UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

Influence of the Nikkei put warrant market in North America on the Japanese stock market, 1989-1993 Yuen, Ringo C.K. 1993

Your browser doesn't seem to have a PDF viewer, please download the PDF to view this item.

Item Metadata

Download

Media
831-ubc_1994-0083.pdf [ 1.74MB ]
Metadata
JSON: 831-1.0087418.json
JSON-LD: 831-1.0087418-ld.json
RDF/XML (Pretty): 831-1.0087418-rdf.xml
RDF/JSON: 831-1.0087418-rdf.json
Turtle: 831-1.0087418-turtle.txt
N-Triples: 831-1.0087418-rdf-ntriples.txt
Original Record: 831-1.0087418-source.json
Full Text
831-1.0087418-fulltext.txt
Citation
831-1.0087418.ris

Full Text

INFLUENCE OF TilE NIKKEI PUT WARRANT MARKET IN NORTH AMERICA  ON TilE JAPANESE STOCK MARKET, 1989-1993 by  RINGO C.K. YUEN B.Comm., The University of British Columbia, 1992  A THESIS SUBMIrthD IN PARTIAL FULFILLMENT OF  THE REQUIREMENTS FOR THE DEGREE OF  MASTER OF SCIENCE (BUSINESS ADMINISTRATION) in THE FACULTY OF GRADUATE STUDIES THE FACULTY OF COMMERCE AND BUSINESS ADMINISTRATION  We accept this thesis as conforming to the required standard  THE UNIVERSITY OF BRITISH COLUMBIA December 1993 ©  Ringo C.K. Yuen, 1993  ____  in presenting this thesis  in  partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission.  (Signature)  Department of  FACUL14 OF COMHERCE sNt 8VSusIES  The University of British Columbia Vancouver, Canada Date  DE-6 (2/88)  bECEF4RER 12,1993  AbI111Nl$Ts7Io  ABSTRACT  This paper studies the influence on the Japanese stock (cash and futures) markets of the Nikkei put warrants which were traded in Toronto and New York from February 1989 to April 1993. Implied changes in the Japanese prices based on the previous days’ North American warrant prices are compared to the actual price changes. Special attention is placed on the period from January 1990 to August 1992 when the Japanese stock market had a major decline.  II  TABLE OF CONTENTS  Abstract Table of Contents  ill  List of Tables  iv  List of Figures  v  I  Introduction  1  II  Data  3  ifi  Methodology  8  IV  Empirical Tests and Results Overnight Variations in the Spot Nikkei Stock Average Overnight Variations in the Japanese NSA Futures Daily Variations in both the Spot NSA and the Japanese NSA Futures Tests using the Open-to-Close Price Movements of the Warrants Relationship between the Trading Volume of the Nikkei Put Warrants and the Absolute Changes in the Spot NSA and the NSA Futures Comparison of the Overnight and Daily Variations in both the Spot NSA and the Japanese NSA Futures  V  Conclusion  32  35  References Appendix  16 21 26 29 30  38 Diagnostic Tests  40  Tables  45  m  LIST OF TABLES  TABLE I  Nildcei Put Warrants traded on the Toronto Stock Exchange between 1989 and 1993 & Nilckei Put Warrants traded on the American Stock Exchange between 1990 and 1993  45  TABLE II  Estimation of Overnight Variations in the Spot NSA using the Movements of the Nikkei Put Warrants  46  TABLE ifi  Estimation of Overnight Variations in the Japanese NSA Futures using the Movements of the Nikkei Put Warrants  47  TABLE IV  Estimation of Daily Variations in the Spot NSA using the Movements of the Nikkei Put Warrants  48  TABLE V  Estimation of Daily Variations in the Japanese NSA Futures using the Movements of the Nikkei Put Warrants  49  TABLE VI  Regression Tests using the Open-to-Close Price Movements of the Warrants (Fixed Exchange Rate Warrant -DXA)  50  TABLE VII  Regression Tests using the Open-to-Close Price Movements of the Warrants (Floating Exchange Rate Warrant NKP.WT)  51  -  TABLE Vifi The Correlation between the Trading Volume of the Nikkei Put Warrants and the Absolute Value of Changes in the Spot NSA and in the Japanese NSA Futures  52  TABLE IX  The Correlation between the Changes in the Spot NSA and in the Japanese NSA Futures at the Opening and Closing of the Japanese Market  53  TABLE A-I  Summary of the Diagnostic Tests (for Close-to-Close Price Movements of the Warrants)  54  TABLE A-II Summary of the Diagnostic Tests (for Open-to-Close Price Movements of the Warrants)  55  iv  LIST OF HGURES  FIGURE 1  The Daily Opening Nikkei Stock Average from February 17, 1989 to April 23, 1993  4  FIGURE 2  Trading Hours and Days for the Stock Exchanges in Japan, the U.S., and Canada  7  FIGURE 3  The Actual & Cumulative Numbers of DXA Prices at different levels of the Opening NSA  14  FIGURE 4  The Correlation between the Overnight Variations in the Spot NSA and the Implied NSA Returns for the DXA Nikkei Put Warrant  18  FIGURE 5  The Correlation between the Overnight Variations in the NSA Futures and the Implied NSA Returns for the DXA Nikkei Put Warrant  24  FIGURE A-i Autocorrelation Function of Residuals (Regression of Overnight Spot NSA Returns on Open-to-Close Warrant Returns for DXA)  43  FIGURE A-2 Normal Probability Plot of Residuals (Regression of Overnight Spot NSA Returns on Open-to-Close DXA Warrant Returns for DXA)  43  FIGURE A-3 Time-Series Plot of Residuals (Regression of Overnight Spot NSA Returns on Open-to-Close DXA Warrant Returns for DXA)  44  v  I INTRODUCTION  In this study, we consider the relationship between the prices of the Nikkei put warrants traded in North America and the prices of the Japanese spot/cash and futures stock market. We are  interested in (1) the extent to which the price movements of the Nikkei put warrants in the previous day influence the opening and closing prices of the Japanese stock market, (2) whether there is any difference between its influence on the Japanese spot/cash market and the Japanese futures market, and (3) the extent of the difference on the influence given that such difference exists. To supplement the price movements of the Nikkei put warrants, we also investigate whether the trading volumes of the Nikkei put warrants have any impact on the opening and closing prices in both the Japanese spot/cash and futures markets.  There is no overlap in trading time between the North American stock markets and the Japanese stock markets. In the past, investors and traders in these two markets relied on the previous day’s movements of the U.S. stock market to estimate the current performance of the Japanese stock market so as to hedge, or speculate their Japanese investment. The introduction of Nikkei put warrants traded on the American and Toronto Stock Exchanges provided investors and traders an additional tool to hedge or speculate their Japanese investment. Since the payoffs of the Nikkei put warrants are direct related to the Nikkei Stock Average (225 stocks), the movements of the warrants can be potentially used to predict the near term performance of the Japanese stock market. Information about the movements of the warrants is released prior to the opening of the Japanese stock market. Such information should be fully incorporated into the opening price of the Japanese stock market if the markets are efficient. 1  Earlier research has examined the correlation of index prices between the U.S. and the Japanese stock markets. In particular, Becker, Finnerty, and Gupta (1990) report that the U.S. index returns in the previous day explain about 17% of the overnight variations in the Japanese index. Using the autoregressive conditionally heteroscedastic (ARCH) models, Hamao, Masulis, and Ng (1990) fmd price spillovers from the U.S. stock market to the Japanese stock market and also fmd high correlations between the lagged U.S. index returns and the current Japanese index returns. Becker, Finnerty, and Tucker (1992) further investigate the intraday interdependency between the U.S. and the Japanese stock markets and find that the correlations between the lagged U.S. index returns and the Japanese index returns are significant but limited to the first hour of trading in Japan. They also suggest that such significant correlations are attributable to the so-called stale or sticky opening index price. Dravid, Richardson, and Craig (1993) report in their recent research that the Nikkei put warrants and futures traded in the U.S. provide important information about the overnight variations in the Japanese index. Using the official and delayed opening index price, they confirm that overnight information is rationally incorporated into prices across international fmancial markets.  We choose the official opening and closing prices of the Nikkei Stock Average (225 stocks) and the NSA futures traded on the Osaka Securities Exchange to represent the prices of the Japanese spot/cash and futures markets. The data enables us not only to fmd out the extent of influence from the North American markets onto the Japanese market, but also to investigate whether the opening price of the Nikkei Stock Average is stale. 1 1  When a stock in the Nikkei Stock Average (225 stocks) is not traded at the open of the Japanese market, its previous day’s closing price is substituted to calculate the opening Nikkei Stock Average. This is so-called the stale price effect. 2  Section II of this paper describes the data. Methodology used is discussed in section ifi in which different measures of the movements of the Japanese stock market and the Nilckei put warrants are defined. The empirical tests and results are explained in section lv. We also link the results together to provide a better understanding of how the opening and closing prices of the Japanese stock market react to the movements in the prices of the warrants. Conclusions are discussed in section V.  II DATA  We examine the influence on the Japanese stock market by the movements of the U.S. and Canadian Nikkei put warrants. The data covers a four year period (U.S./Canadian data from February 17, 1989 to April 22, 1993; Japanese data from February 18, 1989 to April 23, 1993). This period is the time when the Nikkei put warrants were first and last traded. To represent the influence on the Japanese stock market, two sets of information are obtained. They are the Nilckei Stock Average (225 stocks), abbreviated as NSA, and the NSA futures traded in Osaka. The NSA is an arithmetic price average computed by adding the prices of 225 stocks traded in the first section of the Tokyo Stock Exchange and dividing by a divisor that is changed from time to time to adjust for stock splits, rights issues, etc. 2 Daily official opening and closing price data for the spot NSA are obtained from N.E.E.D.S. and Nihon Keizai Shimbun. The  2  A complete list of the 225 stocks as of July 23, 1993 as well as the changes in the component stocks between June, 1989 and April, 1993 is available from the author. 3  daily opening NSA for the study period is plotted in Figure 1.  45  40  a)  -  L  a)  35  >  30  0)  10  T i me  Figure 1 The Daily Opening Nikkei Stock Average from February 17, 1989 to April 23, 1993  Furthermore, the Japanese NSA futures, abbreviated as NSA futures, were introduced by the Osaka Securities Exchange on September 3, 1988 and the underlying asset is the NSA. Brenner, Subrahmanyam, and Uno (1989) report that information affecting the spot market is speedily incorporated into the futures price. So, the NSA futures might react faster than the spot NSA to information contained in the price movements of the Nikkei put warrants.  Daily  opening and closing price data for the nearest maturity NSA futures contracts for the study  4  period are obtained from N.E.E.D.S. and Nihon Keizai Shimbun.  There were twelve Nikkei put warrants, abbreviated as warrant, traded in New York and Toronto during our study period (six in each country). Daily closing price and trading volume data are obtained from the American Stock Exchange Daily Stock Price Record for the U.S. warrants and from the Western Database for the Canadian warrants. 