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This paper provides new evidence on the relationship between internal capital markets and corporate investment by exploiting an exogenous event and an unique empirical setting. Specically, we compare the investment behavior of Korean business group (e.g., chaebol ) rms with non-chaebol Korean rms in the aftermath of the 1997 Asian nancial crisis. Korean chaebol provide a unique setting for the study of internal capital markets, since they comprise a large number of legally independent rms in several dierent industries, which are ultimately controlled by a family owner. Our empirical methodology employs a dierence-in-dierences matching estimator to ensure that chaebol rms (those in the treated group) and non-chaebol rms (those in the control group) are as similar as possible in all observable dimensions other than chaebol membership. The results show that chaebol rms invest signi cantly more than rms in the control group, in the aftermath of the crisis. This dierence in investment behavior does not hold for other, normal periods. In addition, we show that chaebol rm post-crisis investment is positively associated with variables that proxy for the availability of internal capital markets, including industry diversication within a chaebol and chaebol liquidity. Our evidence also suggests that chaebol 's internal capital markets performed ecient capital reallocation following the crisis. Chaebol rms with greater investment opportunities increased investment the most in the aftermath of the crisis, while in the control group investment opportunities were negatively related to post-crisis changes in investment. Finally, chaebol rm protability increased relative to control rms in the years following the crisis. Overall, our results suggest that Korean chaebol were able to use their internal capital markets to mitigate the negative eects of the Asian crisis on corporate investment.

I examine whether dividend policy affects investment decisions through two-stage regressions with diagnostic analyses sufficient to highlight endogeneity. Contrary to Miller and Modigliani [1961, Dividend policy, growth, and the valuation of shares, Journal of Business 34, 411-433], neither the magnitude of dividends nor their changes are merely determined as the residual cash flows after investment spending. Results also indicate that discretionary accruals mitigate the competition for capital resources between investment decisions and dividend policy. However, the marginal propensity to pay dividends is similar between discretionary accruals and the other components of earnings.

This paper examines the determinants of the heated negotiation within the syndicate––i) between the lead underwriter and co-managers and ii) among co-managers––and how it affects IPOs. We find that the heated negotiation is associated with less compensation for co-managers. Our results overall suggest that the inferior co-managers’ bargaining position and superior lead underwriter bargaining power, together increasing a chance of an unfair initial profit sharing, lead to the heated negotiation. The heated negotiation between the lead underwriter and comanagers appears to increase the number of co-manager recommendations, and these recommendations increase when they are better compensated and the IPO size is large. We also consider other key underwriter services such information production, market making, and all-star analyst coverage. However, we find no significant results and these services are commonly not positively related to co-manager compensation, suggesting that the provision of key underwriter services is tightly linked to their corresponding compensation.

Logic suggests that a link might exist between insider trades and share repurchases for their potential to signal mispricing when market prices deviate from fair value; both events emanate from essentially the same set of decision makers. A rich set of literatures suggests that executives have timing ability with respect to both events. However, several researchers view this collective evidence with suspicion and discount the notion that the evidence reflects fundamental mispricing or managerial timing. We address this debate by considering these two transactions jointly using publicly available information to form portfolios evaluated using performance metrics common to the asset management industry as well as those commonly used in academic studies. For “value” buyback firms where the likelihood of undervaluation is seemingly a more plausible economic motivation for repurchases, insider trading provides a strong complement to the repurchase signal. The same is not true for other buyback cases where factors aside from mispricing may be motivating those repurchase decisions. Our evidence is consistent with prior studies which conclude that some managers do exhibit timing ability.

