Abstract

Purpose – Testing several approaches for implied volatility modeling and forecasting.

Design/methodology/approach – Comparative empirical study with four traded options.

Findings – Non-parametric higher-order spline is better than parametric stochastic volatility inspired (SVI) in China.

Research limitations/implications – Our results imply that even though popular on Wall Street, SVI seems not to be utilized by traders and market-makers in China.

Practical implications – Traders may consider higher-order splines as a better method for implied volatility modeling and forecasting.

Originality/value – Propose to model and forecast implied volatility via the fifth-order spline interpolation as a first; initiates studies of the empirical performance of SVI and the fifth-order spline models in implied volatility modeling and forecasting.

Abstract

Purpose – We are the first to investigate the relationship between seasoned equity offerings (SEOs) and anchoring on historical high prices in China.

Design/methodology/approach – We use the ratio of the recent closing price to its historical high in the previous 12–60 months (anchoring-high-price ratio) to study its impact on the market timing of SEOs.

Findings – Empirical results show that the anchoring-high-price ratio significantly and positively affects the probability of additional stock issuances. Contrary to the USA market, the Chinese stock market reacts negatively to the SEOs at historical highs. Moreover, the anchoring-high-price ratio exacerbates the negative effect of announcements and leads to long-term underperformance. Finally, we investigate the impact of the anchoring-high-price ratio on a company’s capital structure, showing that the additional issuance anchoring on historical highs reduces the company’s leverage ratio in the long run. Overall, our findings support the anchoring theory and can help understand better the anchoring behavior of managers and the company’s decision on additional stock issuances.

Originality/value – We are the first to use the anchoring-high-price ratio to study the timing of SEOs. We find that the anchoring-high-priceratio positively affects the probability of SEOs. Unlike the USA, the Chinese stock market reacts negatively to SEOs at high prices. SEOs anchoring on historical highs reduce a firm’s leverage ratio in the long run. Finally, our results support the anchoring theory.