The relationship between South Asian stock returns and macroeconomic variables

This article investigates whether economic variables have explanatory power for share returns in South Asian stock markets. In particular, using data for four South Asian emerging stock markets over the period 1998–2012, the article examines the influence of a selection of local, regional and global economic variables in explaining equity returns; most previous studies that have examined this issue have tended to focus on only local and/or global factors. Important factors are identified by distilling the macroeconomic variables into principal components. Economic activities, real interest rates, real exchange rates and the trade balance represent local factors. Regional factors are represented by interregional trade and regional economic activity while global factors are represented by world financial asset returns and world economic activity. The vector autoregression results suggest that the South Asian markets examined are not efficient. Both local and regional factors can directly and indirectly explain Bangladeshi, Pakistani and Sri Lankan stock returns while the lagged returns of the Pakistani stock market and world economic activity can explain Indian stock returns.     

Fiscal policy and stock market efficiency: An ARDL Bounds Testing approach

The aim of this paper is to investigate the semi-strong market efficiency hypothesis with respect to fiscal policy information, in the context of the Bucharest Stock Exchange. Taking into account that macroeconomic data series of emerging countries usually have a limited size and may be plagued by inconsistencies and structural breaks, this paper proposes an ARDL Bounds testing approach for studying the relationship between stock returns and lagged macroeconomic variables. Moreover, this approach allows us to examine both the long and short-term relationship between fiscal policy and stock returns. The results indicate that, in the long run, stock prices fully and efficiently reflect information on past fiscal policy. However, in the short run, the Romanian stock market reacts efficiently only to unexpected fiscal policy news, while anticipated fiscal policy information displays a significant lagged relationship with current stock returns. In addition, the results also showed that monetary policy information is not incorporated efficiently into stock prices, both in the short and the long run, and its impact on stock returns is larger than the one exerted by fiscal policy.     

Are fundamentals still relevant for European economies in the post-Euro period?

A structural VAR model, with stock prices, real economic activity, a short-term interest rate and inflation, was applied to four European countries to investigate whether economic fundamentals play an important role in their national stock markets. The analysis considers the pre- and post-Euro introduction periods. In general, the results suggest a breakdown in the relationship between real economic activity and real stock returns during the post-Euro period. Second, impulse response analyses reveal that (shocks by) fundamental variables still influence somewhat real stock returns for some countries but the extent and nature of their impact differ among countries in the post-Euro period. Finally, an examination of equity risk premiums corroborates the above findings and, overall, they may be interpreted as the equity markets having a mind of their own, disconnected from the fundamentals and that they are significantly affected by foreign rather than country-specific forces.     

Oil price effects over individual Portuguese stock returns

During the last decades, the world energy dependence increased significantly. Understanding how companies depend on oil prices is essential, especially for countries highly dependent or importers. The work intends to investigate the relationship between oil price changes and Portuguese listed companies’ returns. Using the generalized autoregressive conditional heteroskedasticity model, we conclude that nearly 20 % of the companies are significantly affected by oil prices, finding also evidence that these effects are asymmetric, depending on the company’s current situation in the market (result attributed to the lack of liquidity and the small number of firms included within the sample). There exists some differences among economic sectors in the way they are impacted by oil price changes, although not so much significant. The results show that the bigger the company, the higher the probability of being significantly affected by oil price changes. Results suggest that lagged oil price positive shocks increase Portuguese companies’ returns, by opposition to the current oil price change. Findings highlight the key role played by aggregate demand-side oil price shocks over the financial economic activity, showing sector and individual companies’ differences, thus inducing the possibility of results being highly dependent over the economic context faced by the country under analysis, that firms are more sensitive to oil prices when the equity market is busiest and that oil price increases affect companies returns in a negative way, but price decreases cause more positive than negative effects over company returns.     

