Hot and Cold IPO Markets: Identification Using a Regime Switching Model

34 Pages Posted: 8 Jul 2015

See all articles by Timothy Brailsford

Timothy Brailsford

University of Queensland

Richard Heaney

Australian National University

John Powell

University of Otago

Shi Jing

Australian National University (ANU)

Date Written: July 7, 2015

Abstract

The market for unseasoned equity has the unusual and distinguishing feature of periods of concentrated activity in terms of both volume and underpricing. This paper formally documents the existence of such periods using a regime-switching model that dates transitions between hot and cold states. A number of hot periods are identified over a 20-year period using a variety of IPO activity measures that capture different aspects of new issue volume, proceeds and underpricing. The study further documents a leading relationship between underpricing and IPO volume of up to six months. This relationship supports the contention that the decision to issue is a function of current underpricing. Various reasons are hypothesised for this result and the paper finds supportive evidence through a VAR analysis that reveals the influence of stock market and business conditions.

Keywords: hot issues; IPOs; regime-switching; stock market; unseasoned issues

JEL Classification: G12, G14, G32

Suggested Citation

Brailsford, Timothy and Heaney, Richard and Powell, John and Jing, Shi, Hot and Cold IPO Markets: Identification Using a Regime Switching Model (July 7, 2015). Multinational Finance Journal, Vol. 4, No. 1/2, p. 35-68, 2000, Available at SSRN: https://ssrn.com/abstract=2627665

Timothy Brailsford (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Richard Heaney

Australian National University ( email )

Canberra, Australian Capital Territory 0200
Australia
(+61) 6 2494726 (Phone)
(+61) 6 2495005 (Fax)

John Powell

University of Otago ( email )

P.O. Box 56
Dunedin, Otago 9010
New Zealand

Shi Jing

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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