Volatility transmission and financial crises

In this paper we examine the international transmission of the 1997 South East Asia financial crisis. We estimate a bivariate GARCH-BEKK model, and carry out LR tests for causality-in-variance with bootstrapped critical values. Three pairwise models are estimated for US, European, Japanese and South East Asian daily stock market returns. Volatility spillovers are found in all cases. The dynamics of the conditional volatilities differ, but causality links in the variance are found to be strong and bidirectional in normal periods, and unidirectional (from the markets in turmoil to the others) following the onset of the crisis, consistently with crisiscontingent models. The authors are grateful to an anonymous referee, Graciela Kaminsky, Marco Barassi, Andrea Cipollini and participants in the 2001 AEA Meetings, New Orleans, January 5–7, 2001, and in the Australasian Meeting of the Econometric Society, Auckland, New Zealand, July 6–8, 2001 for useful comments and suggestions Financial assistance from Leverhulme grant F/711/A, “Volatility of share prices and the macroeconomy: real effects of financial crises”, is also gratefully acknowledged.     

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.

     

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.     

Transition, the Evolution of Stock Market Efficiency and Entry into EU: The Case of Romania

In this paper we demonstrate that the measurement of stock market efficiency is an important activity in establishing whether eastern European countries satisfy the Copenhagen Criteria for EU membership. Specifically, we argue that developing an efficient stock market should be an important policy focus for countries with aspirations to join the EU as it helps to demonstrate the existence of a functioning market economy. We illustrate this issue by examining the evolution of stock market efficiency in the Bucharest Stock Exchange from mid-1997 to September 2002. We use a GARCH model on daily price data and model the disturbances using the Student-t distribution to allow for ‘fat-tails’. We find strong evidence of inefficiency in the Bucharest Stock Exchange in that the lagged stock price index is a significant predictor of the current price index. This result is robust to the inclusion of variables controlling for calendar effects of the sort that have been observed in more developed stock markets. The level of inefficiency appears to diminish over time and we find evidence consistent with stock market efficiency in Romania after January 2000.     

Price effects of steel commodities on worldwide stock market returns

We analyze the price effects of steel commodities on stock market returns in emerging and developed economies. These commodities have recently attained increased media exposure due to the rise in the U.S. steel import tariffs, which pose the threat of reducing global demand for steel products and, consequently, lowering prices abroad. However, little has been investigated on the impact of steel commodity prices on worldwide stock market returns. By performing structural VAR and GARCH techniques on a weekly-frequency time series from 2002 to 2015, we find positive and statistically significant effects of linear and non-linear steel commodity price shocks on real stock returns in the commodity markets. In the highly diversified financial markets such as U.S. and Germany, real stock returns do not significantly respond to steel commodity price shocks, although we find highly significant positive responses from developed economies such as Australia, Japan and South Korea. Results are robust to different model specifications. Our evidence suggests that higher tariffs on steel imports represent a larger disadvantage to commodity markets which are more largely impacted by steel commodity prices. We provide economic policy implications based on recent literature.     

Stock prices and exchange rates in VEC model—The case of Singapore in the 1990s

This paper uses an error correction model to explore 1) the asymmetric effects of four different exchange rates on Singapore stock prices and 2) the effects' sensitivity to economic instability. Both the Singapore currency appreciation against the U.S. dollar and Malaysianringgit and depreciation against the Japaneseyen and Indonesianrupiah lead to a longrun increase in stock prices for most selected periods of the 1990s; however, the effect associated with the U.S. dollar exchange rate has a sign reversal between the 1997–98 crisis period and the 1999–2000 recovery period. The influence of exchange rates on stock prices increases in a chronological order in the 1990s. The author would like to thank three anonymous referees and Joachim Zietz,JEF editor, for helpful comments. A summer research grant by the Franklin P. Perdue School of Business, Salisbury State University, is gratefully acknowledged.     

An agent-based early warning indicator for financial market instability

Inspired by the Bank of America Merrill Lynch global breath rule, we propose an investor sentiment index based on the collective movement of stock prices in a given market. We show that the time evolution of the sentiment index can be reasonably described by the herding model proposed by Kirman in his seminal paper “Ants, rationality and recruitment” (Kirman in Q J Econ 108:137–156, 1993). The correspondence between the index and the model allowed us to easily estimate its parameters. Based on the model and the empirical evolution of the sentiment index, we propose an early warning indicator able to identify optimistic and pessimistic phases of the market. As a result, investors and policy-makers can set different strategies anticipating financial market instability. Investors can reduce the risk of their portfolio while policy-makers can set more efficient policies to avoid the effects of financial instability on the real economy. The validity of our results is supported by means of a robustness analysis showing the application of the early warning indicator in eight different worldwide stock markets.

