Hot and Cold IPO Markets: Identification Using a Regime Switching Model
34 Pages Posted: 8 Jul 2015
Date Written: July 7, 2015
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: Suggested Citation