The daily relationship between U.S. asset prices and stock prices of American countries

The daily transmission of U.S. comprehensive stock indices to foreign stock markets has been studied extensively, but the transmission may just be that the foreign stock prices respond to news underlying the change in the U.S. stock indices. Besides the regularly economic announcements, news relevant for the U.S. economy may include qualitative news and non-economic events. Due the daily nature of the news, there is no appropriate reference as to its impact on the U.S. or foreign economy and the only accessible reference probably is the change in the financial asset prices. But the U.S. stock index is general in nature and cannot be used to offer specific information about the U.S. economy. Some U.S. asset prices other than stock indices may reveal more specific information about the U.S. economy. Looking into the daily relationship between these U.S. asset prices and stock indices of four American countries in two periods with drastically different economic conditions, this study finds that the daily relationship between these U.S. asset prices and foreign stock prices is consistent with the prevailing U.S. economic fundamentals. From the relationship we identify some U.S. economic conditions foreign stock prices respond to. These economic conditions include real economic shocks, monetary policies, and business default risks.     

Procyclical ratings and market reactions

We investigate stock price reactions to credit rating changes during competing economic environments. Prior research has shown that credit rating assignments differ during times of economic expansion and economic contraction. We investigate if equity prices adjust differently to changes in credit quality in different economic environments. Our results show that markets react more strongly to negative ratings news during times of economic contraction. When the economy is expanding, markets also overreact by pushing prices higher than they otherwise would during an economic downturn.     

The market for crash risk

This paper examines the equilibrium when stock market crashes can occur and investors have heterogeneous attitudes towards crash risk. The less crash averse insure the more crash averse through options markets that dynamically complete the economy. The resulting equilibrium is compared with various option pricing anomalies: the tendency of stock index options to overpredict volatility and jump risk, the Jackwerth [Recovering risk aversion from option prices and realized returns. Review of Financial Studies 13, 433–451] implicit pricing kernel puzzle, and the stochastic evolution of option prices. Crash aversion is compatible with some static option pricing puzzles, while heterogeneity partially explains dynamic puzzles. Heterogeneity also magnifies substantially the stock market impact of adverse news about fundamentals.     

经济新闻自由度与资本市场的有效性

从金融经济学"效率市场假说"的理论与实证研究结果角度分析经济新闻自由对于金融市场发展的影响后认为,经济新闻自由是实现效率市场的宏观机制之一;只有充分的经济新闻自由,信息才能迅速而充分地扩散到市场,并被包括到资产的价格中,从而实现效率市场,促进资本市场的发展。利用世界银行各国股市市值数据与"自由之家"对各国新闻自由度的评定数据进行的统计分析表明,经济新闻自由与股市市值之间具有显著的正相关性。     

Should the government directly intervene in stock market during a crisis?

Unlike foreign exchange markets where central banks frequently intervene, the governments strive not to intervene in the stock markets since intervention transmit negative signals and carry market-related side effects. The main reasons often cited in support of intervention are to bring price stability and to restore investors’ confidence. During the recent economic turmoil, opportunities for the governments to intervene in the stock markets were mainly exploited in emerging and developing countries. We study the outcome of the Russian government's intervention in its major stock market between September and October 2008. This intervention was intended to reverse the sudden and swift declining trend in traded security prices by altering the market's expectations. By using a combination of event study and a multivariate GARCH model, our findings does not support direct government intervention in the stock market during a crisis.     

