Pairs Of Stocks Research Articles

Inferring Information from Trading

Most theoretical as well as empirical models in market microstructure model information flow and insider trading for one stock at a time. Information consists of a market-wide, an industry-specific, and a firm-specific component. An as yet unexplored implication is that information for one stock may have consequences for other stocks as well. This suggests that market makers may be able to infer information for a specific stock not only from observing the order flow in that stock, but also from observing order flows in other stocks, particularly other stocks within the same industry. This paper models information arrival and the resulting order flows by developing a two-stock sequential trade model based on the one-stock model in Easley, Kiefer, O'Hara, and Paperman (1996). The paper uses a sample of NYSE listed S&P 500 stocks and estimates the model for stock pairs in the same industry and for control stock pairs in different industries. The control pairs consist of stocks in different industries, which are matched on market capitalization and average daily turnover. Using the information in trade data, the model determines the frequency of information events relevant to one or both of the stocks. The analysis shows that the probability of an information event relevant to both stocks is significantly higher for stock pairs in the same industry than for matched stock pairs in different industries. This suggests that market makers may not only infer information from the order flow in their assigned stock, but also from the order flow in other stocks within the same industry.

Noise Trader Risk: Evidence from the Siamese Twins

This paper provides new evidence regarding the magnitude and nature of noise trader risk. I examine returns for two pairs of Siamese twin stocks: Royal Dutch/Shell and Unilever NV/PLC. These unusual pairs of fundamentally identical stocks provide a unique opportunity to investigate the nature of noise trader risk. I investigate two facets of noise trader risk: (1) the fraction of total return variation unrelated to fundamentals (i.e., noise), and (2) the short-run risk borne by arbitrageurs engaged in long-short pairs trading. I report evidence that 30% of daily return variation and 10% of monthly return variation is attributable to noise. Noise trader risk comes in both systematic and firm-specific varieties, and varies considerably over time. The conditional volatility of long-short portfolio returns ranged from 0.4% to 1.6% per day during the 1989-2003 sample period. Noise trader risk was especially high around the failure of Long-Term Capital Management in 1998 and during the collapse of the technology bubble in 2000. I conclude that noise trader risk is a significant limit to arbitrage.

ARE COMMON STOCKS A HEDGE AGAINST INFLATION?

AbstractWe test whether U.K. common stocks hedge against inflation using a framework of the tax‐augmented Fisher hypothesis. Aggregate and disaggregate (seven industry groups) monthly data covering 48 years are used. All pairs of stock and retail price indexes are cointegrated. Tests in most cases reveal significant shifts in the cointegrating vectors, and accounting for these shifts improves the precision of the estimates. The point estimates of goods price elasticity are significantly above unity in all but two cases. These findings, though in sharp contrast to most existing findings that report price elasticity of below unity, appear theoretically more plausible because nominal stock returns must exceed the inflation rate to insulate tax‐paying investors.

Enforcing the Law of One Price: Nonlinear Mean Reversion in the ADR Market

This work presents evidence that cross‐isted stocks (ADRs) are traded in markets that are not completely integrated, and it is the presence of high frequency arbitrage activity that forces these stock pairs to be most commonly in relative equilibrium. A Threshold Autoregressive (TAR) model tests the hypothesis that the reversion to equilibrium of the price discrepancy series is a nonlinear function that has nontrivial thresholds, and that large price discrepancies are relatively short‐lived. The TAR specification models the neutralization of arbitrage forces with thresholds that separate outer regions where large discrepancies have a strong reversion to equilibrium from a central region where transaction costs significantly mitigate this reversion.

TRADING COSTS OF NON‐U.S. STOCKS ON THE NEW YORK STOCK EXCHANGE: THE EFFECT OF INSTITUTIONAL OWNERSHIP, ANALYST FOLLOWING, AND MARKET REGULATION

AbstractWe investigate the differences in market microstructure between U.S. and non‐U.S. stocks cross‐listed on the New York Stock Exchange using a sample of 316 pairs of matched stocks. We find that non‐U.S. stocks have wider spreads and larger adverse‐selection costs than U.S. stocks even after controlling for macro‐level institutional differences. Regression analysis shows that spreads and adverse‐selection costs are negatively correlated with institutional ownership and analyst followings. Thus, the higher spreads and adverse‐selection costs for non‐U.S. stocks can be partly explained by the lower institutional ownership and analyst following of non‐U.S. stocks. In addition, we find that although the spreads and adverse‐selection costs for non‐U.S. stocks are significantly higher before the implementation of Regulation Fair Disclosure (FD), the differences become even greater after Regulation FD, suggesting that Regulation FD has improved the information environment for U.S. stocks.

