Step Interventions and Market Integration: Tests in the U.S., U.K., and Australian Property Markets

Market integration implies the existence of some long-run equilibrium relationship between markets such that movements in one market are transmitted to movements in another. It is an interesting observation of much of the literature regarding a possible relationship between real estate and stock markets that there is relatively scant attention given to the possible existence of structural breaks and the impact that such breaks may have on tests for market integration. Other research has shown that failure to take into account structural breaks in various macroeconomic data series may have yielded misleading results on cointegration (in particular, unit root tests on individual series). In this article we examine the issue of whether the stock market and real estate markets are stationary or nonstationary in the presence of structural breaks. We adopt the techniques of Perron (1989), Zivot and Andrews (1992), and Perron and Vogelsang (1992). Each of these tests is based on different assumptions and therefore may yield differing results. In general, the results do not support cointegration of domestic property and equity markets or cointegration of markets internationally.     

The non-linear relationship between oil prices and stock prices: Evidence from oil-importing and oil-exporting countries

This paper investigates the long-run dynamics between stock and oil prices over the period from March 13, 2001 to August 25, 2017 using the Rafailidis and Katrakilidis (2014) approach, which includes the structural breaks in the relationship between the variables in a Dynamic Ordinary Least Squares model. The approach verifies the existence of cointegration and asymmetry. The main results indicate that when using nonlinear approaches, we can find cointegration and asymmetry. For oil-exporting countries, a positive long-term relationship was found between oil and stock prices. In this case, the wealth effect prevailed for these countries. For oil-importing countries with developed economies, a negative signal was found, confirming that in these economies the business cost channel prevailed. However, oil-importing countries with emerging economies have experienced a positive sign in the long-term relationship, probably due to the economic cycle. In addition, only the United States has seen asymmetric adjustments in the long-term relationship between oil and stock prices.     

The Lead‐Lag Relationship Between Cash and Stock Index Futures in a New Market

This paper investigates the lead‐lag relationship in daily returns and volatilities between price movements of the FTSE/ATHEX‐20 and FTSE/ATHEX Mid‐40 stock index futures and the underlying cash indices in the relatively new futures market of Greece. Empirical results show that there is a bi‐directional relationship between cash and futures prices. However, futures lead the cash index returns, by responding more rapidly to economic events than stock prices. This speed is much higher in the more liquid FTSE/ATHEX‐20 market. Moreover, results indicate that futures volatilities spill information over to the corresponding cash market volatilities in both investigated futures markets, but volatilities in the cash markets have no effect on the volatilities of futures markets. Overall, it seems that new market information is disseminated faster in the futures market compared to the stock market. This implies that the futures markets can be used as price discovery vehicles, providing further evidence that derivatives markets contribute to completing and stabilising capital markets in Greece. A further finding of this study is that futures volume and disequilibrium effects between cash and futures prices are important variables in the explanation of volatilities in cash and futures markets.     

Hedging effectiveness of the Athens stock index futures contracts

This paper examines the hedging effectiveness of the FTSE/ATHEX-20 and FTSE/ATHEX Mid-40 stock index futures contracts in the relatively new and fairly unresearched futures market of Greece. Both in-sample and out-of-sample hedging performances using weekly and daily data are examined, considering both constant and time-varying hedge ratios. Results indicate that time-varying hedging strategies provide incremental risk-reduction benefits in-sample, but under-perform simple constant hedging strategies out-of-sample. Moreover, futures contracts serve effectively their risk management role and compare favourably with results in other international stock index futures markets. Estimation of investor utility functions and corresponding optimal utility maximising hedge ratios yields similar results, in terms of model selection. For the FTSE/ATHEX Mid-40 contracts we identify the existence of speculative components, which lead to utility-maximising hedge ratios, that are different to the minimum variance hedge ratio solutions.     