This study examines trading activity for gold futures contracts in twelve countries. Because of the severe lack of liquidity, in nine of the gold futures markets, we assess them as dysfunctional markets. In the regression analysis, we analyze what factors significantly affect gold futures trade. The regression analysis is performed for liquid markets in three countries: COMEX, USA; SFE, China; and TOCOM, Japan. In the result of this paper, the demand for speculation on gold is shown as a common factor to boost gold futures trades in all markets. The hedge demand for the depreciation of the dollar motivates investors only in SFE, and in the same market exchange rate risk has a negligible impact on trades. On the other hand, exchange rate risk discourages investors in TOCOM to trade gold futures. The investigation which is focused on exchange rate risk shows that investors, only in a market where the variation of exchange rate triggers positive larger variances in gold futures prices, seem to be reluctant to trade gold futures during the period with highly volatile exchange rate. Lastly, we conclude that success of a gold futures market is up to the extent of exposure to exchange rate risk as well as the amount of speculation or hedging.

The overconfidence hypothesis put forward by Gervais and Odean (2001) predicts that if investors are overconfident, they trade more aggressively subsequent to market gains. To gain further insight into the hypothesis, we examine whether both U.S. and domestic market gains make Asian investors trade more aggressively in subsequent periods in their domestic markets. Consistent with the predictions of the theory, we find that both U.S. and domestic market gains make Asian investors trade with more overconfidence in bull markets, in periods of high investor sentiment, and in periods of extremely high market returns after controlling for the alternative theories in explaining the return-volume relation. Moreover, we find that further integration of Asian stock markets with U.S. stock markets after the Asian financial crisis in 1998 is an important reason for Asian investors’ response to U.S. market gains by trading with overconfidence. We also find that Asian investors exhibit more significant overconfident trading behavior in markets with a short-sale constraint than in markets without it.

This paper re-examines the relation of stock market volatility with those of macro-finance variables using data from 1950 to 2009. Unlike the findings in previous studies, macroeconomic volatilities do affect aggregate stock volatility significantly if derivative trading is taken into consideration. On the other hand the evidence on greater stock return variability in economic downturn is ambiguous. It is argued that those findings are likely to have been caused by omitting variables for financial market activities. It is shown that derivative trading, either exchange trading or over the counter trading, increases stock volatility significantly.

This study explores the impact of aggregate daily order imbalances in options on volatility risk premium on its underlying index. Two types of volatility risk premium, ex-post and ex-ante volatility risk premiums, are included to address this issue. Based on Taiwan stock index and options (TXO) data over the period from January 1, 2005 to December 31, 2009, several interesting results emerge. First, order imbalances in near-month options, especially for call options’, have a predominant influence on ex-post and ex-ante volatility risk premiums. Next, order imbalances of near-month options in either direction, excess buy orders or excess sell order, have distinct effect on volatility risk premium. Overall, the increased level of excess buy orders drives ex-post and ex-ante volatility risk premiums upward, but downward only for excess sell orders in call options. Finally, ex-post and ex-ante volatility risk premiums are positively related to order imbalances of near-month options in respond to continuous price variations. Nonetheless, there is no significant relation for index price jumps.

This study examines the empirical performance of three model-based option valuation approaches in the KOSPI200 options market. We evaluate the in-sample pricing, out-of-sample pricing and hedging performance of the approaches based on the specification of option pricing models directly (a pricing model-based approach), on the pricing kernels implied by the option pricing models (an implied pricing kernel-based approach), and on parametric pricing kernels which are independently structured to have their own explicit functional forms (a parametric pricing kernel-based approach). Two option pricing models, a GARCH option pricing model and a Black-Scholes (BS) option pricing model, and their implied pricing kernels are analyzed and two parametric pricing kernel specifications suggested by Rosenberg and Engle (2002) are compared in a unified framework which extends the GARCH process of Duan (1995) to reflect the dynamics of asymmetric volatility. We find that the empirical performance of the approaches related to the GARCH and Black-Scholes option pricing models is moderately improved when we estimate the structural parameters using options data (options-based estimation) compared to the model performances when estimating the parameters using only a time-series of underlying returns data (underlying returns-based estimation). With the estimates under the underlying returns-based estimation, the pricing modelbased option valuation approach outperforms the implied pricing kernel-based option valuation approach for both the GARCH and BS option pricing models. However, with the estimates under the options-based estimation, this relationship is reversed in pricing OTM options in the case of the GARCH option pricing model. Although the BS option pricing model is generally the worst performer with the estimates under the underlying returns-based estimation, it yields better performance for pricing ITM options and similar performance for hedging compared to the GARCH option pricing model with the estimates under the options-based estimation. The option valuation approach based on the parametric pricing kernel of which functional form is a Chebyshev polynomial performs best out of all approaches and methods considered in this study