3 The warrant issued by the BT Bank of Canada in February, 1989 was the first Japan-related put warrant traded on the Toronto Stock Exchange.  Approximately a year later, Goldman Sachs, on behalf of the  Kingdom of Denmark, issued the first U.S. warrant and listed it on the American Stock Exchange. A detail list of the twelve warrants together with their main features is in Table I.  The payoff to the warrant holders shown in Table I can be classified into floating exchange rate payoff and fixed exchange rate payoff.  For the former one, the payoff is  calculated either by converting the difference between the strike price and the closing NSA at the exchange rate prevailing at the time of exercise or by taking the difference between the strike price and the dollar-equivalent closing NSA, which is converted at the prevailing exchange rate. On the other hand, the fixed exchange rate payoff is determined by converting the difference between the strike price and the closing NSA at a fixed conversion rate or exchange rate. Among the twelve warrants considered, eight are under the fixed exchange rate payoff category and four are under the floating exchange rate payoff category.  Daily opening price data for the warrants is not available at the time of this study.  5  *  Payoff Category  U.S. Warrant  Canadian Warrant  Fixed Exchange Rate  DXA, SXA, SXO, EXW, PXB  NKP.WT.B, NKP.WT.C, TFC.WT.N  Floating Exchange Rate  BTB  NKP.WT, NKP.WT.A, SEK.WT  : These three warrants are not included in our study.  Not all twelve warrants were traded until their expiration dates. In particular, three Canadian warrants, NKP.WT.B, SEK.WT and TFC.WT.N, were only traded for a very short period of time (ranging from 9 to 21 months). Besides, these Canadian warrants were not traded 4 and this can present some difficulties in analyzing the influence on the Japanese continuously stock market when any two consecutive trading days of these warrants were too far apart. In order to alleviate this problem, these three warrants are not included in our study.  The payoff on three of the warrants we studied is subject to the exchange rate prevailing at the time of exercise. Therefore, daily exchange rate data for both Yen to US$ and Yen to C$ in Tokyo and New York markets are also obtained from N.E.E.D.S. and Citibase. Moreover, daily exchange rate data also serves another function in our study and it is used to convert all US$ or C$ denominated values of the warrants into Yen so that analysis can be performed in a common currency.  NKP.WT.B was continuously traded for about 7 months, SEK.WT for only 6 months, and 4 TFC.WT.N for about 10 months.  6  American Stock Exchange Toronto Stock Exchange (Day t in the U.S. & Canada) 4  Osaka Securities Exchange Tokyo Stock Exchange (Day t+1 in Japan)  Osaka Securities Exchange Tokyo Stock Exchange (Day t in Japan) 4  I  EST 7pm  4  .  I  I  lam  I  I  I  I  9:30am  I  I  I  4pm  I  7pm  I  I  lam  Figure 2 Trading flours and Days for the Stock Exchanges in Japan, the U.S., and Canada  From Figure 2, it is obvious that there is no time interval in which all four exchanges  are opening at the same time. In particular, there are three hours between the closing of the American and Toronto Stock Exchanges and the opening of the Osaka and Tokyo Stock Exchanges.  On the other hand, there are eight and a half hours between the closing of the  exchanges in Japan and the opening of the exchanges in North America. Although there is no overlapping period, a technical problem in studying the influence on the Japanese stock market caused by the movements of the warrants still exists and it is due to the non-synchronous holidays. To deal with the problem, observations on the movements of the Japanese stock market are deleted when either the U.S. or Canadian stock market is closed. Similarly, when the Japanese market is closed, the movements of the warrants in both the U.S. and Canadian markets are also deleted.  7  ifi METHODOLOGY  To address the issue whether the Japanese stock market was influenced by the North American Nikkei put warrant markets, the daily close-to-open and close-to-close returns for the spot NSA are computed. These two returns might enable us to fmd out the extent of the influence of the warrants on the opening and closing prices of the Japanese stock market. The Japanese stock market is not opened concurrently with the North American stock markets. Information released prior to the opening of the Japanese stock market might be incorporated into the opening NSA. For instance, if the information is firm-specific, the opening stock price of that specific firm might incorporate such information. If the information is industry-specific, the opening prices of the major stocks in that specific industry might incorporate such information. So, a positive information released prior to the opening of the Japanese stock market might result in a positive close-to-open return for the spot NSA.  Stoll and Whaley (1990) report that all 500 stocks for the S&P 500 index are not traded until five to seven minutes after the official opening of the market. Since individual stocks in the index may not begin trading at the opening, the previous day’s closing prices of the stocks are substituted to calculate the opening index. To minimize the effect of such stale prices in the Japanese stock market, Hamao, Masulis, and Ng (1990) suggest replacing the official NSA opening price by the price quoted 15 minutes after the opening of the market. However, this approach implicitly assumes that most stocks for the NSA respond to the pre-trading information within the first 15 minutes of trading and no new information is released during that time interval. In addition, Chung, Kang, and Rhee (1992) find that the volatility at the opening of 8  the Japanese stock market is significantly higher than any other trading hours.  Thus, it is  reasonable to believe that new information which might affect the component stocks for the NSA is released during the first few minutes of trading. Brenner, Subrahmanyam, and Uno (1989) report that new information affecting the Japanese spot market is speedily incorporated into the Japanese futures price. So, information released prior to the opening of the Japanese stock  market might incorporate into the opening price of the NSA futures faster than into the opening price of the spot NSA. In other words, the information released before the opening of the Japanese stock market might highly correlate with the close-to-open return for the NSA futures.  If information released prior to trading is fully incorporated into the opening prices of the spot NSA and the NSA futures, their closing prices will only be affected by information released during the Japanese trading hours. Even when the opening prices of the spot NSA and the NSA futures do not incorporate all pre-trading information, the close-to-close returns for both the spot NSA and the NSA futures and the information released prior to the opening of the Japanese stock market might not have a strong relationship.  Even though there is a three hour difference between the closing of the North American stock markets and the opening of the Japanese stock market, investors can make use of information released prior to the opening of the Japanese market (specifically, prior to three hours before the opening of the Japanese market) to trade the Japan-related securities on the North American markets.  In particular, they can trade the warrants on the American and  Toronto Stock Exchanges so as to hedge or speculate the future stock prices in the Japanese market. Hence, the movements of the warrants might represent the information released prior 9  to the opening of the Japanese stock market and the daily close-to-close return for the warrants is computed to measure such movements.  The warrant can be viewed as a long term American put option. In a standard put option, its value increases as the spot price of the underlying asset decreases. Since the warrants and the NSA are not traded concurrently, a positive change in the price of the warrants might imply that the pre-trading information is negative and the NSA is going to fall. Alternatively, a negative change in the price of the warrants might imply a rise in the NSA. In other words, the daily close-to-close return for the warrants might negatively correlate with the daily close-toopen and close-to-close returns for both the spot NSA and the NSA futures.  However, the use of close-to-close return for the warrants might have a problem because such warrant return overlaps the close-to-open and close-to-close returns for both the spot NSA and the NSA futures. To alleviate the problem, an implied opening price of the warrants can be computed by substituting the latest closing NSA into the payoff formulae. This approach assumes that the warrants are deep in-the-money and the time premium is approximately equal to zero. For example, suppose the closing price of the spot NSA on day t is 29,320.00, then the implied opening price of the DXA on day t is computed as follows: ) 1 0.20 x (37,516.77- Closing NSA 1 Implied DXA Opening Price  =  US$  145.325  =  US$11.281  This approach might provide a good estimate of the opening warrant price when the warrants 10  are deep in-the-money. As the warrants go deep in-the-money, the time premium will approach zero and the intrinsic value based on the closing NSA will become a good approximation of the opening warrant price. So, the open-to-close return for the warrants is computed based on the implied opening warrant price. Similar to previous argument, the daily open-to-close return for the warrants might inversely correlate with the daily close-to-open and close-to-close returns for both the spot NSA and the NSA futures.  According to Clyman (1992) and Shaw, Thorp, and Ziemba (1993), an implied NSA can be derived from the closing price of the warrants using the payoff formulae by assuming that the warrants are deep in-the-money and the time premium is approximately equal to zero. For instance, suppose the closing price of the DXA Nikkei put warrant on day t is $11, then the implied closing price of the spot NSA on day t+1 is computed as follows:  0.20 x (37,516.77- Implied NSAt+1) DXA Price 1  =  US$ 145.325  Implied NSA  =  37,516.77- 11 x 145.325 ÷ 0.20  =  29,523.90  This ‘payoff’ approach might provide a good estimate of the closing price of the spot NSA only when the warrants are deep in-the-money, due to the fact that the price of a warrant is the sum of its intrinsic value and time premium.  As the warrants go deep in-the-money, the time  premium will approach zero and the price of the warrants will become a good approximation of the intrinsic value.  Although the implied NSA may not be a good predictor for either the  opening or the closing price of the NSA when the warrants are not deep in-the-money, changes in the implied NSA might reflect the market expectation of the changes in the NSA. 11  In  particular, a positive change in the implied NSA might suggest a positive change in both the spot NSA and the NSA futures. Since information about changes in the implied NSA is released before the opening of the Japanese stock market, the close-to-close return for the implied NSA  might positively correlate with the close-to-open and close-to-close returns for both the spot NSA and the NSA futures.  