New insights into the role of global factors in BRICS stock markets: A quantile cointegration approach

Because of the acceleration in marketization and globalization, stock markets in the BRICS (Brazil, Russia, India, China, and South Africa) countries are affected by various global factors, for example, oil prices, gold prices, global stock market volatility, global economic policy uncertainty, financial stress, and investor sentiment. This paper offers new insights into the short- and long-run linkages between global factors and BRICS stock markets by applying the quantile autoregressive distributed lags (QARDL) approach. This novel methodology enables us to test short- and long-run linkages accounting for distributional asymmetry. That is, the nonlinear dynamic relationship between the global factors and BRICS stock prices depends on market conditions. Our empirical results show that the effects of gold prices and global stock market volatility on BRICS stock prices are more significant in the long run than in the short run. A decrease in global stock market volatility is associated with higher stock prices, while gold prices demonstrate upward co-movement in dynamic correlations with stock markets. Irrational factors, such as economic policy uncertainty, financial stress, and investor sentiment, play a critical role in the short term, and negative interdependence is dominant. Finally, the rolling-window estimation technique is used to examine time-varying patterns between major global factors and BRICS stock markets.     

Risk spillover between the US and the remaining G7 stock markets using time-varying copulas with Markov switching: Evidence from over a century of data

This paper analyses the risk spillover effect between the US stock market and the remaining G7 stock markets by measuring the conditional Value-at-Risk (CoVaR) using time-varying copula models with Markov switching and data that covers more than 100 years. The main results suggest that the dependence structure varies with time and has distinct high and low dependence regimes. Our findings verify the existence of risk spillover between the US stock market and the remaining G7 stock markets. Furthermore, the results imply the following: 1) abnormal spikes of dynamic CoVaR were induced by well-known historical economic shocks; 2) The value of upside risk spillover is significantly larger than the downside risk spillover and 3) The magnitudes of risk spillover from the remaining G7 countries to the US are significantly larger than that from the US to these countries.     

沪深股市在牛市和熊市阶段的波动非对称效应实证分析

本文分别采用EGARCH-M、TGARCH-M模型对沪深股市在牛市和熊市阶段的非对称波动效应进行了分析,这两个模型得出了相同的结论,在牛市阶段利好消息引起股市更大的波动,在熊市阶段利空消息引起股市更大的波动,而且这两个模型同时也说明了我国股市风险和收益的正相关关系,并从我国股票市场交易者构成和交易机制两方面说明了波动非对称的原因。     

Geopolitical risks and stock market dynamics of the BRICS

This paper examines the effect of geopolitical uncertainty on return and volatility dynamics in the BRICS stock markets via nonparametric causality-in-quantiles tests. The effect of geopolitical risks (GPRs) is found to be heterogeneous across the BRICS stock markets, suggesting that news regarding geopolitical tensions do not affect return dynamics in these markets in a uniform way. GPRs are generally found to impact stock market volatility measures rather than returns, and often at return quantiles below the median, indicating the role of GPRs as a driver of bad volatility in these markets. While Russia bears the greatest risk exposure to GPRs in terms of both return and volatility, India is found to be the most resilient BRICS nation in the group. Noting that geopolitical shocks and in particular terrorist incidents are largely unanticipated, our findings underscore the importance of a strong financial sector that can help return the market to stability and an open economy that allows local investors to diversify country-specific risks in their portfolios.     

Extreme risk transmission channels between the stock index futures and spot markets: Evidence from China

We develop a skewness-dependent multivariate conditional autoregressive value at risk model (SDMV-CAViaR) to detect the extreme risk transmission channels between the Chinese stock index futures and spot markets. The proposed SDMV-CAViaR model improves the forecast performance of extreme risk by introducing the high-frequency realized skewness. Specifically, the realized skewness has a significant impact on the spillovers, but the realized volatility and realized kurtosis do not, which implies that the jump component plays an important role in extreme risk spillovers. The empirical results indicate there are bidirectional extreme risk spillovers between the stock index futures and spot markets, the decline of one market has direct and indirect channels to exacerbate the extreme risk of the other market. Firstly, the market decline will directly increase the extreme risk of related markets by decreasing market returns. Besides, the decline will indirectly increase the extreme risk by increasing the negative realized skewness and extreme risk spillovers.     