This study sheds light on the role of option-implied investor sentiment in the credit default swap (CDS) market. Due to the limits to arbitrage caused by credit or counterparty risk and margin requirements, CDS spreads may deviate from fundamentals under the influence of sentiment-driven investors who possess excessively bearish or bullish perceptions to the market or to the firms. We derive several systematic and firm-specific sentiment measures from index options and individual stock options, respectively, and we investigate their impacts on CDS spreads. The sentiment influence is significant, even after controlling the fundamental variables, and is more pronounced for lower-rated CDS obligors during a turbulent period, which is consistent with the limits to arbitrage theory.

One of the most widely used option valuation models among practitioners is the ad hoc Black-Scholes (AHBS) model. The main contribution of this study is methodological. We carefully consider three dividend strategies (No dividend, Implied-forward dividend, and Actual dividend) for the AHBS model to investigate their eect on pricing errors. We suggest a new dividend strategy, implied forward dividend, which incorporates expectational information on dividends embedded in option prices. We demonstrate that our implied forward dividend strategy produces more consistent estimates between in-sample market and model option prices. Probably even more important is that our new implied forward dividend strategy makes more accurate out-of-sample forecasts for 1-day or 1-week ahead prices. Second, we document that both a Return-volatility Smile and a Return-pricing Error Smile exist. From these return characteristics, we make two conclusions: (1) the return dependency of implied volatility is an important explanatory variable and should be controlled to reduce the pricing error of an AHBS model, and (2) it is important for the hedging horizon to be based on return size, i.e. the larger the contemporaneous return, the more frequent an option issuer must rebalance the option's hedge.

In this paper we consider the pricing of quanto derivatives with the bivariate GARCH-Jump model, in which jumps take place in the price kernel, and consequently in foreign asset returns and in exchange rates. In the empirical investigation, we use Dow Jones, NASDAQ and NIKKEI 225 indexes, exchange rates and corresponding index warrants data to examine the effects of jump on derivative pricing. The empirical results suggest that the unrestricted bivariate NGARCH-Jump model outperforms the other four models considered in this study. The evidence also reveals that the average pricing error is the smallest for the unrestricted bivariate NGARCH-Jump model. Hence, the nonlinear asymmetric model with jumps captures the dynamics of index return and exchange rate well.

Debt is an effective mechanism to mitigate agency costs in relieving manager-shareholder conflicts. Similarly, a choice over maturity of debt allows the firm to discipline entrenched managers. We show cross-country evidence that national culture along with corporate governance factor influences the lender’s (or the borrower’s) choice over the firm’s debt maturity. Using Hofestede’s frameworks (1980, 1991), uncertainty avoidance index (UAI), masculinity (MAS), and long-term orientation (LTO) indices are negatively related to overall debt maturity in country. This implies that the risk-averse lenders offer (or, borrowing firms use) short-term maturity debt when surrounding economic environment becomes more uncertain and ambiguous. This is consistent with literatures that national cultural tendency play a critical role in determining financing decision in the presence of uncertainty and ambiguity. We argue that national culture is one of the last factors to the puzzle of disparity of debt maturities across countries. The relative effect of national culture and corporate governance on firms’ debt maturity selection depends on whether a country’s financial system is bank-based economy (e.g., Japan and Germany) or market-based economy (e.g., U.S. and U.K.).

