The long-run relationship between stock prices and goods prices: New evidence from panel cointegration

We examine the long-run relationship between stock prices and goods prices to gauge whether stock market investment can hedge against inflation. Data from 16 OECD countries over the period 1970–2006 are used. We account for different inflation regimes with the use of sub-sample regressions, while maintaining the power of tests in small sample sizes by combining time-series data across our sample countries in a panel unit root and panel cointegration econometric framework. The evidence supports a positive long-run relationship between goods prices and stock prices with the estimated goods price coefficient being in line with the generalized Fisher hypothesis.     

Financial liberalization and stock market efficiency: an empirical examination of nine emerging market countries

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from nine different countries, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient prior to the actual liberalization.     

AN EMPIRICAL EXAMINATION OF FINANCIAL LIBERALIZATION AND THE EFFICIENCY OF EMERGING MARKET STOCK PRICES

The efficient markets hypothesis in finance suggests that as equity markets are liberalized and made more open to the public, equity prices should reflect the increased availability of information and be more efficiently priced. In this paper, we examine whether emerging market equity prices have become more efficient after financial liberalization. Using two sets of financial liberalization dates, a battery of econometric tests, and data from sixteen countries and three composite portfolios, we find that in spite of theory suggesting the opposite, liberalization does not seem to have improved the efficiency of emerging markets. In fact, most of our statistical tests indicate that the markets were already efficient before the actual liberalization.     

TESTS OF RANDOM WALK AND MARKET EFFICIENCY FOR LATIN AMERICAN EMERGING EQUITY MARKETS

Variance-ratio methodology is used to test the hypothesis that Latin American emerging equity market prices follow a random walk. The data are monthly index prices in local currency from December 1975 to March 1991 for Argentina, Brazil, Chile, and Mexico. The variance-ratio tests reject the random walk hypothesis. However, runs tests indicate that Latin American equity markets are weak-form efficient. These empirical findings suggest that domestic investors might not be able to develop trading strategies that would allow them to earn excess returns.     

Stock Exchange Reforms and Market Efficiency: the Italian Experience

This paper examines whether the reforms introduced by the Italian Stock Exchange from 1991 to 1994 (creation of specialised intermediaries, obligation to trade on the official markets, screen-based trading and cash settlement) did increase market efficiency. The issue is addressed using both the traditional information efficiency model, which tests market efficiency by verifying the predictability of prices conditional on some information subset, and a microstructure approach that measures efficiency as the distance of the price movements from their efficient components, represented by a random walk process. The joint analysis of daily and intraday data on prices and volumes validates the hypothesis that most of the reforms have increased market efficiency over the sample period, except for cash settlement, which appears to have substantially reduced it.     

金融市场有效性联立检验的再检验

在理性预期假定下,基于证券历史价格和收益信息,不能预测证券的未来价格,即市场是弱有效的。对市场有效性检验无效可能是关于基本价格或者正常收益均衡模型设定有误所导致,借助C-CAPM与行为金融模型可以对"市场无效性"进行解释。研究表明,市场有效性假说仅为一个理想范式,无论从有效性的联立检验角度,还是从非理性投资与金融市场关系的角度,都无法对现实的金融市场是否有效做出明确的判断。     

The Recovery Theorem

We can only estimate the distribution of stock returns, but from option prices we observe the distribution of state prices. State prices are the product of risk aversion—the pricing kernel—and the natural probability distribution. The Recovery Theorem enables us to separate these to determine the market's forecast of returns and risk aversion from state prices alone. Among other things, this allows us to recover the pricing kernel, market risk premium, and probability of a catastrophe and to construct model‐free tests of the efficient market hypothesis.     

Do prices reflect market fundamentals in real estate markets?

The purpose of this article is to examine prices on land and REIT shares for possible evidence of deviations from market fundamentals, the underlying economic forces. Models of market fundamentals are developed from the intertemporal capital asset pricing model so that risk aversion and a stochastic investment opportunity set can be incorporated in the analysis. The approach in this article is to compare ex post values of actual discounted cash flows with prices and to test whether the price series are unbiased predictors of the future discounted cash flows. Several tests of the relationship are presented, and the results suggest that prices of real estate investment trusts and prices of farm land do not always reflect fundamental value.     

Re-Examining Variance-Bounds Tests for Asset Prices

The hypothesis of market efficiency is typically rejected by standard variance-bounds tests which assume stationary asset prices. A number of researchers, however, argue that tests used in previous studies are inappropriate since asset prices appear to be generated by nonstationary processes. In this paper, we propose a regression-based variance-bounds test that is valid when the asset price is an integrated process. We apply this test to annual U.S. data over the 1889 to 1985 sample period using measures of the perfect-foresight price constructed from a nonlinear asset-pricing equation that allows for a stochastic discount parameter. The results suggest that the data appear consistent with a version of the efficient-market hypothesis detailed in this paper.     

The market premium for the option to close: evidence from Australian gold mining firms

This study shows the market value of gold mining firms contains a premium for the option to close. The sample uses 41 gold mining producers listed on the Australian Stock Exchange from 1987 to 2013. The premium of the market price over the present value of cash flows is isolated and a pooled cross‐sectional regression tests the degree of association between that premium and theoretical option premiums. The results show market prices incorporate a premium reflecting the option to temporarily close operations. The magnitude of the option premium to close depends on whether firms are out or in the money options.     

Local risk factors in emerging markets: Are they separately priced?

