IDENTIFICATION OF HOT IPO MARKETS USING A BIVARIATE REGIME SWITCHING MODEL

Ricardo Tovar-Silos
Lamar University
ABSTRACT
This study investigates the behavior of industry-level IPO volume and IPO underpricing
in the context of a bivariate Markov regime-switching model. The specification of the model
allows to objectively identify and date four regimes: Low Volume-Low Underpricing, High
Volume-Low Underpricing, Low Volume-High Underpricing and High Volume-High
Underpricing. It is hypothesized that the regime High Volume-Low Underpricing is explained by a
reduction in the level of asymmetry of information whereas the regime High Volume-High
Underpricing is explained by an increase in the level of investor sentiment. The author finds that
on the first half of the nineties all analyzed industries, but Depository Institutions, were in the
regime High Volume-Low Underpricing whereas during the internet bubble period they were all
in the regime High Volume-High Underpricing. Depository Institutions was in the regime High
Volume-High Underpricing during the first half of the eighties a period that coincides with the
deregulation of the banking sector.