This paper studies how the labor union strength affects the repurchase decision. We argue that a low (high) unionized firm is more (less) likely to buy back shares. The low unionized firm may buy back more shares because of the wealth transfer effect between shareholders and labors. In addition, the high unionized firm may not buy back shares to avoid infuriating the powerful union. Yet, we also find that, once the high unionized repurchaser decides to buy back shares, the firm will complete the repurchase program against the labor union. Therefore, a negative relation between the post-buyback abnormal return and the extent to the unionization is suggested. Finally, we find that the impact of union on the repurchase decision is reduced if the buyback is associated with the mergers or employee stock options, and impact is increased whenever the buyback is related to the excess cash distribution or the corporate governance of the firm is well.

We empirically test whether firms that belong to a business group behave differently from stand-alone firms in their decisions regarding internal corporate governance, given product market competition. Existing literature has ignored the possibility that firm characteristics may differentially affect the relationship. We find that the member firms of business groups maintain better internal corporate governance in a non-competitive environment, whereas stand-alone firms do so in a competitive environment. We also find that the positive effects of internal corporate governance on firm value are stronger in a non-competitive environment only for stand-alone firms. We ascribe the detected differences in corporate behavior and performance to differences in the level of competitive pressure to which firms are exposed. When we classify the firms by asset size or product market leadership, we observe a similar pattern.

The literature shows that increases in cash holdings can increase firm value but the marginal value of cash decreases with the level of cash holdings. Increases in cash holdings may come from operation, investment, and financing activities and their implications to the value of cash holdings shall differ. This study examines the effects of cash sources on the value of cash holdings. Consistent with both of the trade-off motives and the agency theory of cash holdings, our results show that the decreased marginal value of cash holdings is significantly lowered when the additional cash comes from operating activities (CFO), indicating lower incentive to accumulate cash and potential higher agency problem concern from accumulating cash internally in profitable firms. On the contrary, the marginal value decrease is significantly mitigated when the additional cash comes from the investment activities (CFI) or financing activities (CFF), and the positive impact of CFF mainly comes from the equity-based financing, suggesting positive signal of managers’ confidence on future growth. In addition, investors value the cash higher if firms also payout cash dividend, except in low-levered firms. Overall, the agency explanation to the value of cash holdings is more pronounced in firms with higher capability of generating cash internally. For firms with better access to external financing for cash holdings, the value of cash holdings is highly determined by the economical rationales of holding large cash.

In an effort to improve market transparency, Korea Exchange (KRX) has continuously adopted measures to publicly disclose more information regarding quotes and orders. This paper studies the effects of four events initiated by KRX aimed to enhance the pre-trade transparency: two for market opening by single-price call auction, and two for regular trading hours operated by continuous auction. Our focus is on the effect of the improved pre-trade transparency on the trading of large and/or most actively traded stocks. We select 20 stocks, 10 largest stocks in market capitalizations, and another 10 most actively traded stocks based on trading volumes, before and after each event. We proceed to directly analyze on how liquidity, depth, and investors trading behavior were affected by these events. Market liquidity and depth were generally improved but not by statistically significant margin. Investors adjusted their trading strategies as smaller number of orders was cancelled and it took less time to for traders to cancel their orders. Our study shows that policies aimed to enhance pre-trade transparency might have only marginal impact on the trading of large and/or actively traded stocks as they have limited success in providing additional information to the investors of these stocks.

Under a Build-Operate-Transfer (BOT) scheme, it is common for a government to select a concessionaire via a Beauty Contest and then sign a concession contract following a two-sided negotiation. The two-sided negotiation following the Beauty Contest influences the bidding strategies of the bidders in the Beauty Contest. This investigation tries to link auctions and bargaining to price royalty in a BOT scheme under information asymmetry. For simplicity, this study assumes that royalty is the only relevant evaluation criterion in the Beauty Contest and the sole issue of negotiation, thus reducing the Beauty Contest to a transformed first-price sealed-bid auction and the subsequent negotiation to bargaining regarding a single issue. Royalty can then be priced using the traditional auction theory combined with a classical bargaining model. Furthermore, subsidy is also considered as a negative payment of a concessionaire, thus the model can price not only royalty for a profitable project but also subsidy for an unprofitable project. Some common collusive tricks are then incorporated into the bidding and bargaining game to discuss how those manipulate the royalty or subsidy. The discussion shows that when the cartel underestimates the net operating cash flows and overestimates the construction costs, it effectively decreases the royalty received by the government or increases the loss subsidy offered by the government. Finally, this study use a case study to demonstrate how the model works in the real world and how the private sector profits from collusion in a BOT tender.