Application of Superresolution Methods for Expert Control of Cylindrical Objects

The possibility of the combined application of the extrapolation procedure to the spectrum of echo signals during construction of its AR model and of the algorithm for the production of flaw images using a multibeam method of projection in the spectral space (PSS) for testing cylindrical objects is shown. Improvement of the quality of flaw images due to a significant decrease in the “side lobe” levels in the point-spread function is demonstrated in a model experiment. These methods may prove to be especially efficient for testing metallurgical flaws in wheel pairs of rolling stock, workpieces for turbine rotors, and similar items.

Mining market data: A network approach

We consider a network representation of the stock market data referred to as the market graph, which is constructed by calculating cross-correlations between pairs of stocks based on the opening prices data over a certain period of time. We study the evolution of the structural properties of the market graph over time and draw conclusions regarding the dynamics of the stock market development based on the interpretation of the obtained results.

TRADING COSTS AND QUOTE CLUSTERING ON THE NYSE AND NASDAQ AFTER DECIMALIZATION

AbstractWe examine execution costs and quote clustering on the New York Stock Exchange (NYSE) and NASDAQ using 517 matching pairs of stocks after decimalization. We find that the mean spread of NASDAQ stocks is greater than the mean spread of NYSE stocks when spreads are equally weighted across stocks, and the difference is greater for smaller stocks. In contrast, the mean NASDAQ spread is narrower than the mean NYSE spread when spreads are volume weighted, and the difference is statistically significant for large stocks. Both NYSE and NASDAQ stocks exhibit high degrees of quote clustering on nickels and dimes, and quote clustering has a significant effect on spreads in both markets.

Application of the ultrametric distance to portfolio taxonomy. Critical approach and comparison with other methods

We calculate the ultrametric distance between the pairs of stocks that belong to the same portfolio. The ultrametric distance allows us to distinguish groups of shares that are related. In this way, we can construct a portfolio taxonomy that can be used for constructing an efficient portfolio. We also construct a portfolio taxonomy based not only on stock prices but also on economic indices such as liquidity ratio, debt ratio and sales profitability ratio. We show that a good investment strategy can be obtained by applying to the portfolio chosen by the taxonomy method the so-called Constant Rebalanced Portfolio.

In Olden Days a Glimpse of Stocking: Fashion, Fetishism and Modernity in Boris Vian’s L’Écume Des Jours

This article analyses an instance of leg fetishism in Boris Vian’s L’Écume des jours (1947). The aim is to show how the protagonist’s fixation on a pair of nylon stockings can be read as a negotiation of the problems of modernity: the ambivalence that the French feel towards the Americanisation of their culture in the postwar years is shown to be located at the heart of this fetish. Fetishism will then be located within recent theories of the ‘everyday’. Once the modernity of the text has been established, it will be analysed comparatively as a cultural icon: models for the novel’s content will be sought in postwar issues of the fashion magazine Elle. This, in turn, will lead into a discussion of a ‘fashion reading’ of L’Écume des jours, incorporating Georg Simmel’s essay of 1904.

Can We Learn to Beat the Best Stock

A novel algorithm for actively trading stocks is presented. While traditional expert advice and ``universal'' algorithms (as well as standard technical trading heuristics) attempt to predict winners or trends, our approach relies on predictable statistical relations between all pairs of stocks in the market. Our empirical results on historical markets provide strong evidence that this type of technical trading can ``beat the market'' and moreover, can beat the best stock in the market. In doing so we utilize a new idea for smoothing critical parameters in the context of expert learning.

Trading Costs and Quote Clustering on the NYSE and NASDAQ after Decimalization

We examine execution costs and quote clustering on the NYSE and NASDAQ using 517 matching pairs of stocks after decimalization. We find that the mean spread of NASDAQ stocks is greater than the mean spread of NYSE stocks when spreads are equally weighted across stocks and the difference is greater for smaller stocks. In contrast, the mean NASDAQ spread is narrower than the mean NYSE spread when spreads are volume-weighted and the difference is statistically significant for large stocks. Both NYSE and NASDAQ stocks exhibit high degrees of quote clustering on nickels and dimes and quote clustering has a significant effect on spreads in both markets.