Linkages between the ADR market and home country macroeconomic fundamentals: Evidence in the context of the BRICs

This study investigates the long-run and short-run lead–lag linkages between American Depositary Receipt (ADR) prices and home country economic fundamentals in the context of the BRICs (Brazil, Russia, India and China). In order to obtain an indication of the segmentation or integration between the ADR market and its underlying stock market, the same investigation is also undertaken in relation to the latter. We find that in the long run, economic growth positively drives ADR returns in the cases of Brazil and China but negatively in the cases of Russia and India. In the short-run, economic growth and money supply lead ADR prices but ADR prices predict inflation and oil prices with regard to Brazil while in Russia, oil prices predict ADR returns but the ADR market leads monetary policies and real economic activity. As regards India, in the short run, oil prices and economic growth lead ADR prices but ADR prices predict money supply changes. Finally, with respect to China, the ADR index lead economic growth and inflation but economic variables do not predict ADR prices in the short-run. In the long run, with the exception of China, we find the same kind of linkages between these economic fundamentals and the underlying stock market although the linkages are somewhat stronger. The short run dynamics for ADRs with respect to economic fundamentals are, however, different for that of the respective home country stock market. This would imply that the ADR market and its underlying stock market, as far as the BRICs are concerned, are integrated in the long-run but not in the short-run.     

Long Memory In Futures Prices

This paper tests for fractional roots in the futures prices for selected commodities, foreign currencies, and stock indexes. The fractional testing method is the spectral regression method suggested by Geweke and Porter-Hudak (1983). The empirical results suggest the presence of a fractional exponent in the differencing process for several commodity and foreign currency futures prices. The returns series for these commodities and currencies exhibit long range positive dependence. However, differencing of exact order one is sufficient for the stock index futures prices. Implications are drawn concerning theoretical and econometric modeling and price forecasting.     

Concentration of the UK Stock Market

Abstract:  During 1999 and 2000 a large number of articles appeared in the financial press which argued that the concentration of the FTSE 100 had increased. Many of these reports suggested that stock market volatility in the UK had risen, because the concentration of its stock markets had increased. This study undertakes a comprehensive measurement of stock market concentration using the FTSE 100 index. We find that during 1999, 2000 and 2001 stock market concentration was noticeably higher than at any other time since the index was introduced. When we measure the volatility of the FTSE 100 index we do not find an association between concentration and its volatility. When we examine the variances and covariance's of the FTSE 100 constituents we find that security volatility appears to be positively related to concentration changes but concentration and the size of security covariances appear to be negatively related. We simulate the variance of four versions of the FTSE 100 index; in each version of the index the weighting structure reflects either an equally weighted index, or one with levels of low, intermediate or high concentration. We find that moving from low to high concentration has very little impact on the volatility of the index. To complete the study we estimate the minimum variance portfolio for the FTSE 100, we then compare concentration levels of this index to those formed on the basis of market weighting. We find that realised FTSE index weightings are higher than for the minimum variance index.     

Modeling systemic risk and dependence structure between oil and stock markets using a variational mode decomposition-based copula method

This study combines the variational mode decomposition (VMD) method and static and time-varying symmetric and asymmetric copula functions to examine the dependence structure between crude oil prices and major regional developed stock markets (S&P500, stoxx600, DJPI and TSX indexes) during bear, normal and bull markets under different investment horizons. Furthermore, it analyzes the upside and downside short- and long-run risk spillovers between oil and stock markets by quantifying three market risk measures, namely the value at risk (VaR), conditional VaR (CoVaR) and the delta CoVaR (∆CoVaR). The results show that there is a tail dependence between oil and all stock markets for the raw return series. By considering time horizons, we show that there is an average dependence between the considered markets for the short-run horizons. However, the tail dependence is also found for the long-run horizons between the oil and stock markets, with the exception of the S&P500 index which exhibits average dependence with the oil market. Moreover, we find strong evidence of up and down risk asymmetric spillovers from oil to stock markets and vice versa in the short-and long run horizons. Finally, the market risk spillovers are asymmetric over the time and investment horizons.     