In this study, the well-known pairs trading strategy, one of typical market neutral strategies, is modified to be able to utilize high frequency equity data, and it is applied to the constituent shares of the KOSPI (Korea Composite Stock Price Index) 100 index. This study is distinguished from the most of previous work on the traditional pairs trading strategy in that we introduce the use of high frequency data in strategy modeling instead of daily closing prices, which allows us to analyze the performance of the strategy in high frequency domain. More specifically, we extract the trading signal, which is based on the spread between stocks of pair, by estimating time adaptive regression coefficients using the Kalman filter. As for underlying universe for the strategy, we confine ourselves to consider the most liquid 100 stocks in KOSPI as a basket for our experiment. Major findings include that arbitrage profitability is in fact present without being subject to market condition even when conservative transaction costs are taken into account. In particular, our strategy outperforms better in bear market condition while it varies depending on industry group. The results also demonstrate that the performance of the strategy is dependent upon timing of the market entry; the performance of trades entered around at opening and closing of the daily market is appeared to be relatively superior to that of trades executed in the rest of daily trading hours. Furthermore, we introduce an enhanced version of the strategy, which selects high-ranking pairs to trade for the next time period based on a set of in-sample statistics. It is verified that the enhanced strategy has better profitability and reliability compared to our basic strategy.

This study extends Sias (2004) and Wylie (2005) to examine whether herding exists among foreign institutional investors (FIIs), what is the cause of their herding, and whether their herding is stable across both bullish or bearish periods or institutional types in the Taiwan stock market. By testing the cross-sectional dependence in the FIIs’ demand for stocks in two adjacent months and decomposing them into their own cascades and other cascades, we demonstrate that the FIIs’ cascades mainly result from their herding for securities traded at medium to high frequency even though their own cascades still exist. We find little evidence that FIIs’ herding behavior is driven by habit investing in stocks which FIIs trade with at least medium to high frequency. The momentum trading of FIIs is found to account for little of their herding, and the obviously positive relationship between the FIIs’ demand and their lag demand changes little, even with their momentum trading being taken into consideration. Moreover, FIIs are more likely to herd in large capitalization securities, and thus investigative herding, rather than informational cascades, is the main reason for herding among FIIs in the Taiwan stock market, contrary to the result put forward by Sias (2004) and Wylie (2005). One of our contributions may be to find that the phenomenon that FIIs’ cascades mainly result from their herding does not change in the bullish and bearish Taiwan stock market. However, since FIIs are more likely to herd in large-capitalization securities, their herding will obviously increase (decline) when they herd in large-capitalization (small-capitalization) stocks in the bullish (bearish) stock market period. This study further finds that FIIs and dealers are more likely to follow similar-type institutions than different-type institutions, respectively, which is consistent with the view proposed by Del Guercio (1996) and Bennett, Sias and Starks (2003) that institutional herding is driven by reputational or characteristic herding. Security dealers in Taiwan will tend more often to follow same-type herding while FIIs will more often negatively follow different-type herding, which implies that, contrary to FIIs, security dealers will exhibit the strongest tendency to herd especially in same-type institutions possibly due to reputation concerns, which is consistent with the view of investigative and reputational herding put forward by Sias (2004) and Wylie (2005).