We provide new evidence on the pricing of local risk factors in emerging stock markets. We investigate whether there is a significant local currency premium together with a domestic market risk premium in equity returns within a partial integration asset pricing model. Given previous evidence on currency risk, we conduct empirical tests in a conditional setting with time-varying prices of risk. Our main results support the hypothesis of a significant exchange risk premium related to the local currency risk. Exchange rate and domestic market risks are priced separately for our sample of seven emerging markets. The empirical evidence also suggests that although statistically significant, local currency risk is on average smaller than domestic market risk but it increases substantially during crises periods, when it can be almost as large as market risk. Disentangling these two factors is thus important in tests of international asset pricing for emerging markets.     

The integration of the real estate market and the stock market: Some preliminary evidence

The current study investigates whether the commercial real estate market is segmented from the stock market using the framework of Jorion and Schwartz (1986). Evidence is found to support the hypothesis that segmentation does exist as the result of indirect barriers such as the cost, amount, and quality of information for real estate rather than legal constraints. However, this evidence is contingent on whether real estate returns are computed with appraised values or imputed sale prices and on which market proxy is chosen.     

Is Bitcoin Really Untethered?

This paper investigates whether Tether, a digital currency pegged to the U.S. dollar, influenced Bitcoin and other cryptocurrency prices during the 2017 boom. Using algorithms to analyze blockchain data, we find that purchases with Tether are timed following market downturns and result in sizable increases in Bitcoin prices. The flow is attributable to one entity, clusters below round prices, induces asymmetric autocorrelations in Bitcoin, and suggests insufficient Tether reserves before month-ends. Rather than demand from cash investors, these patterns are most consistent with the supply-based hypothesis of unbacked digital money inflating cryptocurrency prices.     

Testing weak-form market efficiency: Evidence from the Istanbul Stock Exchange

The random-walk version of the efficient market hypothesis is tested for the Istanbul Stock Exchange (ISE) using its composite, industrial, and financial index weekly closing prices. The results obtained from three of the tests indicate that all three series are a random walk, but a nonparametic test provides some evidence against a random walk.     

The pricing of retail deposits: Concentration and information

The traditional structure-conduct-performance (SCP) hypothesis relates concentration and the mean level of prices but ignores the dispersion of prices around their mean levels. This paper tests two hypotheses which are capable of explaining both the mean and the dispersion of elements in the pricing vector of retail banks—a concentration/collusion-based hypothesis and an asymmetric information-based hypothesis. Evidence is found that the dispersion of bank fees across banks may be due to both market structure and information reasons. The level of bank fees appears to be generally insignificantly related to concentration.     

Asymmetric risk premium in value and growth stocks

There are two competing explanations for the existence of a value premium, a rational market risk explanation, whereby value stocks are inherently more risky than growth stocks, and a market over-reaction hypothesis, where agents overstate future returns on growth stock. Using asymmetric GARCH-M models this paper tests the predictions of the two hypotheses. Specifically, examining whether returns exhibit a positive (negative) risk premium resulting from a negative (positive) shock and the relative size of any premium. The results of the paper suggest that following a shock, volatility and expected future volatility are heightened, leading to a rise in required rates of return which depresses current prices. Further, these effects are heightened for value stock over growth stock and for negative shocks over positive shocks. Thus, in support of the rational risk interpretation, with a volatility feedback explanation for predictive volatility asymmetry.     

Random walk theory and the weak-form efficiency of the US art auction prices

We perform variance ratio tests based on non-parametric methods to detect the size of the random walk component of the US art auction prices. The past 134 years of the US art prices exhibit large transitory component (72%) and based on this, the random walk hypothesis does not hold. However, possibly due to sparse data before 1935 or due to institutional changes of the art market after World War II, we detect structural breakpoints and find that the random walk hypothesis and the weak-form efficiency of the US art market cannot be rejected at least for the past 64 years.     

Short sale constraints: the impact on the return distribution

This paper tests empirically Hong and Stein's theoretical finding, that in an environment of short sale constraints, investor disagreement over future equity prices leads to negatively skewed return distributions. This study uses data from the Indian equity market to examine the third and fourth moments of the return distribution. The skewness of the return distribution is estimated both from realized returns and option prices. Empirical results provide partial supportive evidence for Hong and Stein's hypothesis.     

EARNINGS EXPECTATIONS, FIRM SIZE, AND THE INFORMATIVENESS OF STOCK PRICES

The notion that prices impound a wide array of information, including market expectations, has led to earnings forecast models conditioned on prices. Yet, presumably, analysts' forecasts capture both public information and certain private information not previously impounded in prices. Accordingly, price-based models are seemingly an inefficient, and less effective, source of expecta-tions. This article investigates this hypothesis using financial analysts', price-based, and naive forecasts. Results indicate that analysts' forecasts (1) are at least as accurate as price-based and naive models, and (2) yield better expectations for market tests relating returns and earnings. These inferences are robust across different information environments. The evidence suggests that analysts either possess private information or are more effective information processors, or both.     

The implied volatility term structure of stock index options

This paper tests the expectations hypothesis of the term structure of implied volatility for several national stock market indexes. The tests indicate that the slope of at-the-money implied volatility over different maturities has predictive ability for future short-dated implied volatility, although not to the extent predicted by the expectations hypothesis. The low forecast power may be due to failure to control for a risk premium in the prices of the options. Evidence is presented that a time-varying risk premium proportional to the level of market volatility is consistent with the results.