     

The asymmetric effect of crude oil prices on stock prices in major international financial markets

The aim of this paper is to explore the potential asymmetric impacts of positive and negative shocks in crude oil prices on stock prices in six major international financial markets which include China, Hong Kong, America, Japan, Britain, and Germany. We test for these asymmetric effects on 8 major international financial markets indices over the 2007M01–2020M03 periods. Our independent measures include the prices of Brent crude oil futures and West Texas Intermediate (WTI) futures. We use the nonlinear ARDL (NARDL) model proposed by Shin et al. (2014), which can capture both short- and long-run nonlinearities through positive and negative partial sum decompositions of the explanatory variables. This research finds that positive and negative fluctuations of oil price have asymmetric effects on stock price index in four financial markets, but the performance of the asymmetry is different. Specifically, the impacts of volatility in oil prices on two indices of Chinese stock prices are different, and the asymmetric effects of oil price volatility on stock price indices in China and other financial markets are significantly different.     

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.     

Country and industry convergence of equity markets: International evidence from club convergence and clustering

This study employs the panel convergence methodology developed by Phillips and Sul (2007) to explore the convergence dynamics of international equity markets. The analysis considers both country and industry effects. While traditional portfolio management strategies usually follow a top-down procedure, assuming that country-level effects drive financial aggregates (e.g., stock returns) our empirical results suggest that the equity markets of 37 of the 42 counties in our sample do form a unified convergence club. The empirical findings, however, also show more numerous stock-price convergence clubs in certain industries. That is, country factors play a more important role in explaining the actual convergence in real stock prices than industry factors. Conversely, the volatility of stock prices exhibits much more evidence of convergence than stock prices. These findings should assist portfolio managers in the design and implementation of appropriate portfolio management strategies. Regulatory authorities also can benefit in the design of financial regulation.     

Press freedom and jumps in stock prices

Press freedom varies substantially across countries. In a free environment, any news immediately becomes public knowledge through mediums including various electronic media and published materials. However, in an unfree environment, (economic) agents would have more discretionary powers to disclose good news immediately, while hiding bad news or releasing bad news slowly. We argue that this discretion affects stock prices and that stock markets in countries with a free press should be better processors of economic information. Using an equilibrium asset-pricing model in an economy under jump diffusion, we decompose the moments of the returns of international stock markets into a diffusive risk and a jump risk part. Using stock market data for a balanced panel of 50 countries, our results suggest that in countries with a free press, the better processing of bad news leads to more frequent negative jumps in stock prices. As a result, stock markets in those countries are characterized by higher volatility, driven by higher jump risk and more negative return asymmetry. The results are robust to the inclusion of various controls for governance and other country- or market-specific characteristics. We interpret these as good stock market characteristics because a free press improves welfare and increases economic growth.     

Measuring real–financial connectedness in the U.S. economy

We analyze the connectedness between the real and the financial sectors of the U.S. economy. Using the weekly ADS index of the Philadelphia Fed (the widely used business conditions indicator) to represent the real side, we find that during times of financial distress and business cycle turning points, the direction of connectedness runs from the real sector to financial markets. The ADS index is derived from a model containing a measure of term structure along with real variables. Therefore, it might not be the best representative of the real activity used in the connectedness analysis. As an alternative, we derive a real activity index (RAI) from a dynamic factor model of the real sector variables only. The behavior of RAI over time is quite similar to that of the ADS index. When we include RAI to represent the real side, connectedness from the real side to financial markets weakens substantially, while the connectedness from financial markets to the real side becomes more pronounced.     

Inflation, output, and stock prices: Evidence from two major emerging markets

Research in economics and finance documents a puzzling negative relationship between stock returns and inflation rates in markets of industrialized economies. The present study investigates this relationship for Korea and Mexico. We show that the negative relationship between the real stock returns and unexpected inflation persists after purging inflation of the effects of the real economic activity. Johansen and Juselius cointegration tests verify that the long-run equilibrium between stock prices and general price levels is weak. However, in both economies, stock prices and general price levels seem to show a strong long-run equilibrium with the real economic activity. This paper benefited from the constructive suggestions of an anonymous referee. The remaining errors are the authors’ responsibility. Financial support from the Dr. Robert B. Pamplin, Jr., School of Business Administration, University of Portland, is greatly appreciated.     

US share prices and real supply and demand shocks

Demand and supply sources of output movement are distinguished and the effects of shocks on stock prices are analysed. The real economy has a more pronounced effect on the stock market than vice versa and the influence from the real economy to the stock market is less important than shocks that are peculiar to the market itself. Supply and demand shocks have a greater impact on stock prices than they do on real economy variables and the sensitivity of real stock prices to supply fluctuations has waned while the sensitivity of real stock prices to demand-driven output fluctuations has increased.     