Growth-returns nexus: Evidence from three Central and Eastern European countries

Using a sample of monthly data from January 1996 to December 2012, we provide new evidence on the unidirectional Granger causality from real stock market returns to real economic activity in three Central and Eastern European countries: the Czech Republic, Hungary, and Poland. By employing the Granger causality tests of Cheung and Ng (1996) and Hong (2001), we show evidence of short-term (up to 6 months), medium-term (up to 12 months) and long-term (up to 24 months) causality for the Czech Republic and Hungary. In the case of Poland, only medium-term and long-term causality is found. Using rolling-correlation analysis, we find that although the growth–returns relationship is positive during the examined period, there is an apparent variability in the strength of this relationship that is particularly visible during the period of the financial crisis in the late 2000s. Consequently, we find that the predictive power of stock markets in the CEE-3 countries increases during periods of high market volatility and decreases during periods of economic recovery.     

Stock and credit market expansion and economic development in emerging markets: further evidence utilizing cointegration analysis

This paper empirically investigates the relationship between equity and credit market development and economic growth, in a sample of five very important ‘emerging’ markets. In particular, employing a multivariate time-series methodology to test for long-run trends and causality between variables that proxy for stock market development, credit market development and economic development. The results seem to suggest that equity markets have a role to play only in relatively liberalized economies, like Chile and Mexico. In financially repressed economies, like India, the equity market does not affect real sector growth. Furthermore, the banking crises in the 1980s and 1990s in Chile and Mexico resulted in a negative relation between economic growth and the credit market. In South Korea, equity and credit markets both affect economic growth, but not vice versa. In countries where the nature of the stock market has been speculative, like Taiwan, a negative relationship is detected between equity market development and economic development.     

The Semi-Strong Efficiency of the Australian Share Market*

This paper tests the weak and semi-strong forms of the Efficient-Markets Hypothesis (EMH) using data on the Australian skate market in the 1980s. The tests are based on aggregate share price indexes and the semi-strong efficiency tests use macroeconomic data The weak-form tests examine the autocorrelation structure of share returns and test for unit roots in share prices. The data are found to be consistent with the EMH.     

Oil shocks,policy uncertainty and stock returns in China

This paper examines the interdependence of China's policy uncertainty, the global oil market and stock market returns in China. A structural VAR model is estimated that shows that a positive shock to economic policy uncertainty in China has a delayed negative effect on global oil production, real oil prices and real stock market returns. Shocks to oil market‐specific demand significantly raise China's economic policy uncertainty and reduce the real stock market returns. As measured by a spillover index, the interdependence between these variables has been rising since 2003 as China's influence in the oil market has increased. An equivalent spillover index calculated for the US is smaller and has been largely flat over time.     

Stock markets and industry growth: an Eastern European perspective

This paper reviews the recent stock market developments in Poland and the Czech Republic and provides a case-study insight into the direction of causality between stock market expansion and economic growth. It finds no evidence that the relative failure of the Czech security market affected the country's economy. It also reports that the largest equity issuers in Eastern Europe do not come from industries traditionally considered financially dependent.     

A Time-Varying Risk Analysis of Equity and Real Estate Markets in the US and Japan

The paper offers some new evidence which suggests that Japanese equity and real estate markets might not necessarily behave in a parallel manner to US capital markets. These results are obtained from an examination of the nature of expected and unexpected movements in the returns of Japanese assets and US assets using a present-value model which allows for a time-varying expected discount rate in conjunction with a VAR process. Based on data from 1972–92, it is found that one distinctive difference is that changes in the future expected return for Japanese real estate and stocks are less persistent over time than their US counterparts. It is also found that the impact of Japanese markets on the US market was relatively small. On the other hand, there is some evidence that the US equity market had some significant impact on the Japanese equity market. Returns on Japanese stocks also exhibit a weaker mean reversion process relative to returns on US stocks and US real estate.     

