are in thefield of time-series econometrics He is foundation board member ofthe National Centre for Econometric Research

Lester Ingber received his diploma from Brooklyn Technical High School

in 1958; a bachlor’s degree in physics from Caltech in 1962; and a Ph.D intheoretical nuclear physics from the University of California, San Diego in

1966 He has published approximately 100 papers and books in theoreticalnuclear physics, neuroscience, finance, general optimization, combat analysis,

karate, and education He has held positions in academia, government, andindustry Through Lester Ingber Research (LIR), he develops and consults

on projects documented in his Webste (http://www.ingber.com/ archive)

Pankaj K Jain is the Suzanne Downs Palmer Associate Professor of

Finance at the Fogelman College of Business at the University of Memphis.Previously he worked in the financial services industry He has publishedhis award-winning research on financial market design in leading journals

such as the Journal of Finance, the Journal of Banking and Finance, Financial

Management, the Journal of Investment Management, the Journal of Financial Research, and Contemporary Accounting Research He has been invited to

present his work at the New York Stock Exchange, National StockExchange of India, National Bureau of Economic Research in Cambridge,and the Capital Market Institute at Toronto

Fredj Jawadi is currently an assistant professor at Amiens School of

Management and a researcher at EconomiX at the Universit y of ParisOuest Nanterre La Defense (France) He holds a master’s degree ineconometrics and a Ph.D in financial econometrics from the University

of Paris X Nanterre (France) His research topics cover modeling assetprice dynamics, nonlinear econometrics, international finance, and finan-cial integration in developed and emerging countries He has published in

international refereed journals such as the Journal of Risk and Insurance,

Applied Financial Economics, Finance, and Economics Bulletin, as well as

authoring several book chapters

Christine Jiang is a professor of finance at the Fogelman College of

Busi-ness and Economics at the University of Memphis, TenBusi-nessee ProfessorJiang’s research includes issues in market microstructure, investments, andinternational finance She has made numerous presentations at national andinternational conferences She has published articles on market microstruc-ture, exchange rates, mutual fund performance, and asset pricing in the

Journal of Finance, the Journal of Banking and Finance, Financial Analysts Journal, Decision Science, the Journal of Financial Research, Financial Review,

and other refereed journals Her work has been featured in articles in the

Financial Times and Dow Jones News Service Winner of the Suzanne

Downs Palmer Professorship in Research in 2003 and 2006 at the sity of Memphis, Professor Jiang earned her Ph.D in finance from DrexelUniversity in Philadelphia, PA She also holds a master’s degree from theSloan School of Management of the Massachusetts Institute of Technology,and a bachelor’s of science from Fudan University in Shanghai, China

Univer-xxiv

Vasileios Kallinterakis (BSc., double MSc, Ph.D.) works as a teaching

fellow in finance at Durham Business School, UK His research interestsrelate to behavioral finance with particular emphasis on issues of herdingand feedback trading and his research has been presented in several confer-ences and published in peer-reviewed journals Professor Kallinterakis hasserved as referee and member of the editorial board for several academicjournals and is currently providing consultancy services for a major globalbrokerage house

Sarv injit Kaur (ACCA, MSc) is a regulatory reporting manager with

HSBC UK She possesses extensive industry experience in auditing andfinancial analysis having previously worked in her native Malaysia forHSBC and Ernst & Young in various posts for several years She is alsoactive in finance research, currently investigating the association betweenexchange-traded funds and investors’ behavior

Dimitris Kenourgios is a lecturer in the Department of Economics at

University of Athens He studied economics at the University of Athens andbanking and finance at the University of Birmingham, UK (MSc) He alsoholds a Ph.D in finance from the University of Athens, Department of Eco-nomics He specializes in emerging financial markets and risk management

His works have been published in Small Business Economics, the Journal

of Policy Modeling, Applied Financial Economics, and the Journal of Economic Integration, among others.