Unlike the standard put option, the actual intrinsic value of the warrants is impossible to determine because the current value of the NSA is unobservable when the warrants are trading in the North American stock markets. So, there are possibilities that the warrants can be traded either at a premium or at a discount relative to the latest closing NSA. If the warrants are  traded at a premium, the NSA is expected to fall. Conversely, if the warrants are traded at a discount, the NSA is expected to rise. Similar to the payoff approach, the daily premium or discount of the warrants can be computed by taking the difference between the market price of the warrants and the price obtained by substituting the latest closing price of the NSA into the payoff formulae. This approach also assumes that the warrants are deep in-the-money and the time premium is approximately equal to zero. For example, consider the DXA Nikkei put warrant again. Suppose the market closing price of the DXA on day t is $11 and the closing  price of the spot NSA on day t is 29,320.00, then the premium of the DXA on day t is computed as follows: 5  Discount is represented by a negative premium. 12  , 0] 1 0.20 x Max[3 7,516.77- Close NSA 1 Premium  =  Pt  -  US$ 145.325  =  =  11 -  -  0.20 x (37,516.77- 29,320.00) ÷ 145.325  US$ 0.28 (Discount)  Similar to the payoff approach for calculating the implied NSA, this approach might provide a good estimate of the premium or discount only when the warrants are deep in-the-money. In fact, when the warrants are not deep in-the-money, the premium computed under this approach includes the time premium. However, changes in the premium or discount might correspond to the market expectation of the changes in the NSA.  Specifically, when changes in the  premium or discount are positive (i.e. an increase in premium or a decrease in discount), the NSA is expected to fall.  On the other hand, when changes in the premium or discount is  negative (i.e. a decrease in premium or an increase in discount), the NSA is expected to rise. Hence, a positive change in the premium or discount might inversely correlate with the close-toopen and close-to-close returns for both the spot NSA and the NSA futures.  The approaches described above for calculating the implied NSA and warrant premium rely heavily on two assumptions: the warrants are deep in-the-money and the time premium is approximately equal to zero. In fact, the warrants we studied were deep in-the-money in most of the time. For instance, consider the DXA Nikkei put warrant. It has a strike price of 37,516.77. Suppose DXA is considered to be deep in-the-money when the NSA is below 30,000 at the time of trading, then 84% of the DXA quotes are deep in-the-money. The distributions of the actual and cumulative numbers of the DXA quotes are shown graphically in Figure 3.  13  In addition, the average time premium for the DXA is about -0.10, which is very close to zero.  Cumulative No of DXA Closing prices 0 14000s 15000 s 16000s  cc  17000 s 10000 6 19000s 20000 21000e 22000 e LflIUUUUflFUUUUUWUUI 23000 •s iiuuuwuInn 24000 s 25000 5 26000 •s 7000 s 28000 s 29000 s 300006 31000 s 32000 s 33000 4000 s 35000 s 36000 s 37000s 0  50  Actual  100  100  200  300  400  500  600  700  800  I  I  I  I  I  I  I  15000 16000 17000 ,l..,.c 18000 < 19000 < 20000 ).< 21000 22000 N,-s23000 24000 NLc 25000 26000 Nl, c 27000 c 28000 < 29000 < 30000 ).c 31000 ..c 32000 < 33000 < 34000 4. < 35000 4. < 36000 < 37000 X< 30000  150  No of DXA Closing Prices No of DXA prices when opening NSA is within the  —.,L._Cumulative no of OXA prices when openTng NSA is Note:  900  labeled range  less than the labeled NSA  the etrike price of DXA Is 37..516.77  Figure 3 The Actual & Cumulative Numbers of DXA Prices at different levels of the Opening NSA  Several authors have reported different models to price the warrants (for instance, Chen, Sears, and Shahrokhi (1992) and Dravid, Richardson, and Sun (1993)). However, a modelbased approach is not chosen in this study to compute the implied NSA and the premium or discount of the warrants, because a model-based approach requires a correct pricing model and an accurate estimate of the model parameters (i.e. interest rate, dividend yield, exchange rate and volatility of the NSA).  14  Becker, Finnerty, and Gupta (1990) report that correlations between the returns for the spot NSA and S&P 500 in a common currency are slightly lower than in their local currencies. To test whether the same result occurs in the warrants, the daily common currency returns for the warrants, yen-equivalent premium and the changes in the yen-equivalent premium are also computed. Then, all empirical tests are performed in both local and common currencies. If the same result happens in the warrants, the tests using the local currency returns will have at least the same or better outcomes than the tests using the common currency returns.  Karpoff (1987) finds that both return and absolute return for the U.S. indices are positively correlated with trading volume. Bailey (1989) also reports that absolute return for the Japanese indices and trading volume of the respective futures contracts are correlated. Specifically, he finds positive correlations between the absolute close-to-close return for the Osaka Stock 50 Index and the trading volume of the Osaka Stock 50 futures and also between the absolute close-to-close return for the spot NSA and the trading volume of the NSA futures traded on the Singapore International Monetary Exchange. Although Bailey (1989) and other authors only show a positive correlation between the absolute index return and the futures trading volume, the same relationship might also hold between the absolute spot NSA and NSA futures returns and the trading volume of the warrants because the warrants’ payoffs are subject to the closing NSA at the time of exercise. Hence, the daily absolute close-to-open and close-to close returns for both the spot NSA and the NSA futures are computed. The total daily trading volume of the warrants as well as the dollar-equivalent and yen-equivalent trading volumes are also calculated. So, a large trading volume of the warrants on day t might result in a large absolute changes in the spot NSA and the NSA futures on day t+1. In other words, the total 15  trading volume of the warrants might positively correlate with both the absolute close-to-open and close-to-close returns for the spot NSA and the NSA futures.  IV EMPIRICAL TESTS AND RESULTS  Overnight Variations in the Spot Nikkei Stock Average  To investigate the extent of the overnight variations in the spot NSA that can be explained by the movements of the warrants in the previous day, we regress the close-to-open returns for the spot NSA on (1) the close-to-close returns for each warrant in both local and common currencies, (2) the close-to-close returns for the implied NSA derived from the price of each warrant, and (3) the changes in the premium and yen-equivalent premium of each warrant. The general form of regression is as follows:  =  +  ÷a IMPr + 2  pj(C  +  E  where 50 is the close-to-open return for the spot NSA from day t-1 to day t, P is the close-toclose return for the warrant from day t-1 to day t, IMP is the close-to-close return for the implied NSA from day i-i to day t, and PM is the change in the premium of the warrant from day t-1 to day t. If the movements of the warrants explain the overnight variations in the spot NSA, the values of the coefficients a 1 and a 3 are expected to be negative whereas a 2 is expected to be positive.  16  Table II reports the results of the regressions of the overnight variations in the spot NSA 6 Similar to Becker, Finnerty, on the three different measures of the movements of the warrants. and Gupta (1990) and Hamao, Masulis, and Ng (1990), the overnight variations in the spot NSA and the movements of the warrants are found to be significantly correlated. In particular, there is a correlation of -0.405 between the overnight changes in the spot NSA and the changes in the price of the fixed exchange rate warrants. The same correlation for the floating exchange rate warrants is slightly lower and it is -0.358. In other words, the fixed and floating rate warrant returns can explain 16.4% and 12.8% of the overnight variations in the spot NSA respectively. These correlations are significant at the 1% level and are consistent with the theory that the opening price of the spot NSA is expected to fall when there is an increase in the price of the warrants in the previous day or vice versa.  Moreover, it is reasonable to have a lower  correlation for the floating rate warrants because the price of the floating rate warrants contains an additional factor: exchange rate.  The changes in the implied NSA and in the price of the warrants might have the same explanatory power on the overnight variations in the spot NSA since the implied NSA which is calculated using the payoff approach is simply a linear transformation of the warrant’s price. So, the correlations between the overnight changes in the spot NSA and the changes in the implied NSA might be as same as the correlations with the changes in the price of the warrants. However, the results in Table II show that the changes in the implied NSA for the fixed  6  This paper only reports the results of two warrants (fixed exchange rate warrant DXA and floating exchange rate warrant NKP.WT) and the results for the remaining warrants are available from the author. -  -  17  exchange rate warrants explain 2 1.0% of the overnight variations in the spot NSA, which is 4.6% more relative to the use of the changes in the price of the warrants. Dravid, Richardson, and Craig (1993) also report that when the fixed exchange rate warrants are deep in-the-money, the implied NSA returns which are calculated using the model-based approach outperform the warrant returns in explaining the overnight variations in the spot NSA by about 4.6%. Figure 4 shows the correlation between the overnight variations in the spot NSA and the implied NSA returns for the DXA Nikkei put warrant graphically.  0  a)  -  -I-J  0.05  0  9-  C’) 0  4-, a)  C)  -0.05  4-,  0:1) U,  0 C)  —o.-i  —4  —  —z  —i  0  2  4  2  5  Thousr,dt h.  The  Cloee—to—Operi  Pettjrrie  1or  the  Spot  NSA  Figure 4 The Correlation between the Overnight Variations in the Spot NSA and the Implied NSA Returns for the DXA Nikkei Put Warrant  On the other hand, the implied NSA returns for the floating exchange rate warrants only explain 10.5% of the overnight variations in the spot NSA, which is 2.3% less than the use of the warrant returns.  This difference might be again due to the floating exchange rate.  According to the payoff approach, the implied NSA for the floating rate warrants is computed  18  based on not only the closing price of the warrants but also the exchange rate prevailing at the closing of the American Stock Exchange. Since an additional exchange rate factor is required in the payoff approach when calculating the implied NSA returns for the floating rate warrants, it is obvious that the correlation between the implied NSA returns for the floating rate warrants and the overnight variations in the spot NSA is much lower.  