Mutual excitation in Eurozone sovereign CDS

We study self- and cross-excitation of shocks in the Eurozone sovereign CDS market. We adopt a multivariate setting with credit default intensities driven by mutually exciting jump processes, to capture the salient features observed in the data, in particular, the clustering of high default probabilities both in time (over days) and in space (across countries). The feedback between jump events and the intensity of these jumps is the key element of the model. We derive closed-form formulae for CDS prices, and estimate the model by matching theoretical prices to their empirical counterparts. We find evidence of self-excitation and asymmetric cross-excitation. Using impulse-response analysis, we assess the impact of shocks and a potential policy intervention not just on a single country under scrutiny but also, through the effect on cross-excitation risk which generates systemic sovereign risk, on other interconnected countries.     

Fake news

This analysis uses Twitter stock and options prices sampled at a 30 s frequency around the fake news announcement, of a bid for a controlling stake in Twitter stock, to investigate how noise trading and informed trading is disseminated into equity and option markets. We find reaction to the fake news occurred in the equity market, and the option market reacted with a delay. This differs from many analyses of actual news events, which found informed traders prefer the options market, and information from their trades then leaks into the equity market. We conclude uninformed traders, and those aware of the hoax, prefer to trade in equity over option markets. This result has implications for isolating informed trading around actual news events.     

Voluntary Disclosure and Analyst Forecast

Empiricists document that firms more often voluntarily disclose bad news than good news and link this pessimism to managers’ increased incentives not to fall short of earnings expectations. This paper analyzes the voluntary disclosure of a manager’s private information by explicitly considering her incentives to meet or beat an analyst’s earnings forecast. The model predicts that managers who face strong incentives to meet or beat these forecasts more frequently disclose bad news than good news in order to guide analysts’ expectations about future earnings downward. This pessimism is higher in markets with less informed managers and may hold even if the manager has strong incentives for high stock prices and meet-or-beat incentives are comparably low.     

Time-frequency effect of crude oil and exchange rates on stock markets in BRICS countries: Evidence from wavelet quantile regression analysis

This study examines the effects of oil prices and exchange rates on stock market returns in BRICS countries (Brazil, Russia, China, India and South Africa) from a time–frequency perspective over the period 2009–2020. We use wavelet decomposition series to develop a threshold rolling window quantile regression to detect time–frequency effects at various scales. The empirical results are as follows. First, our findings confirm that the effects of both crude oil prices and exchange rates on BRICS stock returns are asymmetric. Positive shocks of crude oil have a greater impact on a bull market, whereas negative shocks have a greater impact on a bear market. Second, there is a short-term enhancement effect of crude oil and exchange rate on BRICS stock markets. In addition, volatility in the macro financial environment also exacerbates the impacts of oil prices and exchange rates on the stock market, and these fluctuations are heterogeneous. Overall, these findings provide useful insights for international investors and policy makers.     

Economic policy uncertainty,oil price volatility and stock market returns: Evidence from a nonlinear model

This paper investigates the nonlinear relationship between economic policy uncertainty, oil price volatility and stock market returns for 25 countries by applying the panel smooth transition regression model. We find that oil price volatility has a negative effect on stock returns, and this effect increases with economic policy uncertainty. Furthermore, there is pronounced heterogeneity in responses. First, oil-exporting countries whose economies depend more on oil prices respond more strongly to oil price volatility than oil-importing countries. Second, stock returns of developing countries are more susceptible to oil price volatility than that of developed countries. Third, crisis plays a crucial role in the relation between oil price volatility and stock returns.     

Determinants of European stock market integration

We analyse the determinants of stock market integration among EU member states for the period 1999–2007. First, we apply bivariate DCC-MGARCH models to extract dynamic conditional correlations between European stock markets, which are then explained by interest rate spreads, exchange rate risk, market capitalisation, and business cycle synchronisation in a pooled OLS model. By grouping the countries into euro area countries, “old” EU member states outside the euro area, and new EU member states, we also evaluate the impact of euro introduction and the European unification process on stock market integration. We find a significant trend toward more stock market integration, which is enhanced by the size of relative and absolute market capitalisation and hindered by foreign exchange risk between old member states and the euro area. Interest rate spreads and business cycle synchronisation are also significant factors in explaining equity market integration.     