In this paper I establish the presence of seasonality in the cash flows to the U.S. domestic mutual funds. January is the month with the highest net cash flows to equity funds and December is the month with the lowest net cash flows. The large net flows in January are attributed to the increased purchases, and the small net flows in December are due to the increased redemptions. Thus, the turn-of-the-year period is the time that most mutual fund investors make their investment decisions. I offer the possible sources for the seasonality in mutual funds flows.

Using bank accounting data for 22 countries in Asia over the period 1995-2009, this article is the first to apply the dynamic panel Generalized Method of Moments (GMM) technique to investigate the impacts of diversification on profitability and risk for 967 banks. We find that income diversification in Asian banks reduces risk, but does not increase profitability on a broad sample basis. When bank specialization and a country’s income level are considered, the results become complicated. Diversification decreases profitability as well as increases risk for savings banks. The impact is also different for commercial, cooperative, and investment banks either by increasing profitability or reducing risk. On the other hand, diversification increases risk for banks in high income countries, while increasing profitability or reducing risk for banks in middle and low income countries. Finally, our results further reveal that the persistence of risk is greatly affected by bank specialization and a country’s income level, as all risk variables present persistence from one year to the next. Our findings suggest that the type of bank specialization matters for the effect of diversifying revenue sources.

We investigate the effect of private equity funds on the governance of targets of partial acquisitions for the 1997-2000 period. We find that private equity funds dominate the partial acquisitions market and account for most of shareholder activism. The three-day cumulative abnormal return (CAR) on partial acquisitions by activist private equity funds is 18.51% showing a significant economic effect of the private equity fund activism on the target firm governance. The CAR for partial acquisitions by non-activist private equity funds is 1.86%, which is likely to reflect a partial resolution of the pricing inefficiencies in small-cap markets. Activist private equity funds are more likely to obtain a board representation. While most activist private equity funds stay with target firms at least for a year, some activist private equity funds close their position within a year via takeover. The takeover anticipation effects appear to be present in the positive market reaction to partial acquisitions by private funds. Underleveraged targets are more likely to be taken over in a year. Furthermore, the market reaction to partial acquisitions by activist private equity funds is particularly large when there is no previous outside block.

This paper provides further evidence regarding the effect of deposit insurance on the risk-shifting behavior at commercial banks in the United States. In particular, we compare the risk-shifting behavior of commercial banks before and after adopting the risk-based capital requirements in the U.S. market. To test the risk-shifting behaviors, we propose a new pricing model for the valuation of deposit insurance premium using a barrier option framework. We also estimate the unknown parameters using a maximum likelihood estimation method rather than Ronn and Verma’s (1986) two-equation approach. We find that the risk-shifting behaviors at commercial banks have reduced significantly but have not disappeared after the adoption of a risk-based deposit insurance system. The risk-shifting behavior at commercial banks still exists, especially for those banks with high risks or high financial distress probabilities. We find that the deposit insurance reform prevents large banks from shifting their risk to the deposit insurers as well.

Recent evidences indicate that privatization leads to enormous benefits to society, with few, if any, undesirable costs. However, stakeholders of privatization seem not to be satisfied with the resulting performance of privatized firms. Using data from 202 privatized firms from 37 countries during the period 1980–2002, we follow the long-run operating performance of privatized companies for up to 10 years and study the costs and benefits of privatization. Privatization is followed by a 1.1-percentage- point increase in the 5-year mean ratio of operating income to sales as firms catch up with the global standard of industry-matched control groups and by a 2.3-percentage-point decrease in the next 5-year mean ratio. Indeed, the previously documented striking achievements were merely a reflection of the world business cycle, the pace of economic activity in general, and the technological innovations during the last three decades.