Kees G Koedijk is Dean of the Facult y of Economics and Business

Administration and Professor of Finance at Tilburg Universit y, TheNetherlands He is also affiliated with Maastricht University and the Cen-tre for Economic Policy Research He has published widely on marketmicrostruct ure, risk management, international finance, and sociallyresponsible investing His work has appeared in leading international

journals such as the Review of Financial Studies, the Journal of Business, and the Journal of International Money and Finance Professor Koedijk is a

former member of the economic advisory council for the Dutch House ofParliament

Daniel M Kohlert completed his Ph.D (summa cum laude) in financial

economics at Bamberg University (Germany) in 2008 He is an assistantprofessor of finance at the department of management, business administra-tion and economics at Bamberg University He holds an MBA in financeand marketing from Western Illinois University and a MSc in finance from

the University of Bamberg His major fields of research are behavioral andempirical finance as well as neuro-finance.

Lawrence Kryzanowski is the senior research chair in finance at

Concor-dia University in Montreal, Canada He is the (co-)author of more than 110refereed journal articles and the recipient of 15 research awards, including abest paper award at the 2008 FMA (U.S.) meeting He is the foundingchairperson of the Northern Finance Association and is active in variouseditorial capacities for various refereed journals His more recent activities

as an expert witness include utility rate of return applications and courtproceedings for price distortion due to alleged misrepresentation He wasthe first representative of retail investors on the Regulation Advisory Com-mittee (RAC) of Market Regulation Services (now IIROC), which reviewsall amendments to the common set of equities trading rules established toregulate various trading practices in order to ensure fairness and maintaininvestor confidence in Canadian markets

Skander Lazrak is an associate professor in finance at Brock University in

St Catherines, Canada The authors solely or jointly have published sively on market performance

exten-Camillo Lento is a Ph.D candidate at the Universit y of Southern

Queensland (Australia) and lecturer at Lakehead University (Canada) He is

a chartered accountant (Canada) and holds an MSc (finance) and BComm(honours) from Lakehead University (Canada) Before embarking on hisPh.D., he worked in a variety of positions in accounting, auditing, and assetvaluation He has authored numerous studies on technical analysis and trad-ing models He is refining his research activities in combined signalapproach to technical analysis that jointly employs various individual trad-ing rules into a combined signal His research on technical analysis appears

in both academic journals and practitioner magazines

Thomas H McInish is an author or coauthor of more than 100 scholarly

articles in leading journals such as the Journal of Finance, the Journal of

Financial and Quantitative Analysis, the Journal of Portfolio Management, the Review of Economics and Statistics, and the Sloan Management Review Cited as

one of the “Most Prolific Authors in 72 Finance Journals,” Professor McInishwas ranked 20 (tie) out of 17,573 individuals publishing in these journalsfrom 1953 to 2002 Another study ranked him as 58 out of 4,990 academics

in number of articles published during 1990 to 2002 Professor McInish’s authored, path-breaking article on intraday stock market patterns originally

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published in the Jour nal of Finance was selected for inclusion in (1)

Microstructure: The Organization of Trading and Short Term Price Behavior,

which is part of the series edited by Richard Roll of UCLA entitled The

International Library of Critical Writings in Financial Economics (this series is a

collection of the most important research in financial economics and serves as

a primary research reference for faculty and graduate students); and (2)

Con-tinuous-Time Methods and Market Microstructure, which is part of the tional Library of Financial Econometrics edited by Andrew W Lo of MIT.

Interna-Professor McInish’s book, Corporate Spin-Offs, was selected by Choice, a

pub-lication of the Association of College and Research Libraries, for inclusion onits list of “Outstanding Academic Books 1984.” Blackwell Publishers pub-

lished his book Capital Markets: A Global Perspective in 2000 in English and

Chinese Professor McInish earned his Ph.D from the University of burgh He is a Chartered Financial Analyst (CFA), a highly respected pro-fessional designation Professor McInish holds the Wunderlich Chair ofExcellence in Finance at the University of Memphis, Tennessee

