Eric C. Chang, J. Michael Pinegar, R. Ravichandran, International Evidence on the Robustness of the Day-of-the-Week Effect, The Journal of Financial and Quantitative Analysis, Vol. 28, No. 4 (Dec., 1993), pp. 497-513

We examine the investment behavior of market participants within different international markets (i.e., US, Hong Kong, Japan, South Korea, and Taiwan), specifically with regard to their tendency to exhibit herd behavior. We find no evidence of herding on the part of market participants in the US and Hong Kong and partial evidence of herding in Japan. However, for South Korea and Taiwan, the two emerging markets in our sample, we document significant evidence of herding. The results are robust across various size-based portfolios and over time. Furthermore, macroeconomic information rather than firm-specific information tends to have a more significant impact on investor behavior in markets which exhibit herding. In all five markets, the rate of increase in security return dispersion as a function of the aggregate market return is higher in up market, relative to down market days. This is consistent with the directional asymmetry documented by McQueen et al. (1996) (McQueen, G., Pinegar, M.A., Thorley, S., 1996. Journal of Finance 51, 889–919).

This study considers the joint influence of contemporaneous and lagged responses to macroeconomic news in explaining US day-of-the-week effects. Macroeconomic news is measured by movements in large firms' stock prices. The average response of smaller stocks to these movements is abnormally high on Mondays, especially in down markets. After corrections for these asymmetries, the US day-of-the-week effect weakens substantially for most size-ranked portfolios in most of the six approximately equal subperiods between 1962 and 1992. These findings suggest that seasonals in processing macroeconomic news account for much of the day-of-the-week effect in equity returns.

This paper develops an expected utility model of a multinational firm facing exchange rate risk exposure to a foreign currency cash flow. Currency derivative markets do not exist between the domestic and foreign currencies. There are, however, currency futures and options markets between the domestic currency and a third currency to which the firm has access. Since a triangular parity condition holds among these three currencies, the available, yet incomplete, currency futures and options markets still provide a useful avenue for the firm to indirectly hedge against its foreign exchange risk exposure. This paper offers analytical insights into the optimal cross-hedging strategies of the firm. In particular, the results show the optimality of using options in conjunction with futures in the case of currency mismatching, even though cash flows appear to be linear.

We propose new tests to examine whether stock index futures affect stock market volatility. These tests decompose spot portfolio volatility into the cross-sectional dispersion and the average volatility of returns on the portfolio's constituent securities. Our tests show that for Nikkei stocks spot portfolio volatility increased and cross-sectional dispersion decreased compared with average volatility when Nikkei futures began trading on the Osaka Securities Exchange, but not on the Singapore International Monetary Exchange. For non-Nikkei stocks, no shift occurred when futures trading began on either exchange. These findings are consistent with the hypotheses that futures trading increases spot portfolio volatility but that there is no volatility “spillover” to stocks against which futures are not traded. However, the increase in volatility attributable to futures trading is small compared with volatility shifts induced by changes in broad economic factors.