The changes in the premium of the warrants, as predicted by theory, have a significant negative correlation with the overnight variations in the spot NSA. In particular, the correlations between the changes in the premium of the warrants and the overnight changes in the spot NSA are -0.361 for the fixed exchange rate warrants and -0.253 for the floating exchange rate warrants. The changes in the premium of the fixed and floating rate warrants alone explain 13.0% and 6.4% of the overnight variations in the spot NSA respectively. Although these correlations are lower than the correlations between the overnight NSA returns and either the warrant returns or the implied NSA returns, they are significant at the 1 % level. Hence, when there is a positive change in the premium of the warrants in the previous day (i.e. either an increase in premium or a decrease in discount), the opening price of the spot NSA is expected to fall or vice versa. In addition, an additional exchange rate is required in the payoffapproach when calculating the premium of the floating rate warrants, Hence, it is reasonable to have a lower correlation between the changes in the warrant’s premium and the overnight variations in the spot NSA.  Table II also reports the results of regressions of the overnight variations in the spot NSA on two measures together. Specifically, we regress the overnight NSA returns on (1) both the 19  warrant returns and the changes in the premium of the warrants and (2) both the implied NSA returns and the changes in the premium of the warrants. Since neither the warrant returns nor  7 the implied NSA returns are highly correlated with the changes in the premium of the warrants, the two-factor models might explain the variations in the spot NSA better than the one-factor models. In fact, results in Table II confirm that the two-factor models outperform the one-factor models by about 3% for the fixed rate warrants and about 1.5% for the floating rate warrants.  All coefficients of the two-factor models are also significant at the 1 % level except the constant terms significant at the 5% level. In other words, the warrant returns together with the changes in the premium of the warrants explain 20.1% and 14.4% of the overnight NSA returns for the fixed and floating rate warrants respectively.  The results improve to 23.4% and 11.9% for the fixed and floating rate warrants when the changes in the premium are added to the regressions of the overnight NSA returns on the implied NSA returns. Furthermore, the coefficients of the warrant returns and the implied NSA returns in the two-factor models do not differ significantly from the same coefficients in the onefactor models. However, the coefficients of the changes in the premium of the warrants in the two-factor models, though significant, drop as much as a half of the same coefficients in the onefactor models. Hence, the warrant returns and the implied NSA returns appear to capture most of the pre-trading information which might affect the Japanese stock market, whereas the changes in the premium of the warrants seem to play a supporting role in explaining the the DXA, the correlation between the warrant returns and the changes in the warrant premium is 0.455 and the correlation between the implied NSA returns and the changes in the warrant premium is -0.463 (both correlations are significant at the 1% level). The similar correlations for the NKP are 0.355 and -0.415 respectively. 20  overnight changes in the spot NSA.  To investigate whether the exchange rate can affect the results, regressions are also 8 Similar to Becker, Finnerty, and Gupta (1990), all calculated on a common currency basis. correlations between the overnight variations in the spot NSA and the three different yenequivalent measures of the movements of the warrants are about the same (i.e. at most ±0.006) as the correlations calculated on the local currency basis. Even for the floating exchange rate warrants, the common currency models only outperform the local currency models by roughly 0.4% in explaining the overnight NSA returns.  Thus, it is reasonable to believe that the  regressions of the overnight variations in the spot NSA on the movements of the warrants which are measured in their local currencies are sufficient.  Overnight VariaUons in the Japanese NSA Futures  Since the movements of the warrants only explain at most 23.4% of the overnight variations in the spot NSA and it is reported that the futures price responds to new information faster than the spot price, it is interesting to find the extent of the overnight variations in the Japanese NSA futures that can be explained by the movements of the warrants in the previous day.  In  particular, we regress the close-to-open returns for the NSA futures traded on the Osaka Securities Exchange on (1) the close-to-close returns for each warrant in both local and common  8  Since the regression results calculated on the common currency basis are very similar to the results based on the local currency, we only include the local currency results. The common currency results for the warrants are available from the author. 21  currencies, (2) the close-to-close returns for the implied NSA derived from the price of each warrant, and (3) the changes in the premium and yen-equivalent premium of each warrant. The general form of regression is as follows: FCO  =  + 0 y P 1 P 3 r+y?MPr+y M-”+c y  where F° is the close-to-open return for the NSA future from day t-1 to day t, P is the closeto-close return for the warrant from day t-1 to day t, IMP is the close-to-close return for the implied NSA from day t-1 to day t, and PM is the change in the premium of the warrant from day t-1 to day t. If the movements of the warrants explain the overnight variations in the NSA futures, the values of the coefficients y and ‘y are expected to be negative whereas  72  is  expected to be positive.  Table ifi reports the results of the regressions of the overnight variations in the NSA futures on the three different measures of the movements of the warrants. Similar to the results for the spot NSA, the overnight variations in the NSA futures and the movements of the warrants are also found to be significantly correlated. In particular, the correlations between the overnight changes in the NSA futures and the changes in the warrant’s price are -0.574 for the fixed exchange rate warrants and -0.507 for the floating exchange rate warrants. In other words, the fixed and floating rate warrant returns explain 33.0% and 25.7% of the overnight variations in the NSA futures respectively. These correlations again are significant at the 1 % level and are consistent with the theory that the opening price of the NSA futures is expected to fall when there is an increase in the price of the warrants in the previous day or vice versa.  22  Moreover, it is reasonable to have a lower correlation for the floating rate warrants because the price of the floating rate warrants contains an additional factor: exchange rate.  Furthermore, the correlation between the overnight variations in the NSA futures and the changes in the implied NSA for the fixed exchange rate warrants is 0.600 (the correlation is shown graphically in Figure 5).  It means that the implied NSA returns for the fixed rate  warrants explain 36.0% of the overnight movements in the NSA futures, which is 3.0% more relative to the use of the warrant returns.  Since the 3.0% improvement in explaining the  overnight variations in the NSA futures is about the same as the improvement when the implied NSA returns are calculated using the model-based approach, this result suggests that the implied NSA returns which are calculated using the payoff approach might be acceptable. Unlike the results for the spot NSA, the implied NSA returns for the floating exchange rate warrants explain 29.4% of the overnight variations in the NSA futures, which is 3.7% more relative to the use of the warrant returns. Even though the exchange rate is involved in the payoff approach when calculating the implied NSA returns for the floating rate warrants, this additional factor appears to improve the explanatory power of the implied NSA returns on the overnight variations in the NSA futures.  Similar to the results for the spot NSA, the changes in the premium of the warrants also have a significant negative correlation with the overnight variations in the NSA futures. In particular, the correlations between the changes in the premium of the warrants and the overnight changes in the NSA futures are -0.445 for the fixed exchange rate warrants and -0.391 for the floating exchange rate warrants. Hence, the changes in the premium of the fixed and 23  0.1 0  a)  -  0.05  L. 0  cn  t 0 .1-3  a.) (0 0  C.)  -o.o  (0 0 C.) C)  —0.  ‘1  -0.  0 • 05  The  I  CIoee-to—oper,  Returrie  -for  the  NSA  Futuree  FIgure 5 The Correlation between the Overnight Variations in the NSA Futures and the Implied NSA Returns for the DXA Nilckei Put Warrant  floating rate warrants alone explain 19.8% and 15.3% of the overnight NSA futures returns respectively. Although these correlations are lower than the correlations between the overnight variations in the NSA futures and either the warrant returns or the implied NSA returns, they  are significant at the 1 % level. Thus, when there is a positive change in the premium of the warrants in the previous day (i.e. either an increase in premium or a decrease in discount), the  opening price of the NSA futures is expected to fall or vice versa. Furthermore, exchange rate is involved when calculating the premium of the floating rate warrants. It is reasonable to have a lower correlation between the changes in the warrant’s premium and the overnight changes in the NSA futures.  The results of regressions of the overnight variations in the NSA futures on two measures  24  together are also shown in Table IV. The two-factor models outperform the one-factor models by about 3.5% for both the fixed and floating rate warrants. In other words, the warrant returns together with the changes in the premium of the warrants explain 36.8% and 30.3% of the overnight variations in the NSA futures for the fixed and floating rate warrants respectively. The results improve to 39.0% and 32.0% for the fixed and floating rate warrants when the changes in the premium are added to the regressions of the overnight NSA futures returns on the changes in the implied NSA. All coefficients of the two-factor models are also significant at the 1 % level. Furthermore, the coefficients of the warrant returns and the implied NSA returns in the two-factor models do not differ significantly from the same coefficients in the onefactor models. However, the coefficients of the changes in the premium of the warrants in the two-factor models drop as much as 55% of the same coefficients in the one-factor models. Hence, the warrant returns and the implied NSA returns appear to capture most of the pre trading information which might affect the Japanese stock market, whereas the changes in the premium of the warrants seem to play a very minor role in explaining the overnight changes in the NSA futures.  In addition, similar regressions are also calculated on a common currency basis to investigate whether the exchange rate can affect the results.  All correlations between the  overnight variations in the NSA futures and the three different yen-equivalent measures of the movements of the warrants are roughly the same (i.e. at most ±0.004) as the correlations calculated on the local currency basis.  Even for the floating exchange rate warrants, the  common currency models only outperform the local currency models by roughly 0.5% in explaining the overnight NSA futures returns. 25  Thus, it is reasonable to believe that the  regressions of the overnight variations in the NSA futures on the movements of the warrants which are measured in their local currencies are sufficient.  