转型期股票市场和经济增长:微观行为机制分析

本文对股票市场与经济增长的关系进行了微观分析。在建立模型的基础上分析了股票市场对经济增长作用的传导机制,结合中国转型期经济的实际情况对股票市场和经济增长的关系进行了考察和假设。从总体上说,中国的股票市场对经济增长的作用影响不大。     

Conditional correlations and volatility spillovers between crude oil and stock index returns

This paper investigates the conditional correlations and volatility spillovers between the crude oil and financial markets, based on crude oil returns and stock index returns. Daily returns from 2 January 1998 to 4 November 2009 of the crude oil spot, forward and futures prices from the WTI and Brent markets, and the FTSE100, NYSE, Dow Jones and S&P500 stock index returns, are analysed using the CCC model of Bollerslev (1990), VARMA-GARCH model of Ling and McAleer (2003), VARMA-AGARCH model of McAleer, Hoti, and Chan (2008), and DCC model of Engle (2002). Based on the CCC model, the estimates of conditional correlations for returns across markets are very low, and some are not statistically significant, which means the conditional shocks are correlated only in the same market and not across markets. However, the DCC estimates of the conditional correlations are always significant. This result makes it clear that the assumption of constant conditional correlations is not supported empirically. Surprisingly, the empirical results from the VARMA-GARCH and VARMA-AGARCH models provide little evidence of volatility spillovers between the crude oil and financial markets. The evidence of asymmetric effects of negative and positive shocks of equal magnitude on the conditional variances suggests that VARMA-AGARCH is superior to VARMA-GARCH and CCC.     

Arbitrage in stationary markets

We analyse questions of arbitrage in financial markets in which asset prices change in time as stationary stochastic processes. The main focus of the paper is on a model where the price vectors are independent and identically distributed. In the framework of this model, we find conditions that are necessary and sufficient for the absence of arbitrage opportunities. We discuss the relations between the results obtained and the phenomenon of “volatility-induced growth” in stationary markets. Financial support by the Swiss National Center of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK) is gratefully acknowledged.     

World Economic Prospects

Overview: World growth cut as financial woes persist

• This month sees our world GDP forecast for 2016 cut to 2.3%, from 2.6% previously. Our new forecast implies this year will be the weakest for the world economy since 2009.
• Our 2016 growth forecast was over 3% in mid‐2015. But the economic backdrop has worsened markedly since, with steep drops in stock markets, slumping commodities and widening credit spreads.
• We flagged the risks from the financial market sell‐off last month and conditions have improved little since. Worse, there are some signs that weakness in the real economy may be broadening.
• This month's global downgrade partly reflects familiar factors such as worsening emerging markets: we now expect even deeper recessions in Brazil and Russia.
• The US forecast has also been downgraded again, to 2% from 2.4% last month. This in part reflects a soft Q4 GDP reading, one worrying detail of which was a weaker performance by consumer spending.
• Signs of a slowdown in services were also visible in the PMI surveys for January in the US and Eurozone. Partly as a result, our Eurozone growth forecast has been cut this month to 1.6% from 1.8%.
• With world industry already stagnant, signs of weakness spreading to services are unwelcome. We are particularly concerned that the financial market slump will create a negative global credit and confidence shock.
• Another concern is that the collapse in world stock prices is starting to have ‘negative wealth effects’. For most consumers, wealth effects are more likely to be generated by house price moves. In this respect, there is some room for optimism – house prices are still growing in most of the main economies.
• But housing is weakening in some emerging countries and world house and stock prices have tended to move together since 2007.
• Pressures on policymakers to act remain strong and are increasingly focused on using negative interest rates – as in Japan and Sweden in the last month.

     

Portfolio choice,behavioral preferences and equity home bias

We provide a plausible explanation of aggregate portfolio behavior, in a framework where economic agents have behavioral (narrow framing) preferences. The representative agent derives utility not only from consumption (standard models) but also from risky financial wealth fluctuations. Moreover, the investor frames the stock market risk narrowly and has loss averse preferences. We numerically solve, for the foreign equity share, a simple model of international portfolio choice, providing a possible explanation for the equity home bias puzzle. Only economic agents able to process correctly information deriving from stock markets exploit the diversification opportunities provided by international financial markets.     

The impact of VIX on China’s financial market: A new perspective based on high-dimensional and time-varying methods

Based on the new perspective of high-dimensional and time-varying methods, this paper analyzes the contagion effects of US financial market volatility on China’s nine financial sub-markets. The results show evidence of non-linear Granger causality from the US financial volatility (VIX) to the China’s financial markets. Increased US financial volatility has a negative next-day impact on the stock, bond, fund, interest rate, foreign exchange, industrial product and agricultural product markets, and a positive next-day impact on the gold and real estate markets. US financial volatility has the greatest impact on industrial product market, following by stock, agricultural product, fund, real estate, bond, gold, foreign exchange, and interest rates. Major risk events such as the global financial crisis can cause an enhanced contagion effect of US financial volatility to China's financial markets. This paper supports the achievements of China's actions to prevent and resolve major financial risks in the period of the COVID-19 epidemic.