Pitts-Alexander Molchanov is a senior lecturer in finance at Massey University,

New Zealand He joined Massey in July 2006 after completing his mastersand doctoral degrees at the University of Miami, Florida His research top-ics include, but are not limited to, market design and microstructure, inter-national finance, market efficiency, and econometrics His research has beenpresented at major international conferences in the United States, Europe,and Australasia

Duc Khuong Nguyen is a professor of finance and head of the

Depart-ment of Economics, Finance and Law at ISC Paris School of ManageDepart-ment(France) He holds an MSc and a Ph.D in finance from the University ofGrenoble II (France) His principal research areas concern emerging mar-kets finance, market efficiency, volatility modeling, and risk management

in international capital markets His most recent articles are published in

refereed journals such as the Review of Accounting and Finance, the

Ameri-can Journal of Finance and Accounting, Economics Bulletin, the European Journal of Economics, Finance and Administrative Sciences, and Bank and Markets.

Helen O’Gorman received her bachelor’s degree in mathematical studies

from the National University of Ireland Maynooth in 2008 She then ceeded to complete an MSc in operational research at the University ofEdinburgh, Scotland Her MSc dissertation project was titled “The Devel-opment of a Risk Monitoring Tool Dedicated to Commodity Trading in the

pro-Precious Metals Sector” and contains material similar to that discussed inher respective chapter in this book.

Spyros Papathanasiou is head of investment department in Solidus

Securities S.A He studied economics at the University of Athens (BSc,1995) and banking at the Hellenic Open University (MSc, 2003) He alsoholds a Ph.D in finance from the Hellenic Open University (2009) Hismain research interests are international stock markets, derivatives, andentrepreneurship

Ohaness G Paskelian is an assistant professor of finance in the College of

Business at the University of Houston–Downtown He received his Ph.D

in finance from the University of New Orleans (Louisiana) He holds a ter’s in finance and economics from the University of New Orleans, and abachelor’s in computer engineering from the American University of Beirut,Lebanon Professor Paskelian teaches financial management, cases in finan-cial management, and financial markets and institutions His main researchinterests lie in the studies of asset pricing, agency issues and firm valuation,and corporate governance mechanisms in the emerging markets He is a frequent presenter at national and international conferences on finance

mas-Vlad Pavlov received his MEc from the New Economic School in Moscow in

1996 He completed his Ph.D in 2004 from the Australian National sity He joined the Queensland University of Technology as a lecturer infinance in 2000 In 2008 he spent a year working as a senior analyst for aglobal macro hedge fund His research concentrates on financial econometricsand time-series analysis

Univer-Edward Pekarek is a clinical law fellow for the nonprofit Investor Rights

Clinic of Pace University Law School, John Jay Legal Services, Inc., and a

former law clerk in the United States District Court for the Southern trict of New York Mr Pekarek holds an LLM degree in corporate bankingand finance law from Fordham University School of Law, a JD from Cleve-land Marshall College of Law, and a bachelor’s degree from the College ofWooster, Ohio As a law student, Professor Pekarek co-authored and editedthe merit brief for the Respondents in the United States Supreme Court

Dis-matter of Cuyahoga Falls v Buckeye Community Hope Foundation, and an amicus brief in Eric Eldred, et al v John Ashcroft, Attorney General He is

the former editor-in-chief of a specialty law journal and a nationally rankedlaw school newspaper, and is the author of numerous published articlesregarding securities, banking, and corporate governance issues, which have

xxviii

been cited by such notables as former Securities and Exchange CommissionDirector of Enforcement Linda Chatman Thomsen, as well as the RANDInstitute for Civil Justice in a report commissioned by the SEC regardingbroker-dealer and investment adviser regulation.