Hedging and diversification across commodity assets

ABSTRACT

We investigate the conditional cross effects and volatility spillover between equity markets and commodity markets (oil and gold), Fama and French HML and SMB factors, volatility index (VIX) and bonds using different multivariate GARCH specifications considering the potential asymmetry and persistence behaviours. We analyse the dynamic conditional correlation between the US equity market and a set of commodity prices and risk factors to forecast the transmission of shock to the equity market firstly, and to determine and compare the optimal hedge ratios from the different models based on the hedging effectiveness of each model. Our findings suggest that all models confirm the significant returns and volatility spillovers. More importantly, we find that GO-GARCH is the best-fit model for modelling the joint dynamics of different financial variables. The results of the current study have implications for investors: (i) the equity market displays inverted dynamics with the volatility index suggesting strong evidence of diversification benefit; (ii) of the hedging assets gold appears the best hedge for the US equity market as it has a higher hedge effectiveness than oil and bonds over time; and (iii) despite these important results, a better hedge may be obtained by using well-selected firm sized and profitability-based portfolios.     

Time-varying synchronization of European stock markets

We study intraday comovements among three developed (France, Germany, and the United Kingdom) and three emerging (the Czech Republic, Hungary, and Poland) European stock markets. When applying a Dynamic Conditional Correlation GARCH model to 5- min tick intraday stock price data (2003–2006), we find a strong correlation between the German and French markets and also between these two markets and the UK stock market. However, very little systematic positive correlation during a trading day can be detected between the developed and emerging stock markets, or within the emerging group itself. Hungary exhibits higher correlation with the developing markets and the emerging markets and its dynamics show an increasing trend; Poland and the Czech Republic produce less clear-cut results.     

Foreign News and Spillovers in Emerging European Stock Markets

We analyze foreign news and spillovers in the emerging EU stock markets (the Czech Republic, Hungary, and Poland). We employ high‐frequency five‐minute intraday data on stock market index returns and four classes of EU and US macroeconomic announcements during 2004–07. We account for the difference of each announcement from its market expectation and we jointly model the volatility of the returns accounting for intraday movements and day‐of‐the‐week effects. Our findings show that intraday interactions on the new EU markets are strongly determined by mature stock markets as well as the macroeconomic news originating thereby. We show that strong contemporaneous links across markets are present even after controlling for macroeconomic announcements. Finally, in terms of specific announcements, we are able to show the exact sources of macro news spillovers from the developed foreign markets to the three new EU markets under research.     

A Spoonful of Sugar: Privatization and Popular Support for Reform in the Czech Republic

We analyze the role of privatization in creating a constituency for economic reform, markets, and democratic institutions, focusing on the Czech Republic. Drawing on a 1996 survey, we examine the 1,459 respondents' opinions on reforms, economic policies and systems, the legitimacy of transition, and democratic values. Using ordered probit estimation, we find that receiving property through restitution is strongly associated with support for reform and markets. Concerning voucher privatization, we find positive effects for participants retaining shares, but little impact of participation alone. Our simulations suggest that policy designs have substantial consequences for citizens' support of reforms, markets, and democracy.     

Oil price risk in the Spanish stock market: An industry perspective

This study examines the sensitivity of the Spanish stock market at the industry level to movements in oil prices over the period 1993–2010, paying special attention to the presence of endogenously determined structural changes in the relationship between oil price changes and industry equity returns. The empirical results show that the degree of oil price exposure of Spanish industries is rather limited, although significant differences are found across industries. The oil price sensitivity is very weak in the 1990s, a period of fairly stable and low oil prices. Instead, the link between crude oil and stock prices seems to have increased during the 2000s, becoming primarily positive. This evidence highlights the key role played by aggregate demand-side oil price shocks associated with the global real economic activity in the link between oil price fluctuations and the Spanish stock market.     

Oil shocks,US economic uncertainty,and emerging stock markets

This paper investigates the impacts of oil price shocks and US economic uncertainty on emerging equity markets within a structural VAR model. I find that both precautionary oil demand and US economic uncertainty shocks have significant negative effects on emerging stock returns, whereas aggregate demand shocks cause a sustained rise of the returns. In particular, the direct effects of oil shocks on emerging stock returns are amplified by the endogenous response of US economic uncertainty. Variance decomposition analysis shows that oil market fundamentals and US economic uncertainty are an important determinant of emerging equity returns, accounting for 35% and 24% of their long-term variations, respectively. The heterogeneous impacts of structural shocks on individual emerging markets, however, suggest that a well-diversified portfolio can be obtainable.     