In this paper we investigate the effects of corporate ownership structure on dividend policy in the two different economic regimes: The People’s Republic of China and The Republic of Korea. We compare the ownership structure and financial status of firms, build a model to compare the effects of different ownership structure and analyze the determinants of corporate cash dividend policy in China and Korea. As a result, we have found that the preferences for dividend of major shareholders of firms in both countries are quite different, that dividend level in China has a significant and positive relationship with the largest shareholder’s and state ownership, while dividend level in Korea does not, and that dividend per share has a positive relationship with earning per share but without any relationship with cash ratio in China, while it has a positive relationship with cash ratio but without any relationship with earning per share in Korea.

This paper investigates the trading behavior of individual, domestic institutional and foreign investors around earnings announcements in the Korean stock market. We first find that post-earnings-announcement drift (PEAD) exists in the Korean stock market for the post-2000 sample period, and that PEAD in Korea is similar in magnitude and persistence to PEAD in the US. Inspecting the trading behavior of the three types of investors before and after earnings announcements, we find that foreign investors’ trading behavior prior to earnings announcements predicts earnings surprise, and that their trades after earnings announcements appear to exploit PEAD to their advantage. In contrast, domestic institutional investors’ trades do not predict earnings surprise and their post-announcement trades do not seem to take account of PEAD. The findings suggest that foreign investors are superior to domestic investors in terms of informational advantage and/or investor sophistication. Somewhat puzzling is the trading behavior of individual investors, whose trades before earnings announcements predict earnings surprise in the opposite direction, and they continue to buy bad earnings surprise firms even after earnings announcements.

We apply nonparametric statistical procedures to extract jumps around scheduled macroeconomic news in U.S. Treasury bond, U.S. Treasury note and Eurodollar futures prices from 2001 to 2004. Volatility and trading activity during announcement days with jumps versus no jumps are also analyzed with computerized trade reconstruction (CTR) and time and sales high frequency data. Several interesting results are obtained. First, while jumps often occur during announcement periods, many jumps cannot be associated with macroeconomic news releases. Second, volatility and trading volume are higher during announcement days with jumps than announcement days without jumps. Furthermore, volatility returns to the pre-announcement level faster following scheduled news releases with jumps than after announcements without jumps. Third, we find that price and trading volume are adjusting simultaneously in the first one-minute interval following the announcement. Thus our results do not confirm that there exists a twostage adjustment process for prices and trading volume in interest rate futures following scheduled public news releases.

The study indicates that a continuous component and infinite activity jumps are present in the ultra-high frequency VIX data, especially when taking into account the impact of market microstructure noise on various statistics. The degree of jump activity is in the range from 1.71 to 1.95, indicating a very high degree of jump activity. The total quadratic variation can be split into a continuous component of 29% and a jump component of 71%, which by construction is attributable to small and large jumps. The study further examines two jump-diffusion models in the Lévy process class using front-month VIX futures data from Q2 2006 to Q3 2009. Using one-day lagged structural parameters, modeling finite-activity jumps is important for pricing. But for simple trading strategies, incorporating infinite-activity jumps yields the best performance with an average absolute error of one-and-a-half to two volatility points each day.

This paper examines the hedging impact on the underlying stock market using a comprehensive dataset of covered warrants traded in the Taiwan Stock Exchange (TWSE). Since TWSE requires the warrant issuers to conduct dynamic hedging over the life of warrants, we can estimate the number of shares bought or sold for rebalancing the hedging portfolio and measure its impact. We find significant positive abnormal returns and trading volumes before the announcement day of warrants issuance, suggesting that issuers establish their hedging portfolios before the announcement day. The magnitude of the price effect is positively related to the size of the hedging portfolio. Moreover, there is a significantly positive relationship between stock return volatility and the price elasticity of hedging demand (defined as the percentage of shares needed for rebalancing hedge portfolio when the underlying stock price changes 1%). Finally, we also observe significantly negative price effect to the underlying stock before (after) the expiration date for call warrants that are expired out-of-the-money (in-the-money). For call warrants expired in-the-money, the negative price impact is due to the fact that warrants traded in TWSE are cash settlement when exercised, and thus the issuers have to liquidate the hedging portfolio after expiration, which results in selling pressure on the underlying stock.