Testing the Gaussian copula hypothesis for financial assets dependences

Using one of the key properties of copulas that they remain invariant under an arbitrary monotonic change of variable, we investigate the null hypothesis that the dependence between financial assets can be modelled by the Gaussian copula. We find that most pairs of currencies and pairs of major stocks are compatible with the Gaussian copula hypothesis, while this hypothesis can be rejected for the dependence between pairs of commodities (metals). Notwithstanding the apparent qualification of the Gaussian copula hypothesis for most of the currencies and the stocks, a non-Gaussian copula, such as the Student copula, cannot be rejected if it has sufficiently many ‘degrees of freedom’. As a consequence, it may be very dangerous to embrace blindly the Gaussian copula hypothesis, especially when the coefficient of correlation between the pairs of assets is too high, such that the tail dependence neglected by the Gaussian copula can became large, leading to the ignoring of extreme events which may occur in unison.

Dependency detection in MobiMine: a systems perspective

This paper considers the problem of detecting dependencies among data streams and presenting the results in a mobile data mining system. It particularly focuses on the systems issues addressed by MobiMine, a system for mining financial data streams from PDAs. It presents an overview of the MobiMine, explains the two algorithmic techniques (correlation and conditional probability rules) used for detecting dependencies between a pair of stocks, identifies the systems challenges, and offers solutions. The paper also presents experimental results supporting MobiMine’s scalable performance.

Survey and Review

A story in Aristotle's Politics is often cited as the first published discussion of a financial derivative, an instrument whose value is derived from other assets or events. In Greece of the fifth century B.C., the philosopher Thales, believing six months in advance that the spring weather would be exceptionally favorable to olive growth, negotiated the right to rent oil presses for the next harvest at a bargain rate from press owners who wanted to hedge their bets against the possibility of a poor harvest. In today's parlance, Thales purchased a call option. When spring brought a lush olive harvest, Thales rented the machines to others at a much higher rate, making a tidy profit to support his philosophical inquiries. Options and other financial derivatives have become extremely popular in recent years, for better or worse. Overinvestment in derivatives of questionable value has led to notorious financial disasters such as the bankruptcy of Orange County, California, and the collapse of Barings Bank. Warren Buffett famously described derivatives as "financial weapons of mass destruction" in the Berkshire Hathaway Annual Report of 2002. Nonetheless, derivatives are undoubtedly here to stay; in 2002, trade in derivatives worldwide was estimated at $100 trillion or more, equaling or exceeding the total value of "real" equities. Readers of SIAM Review can take a special interest in derivatives because their analysis is an arena in which mathematics has had a huge impact on finance. In particular, the 1970s papers of Black and Scholes (1973) and Merton (1976) began a flood of research on options pricing that continues to this day. This issue's Survey and Review paper focuses on the special case of a spread option, a derivative that is based on the difference in value of two assets. Suppose you have some money to invest and the choice between two stocks to buy. You suspect that one will do much better than the other over the next few years, but you don't know which one. An ideal situation might be if you could buy one of them and hold it for a certain length of time, and then have the option of trading it in for the other stock if it turns out that that one did better. Another way to achieve the same benefit would be if someone agreed to pay you the difference in value between the two stocks at some specified time if you discover with hindsight that you made the wrong decision. Of course no one will offer you such an option free of charge, and so the mathematical question is how to price this option. This question is even more challenging if the option has a strike price that must be paid in order to exercise it. While spread options aren't publicly traded on arbitrary pairs of stocks, a variety of complex spread options are available in many markets, and are particularly popular in energy markets. Energy prices are extremely volatile compared to other commodities, a fact that most consumers are well aware of and that greatly affects producers, distributors, and speculators. Spread options are an important hedging and speculation tool, and are available in many different forms. For example, options may be based on the difference between the prices of two different forms of oil (the crack spread), between the prices of oil and electricity (the spark spread), or between the prices of a single commodity at two different times (calendar spreads) or locations (locational spreads). In the following article by Carmona and Durrleman, section 2 is devoted to a detailed description of these and other spread options that are used in practice. The authors then summarize the classical Black--Scholes pricing paradigm for options based on a single commodity, and the multivariate extensions needed for the analysis of spread options. The underlying stochastic differential equations can be solved by various approaches, and several approximations are illustrated and compared. Particular difficulties associated with energy markets are discussed throughout and are a main focus of the latter sections. Financial mathematics is as exciting growth area for applied mathematics, and we hope this paper will introduce readers to some challenging problems of current interest in this field.