Jack Penm is an Academic Level D at Australian National University

(ANU) He has an excellent research record in the two disciplines in which

he earned his two Ph.D.s, one in electrical engineering from the University

of Pittsburgh, PA, and the other in finance from ANU He is an author/co-author of more than 80 papers published in various internationallyrespected journals

Giovanni Petrella is an associate professor of banking at the Catholic

University in Milan, Italy In 2009 he was a visiting lecturer in the ment of Finance, Insurance & Real Estate at the University of Florida Atthe Catholic University he teaches an undergraduate class on derivativesand a graduate class on market microstructure; at the University of Florida,

Depart-he taught a securities trading course in tDepart-he Master of Science in Finance(MSF) program He has published papers in the areas of market micro-structure, derivatives, and portfolio management in the following journals:

the Journal of Banking and Finance, the Journal of Futures Markets, the

European Financial Management Journal, the Journal of Trading, and the Journal of Financial Regulation and Compliance.

Alexandre Repkine graduated with BSc in mathematics from Moscow

State University in 1993 He studied at the New Economic School in sia in the Master of Economics program, where he obtained the MSc ineconomics degree in 1995 He received his Ph.D in economics from theCatholic University of Leuven, Belgium, in 2000 and has taught economics

Rus-at numerous Korean universities since 2001 He is an assistant professor inthe Department of Economics at Korea University

Gerasimos G Rompotis is a senior auditor at KPMG Greece and a

researcher with the faculty of economics at the National and KapodistrianUniversity of Athens His main areas of research cover financial manage-ment and the performance of exchange-traded funds His work has beenpublished in a number of industry journals In addition, the work of theauthor has been presented at several international conferences

Fabr ice Rousseau is lect urer at the National Universit y of Ireland

Maynooth His research interests include market microstructure, corporate

finance with a focus on the design of initial public offerings, behavioralfinance, and financial integration He graduated from the University ofToulouse and holds a Ph.D in finance from the Universitat Autonoma deBarcelona Upon completing his Ph.D., he joined the Department of Eco-nomics, Finance and Accounting at NUI Maynooth From July 2006 toJune 2007, he was a visiting scholar at the Department of Economics at

Arizona State University Some of his research has been published in The

Manchester School.

Philip A Stork is a visiting professor of finance at Massey University,

New Zealand He was a professor of finance at Erasmus University dam where he also obtained his Ph.D, and a visiting professor at Duisen-berg School of Finance in A msterdam and at the Business School ofAix-en-Provence He has worked in various roles for banks, brokers, andmarket makers in Europe, Australia, and the United States His academicwork has been published in major international journals, including the

Rotter-European Economic Review, Economics Letters, the Journal of Applied metrics, the Journal of Fixed Income, and the Journal of International Money and Finance.

Econo-Nareerat Taechapiroontong received her Ph.D from the University of

Memphis, Tennesee in market microstructure She is a full-time lecturer atMahidol University, Thailand She has previously worked as a trading offi-cer at Securities One Public Co., Ltd She has published her work on infor-

mation asymmetry and trading in the Financial Review Her work has also

been presented at the 2003 FEA conference at Indiana University, the 2002FMA Annual Meeting in San Antonio, and the 21st Australasian Financeand Banking Conference 2008 in Australia

R D Terrell is a financial econometrician, and an officer in the general

division of the Order of Australia He served as Vice-Chancellor of tralian National University from 1994 to 2000 He has also held visitingappointments at the London School of Economics, the Wharton School,University of Pennsylvania, and the Econometrics Program, PrincetonUniversity He has published a number of books and research monographsand approximately 80 research papers in leading journals

Aus-Hipòlit Torró is professor of finance in the department of financial

nomics at the University of Valencia (Spain) He obtained a degree in nomics and business with honors and a Ph.D in financial economics at the

eco-xxx

University of Valencia and a MSc in financial mathematics at the universities

of Heriot-Watt and Edinburgh in Scotland He has published articles in

financial journals such as the Journal of Futures Markets, the Journal of

Busi-ness Finance and Accounting, the Journal of Risk Finance, Quantitative Finance, Investigaciones Economicas His areas of research are portfolio management

(hedging and trading rules) and financial modeling of stock, interest rates,bonds, and commodities (weather and electricity)