Volatility transmission between Islamic and conventional equity markets: evidence from causality-in-variance test

This study examines whether a volatility/risk transmission exists between the Dow Jones Islamic stock and three conventional stock markets for the United States, Europe and Asia during the pre- and the in- and post-2008 crisis periods. It also explores the volatility spillover dynamics between those markets and US Monetary policy, oil prices, global financial risk and uncertainty factors. The recently developed Hafner and Herwartz (2006)’s causality-in-variance test provides evidence of risk transfers between these seemingly different equity markets, indicating a contagion between them during the full sample and the subperiods. The volatility structure of these markets is dominated by short-run volatility in the first period and by high long-run volatility in the second period. The volatility impulse response analysis indicates a similar volatility transmission pattern although it is characterized by a more volatile and short-lived structure in the second period. It also appears that the Islamic equity market responds to shocks from the risk factors and not from the oil price and the US economic policy uncertainty index during both periods.     

Evaluation periods and asset prices: Myopic loss aversion at the financial marketplace

Examining myopic loss aversion (MLA [Benartzi, S., Thaler, R., 1995. Myopic loss aversion and the equity premium puzzle. Quarterly Journal of Economics 110, 73–92]) in real financial markets has several merits: in repeated situations investors may learn from each other, aggregate market prices may eliminate individual violations of expected utility, and individuals may decide differently in real situations than in laboratories. We utilize a special feature at the Tel Aviv stock exchange (TASE): occasional shifts of securities from daily to weekly trading. If investors’ decisions are influenced by trading frequency manipulation, then returns should be predictably affected. MLA results in a negative relation between risk aversion and the length of the evaluation period. Thus, the longer the evaluation period is, the lower the expected return is. This intuition also suggests reduced sensitivity to economic events in longer evaluation periods. We find strong support for MLA in the marketplace when testing expected return, as well as return sensitivity.     

How index investment impacts commodities: A story about the financialization of agricultural commodities

This paper focuses on the impact of financial investors on agricultural prices, a phenomenon known as the financialization. In this aim, we check whether financial mechanisms drive extreme values and the mean of agricultural returns in the same way. Relying on the Threshold AutoRegressive Quantile (TQAR) methodology, we find evidence of reinforcement linkages between equity and agricultural markets since 2004, corresponding to the rise in inflows of institutional investors in commodity markets. These results show that agents impact more deeply commodity markets when the commodity index value is high. In addition, in extreme quantiles (0.75 and 0.90) of agricultural returns, the relationship between agricultural and stock returns is always significant when the commodity index return is in the higher regime. This finding suggests that, stock markets had a greater impact on agricultural price dynamics during the extreme movements which occurred during the 2007–2008 financial crisis, highlighting a potential influence of financial markets on the financialization of commodities.     

Do market prices aggregate information about macroeconomic uncertainty (or risk)?

This article examines several economic variables that represent either confidence in future economic conditions or the degree of risk/uncertainty about future conditions in order to determine which contain more information about future employment and output. Some of these variables are prices, while others are from surveys. Causality tests, historical decompositions within a VAR and out-of-sample forecasts are among the tools used. This article concludes that monthly stock returns contain much more information about future economic conditions than the other variables. The spread between Moody’s BAA and AAA bonds, the spread between the constant maturity 10-year government bond and the federal funds rate, as well as uncertainty in future economic conditions as measured by the Federal Reserve Bank of Philadelphia’s Business Outlook Survey also provide information about future economic conditions. Notably, this article finds that monthly stock returns contain more information about future economic conditions than does the vix and that variables based on market prices provide more information than survey data. This result provides some support for the notion that market prices aggregate information.