Daily Vadations in both the Spot NSA and the Japanese NSA Futures  Since the payoff of the warrants are based on the closing NSA at the time of exercise, it is interesting to further investigate whether the movements of the warrants in the previous day can explain the extent of the daily variations in both the spot NSA and the Japanese NSA futures, we regress the close-to--close returns for each of the spot NSA and the NSA futures on (1) the close—to-close returns for each warrant in both local and common currencies, (2) the close-toclose returns for the implied NSA derived from the price of each warrant, and (3) the changes in the premium and yen-equivalent premium of each warrant. The general forms of regressions are as follows:  SC  =  po+pip:+pzIMp:c÷pspMc+e  +  =  +  AJMP7 + pcc +  where S is the close-to-close return for the spot NSA from day t-1 to day t, F is the closeto-close return for the NSA futures from day t-1 to day t, P is the close-to-close return for the warrant from day t-1 to day t, IMP is the close-to-close return for the implied NSA from day  t-1 to day t, and PM is the change in the premium of the warrant from day t-1 to day t. If the movements of the warrants explain the daily variations in the spot NSA and the NSA futures, the values of the coefficients I3,  fl,  1 and X X 3 are expected to be negative whereas 26  2  and X 2 are  expected to be positive.  Table IV reports the results of the regressions of the daily variations in the spot NSA on the three different measures of the movements of the warrants and the similar regression results for the NSA futures are shown in Table VI. The daily variations in both the spot NSA and the NSA futures are also found to have significant correlations with the movements of the warrants. In particular, the correlation between the changes in the price of the warrants and the daily changes in either the spot NSA or the NSA futures is about -0.345. In other words, the warrant returns explain about 12% of the daily variations in the spot NSA and in the NSA futures. These correlations are significant at the 1 % level and again are consistent with the theory that the closing prices of the spot NSA and the NSA futures are expected to fall when there is an increase in the price of the warrants in the previous day or vice versa.  Moreover, it is  interesting to note that there is no significant difference between the fixed and floating rate  warrants in explaining the daily variations in both the spot NSA and the NSA futures.  In addition, the correlations between the changes in the implied NSA and the daily variations in both the spot NSA and the NSA futures are about 0.352. It means that the implied NSA returns explain roughly 12% of the daily variations in the spot NSA and the NSA futures, which is about the same relative to the use of the warrant returns. Besides, the changes in the premium of the warrants are also found to have significant negative correlations with the daily variations in both the spot NSA and the NSA futures. In particular, the correlation between the changes in the premium of the warrants and the daily changes in the spot NSA is about -0.329  and the correlation between the changes in the premium and the daily changes in the NSA 27  futures is about -0.282. In other words, the changes in the premium of the warrants alone explain 11 % and 8% of the daily variations in the spot NSA and the NSA futures respectively. Since the correlations are significant at the 1 % level, the closing prices of the spot NSA and the NSA futures are expected to fall when there is a positive change in the premium of the warrants in the previous day (i.e. either an increase in premium or a decrease in discount) or vice versa.  The results in Tables IV and V also confirm that the two-factor models outperform the one-factor models by about 3.7% for the daily variations in the spot NSA and about 2.0% for the daily variations in the NSA futures.  All coefficients of the two-factor models are also  significant at the 1 % level except the constant terms. In other words, the warrant returns together with the changes in the premium of the warrants explain roughly 16% of the daily variations in the spot NSA and the implied NSA returns explain about 14% of the daily variations in the NSA futures when the changes in the premium are added to the regressions. Furthermore, the coefficients of the warrant returns and the implied NSA returns in the twofactor models do not differ significantly from the same coefficients in the one-factor models. However, the coefficients of the changes in the premium of the warrants in the two-factor models drop as much as a half of the same coefficients in the one-factor models. Hence, the warrant returns and the implied NSA returns appear to capture most of the pre-trading information which might affect the Japanese stock market, whereas the changes in the premium of the warrants seem to play a very minor role in explaining the daily changes in both the spot NSA and the NSA futures. Moreover, regressions are also calculated on a common currency basis and the results are very much the same as on the local currency basis.  Thus, it is  reasonable to believe that the regressions of the daily variations in the spot NSA or the NSA 28  futures on the movements of the warrants which are measured in their local currencies are  sufficient.  Tests using the Open-to-Close Price Movements of the Warrants  The objective of this section is to investigate whether the open-to-close price movements of the warrants can be used to explain more about the overnight and daily variations in the spot NSA and the NSA futures. Specifically, we substitute the open-to-close price movements of the warrants for the close-to-close price movements in all regression tests described above. The results are reported in Table VI and Table VII for the fixed and floating exchange rate warrants respectively.  Similar to results using the close-to-close price movements of the warrants, the open-toclose price movements of the warrants are also found to be significantly correlated with the overnight variations in the spot NSA.  In particular, the average correlation between the  overnight variations in the spot NSA and the open-to-close warrant returns is about -0.411. The same correlation for the open-to-close implied NSA returns is roughly 0.452. In other words, the open-to-close returns for the warrants and the implied NSA explain about 16.7% and 20.4% of the overnight variations in the spot NSA respectively.  The overnight variations in the NSA futures and the open-to-close price movements of the warrants are also found to be significantly correlated. The average correlation between the overnight variations in the NSA futures and the open-to-close returns for the warrants is -0.540 29  and the same correlation for the open-to-close implied NSA returns is about 0.560. The results suggest that the open-to-close returns for the warrants and the implied NSA explain about 29.0%  and 31.3% of the overnight variations in the NSA futures respectively.  In fact, the regression results using the open-to-close price movements of the warrants  are about the same as the results using the close-to-close price movements of the warrants. In other words, the open-to-close price movements of the warrants might not explain more about the overnight and daily variations in the spot NSA and the NSA futures. Even though the closeto-close price movements of the warrants overlap with both the overnight and daily variations in the spot NSA and the NSA futures, the regression results using the close-to-close warrant  price movements are quite satisfactory.  Relationship between the Tmding Volume of the Nikkei Put Warrants and the Absolute Changes in the Spot NSA and the NSA Futures  To investigate whether the trading volume of the warrants in the previous day has any influence on the absolute changes in the spot NSA and the Japanese NSA futures, we calculate the correlations between the trading volume of the warrants (in unit-volume, dollar-equivalent volume and yen-equivalent volume) in the previous day and various measures of the movements of the Japanese stock market: (1) the close-to-open absolute returns for the spot NSA and the NSA futures, (2) the close-to-close absolute returns for the spot NSA and the NSA futures, and (3) the absolute ratios of the NSA futures price over the spot NSA at open and close.  30  Table Vifi reports the correlations between the sum of the trading volume of all warrants  and the various measures of the movements of the Japanese market. In contrast to Bailey (1989), the trading volume of the warrants is found to have a significant and negative correlation with the absolute overnight variations in the spot NSA. In other words, when the warrants are heavily traded in the previous day, the absolute overnight changes in the spot NSA are expected to be small. On the other hand, the correlation between the trading volume of the warrants and the absolute overnight returns for the NSA futures is found to be significant positive. Since the correlation is significant at the 1% level, it is consistent with the theory that when the warrants  are heavily traded in the previous day, the absolute overnight changes in the NSA futures are expected to be large. The correlation is more significant and higher when the trading volume of the warrants is measured in terms of dollar- or yen-equivalent volume than in terms of unit volume.  Moreover, the correlation between the trading volume and the absolute daily returns for the spot NSA is significant and positive. Therefore, when the warrants are heavily traded in the previous day, large absolute daily changes in the spot NSA are expected. In other words, the trading volume information of the warrants in the previous day might not have a major influence on the opening price of the spot NSA; however, it might have a significant impact on the closing price of the spot NSA.  Furthermore, the correlation between the trading volume and the  absolute daily returns for the NSA futures is also significant and positive, but is less than the correlation between the trading volume and the overnight returns for the NSA futures. So, when the warrants are heavily traded in the previous day, the absolute overnight changes in the NSA futures are expected to be larger than their absolute daily changes. Hence, the correlation 31  suggests that the trading volume information of the warrants in the previous day might be speedily incorporated into the opening price of the NSA futures and such information might have a smaller impact on the closing price of the NSA futures.  Comparison of the Overnight and Daily Variations in both the Spot NSA and the Japanese NSA Futures  The results in Tables II to V show the extent of the overnight and daily variations in both the spot NSA and the Japanese NSA futures that can be explained by the movements of the warrants. It is obvious that the movements of the warrants in the previous day explain the overnight variations in both the spot NSA and the NSA futures better than their daily variations. For instance, the implied NSA returns for the fixed exchange rate warrants explain 21% and 36% of the overnight variations in the spot NSA and the NSA futures respectively; however, they only explain about 11% of the daily variations in the spot NSA and the NSA futures. It might be due to the fact that the warrants are traded prior to the opening of the Japanese stock market and thus any information which is contained in the price movements of the warrants might be incorporated into the opening prices of the spot NSA and the NSA futures. Moreover, new information which affects the Japanese stock market might be released during the Japanese trading hours, and therefore the closing prices of both the spot NSA and the NSA futures might correlate less with the movements of the warrants. Hence, it is reasonable to believe that the movements of the warrants in the North American markets in the previous day might have a significant and substantial influence on the opening prices of the Japanese stock market, but might only have a relative minor influence on the closing prices.  