Browsing by Author "Jordan, James V."
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- An empirical examination of Value line optionsBroughton, John B. (Virginia Polytechnic Institute and State University, 1989)A number of studies have investigated the performance of common stocks recommended in The Value Line Investment Survey. Little attention, however, has been given to the performance of call options recommended in Value Line Options. This study has two major purposes. The first is to determine whether an investor acting on Value Line’s call purchase recommendations and following Value Line’s prescribed strategy earns abnormal returns, and if so, to identify the portion of the abnormal return that is associated with purchasing calls that are undervalued relative to the prevailing stock price and the portion that is due to the undervaluation of the underlying stock. The second major purpose is to determine whether there is a correlation between Value Line’s option and stock rankings and returns performance. Underlying both of these purposes is a test of the superiority of Value Line’s estimates of future stock price variance relative to volatilities implied by prevailing market stock and call option prices. The results indicate that abnormal returns are earned by following the prescribed strategy but that abnormal returns are eliminated after consideration of transactions costs. There is, however, a strong and persistent correlation between option rankings and returns performance. In general, the results are consistent with the relative superiority of Value Line’s estimates of future stock price variance.
- On the relationship of derivative assets to their underlying instrumentsBrown, Sharon J. (Virginia Tech, 1994-05-03)The first essay, "Market Integration and Side by Side Trading of Derivative and Cash Instruments" inquires into the microstructure of integrated trading of derivative and cash instruments and proposes a spatial differentiation model as a framework for analysis. The model illustrates that when broker-dealers can execute cash and derivative transactions proximately they can increase their returns by serving a larger proportion of investors who hold diverse portfolios thereby helping investors to economize on transactions costs. The model predicts that transactions involving a cash and derivative will be effected through an integrated system. The second essay, "Stock Index Futures Trading and Stock Market Volatility," reviews theoretical models and empirical evidence on the relationships between the level of futures trading and volatility. An empirical investigation is conducted by examining the relationship between the daily trading value of the S&P 500 stock index futures contract and the traded value of New York Stock Exchange stocks and considers whether there is higher price volatility in the stock markets when the level of trading in the futures markets is high relative to trading in the cash market. No evidence, theoretical or empirical, is found to support the notion that futures trading leads to greater volatility in the underlying cash market. The third essay, "Liquidation and Delivery Under Conditions of Manipulation models how strategic traders would respond to manipulation given an option to liquidate or deliver on the contract. A perfect Bayesian equilibrium concept is used in which traders must decide whether to liquidate or deliver given the realization of the first period equilibrium futures price. If detected by floor brokers who competitively bid prices to their expected value, the manipulator will cause prices to move against him, raising the equilibrium price when he puts in orders to buy and lowering the price when he seeks to selL Revelation of manipulation through prices also alters the behavior of other traders. An analysis of reactions in a simplified extensive form game indicates that detection of manipulation allows other market participants to stategically adjust their plans regarding liquidation and avoid incurring losses to the manipulator.