Impact of Trypanosoma cruzi clonal evolution on its biological properties in mice

Twenty Trypanosoma cruzi stocks attributed to the 19, 20, 39, and 32 clonal genotypes were comparatively studied in BALB/c mice during the acute and chronic phases of the infection to test the working hypothesis that T. cruzi clonal structure has a major impact on its biological properties. Fourteen parameters were assayed: (1) infectivity; (2) prepatent period; (3) patent period; (4) maximum of parasitemia; (5) day of maximum of parasitemia; (6) parasitemia; (7) mortality, (8) percentage of positive hemoculture, (9) tissue parasitism; (10) inflammatory process during the acute phase of the infection; (11) mortality, (12) percentage of positive hemoculture; (13) tissue parasitism; and (14) inflammatory process during the chronic phase of the infection. Statistical comparison showed that the results are overall consistent with the working hypothesis that biological differences are proportional to the evolutionary divergence among the genotypes. Thus, closely related genotypes (19 vs 20 and 32 vs 39) show in general fewer differences than distantly related groups (19 or 20 vs 32 or 39) except for the comparison between 19 and 32. The working hypothesis is even more strongly supported by the result of the nonparametric Mantel test, which showed a highly significant correlation ( P=2.3×10 −3) between biological differences and genetic distances among all pairs of stocks. These data taken together emphasize that it is crucial to take into account the phylogenetic diversity of T. cruzi natural clones in all applied studies dealing with diagnosis, drug and vaccine design, epidemiological surveys, and clinical diversity of Chagas' disease. Index Descriptors and Abbreviations: Trypanosoma cruzi; phylogenetic distance; biological properties; clonal theory; multilocus enzyme electrophoresis (MLEE); randomly amplified polymorphic DNA (RAPD); acute phase (AP); chronic phase (CP); days after inoculation (d.a.i.); liver infusion tryptose (LIT); gastrointestinal tract (GIT); genitourinary tract (GUT); percentage of infectivity (%INF); percentage of mortality during the acute phase (%MORT AP); percentage of mortality during the chronic phase (%MORT CP); prepatent period (PPP); patent period (PP); maximum of parasitemia (MP); day of maximum of parasitemia (DMP); parasitemia (PAR); percentage of positive hemoculture during the acute phase (% +HC AP); percentage of positive hemoculture during the chronic acute phase (% +HC CP); tissue parasitism (TP); inflammatory process (IP); tissue parasitism during the acute phase (TP AP); tissue parasitism during chronic phase (TP CP); inflammatory process during acute phase (IP AP); inflammatory process chronic phase (IP CP); Mann–Whitney test (MW); Kruskal–Wallis (KW); Kolmogorow–Smirnov test (KS).

Portfolio Considerations in Risk Management by Financial Intermediaries: Evidence from Trading Behaviour of London Equity Dealers

We use a rich dataset of trades of London equity dealers across all stocks to investigate the importance of portfolio considerations in risk management by financial intermediaries. We examine how the trading and pricing decisions of these dealers in individual stocks are conditioned by their ordinary and inventories in that stock, where the inventory is the dealer's ordinary inventory in that stock corrected for any reinforcing or offsetting effects arising from her inventory positions in other correlated stocks. We examine two types of equivalent inventories: the first based on correlations in total returns (as in Ho and Stoll (1983)), and the other based only on correlations in the unhedgeable component of returns (as in Froot and Stein (1998)). In addition to the mean reversion in ordinary inventory documented in earlier studies, we find strong mean reversion in both total and unhedgeable equivalent inventories indicating that portfolio considerations do influence dealers' overall risk management. However, we find that portfolio considerations are not important in determining whether, and at what price, a dealer executes a particular trade. Dealers with divergent ordinary (rather than equivalent) inventories execute large public and inter-dealer trades; and dealers offer significantly higher price improvement, and charge significantly lower effective spread, for large public trades that reduce the divergence of ordinary inventories rather than the those that reduce the divergence of equivalent inventories. We also find that portfolio considerations at the individual trade level are neither significant for small dealer firms nor for large dealer firms, and also neither significant at the level of desks, nor for the dealer firm as a whole. Cross-sectionally across stocks, we find that the intensity of mean reversion in individual stock inventories depends only on the specific risk of the stock and not on its beta or its industry beta. Our findings are contrary to the expectation that a dealer firm would actively manage their inventory risk exposure by taking off-setting positions in different individual stocks based on correlations between pairs of individual stocks. Instead, these findings are consistent with the decentralization of the market making function within securities firms to individual dealers. In this context, our results appear to be driven by the policy of evaluating and rewarding individual dealers according to the trading profits they generate in the stocks assigned to them, rather than by the difficulties of coordinating and sharing information instantaneously across different individual dealers.