32  In addition, the movements of the warrants explain the overnight variations in the NSA  futures more than the overnight variations in the spot NSA. For example, the implied NSA returns for the fixed exchange rate warrants explain 36% of the overnight variations in the NSA futures, but explain only 21% of the overnight variations in the spot NSA. The difference is even larger for the floating exchange rate warrants (i.e. the implied NSA returns explain 29% of the overnight variations in the NSA futures and only 10% of the overnight variations in the spot NSA). The results are consistent with the fmding reported by Brenner, Subrahmanyam, and Uno (1989) that information affecting the spot market is speedily incorporated into the futures price. Therefore, the pre-trading information, which is contained in the price movements of the warrants and might influence the spot NSA, seems to be speedily incorporated into the opening price of the NSA futures. So, the movements of the warrants explain the overnight variations in the NSA futures better than the overnight variations in the spot NSA.  On the other hand, the movements of the warrants explain about the same daily variations in both the spot NSA and the NSA futures. For instance, the implied NSA returns for the fixed exchange rate warrants explain about 11% of the daily variations in both the spot NSA and the NSA futures. For the floating exchange rate warrants, the implied NSA returns explain about 13% of the daily variations in the spot NSA and the NSA futures. The results suggest that (1) the pre-trading information which is contained in the price movements of the warrants might reflect more on the opening price of the NSA futures than on the opening price of the spot NSA; (2) the closing prices of both the spot NSA and the NSA futures appear to incorporate the same pre-trading information and new information released during the Japanese trading hours; (3) during the Japanese trading hours, the spot NSA seems to incorporate the pre-trading 33  information which has not yet reflected on its opening price; and (4) the NSA futures opening  price might incorporate most of the pre-trading information and during the Japanese trading hours, the NSA futures appear to adjust mostly to the newly released information.  At the first glance, the results are consistent with the theory that the official opening price of the spot NSA is stale. Since individual stocks for the NSA may not begin trading at the opening of the Japanese stock market, the previous day’s closing prices of the stocks are substituted to calculate the spot NSA. Thus, the overnight variations in the spot NSA is less correlated with the movements of the warrants. However, the results in Table VIII raise another concern about the stale opening price of the spot NSA. In particular, the trading volume of the  warrants has about the same correlation with the absolute overnight changes in the NSA futures and with the absolute daily changes in the spot NSA. On the other hand, the trading volume is negatively correlated with the absolute overnight changes in the spot NSA and is less positively correlated with the absolute daily changes in the NSA futures. Thus, the results suggest that the NSA futures might rapidly incorporate trading volume information of the warrants into its opening price, whereas the spot NSA might not incorporate such information into its opening price.  Instead, during the Japanese trading hours, the spot NSA appear to be led by the  overnight changes in the NSA futures to adjust its price accordingly.  To support the above findings, we also calculate the correlations between the overnight and daily changes in the spot NSA and in the NSA futures. The results in Table IX show that the daily changes in the spot NSA and the NSA futures are significantly correlated; however, the correlation between their overnight changes, though significant, is relatively small. 34  In  particular, the correlation between the daily changes in the spot NSA and the NSA futures is 0.857 but the correlation between their overnight changes is only 0.452. Thus, the results suggest that the overnight changes in the spot NSA and the NSA futures might not be the same, whereas at the end of the Japanese trading day, the changes in the spot NSA from the previous day’s closing price might be very close to the same changes in the NSA futures. Moreover, it is interesting to note that the correlation between the overnight and daily changes in the NSA futures is 0.660 and the same correlation for the spot NSA is only 0.347. Also, there is a correlation of 0.5 18 between the daily changes in the spot NSA and the overnight changes in the NSA futures. Since the correlations are significant at the 1% level, the results suggest that the changes in the NSA futures might mostly be taken place at the opening of the market, whereas the changes in the spot NSA might mainly be taken place during the trading hours. In other words, the changes in the spot NSA might be led by the changes in the NSA futures, and hence the Japanese spot/cash market might be led by the Japanese futures market.  Since the  movements of the warrants explain a significant portion of overnight variations in the NSA futures, it is reasonable to believe that the Nikkei put warrants traded in North America might have a significant influence on the Japanese stock market.  V CONCLUSION  This paper reports the correlation of the Nikkei put warrants traded in the North America on the Japanese stock market from 1989 to 1993. In particular, we examine the relationship between the movements of the warrants and the overnight and daily variations in the spot NSA and the 35  Japanese NSA futures. The implied NSA returns derived from the price of the warrants are satisfactory in explaining the overnight and daily variations.  Specifically, the implied NSA  returns explain as much as 40% of the overnight variations in both the spot NSA and the NSA futures; however, only a small percentage of the daily variations in the spot NSA and the NSA futures is explained by the implied NSA returns. This finding is consistent with the theory that the information contained in the price movements of the warrants is released prior to the opening of the Japanese stock market and is rapidly incorporated into the opening prices of the spot NSA  and the NSA futures.  Moreover, we fmd that the implied NSA returns explain the overnight variations in the NSA futures much better than the overnight variations in the spot NSA. On the other hand, about the same daily variations in both the spot NSA and the NSA futures is explained by the implied NSA returns. So, the results suggest that the movements of the warrants might have more influence on the NSA futures opening price than on the spot NSA opening price but have the same and smaller influence on the closing prices of both the spot NSA and the NSA futures.  Furthermore, we also examine the relationship between the trading volume of the warrants and changes in the spot NSA and the NSA futures. The results show that trading volume of the warrants has strong ties with (1) the absolute overnight returns in the NSA futures, (2) the absolute daily returns in the spot NSA, and (3) the absolute daily returns in the NSA futures. On the other hand, the results indicate that there exists a negative relationship between the trading volume and the absolute overnight returns in the spot NSA.  36  The above fmdings suggest that the opening price of the spot NSA might be stale. However, when we examine the correlations between the overnight and daily returns for both the spot NSA and the NSA futures, we find that the daily returns for the spot NSA and the NSA futures are highly correlated, whereas their overnight returns are less correlated. Besides, the daily returns for the spot NSA are more correlated with the overnight returns for the NSA futures than with the daily returns for the spot NSA. Also, the overnight and daily returns for the NSA futures are very correlated. It is reasonable to believe that the movements of the Nikkei put warrants traded in the North American markets might have a significant influence on the opening price of the Japanese NSA futures, whereas the spot NSA might observe the opening price of the NSA futures and adjust its price accordingly during the trading hours.  37  REFERENCES Bailey, W. 1989. “The Market for Japanese Stock Index Futures: Some Preliminary Evidence.” Journal of Futures Markets 9.4: 283-295. Becker, K.G., J.E. Finnerty, and M. Gupta. 1990. “The Intertemporal Relation Between the U.S. and Japanese Stock Markets.” Journal of Finance 45.4: 1297-1306. Becker, K.G., J.E. Finnerty, and A. L. Tucker. 1992. “The Intraday Interdependence Structure Between U.S. and Japanese Equity Markets.” Journal of Financial Research 15.1: 27-37. Brenner, M., M.G. Subrahmanyam, and J. Uno. 1989. “Stock Index Futures Arbitrage in the Japanese Markets.” Japan and the World Economy (June): 303-330. Brenner, M., M.G. Subrahmanyam, and J. Uno. 1990. “Arbitrage Opportunities in the Japanese Stock and Futures Markets.” Financial Analysts Journal 46.2: 14-24. Brock, W.A. and A.W. Kleidon. 1992. “Periodic Market Closure and Trading Volume. A Model of Intraday Bids and Asks.” Journal ofEconomic Dynamics and Control 16: 451489. Chen, K.C., R.S. Sears, and M. Shahrokhi. 1992. “Pricing Nilckei Put Warrants: Some Empirical Evidence.” Journal of Financial Research 15.3: 231-251. Chung, Y.P., J.K. Kang, and S.G. Rhee. 1992. “An Intraday Transactions Data Test of Nilckei Stock Average Index Futures Price Behavior and Index Arbitrage Profitability.” Working Paper. University of California, Riverside. Clyman, D.R. 1992. “Arbitrage and Fixed Exchange Rate Nikkei Put Warrants.” Working Paper. Harvard Business School. Dravid, A., M. Richardson, and A. Craig. 1993. “Explaining Overnight Variation in Japanese Stock Returns: The Information Content of Derivative Securities.” Working Paper. Wharton School of the University of Pennsylvania. Dravid, A., M. Richardson, and T.S. Sun. 1993. “Pricing Foreign Index Contingent Claims: An Application to Nikkei Index Warrants.” forthcoming in Journal ofDerivatives. Hamao, Y., R.W. Masulis, and V. Ng. 1990. “Correlations in Price Changes and Volatility Across International Stock Markets.” Review of Financial Studies 3.2: 281-307. Hamao, Y. 1991. “Japanese Financial Markets: An Overview.” in W. Ziemba, W. Bailey, and Y. Hamao, eds., Japanese Financial Market Research: 3-21. 38  Karpoff, J.M. 1987. “The Relation between Price Changes and Trading Volume: A Survey.” Journal of Financial and Quantitative Analysis 22: 109-123. Karolyi, G.A. 1993. “Stock Market Volatility Around Expiration Days in Japan.” Working Paper. Ohio State University. Merton, M.H. 1.992. “The Economics and Politics of Index Arbitrage in the U.S. and Japan.” Address presented at the 4th Annual Pacific-Basin Capital Markets Research Conference (July), Hong Kong. Shaw, J., E.O. Thorp, and W.T. Ziemba. 