汇率制度改革后中国股市与汇市关系——人民币名义汇率与上证综合指数的实证研究

本文利用协整检验和Granger因果检验的计量方法研究了汇率制度改革后中国股市与汇市的关系。实证结果表明,汇率制度改革后中国股市与汇市存在长期稳定的协整关系,人民币升值是中国股市上扬的单向Granger原因。最后,本文利用国际收支和资本流动理论对这些实证结果作了进一步解释,并提出了相应的政策建议。     

Stock prices and demand for money in China: New evidence

This paper investigates the relationship between stock prices and the real money demands for China within a cointegrated framework. This study reports two important results. First, test results reveal that a stable long-term relationship exists between broad money (M2) and its determinants including real income, foreign interest rate, and stock prices. Second, stock prices have a significant substitute (positive) effect on long-run broad-money (M2) demand and its omission can lead to serious misspecification in the money demand function in both the short- and long-run. Finally, we demonstrate that long-run income elasticity is not significantly different from unity with the inclusion of stock prices in the money demand equation.     

Fractional integration in daily stock market indexes

I use parametric and semiparametric methods to test for the order of integration in stock market indexes. The results, which are based on the EOE (Amsterdam), DAX (Frankfurt), Hang Seng (Hong Kong), FTSE100 (London), S&P500 (New York), CAC40 (Paris), Singapore All Shares, and the Japanese Nikkei, show that in almost all of the series the unit root hypothesis cannot be rejected. The Hang Seng and the Singapore All Shares seem to be the most nonstationary series with orders of integration higher than one, and the S&P500 is the less nonstationary series, with values smaller than one and showing mean reversion.     

我国股市与汇市之间关系的再检验——基于滚动时间窗口技术和阈值误差修正模型的证据

本文采用滚动时间窗口的技术,基于协整检验和Granger因果检验的方法,检验我国股票市场和人民币兑美元汇率之间的联动关系。实证结果表明,股价与汇率之间长期均衡关系是随时间变化的。2008年之前,股价与汇率之间总体上不存在长期均衡关系,而且仅存在汇率到股价的单向引导关系。2008年之后,二者之间总体上存在显著的长期均衡关系,而且股价与汇率互为对方变动的Granger原因。运用阈值误差修正模型,我们发现股价与汇率之间的短期均衡存在显著的非对称效应。汇率对股价的短期影响要远远大于股价对汇率的影响。     

Net Asset Value Discounts for Asian-Pacific Real Estate Companies: Long-Run Relationships and Short-Term Dynamics

This study investigates the time series behavior of real estate company net asset value discount/premium (NAVDISC) in eight Asian-Pacific securitized real estate markets from 1995 to 2003. We postulate that if there is a stable NAVDISC for real estate companies in the long-run, then there should be a long-run cointegrating relation between their stock prices (Ps) and net asset values (NAVs). Employing panel data cointegration econometrics that comprises three approaches; panel unit root test, heterogeneous panel cointegration test and dynamic panel error-correction modeling (ECM), we find that long run NAVDISCs persist in individual Asian-Pacific securitized real estate markets and the regional market. All the NAVDISCs exhibit mean reversion and that the respective disequilibrium errors fluctuate around the mean values. Moreover, NAV is an important factor that statistically explains the price variations in real estate stock prices regardless of their speed of mean-reversion in the NAV discount /premium.     

Equity and fixed income markets as drivers of securitised real estate

This paper re-examines the sensitivity and importance of interest rates and stock market price behavior on securitised property by decomposing their long-run impact between transient and permanent effects. This is achieved in a framework that accounts for endogenously determined structural breaks within the data. The results provide a different perspective on the relationship securitised property has with these markets and sheds new light on their long-run interaction. Once structural breaks are accounted for the results show that securitised property is driven by both interest rate and stock market changes, regardless of the type of securitised property being examined. Evidence also points to companies with increased debt-to-asset ratios and companies that are tax-exempt entities are still all influenced by both the equity and fixed income markets over the long-run period, although the influence these factors have do vary across time.     

Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index

We examine market reactions to changes in the FTSE SmallCap index membership, which are determined quarterly based on market capitalization and are free of information effects. Our main results are asymmetric price and liquidity responses between the firms that are shifted between FTSE indexes and the firms that are new to FTSE indexes. Firms promoted from a smaller-cap to a larger-cap FTSE index experience a permanent increase in stock price accompanied by improvements in liquidity. Similarly, firms demoted from a larger-cap to a smaller-cap FTSE index experience a permanent decrease in stock price accompanied by declines in liquidity. In contrast, firms added to the FTSE SmallCap index that were not previously in FTSE indexes show a transitory price gain and declines in liquidity. The results support the liquidity and price pressure hypotheses.     

Volatility spillovers between oil prices and the stock market under structural breaks

This paper employs univariate and bivariate GARCH models to examine the volatility of oil prices and US stock market prices incorporating structural breaks using daily data from July 1, 1996 to June 30, 2013. We endogenously detect structural breaks using an iterated algorithm and incorporate this information in GARCH models to correctly estimate the volatility dynamics. We find no volatility spillover between oil prices and US stock market when structural breaks in variance are ignored in the model. However, after accounting for structural breaks in the model, we find strong volatility spillover between the two markets. We compute optimal portfolio weights and dynamic risk minimizing hedge ratios to highlight the significance of our empirical results which underscores the serious consequences of ignoring these structural breaks. Our findings are consistent with the notion of cross-market hedging and sharing of common information by financial market participants in these markets.     

On the predictability of stock prices: A case for high and low prices

This paper contributes to technical analysis (TA) literature by showing that the high and low prices of equity shares are largely predictable only on the basis of their past realizations. Moreover, using their forecasts as entry/exit signals can improve common TA trading strategies applied on US equity prices. We propose modeling high and low prices using a simple implementation of a fractional vector autoregressive model with error correction (FVECM). This model captures two fundamental patterns of high and low prices: their cointegrating relationship and the long-memory of their difference (i.e., the range), which is a measure of volatility.     

Cross-sectional tests of deterministic volatility functions

We study the cross-sectional performance of option pricing models in which the volatility of the underlying stock is a deterministic function of the stock price and time. For each date in our sample of FTSE 100 index option prices, we fit an implied binomial tree to the panel of all European style options with different strike prices and maturities and then examine how well this model prices a corresponding panel of American style options. We find that the implied binomial tree model performs no better than an ad-hoc procedure of smoothing Black–Scholes implied volatilities across strike prices and maturities. Our cross-sectional results complement the time-series findings of Dumas et al. [J. Finance 53 (1998) 2059].     

Fractional cointegration and tests of present value models

This paper tests the validity of present value (PV) models of stock prices by employing a two-step strategy for testing the null hypothesis of no cointegration against alternatives which are fractionally cointegrated. Monte Carlo simulations are conducted to evaluate the power and size properties of this test, which is shown to outperform existing ones, and to compute appropriate critical values for finite samples. It is found that stock prices and dividends are both I(1) nonstationary series, but they are fractionally cointegrated. This implies that, although there exists a long-run relationship, which is consistent with PV models, the equilibrium errors exhibit slow mean reversion. As the error correction term possesses long memory, deviations from equilibrium are highly persistent.     

Return and Volatility Spillovers Between Large and Small Stocks in the UK

Abstract:  This paper investigates return and volatility spillover effects between the FTSE 100, FTSE 250 and FTSE Small Cap equity indices using the multivariate GARCH framework. We find that return and volatility transmission mechanisms between large and small stocks in the UK are asymmetric. In particular, there are significant spillover effects in both returns and volatility from the portfolios of larger stocks to the portfolios of smaller stocks. For volatility, there is also evidence of limited feedback from the portfolios of smaller stocks to the portfolios of larger stocks, although sub-period analysis suggests that this is to some extent period-specific. Simulation evidence shows that non-synchronous trading potentially explains some, but not all, of the spillover effects in returns, and that it explains none of the spillover effects in volatility. These results are consistent with a market in which information is first incorporated into the prices of large stocks before being impounded into the prices of small stocks.