Mathijs A van Dijk is an associate professor of finance at the Rotterdam

School of Management (Erasmus University) He was a visiting scholar atthe Fisher College of Business (Ohio State Universit y) and the FuquaSchool of Business (Duke University, North Carolina) His research focuses

on international finance He has published in various journals in financial

economics, including the Financial Analyst Journal, the Journal of Banking

and Finance, the Journal of International Money and Finance, and the Review

of Finance He has presented his work at numerous international

confer-ences as well as seminars at, among others, Dartmouth, Harvard, andINSEAD In 2008 he received a large grant from the Dutch National Sci-ence Foundation for a five-year research program on liquidity crises ininternational financial markets

Irma W van Leeuwen is senior learning officer at ICCO Netherlands.

She was previously affiliated with the Research and Development ment of Oxfam Novib and with the Department of Finance at MaastrichtUniversity Her past research has concentrated on market microstructure,

Depart-in particular on price discovery and liquidity Depart-in multiple dealer financialmarkets Her experimental study on interdealer trading appeared in the

book Stock Market Liquidity by François-Serge Lhabitant and Greg N

Gregoriou Her current research interests include development economics.Her study on microinsurance has been published by the Institute of SocialStudies in The Hague

Anne Vanhems is professor of statistics in Toulouse Business School,

France She obtained her Ph.D in applied mathematics in 2001 at the versity of Toulouse, France and also graduated from ENSAE, Paris Sheobtained the Fullbright grant to visit the Bendheim Center for Finance atPrinceton University in 2002 She was a visiting professor in the economicdepartment at University College London She is working on structuralnonparametric econometrics, as well as on estimation of hedge funds per-formances and market microstructure

Uni-Laura Whitney received a bachelor’s degree in mathematical economics

from Wake Forest University, NC, and worked for three years as an tions research associate for a government contractor in the Washington, DCarea She recently completed her MSc in operational research at the Univer-sity of Edinburgh, UK, where she took classes in modeling and simulation,optimization, risk analysis, and finance Her dissertation project focused onthe development of a risk-monitoring tool dedicated to commodity trading,similar to the one developed for her respective chapter in this book

opera-Michael C S Wong is an associate professor at City University of Hong

Kong He architected risk systems for more than five banks, including thefirst Basel-standard IRB system in Hong Kong, as well as advised morethan 20 banks on risk management and provided training to more than3,000 risk managers and regulators in the China region He is a foundingmember of CTRISKS, an Asia-based credit rating agency and a founding

member of FRM Committee of GARP Professor Wong is listed in Risk

Who’s Who and was awarded Teaching Excellence Award by City

Univer-sity of Hong Kong Before his academic and consulting career, he worked

in investment banking, specializing in currency, metals, and derivativestrading

Fei Wu is a professor in finance at University of Electronic Science and

Technology of China, Chengdu, China He taught at Massey University,New Zealand from 2004 to 2009 His research focuses on behavioralfinance and market microstructure Dr Wu’s research has been published

in Financial Management, Journal of Financial Markets, Journal of Bankingand Finance, Journal of Portfolio Management, and many other journals

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I would like to thank Ms Morgan Ertel at McGraw-Hill (New York City)for assistance, suggestions, and development of the manuscript I also thankthe production manager Richard Rothschild at Print Matters, Inc (NewYork City) for assistance in the manuscript Finally, I thank a handful ofanonymous referees for their valuable assistance in reviewing, selecting, andmaking comments to each chapter in this book Neither the editor nor thepublisher can guarantee the accuracy of each chapter and each contributor

is responsible for his or her own chapter

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EXECUTION AND

MOMENTUM

TR ADING

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or the average security in that security type We also provide an tion of how trade execution costs are affected adversely by worries of aglobal recession.