1993. “Convergence to Efficiency of the Nikkei Put Warrant Market of 1989-1990.” Working Paper. University of British Columbia. Stoll, H.R. and R.E. Whaley. 1990. Financial Studies 3: 37-71.  “Stock Market Returns and Volatility.” Review of  Tufano, P. 1992. “Goldman, Sachs & Co. Nikkei Put Warrants School Case: N9-292-113 (Rev. 1/16/93).  -  1989.” Harvard Business  Ziemba, W.T., W. Bailey, and Y. Hamao, eds. 1991. Japanese Financial Market Research. The Netherlands: Elsevier Science. Ziemba, W.T. and S.L. Schwartz. 1992. Invest Japan: The Structure, Performance and Opportunities of the Stock and Bond Markets. Chicago: Probus.  39  APPENIMX  Diagnostic Test&  Several diagnostic tests are performed to ensure that the results obtained from the linear regression models in this study are conclusive. The tests include checking whether the following assumptions of a linear regression model are satisfied: 1.  The residuals should be approximately independent of one another no autocorrelation.  2.  The residuals should be normally distributed  3.  The residuals should have approximately the same variance  -  -  normality. -  homoscedasticity.  Moreover, the day of the week and January effects are also tested to ensure that the regression models in this study are not misspecifled. Results of the diagnostic tests are summarized in Table A-I for regressions on the close-to-close price movements of the warrants and Table A-il 9 for regressions on the open-to-close price movements of the warrants.  The first assumption means that there should be independence between successive residuals. To test the presence of autocorrelation in the regression models, the corresponding lagged observations are included into the original regression models and the Durbin-Watson statistics are calculated. As seen from the Table A-I and Table A-il, most of the observed d values are significant at the 5% level and are about 2 which is above the upper critical value of the Durbin-Watson statistic given the sample size. However, the coefficients of the lagged  Only the test results for DXA are reported in this paper. 40  observations in several models are significant. It raises some concern about the autocorrelation effect in the models.  To investigate whether the effect is significant, the autocorrelation  functions of the residuals are produced and one of the plots is shown in Figure A-i. Based on the resulting plots, no clear pattern of residuals over time is found.  Using the Bartlett’s  ° the theoretical autocorrelations of each lag are computed and tested with the 1 formula, estimated autocorrelation coefficients shown in the autocorrelation function plots. Only the first lag is found to be marginally significant in several models. Therefore, it is reasonable to believe that autocorrelation of the first lag might exist in some models but its effect is minimal. Since the objective of this paper is to investigate whether the movements of the Nikkei put warrants contain any information that can influence the Japanese stock market, the regression models in  this paper do not include the lagged variables.  To test the second assumption, the normal scores of residuals are computed and the normal probability plots are produced. One of the normal probability plots is shown in Figure A-2. Based on the resulting plots, the residuals are found to be significantly correlated with their normal scores. Hence, we can conclude that the residuals are normally distributed.  To determine whether the homoscedasticity is maintained in the regression models, the time-series plots of residuals are produced and one of the plots is shown in Figure A-3. The resulting plots show that homoscedasticity is maintained in most of the regression models except that a slightly less homoscedasticity is found in models for overnight variations in the spot NSA.  10  Compute Var(rk) (i + 2 t2) ÷ n, where rk: estimated autocorrelation of lag k; i: 1 to k-i; n: number of observations. 41  Since the heteroscedasticity is marginal and is only found in this specific group of models, the regression models in this paper are not adjusted for the heteroscedasticity.  Furthermore, dummy variables for the days of the week and January are also included into the original regression models. If the original regression models were misspecifled and the days of the week and/or January did influence the dependent variables, the coefficients of the respective dummy variables would be significant. However, the results show that all coefficients of the dummy variables for the days of the week and January are small and insignificant (except Wednesday and January which have some marginal influence in some models). To maintain the consistency among models, the regression models in this paper do not include these two variables.  42  Au-tocorre I at Ton —1  0.5  0  -0.5  -0. oo,iea -0. 011288 —0.018844  — I  0.091121  0.015795 0.05504  — 0.05338 I 0.032163 •  —0.017275  0.094739 0.052544  —0. 0.090039 014201  -0.109298 0.00325 0.03748  I  —0.010713  — 0.062215 0.01433 • — 0.021397 -0.05075 — —0.023736 I — 0.097626 —0.039005 • 0.002179 — 0.078359 —0.000902  —0.033278 -0.067626  —0. 011587 —0.089544  —  0.019981  Figure A-i : Autocorrelation Function of Residuals (Regression of Overnight Spot NSA Returns on Open-to-Close Warrant Returns for DXA)  4  3  2  I L  0 0  a  —1  —2  -  x  xxx  :  -;;; x>  x  —3  x  -4 —3  I  I  —2  —1  I  0  Standard T zed  1  2  3  Rca T due I  Figure A-2 : Normal Probabifity Plot of Residuals (Regression of Overnight Spot NSA Returns on Open-to-Close Warrant Returns for DXA)  43  .  II  IE  a  0•  I!n  (p  3  —1  I U  I P3 0 4  Standardized Residual P3  U  93/04/10  BT Bank of Canada Series IV  NKP.WT.C  93/02/22  Warrant  +  NSA +  -  -  Ex(T/C$)  NSA, 0) ÷ 37,460.32  +  NSA, 0) ÷ 29,843.34  NSA, 0)  C$2.75 ÷ 7.00% x Max(37,460.32  C$0. 1168 x Max(35,963.74  -  -  Ex(T/C$), 0)  7.25% x Max(37,460.32 NSA, 0) ÷ 37,460.32  -  C$2.50 ÷ 7.25% x Max(29,843.34  C$2.50  C$0. 1031 x Max(270.54  C$0.1168 x Max(32, 174.00- NSA, 0) ÷ Ex(T/C$)  Payoff of One  Kingdom of Denmark  AS Eksportfinans  Paine Webber Op Inc  Salomon Inc  Salomon Inc  DXA  EXW  PXB  SXA  SXO  93/02/16  93/01/19  93/04/08  93/04/22  93/01/03  93/01/16  j__Expiry  US$0.20 x Max(37,471.99  -  -  -  -  -  -  +  Ex(Z/US$)  NSA, 0)  145.520  159.800  93/01/11  -  90/02/16 93/02/16  -  90/01/18 93/01/19  -  90/04/18 93/04/08  -  90/04/27 93/04/22  -  -  90/01/15 92/12/31  90/02/01  Period of Trading  -  90/02/22 91/07/09  -  90/02/22 90/11/22  -  90/04/10 93/03/29  -  Ex: Exchange rate at the time of exercise  NSA, 0) ÷ 144.550  +  +  NSA, 0) ÷ 158.840  NSA, 0) ÷ 145.325  NSA, 0)  US$0.20 x Max(36,821.14 NSA, 0)  US$0.20 x Max(29,249.06  US$0.20 x Max(29,424.58  US$0.20 x Max(37,516.77  US$0.50 x Max(37,206.42  Payoff of One Warrant  NSA: The closing Nikkei Stock Average at the time of exercise Sources : Toronto Stock Exchange Review and Standard & Poor’s Stock Reports ASE  Bankers Trust Corp  Issuer  92/02/10  90/03/20 9 1/12/19  -  -  89/06/14 92/06/12  89/02/17  Period of Trading  Nikkei Put Warrants traded on the American Stock Exchange between 1990 and 1993  Trilon Financial Corp  BTB  Symbol  TFC.’WT.N  92/11/16  93/03/16  BT Bank of Canada Series ifi  NKP.WT.B  AB Svensk Exportkredit Series II  92/06/15  BT Bank of Canada Series II  NKP.WT.A  SEK.WT  92/02/17  Expiry  BT Bank of Canada  Issuer  NKP.WT  Symbol  Nildcei Put Warrants traded on the Toronto Stock Exchange between 1989 and 1993  TABLE I  TABLE II Estimation of Overnight Variations in the Spot NSA using the Movements of the Nikkei Put Warrants  This table reports the regressions of the close-to-open returns for the spot NSA (50) on the close-to-close returns for the fixed and floating exchange rate warrants (P), the close-to-close returns for the implied NSA derived from the price of the warrants (IMP) and the changes in the premium of the warrants (PM). The regressions investigate the relation between the overnight changes in the spot NSA and the three different measures of the movements of the warrants. Returns are calculated as loge price relatives. t-values are shown in parentheses and F-values are shown in square brackets. The general form of regression is as follows:  Warrant  Constant a 0  P° a 1  Fixed Rate DXA  0.000141 (2.42) *  -0.017574 (-11.76) #  0.000140 (2.46)*  IMPC. a 2  Adj R 2  Correlation  16.4%  -0.405 [138.39] #  21.0%  0.458 [187.52]#  13.0%  -0.361 [105.70] #  (13.69)# -0.001184  (1.50)  (-10.28) #  0.000124 *  -0.013088  -0.000715  (-7.88) #  (-5.69) #  0.000127 (2.26) * Floating Rate NKP.WT  3 a  0.040047  0.000089  (2.17)  PMC.c  0.000489  (5.94) #  0.032359 (9.80) #  (5.27)# (5.84) # 0.000477 (5.76)#  12.8%  -0.358 [100.78] #  10.5%  0.324 [80.70] #  -0.001869 (-6.87)#  6.4%  -0.253 [47.17]#  -0.001012  14.4%  0.055294 (8.98) #  0.000449 -0.012174 (-8.00) #  23.4%  (-4.75) #  -0.014255 (-10.04) #  0.000490 (5.88) #  0.000477  -0.000590  20.1%  (-3.59) # 0.044923 (6.54)#  *:  Significant at a 5% level #: SignifIcant ata 1% level  46  -0.000983 (-3.31)#  11.9%  TABLE ifi  Estimation of Overnight Variations in the Japanese NSA Futures using the Movements of the Nikkei Put Warrants  This table reports the regressions of the close-to-open returns for the Japanese NSA futures (F°) on the close-to-close returns for the fixed and floating exchange rate warrants (P), the close-toclose returns for the implied NSA derived from the price of the warrants (IMP) and the changes in the premium of the warrants (PM). The regressions investigate the relation between the overnight changes in the Japanese NSA futures and the three different measures of the movements of the warrants. Returns are calculated as log, price relatives. t-values are shown in parentheses and F-values are shown in square brackets. The general form of regression is as follows: =  Warrant Fixed Rate DXA  Constant 0.000741 (2.54) #  IMPCC+PIPICC+ 2 +PCC÷  P°’ ‘y 1  72 IMP°  -0.139386 (-18.66) # 0.292870 (19.91)#  0.000705  (2.47)* 0.000341  -0.008151  (1.07) 0.000644 (2.27) *  0.000682 (2.55) #  -0.113861 (-13.81) # 0.245380 (14.89) #  33.0%  -0.574 [348.23] #  36.0%  0.600 [396.45]#  19.8%  -0.445 [173.91] #  36.8%  -0.003642 (-5.89) #  39.0% 25.7%  -0.507 [237.961 #  29.4%  0.542 [286.43] #  -0.010168 (-11.15)#  15.3%  -0.391 [124.25]#  -0.006024 (-6.73) #  30.3%  -0.004719 (-5.13) #  32.0%  0.326010 (16.92) #  0.000477 (1.67)  0.000648 (2.53) #  Correlation  -0.004066 (-6.52) #  -0.071230 (-15.43) #  0.000711 (2.73) #  0.000609 (2.35) *  Adj R 2  (-13.19) #  0.000625 (2.24) * Floating Rate NKP.WT  3 PM”y  -0.058839 (-12.16) # 0.276220 (12.99) #  *:  Significant at a 5% level #: Sigrnficantata 1% level  47  TABLE 1Y  Estimation of Daily Variations in the Spot NSA using the Movements of the Nikkei Put Warrants  This table reports the regressions of the close-to-close returns for the spot NSA (S) on the close-to--close returns for the fixed and floating exchange rate warrants (P), the close-to-close returns for the implied NSA derived from the price of the warrants (Th1P) and the changes in the premium of the warrants (PM). The regressions investigate the relation between the daily changes in the spot NSA and the three different measures of the movements of the warrants. Returns are calculated as loge price relatives. t-values are shown in parentheses and F-values are shown in square brackets. The general form of regression is as follows: SC  