Are the stock and real estate markets integrated in China?

This paper examines the dynamic short-run and long-run co-movement between the real estate and stock markets in China by employing a continuous wavelet method. We use gross domestic product and M2 (broad money supply) as control variables to eliminate the common factors of the two markets and to identify the real nexus between them. The empirical results show that the co-movement between real estate and stock prices is weak in the short run, except during the financial crisis period. Since the stock market is highly volatile, while real estate prices are relatively stable, the two markets are less correlated in the short run. The results also show that real estate prices affect stock prices in the long run, which supports the existence of a credit-price effect in China. Real estate prices remained very high in most time periods. Enterprises and individuals can obtain funds from bank loans to invest in the stock market, thus raising stock prices. These findings indicate that the two markets are generally segmented in the short run but are integrated in the long run. The stabilization of the real estate market is critical for stability in the stock market, but not vice versa. Additionally, investments in the two markets may not provide a high level of risk dispersion in the long run in China.

     

Order aggressiveness, pre-trade transparency, and long memory in an order-driven market

Recent empirical research has documented that the state of the limit order book influences stock investors' strategies. Investors place more aggressive orders when the same side of the order book is thicker, and less aggressive orders when it is thinner. We conjecture and demonstrate that this behavior is related to long memories of trading volume, volatility, and order signs in stock markets. We investigate our conjecture in two types of artificial stock markets: a transparent market, in which agents observe all limit orders on both sides of the book and order volumes at those prices before they trade; and a less transparent market, in which agents observe only the best five bid and ask quotes with the depth available at these limit prices. The first market structure resembles certain actual stock exchanges in the level of pre-trade transparency, such as the Australian Stock Exchange, NYSE OpenBook, and the London Stock Exchange, whereas the second market structure is consistent with stock exchanges such as Euronext Paris, the Toronto Stock Exchange, the Tokyo Stock Exchange, and Hong Kong Exchanges and Clearing. We demonstrate that our long memory results are robust with different levels of pre-trade transparency, implying that the strategy constructed by the state of the order book is key for explaining long memories in many actual stock exchanges.     

America's decoupling from China: A perspective from stock markets

America's decoupling-from-China debate started after July 2018, reached its peak in August 2020, and is likely to continue even if it may not be a high priority for the Biden administration. Many studies have examined various aspects of this issue, especially the potential economic impacts on the US economy. Unlike previous research, this study looks at the response of stock markets. Using Google Trends data, this study created a weekly dataset from January 2020 to June 2021 to measure investor sentiment towards the US decoupling from China. Employing the generalised autoregressive conditional heteroskedasticity (GARCH) models, the study finds that concern over decoupling is associated with significant variations in stock market prices. From this we can infer that the overall effects of decoupling on the US economy are likely to be considerable.     

The role of implied volatility in forecasting future realized volatility and jumps in foreign exchange,stock, and bond markets

We study the forecasting of future realized volatility in the foreign exchange, stock, and bond markets from variables in our information set, including implied volatility backed out from option prices. Realized volatility is separated into its continuous and jump components, and the heterogeneous autoregressive (HAR) model is applied with implied volatility as an additional forecasting variable. A vector HAR (VecHAR) model for the resulting simultaneous system is introduced, controlling for possible endogeneity issues. We find that implied volatility contains incremental information about future volatility in all three markets, relative to past continuous and jump components, and it is an unbiased forecast in the foreign exchange and stock markets. Out-of-sample forecasting experiments confirm that implied volatility is important in forecasting future realized volatility components in all three markets. Perhaps surprisingly, the jump component is, to some extent, predictable, and options appear calibrated to incorporate information about future jumps in all three markets.