Since the performance of all investment decisions are directly affected bythe quality of effecting such decisions in the marketplace and varies withinand across security types, all investors must carefully balance the marginalbenefits and costs of each transaction Such costs include commissions, fees,execution, and opportunity costs Execution quality reflects various tradingdemands for immediate liquidity (speed) based on different investmentstyles and on the availability and cost of such liquidity at each point in time.The latter includes the expected and actual impact of investor trade onmarket prices and on the cost and likelihood of concluding the remainder of

a trade Since execution quality is most often unobservable, it is imputedfrom the data either as the difference between the actual trade executionprice and the price that would have existed in the absence of the trade or asthe difference (referred to as performance leakage) between the quoted oractual trade price and its counterpart in the absence of trade costs (referred

to as the “fair” price) The time to complete a trade for a fixed concessionfrom the “fair” price is another dimension of execution quality, which cannot be measured using most available databases (such as the one usedherein) that do not provide information on order submissions and their sub-sequent fill history Execution quality also affects the pricing of securitiesthrough its impact on value discounts

Trade activity measures of liquidity include (un)signed number and lar value of shares traded and the number of trades Metrics for measuringexpected or actual trade execution costs include quoted, effective and real-ized spreads, and quoted depths Hasbrouck (2009) provides a good review

dol-of various measures dol-of trade and market impact costs using daily data.Earlier research focuses on the measurement of execution cost (e.g.,Collins and Fabozzi, 1991), on the impact of execution costs on the speedand method by which institutional investors should implement buy and selldecisions (e.g., Bodurtha and Quinn, 1990; Wagner and Edwards, 1993;Wilcox, 1993), and on trading costs in different international markets (e.g.,Kothare and Laux, 1995) More recent studies examine the effects ofchanges in exchange rules on execution costs across trading platforms (e.g.,Venkataraman, 2001; SEC, 2001; Bessembinder, 2003; Boehmer, 2005) and

on institutional differences (Eleswarapu and Venkataraman, 2006)

To our knowledge, few published studies examine the trade execution costperformance of security types other than stocks, bonds, and highly liquid

4

derivatives This study is the first to examine trade execution costs for all thesecurity types on the Toronto Stock Exchange (TSX) We expect to find sig-nificant differences in execution costs for a dichotomization of trades bysecurity type.

The remainder of this chapter is organized as follows The second section ofthis chapter discusses the sample and data This chapter’s third section presentsthe measures of market quality The fourth section presents the empirical estimates of market quality; and the fifth section concludes the chapter

SAMPLE AND DATA

Our initial sample contains all 2,300 listed securities on the TSX for thefirst two calendar months of 2008; namely, 1,300 common shares, 15 shareslisted in USD, 256 preferred shares, 396 units including income trustsunits, 149 debentures,1 119 warrants, and 65 NT_NO notes includingasset-linked, principal protected notes sponsored by the Royal Bank.2As iscommon practice in the literature and reporting in the financial press (e.g.,

Globe and Mail ) and following the definition of the SEC regarding penny

shares available at http://www.sec.gov/answers/penny.htm, the commonshare sample is split in two based on those trading at or above $5 per share(Common
$5) and those trading at less that $5 per share (Common $5)based on the time-series mean price of each common share

Trading data are extracted from the TSX’s Trades and Quotes (TAQ)database As in Chordia, Roll, and Subrahmanyam (2001), the data arecleaned by removing: (i) quotes/trades outside regular trading hours of 9:30

to 16:00 EST; (ii) trades with negative numbers of shares or trading prices;(iii) trades with delayed delivery, special settlement and/or delivery, or sub-ject to special restrictions and conditions; (iv) bids exceeding offers or eitherwith nil prices or volumes; and (v) quoted percentage spreads exceeding

30 percent.3These filters delete 2.74 percent and 5.41 percent of the initial202,710,358 quotes and 27,276,955 trades, respectively

MEASURES OF PERFORMANCE LEAKAGE

AND VALUE DISCOUNTS

Our first measure is the quoted spread, QS i,t , for security i at time t or

QS i,t  (Ask i,t  Bid i,t ) / [0.5(Ask i,t  Bid i,t)], where the denominator is themidspread Our second measure is superior to the first for a patient investor