Warrant  Constant ()  Fixed Rate  -0.000398 (-0.63)  DXA  =  ÷ 0 p P 1 ’ 2 P 3 MPr+p Mr+ +p p  P  IMP  (2  -0.163320 (-10.10) #  -0.000471 (-0.74)  0.312290 (9.52) #  -0.000891  (-1.41) -0.000594 (-0.96)  -0.111830 (-6.24)#  (-1.06) -0.000195 (-0.36)  11.4%  0.338 [90.61] #  -0.008203  16.9%  -0.351 [99.44] N  -0.008516  15.9%  (-6.19)# -0.342 [91.59] N  (-0.86) (-0.59)  -0.355 [101.91] #  11.7%  -0.000467 -0.000313  12.6%  12.3%  0.412980 (10.55)#  (-0.29)  Correlation  -0.012214 (-9.97) #  -0.088609 (-9.57) #  -0.000155  Adj R 2  (-6.05)# 0.201250 (5.49)#  -0.000659  Floating Rate NXP.WT  PM  -0.068406 (-6.97) N  13.9%  0.373 [111.40]#  -0.014639 (-8.43) N  9.4%  -0.307 [71.11] N  -0.009822  15.3%  (-5.41) N  -0.000265  0.326460  -0.008200  (-0.51)  (7.52) #  (-4.37) N  *: Significant at a 5% level N: Significant ata 1% level  48  16.2%  TABLE V  Estimation of Daily Variations in the Japanese NSA Futures using the Movements of the Nikkei Put Warrants  This table reports the regressions of the close-to-close returns for the Japanese NSA futures (F) on the close-to-close returns for the fixed and floating exchange rate warrants (P), the close-toclose returns for the implied NSA derived from the price of the warrants (IMP) and the changes in the premium of the warrants (PM). The regressions investigate the relation between the daily changes in the Japanese NSA futures and the three different measures of the movements of the warrants. Returns are calculated as loge price relatives. t-values are shown in parentheses and F-values are shown in square brackets. The general form of regression is as follows: =  +  Warrant  Constant )  PX 1  Fixed Rate  -0.000647  DXA  (-1.10)  -0.147770 (-9.81) #  +  IMP + A 2 A PM’ ÷ 3  IMP X 2  PM X 3  0.287680 (9.45) #  -0.000708  (-1.20) -0.001078  -0.009431  (-1.80)  (-8.13)#  -0.000774  (-1.33)  -0.114310 (-6.76) #  -0.000828 (-1.42) Floating Rate  -0.000459  NKP.WT  (-0.91)  0.216610 (6.27)#  -0.000549  -0.066367  (-1.10)  (-7.11) #  -0.000505 (-1.01)  0.3 12320 (7.56)#  *:  Significant ata5% level #: Significant ata 1% level  49  12.0%  -0.346 [96.29] #  11.2%  0.335 [89.21] #  8.6%  -0.293 [66.05]#  14.1%  -0.005451 (4.21)#  13.4% 11.3%  -0.336 [87.67] #  13.0%  0.361 [103.04] #  -0.012182 (-7.37) #  7.3%  -0.270 [54.34] #  -0.007509 (-4.35) #  13.7%  -0.006022 (-3.37)#  14.4%  0.375850 (10.15) #  -0.000698 (-1.35)  Correlation  -0.005331 (-4.17) #  -0.081811 (-9.36) #  -0.000424 (-0.85)  Adj R 2  TABLE VI  Regression Tests using the Open-to-Close Price Movements of the Nikkei Put Warrants (Fixed Exchange Rate Warrant - DXA) This table reports the regressions of [1] the close-to-open returns for the spot NSA (Sco), [2] the ), [3] the close-to-close returns for the 0 close-to-open returns for the Japanese NSA futures (Fc spot NSA (S), [4] the close-to-close returns for the NSA futures (F), [5] the ratio of the NSA futures opening price to the spot NSA opening price (F°/S°), and [6] the ratio of the NSA futures closing price to the spot NSA closing price (F/SC) on the open-to-close returns for the DXA fixed exchange rate warrants (P°) and the open-to-close returns for the implied NSA derived from the warrant prices (IMP°). Returns are calculated as loge price relatives. t-values are shown in parentheses and F-values are shown in square brackets. -  Dependent Variable  Constant  P°  S°  -0.000041  -0.030368 (-9.66) #  (-0.56)  0.059508 (11.20)#  -0.000133  (-1.82) F°°  -0.000626  (-1.87)  -0.202720 (-14.13) #  0.361480 (14.69) #  -0.001120  (-3.31) # S°  -0.001948  (-2.67) #  -0.248990 (-7.99) # 0.456350 (8.51)#  -0.002597  (-3.52)# F  -0.001869  (-2;65) #  -0.221150 (-7.35) # 0.395530 (7.60) #  -0.002411  (-3.37) # F°/S°  0.007968 (16.88) #  -0.174830 (-8.66) #  0.007586 (15.73) # F/Sc  0.008632 (21.94)#  IMP°  0.299000 (8.53) # 0.025350 (1.51)  0.008757  -0.063780 (-2.19) *  (21.88) # *:  Significant at a 5% level #: Significantata 1% level  50  Adj R 2  Correlation  15.0%  -0.390 [93.39] #  19.3%  0.440 [125.50]#  27.6%  -0.526 [199.61] #  29.2%  0.541 [215.84] #  10.8%  -0.330 [63.92] #  12.0%  0.349 [72.45]#  9.2%  -0.307 [54.00] #  9.8%  0.316 [57.83] #  12.4%  -0.355 [75.08] #  12.1%  0.351 [72.75] #  0.2%  0.063 [2.27]  0.7%  -0.095 [4.81] *  TABLE VII  Regression Tests using the Open-to-Close Price Movements of the Nikkei Put Warrants (Floating Exchange Rate Warrant - NKP.WT) This table reports the regressions of [1] the close-to-open returns for the spot NSA (Sco), [2] the close-to-open returns for the Japanese NSA futures (F°), [3] the close-to-close returns for the spot NSA (S), [4] the close-to-close returns for the NSA futures (F), [5] the ratio of the NSA futures opening price to the spot NSA opening price (PIS°), and [6] the ratio of the NSA futures closing price to the spot NSA closing price (P/S on the open-to-close returns for the DXA fixed exchange rate warrants (P°) and the open-to-close returns for the implied NSA derived from the warrant prices (IMP°). Returns are calculated as loge price relatives. t-values are shown in parentheses and F-values are shown in square brackets. -  Dependent Variable  Constant  P°  S°°  -0.000164 (-1.80)  -0.016838 (-8.53) #  -0.000217 (-2.38) * F°  -0.001193 (-2.52) *  0.058017 (9.38) # -0.121280 (-11.86) N 0.406330 (12.71)#  -0.001512  (-3.22)# S°  -0.002989  (-3.23) #  -0.142480 (-7.14) # 0.481460 (7.62)#  -0.003385  (-3.65)# F  -0.002793  (-2.95) #  F°/S°  -0.134480 (-6.58) N  -0.003187  0.458700  (-3.35)#  (7.09)#  0.010341 (16.06)#  -0.094700  0.011566 (22.08)#  Adj R 2  Correlation  18.3%  -0.431 [72.83] #  21.4%  0.465 [87.91] N  30.4%  -0.553 [140.66] #  33.4%  0.580 [161.62]#  13.5%  -0.371 [51.02] N  15.2%  0.392 [58.14]#  11.7%  -0.346 [43.33] #  13.3%  0.369 [50.30]#  12.5%  -0.354 [46.53]#  14.6%  0.386 [55.91] N  0.5%  0.089 [2.46]  0.1%  -0.071 [1.45]  (-6.82)#  0.010040 (15.59) N P/S°  IMP°  0.327580 (7.48) N 0.017730 (1.57)  0.011533 (21.70)#  -0.043470 (-1.20)  *:  Significant at a 5% level N: Significant ata 1% level  51  TABLE Vifi  The Correlation between the  Trading  Volume of the Nikkei  Put  Warrants  and the Absolute Value of Changes in the Spot NSA and in the Japanese NSA  Futures  This table reports the correlations of the trading volume of the Nikkei Put Warrants with (1) the (2) the close-to-open absolute returns for the spot NSA S° and for the NSA futures F° and for the NSA futures FC and close-to-close absolute returns for the spot NSA (3) the absolute ratios of the NSA futures price over the spot NSA at open F/So and at close FC/SC The correlations show the effect of the trading volume of the Nikkei Put Warrants on the absolute changes in both the spot NSA and the Japanese NSA futures over the study period (February 17, 1989 to April 23, 1993). Returns and ratios are calculated as log, price relatives. F-values are shown in the parentheses.  (I  (I  (I  I) (IS I)  (I  I).  I)  (I  I)  I)  TRADING VOLUME  I S’°  I Fl  IS’ I  *I 0 IF  UNiT-VOLUME  -0.220 (40.09) #  0.300 (77.80) #  0.288 (71.01) #  0.241 (48.45) #  0.266 (59.79) #  0.216 (38.45) N  DOLLAR-VOLUME  -0.195 (31.05) N  0.336 (99.93) N  0.356 (113.89) N  0.292 (73.00) N  0.245 (50.25) N  0.249 (51.84) N  YEN-VOLUME  -0.200 (32.79) N  0.328 (94.60) N  0.350 (109.47) N  0.288 (70.74) N  0.251 (52.63) N  0.252 (53.43) N  N : Significant at a 1% l.vel  Unit-Volume : The sum of the trading volume of all Nikkei Put Warrants Dollar-Volume: The sum of the dollar-equivalent trading volume of all warrants which is computed by multiplying the unit volume to the respective dollar price Yen-Volume : The sum of the yen-equivalent trading volume of all warrants which is computed by multiplying the unit volume to the respective yen-equivalent price  52  I  I  I F/Si  TABLE IX  The Correlation between the Changes in the Spot NSA and in the Japanese NSA Futures at the Open and Close of the Japanese Market  This table reports the correlations between the close-to-open and close-to-close returns for the spot NSA (S°, SC_C) and the same returns for the Japanese NSA futures (F°, F). The correlations show the relationship between the changes in the spot NSA and the changes in the Japanese NSA futures at the open and close of the Japanese market over the study period (February 17, 1989 to April 23, 1993). Returns are calculated as loge price relatives. F-values are shown in the parentheses.  SC  Sce  FCo  0 S  1  S  0.347 (141.07) #  1  F°  0.452 (264.05) #  0.518 (378.84) #  1  FC_C  0.293 (96.47) #  0.857 (2860.14) #  0.660 (795.58) #  #: significant at a 1 % level  53  Fe_C  1  1: 2: 3 : 4:  Results Results Results Results  are based are based are based are based  I  N  N  i  ‘  •  I  i  N  N  N  N  N  N  N  N  N  N  N  N  N  N  N  N  1 IMP,.  Normal  *  i  N  N  N  Normal  Normal  *  *  2.04  2.08  Normal  *  2.08  Normal  Normal  Normal  Normal  *  Normal  Normal  *  2.00 a  2.18  2.16  2.13  2.06  2.12  i  Normal  *  Normal  2.12* 2.09  Normal  *  2.04  2.02 • Normal  Normal  1.92 • 2.06  Nonnal  1 Normality Teat:  *  1.94  D-W: d value  N  N  N  1 PM,.  N:Signiflcantatal%level i:Insigniflcant on the nonnal probability plot of residuals vecaus their normal scores on the tilno-senee plot of residuals on the significance of the coefficionts of the dummy variables for the day of the week on the significance of the coefficionts of the dummy variables for January  *:Sig..if5aiga5%iel  1  P,  S°  N  N i  N  i  S  1 P,.  Lagged  Dependont Variable  Constant  Constant  Constant  Constant  Cocalant  Cot  Corntanl  Co  Constant  Constant  Constant  Constant  Slightly Non-constant  Slightly Non-constant  Slightly Non-constant  Slightly Non-constant  2 Humoscedasticity Teat:  Marginal Significanton Wednesday  Marginal Significanton Wednesday  Marginal Significanton Wednesday  Marginal Significant on Wednesday  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  3 Day of the Week Effect Test  SummRry of the.Diagnostic Tests (for Close-to-Close Price Movements of the Warrants)  TABLE A-I  Insignificant  Insignificant  Insignificant  Insigniflc  Insigniflcm  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  Insignificant  4 January Effect Test:  U’ U’  •: 1: 2: 3: 4:  1  1  1  i  i  Lagged  N  N  N  1  P,  N  N  N  I  1 1MP  1.91  *  Normal  Normal  *  1.89  Normal  1.701  1.671  Normal  Normal  1.87  Normal  Normal  *  *  Normal  *  1 Nonnahty Test:  1.87w  1.80  1.81  D-W: d value  Significantata 5% level I: Signiflcantsta 1% level i: Insignificant Results are based on the normal prebibility plot of residuals versus their normal scores Results are bused en the tirm-serics plot of residuals Results are bused on the significance of the coefficients of the dummy variables for the day of the week Results are based on the significance of the coefficients of the dummy variables for Januacy  Fr  F°  Sr  S°  Dependent Variable  Constant  Constant  Constant  Constant  Constant  Constant  Constant  Constant  Teat3 Homoscedasticity  Marginal Significanton Wednesday  Marginal Significant on Wednesday  Insignificant  Insignificant  Marginal Significant on Wednesday  Marginal Significant on Wednesday  Insignificant  Insignificant  1 flay of the Week Effect Test  Summary of the Diagnostic Tests (for Open-to-Close Price Movements of the Warrants)  TABLE A-il  Insignificant  Insignificant  Significant  Significant  Insignificant  Insignificant  Insignificant  Insignificant  4 January Effect Test  

Cite

Citation Scheme:

        

Citations by CSL (citeproc-js)

Usage Statistics

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0087418/manifest

Comment

Related Items