Early ontogeny of coal grunter from hormone-induced spawnings and laboratory-reared embryos and larvae

Spawning of coal grunter Hephaestus carbo was successfully induced using doses of human chorionic gonadotrophin (hCG) between 500 and 3000 IU kg (body weight)−1. Water hardened eggs are telolecithal, amber in colour, spherical, transparent, demersal and slightly adhesive with a single large oil droplet and perivitelline space 47% of total egg volume. Cleavage begins 10–15 min after fertilization. Epiboly begins 6h after fertilization and continues for 4 h. Invagination of the neural tube is apparent 11·5 h after fertilization, followed by progressive organogenesis up to hatching 60–80 h after fertilization. An invagination in the yolk, consistent in shape, position and time of appearance among embryos spawned from numerous brood stock pairs, was visible in all fertilized eggs between neurulation (11-5 h) and early organogenesis (20 h). The functional significance of this yolk invagination is unknown. Newly-hatched larvae (4·2 mm LT) are elongate and possess well developed eyes, a functional mouth, and a large yolk sac. Yolk is fully resorbed and first feeding occurs at 6 days posthatching. The sequence of fin formation is caudal, second dorsal and anal, first dorsal, pectoral and pelvic. The prefiexion larval stage lasts for c.8 days and flexion of the notochord is complete within a further 8–9 days. Squamation commences at 30 days posthatching and transition to the juvenile life stage is complete by 35–40 days posthatching.

Early ontogeny of coal grunter from hormone‐induced spawnings and laboratory‐reared embryos and larvae

Spawning of coal grunter Hephaestus carbo was successfully induced using doses of human chorionic gonadotrophin (hCG) between 500 and 3000 IU kg (body weight)−1. Water hardened eggs are telolecithal, amber in colour, spherical, transparent, demersal and slightly adhesive with a single large oil droplet and perivitelline space 47% of total egg volume. Cleavage begins 10–15 min after fertilization. Epiboly begins 6h after fertilization and continues for 4 h. Invagination of the neural tube is apparent 11·5 h after fertilization, followed by progressive organogenesis up to hatching 60–80 h after fertilization. An invagination in the yolk, consistent in shape, position and time of appearance among embryos spawned from numerous brood stock pairs, was visible in all fertilized eggs between neurulation (11‐5 h) and early organogenesis (20 h). The functional significance of this yolk invagination is unknown. Newly‐hatched larvae (4·2 mm LT) are elongate and possess well developed eyes, a functional mouth, and a large yolk sac. Yolk is fully resorbed and first feeding occurs at 6 days posthatching. The sequence of fin formation is caudal, second dorsal and anal, first dorsal, pectoral and pelvic. The prefiexion larval stage lasts for c.8 days and flexion of the notochord is complete within a further 8–9 days. Squamation commences at 30 days posthatching and transition to the juvenile life stage is complete by 35–40 days posthatching.

Testing the Gaussian Copula Hypothesis for Financial Assets Dependences

Using one of the key property of copulas that they remain invariant under an arbitrary monotonous change of variable, we investigate the null hypothesis that the dependence between financial assets can be modeled by the Gaussian copula. We find that most pairs of currencies and pairs of major stocks are compatible with the Gaussian copula hypothesis, while this hypothesis can be rejected for the dependence between pairs of commodities (metals). Notwithstanding the apparent qualification of the Gaussian copula hypothesis for most of the currencies and the stocks, a non-Gaussian copula, such as the Student's copula, cannot be rejected if it has sufficiently many degrees of freedom. As a consequence, it may be very dangerous to embrace blindly the Gaussian copula hypothesis, specially when the correlation coefficient between the pair of asset is too high as the tail dependence neglected by the Gaussian copula can be as large as 0.6, i.e., three out five extreme events which occur in unison are missed.