The Cross–section of Risk Premia in the Italian Stock Market

Our analysis compares multi–factor models with Italian stock market data for the period 1990–2000. The first, the simple CAPM, is the relevant benchmark because of its simplicity. The second, the extended Fama–French model (including the momentum portfolio), is the best candidate for substituting the one–factor model. The third is a multi–factor model including sectors; and the fourth is a multi–factor model including the change in short–term interest rates as an extra factor. The results of our research are mildly positive. The Fama–French multi–factor model behaves rather well in time series tests. However, in the cross–section, the average premia are not significantly different from zero, supporting the idea that they are not able to explain the cross–section of returns in the Italian market. Moreover, there is weak evidence that the factor portfolios have predictive power for macroeconomic variables characterizing the state of the economy. What may explain the results? There are two main components: first is the presumably large size of shocks to returns in the Italian case, which makes it difficult to explore the relation among expected returns; second is the presence of extra factors which are not accounted for in our analysis. (J.E.L.: G11, G12).     

The Stability of the Relation Between the Stock Market and Macroeconomic Forces

This paper identifies the macroeconomic factors that influence Italian equity returns and tests the stability of their relation with securities returns. The relation between stock returns and the macroeconomic factors is found to be unstable: not only are the factor loadings of individual securities virtually uncorrelated over time, but a high percentage of the shares experience a reversal of the sign of the estimated loadings. This result is not confined to single periods or to a small group of shares, but holds in different sub–periods and for securities in all risk classes. These findings suggest that research should carefully investigate the specification of the return generating process and the stability of the risk measures.
(J.E.L.: G12, E44).     

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.     

The nonlinear multidimensional relationship between stock returns and the macroeconomy

We use nonparametric dimension-reduction methods to extract from a set of 15 macroeconomic variables the risk factors that are priced in the stock market. The dominant factor moves with the business cycle but, because it is a nonlinear function of observed macroeconomic variables, it captures a rich set of interactions. Low-credit risk and low-inflationary expectations have a greater positive effect on stock returns when leading macroeconomic indicators are high relative to current economic activity, i.e. early in the business cycle as the economy emerges from recession. High-stock returns also arise in periods when the economy is booming relative to its leading indicators, but such periods tend to portend crashes.     

Predicting long-run risk factors of stock returns: Evidence from Australia

This study utilises the stock market data provided by the Australian Equity Database to analyse the long-run relationship between Australian stock returns and key macroeconomic variables over the period 1926–2017. To measure the diverse risk factors in the stock market, we examine the possible determinants in four main categories: real, financial, domestic and international. Our results reveal that historical stock returns are strongly connected to financial and international factors as compared to real and domestic factors. Both the 1973–1974 OPEC Oil Price Crisis and 2007–2008 Global Financial Crisis had dampening effects on stock returns. There is a positive association between the US and Australian stock markets in the long-run. These findings on stock market dynamics and their linkages with domestic and international macroeconomic policy changes in the long-run have important implications for traders and practitioners.     

CAPM anomalies and the pricing of equity: evidence from the Hong Kong market

Using a sample of equity stocks traded on the Hong Kong stock market, this study examines empirically the independent and joint roles of the more commonly hypothesized variables in explaining cross-sectional variation in average returns over the period from January 1980 to December 1994. Evidence indicates that beta, book leverage, earnings-price ratio and dividend yield are not priced, whereas significant book-to-market equity, market leverage (absorbed by book-to-market equity), size, and share price effects are observed. The findings should prove valuable in portfolio management and corporate financial decisions.     

Performance of value- and size-based strategies in the Italian stock market

This paper investigates the performance of size- and value-based strategies in the Italian stock market in the period 2000–2018. Previous research argued the impossibility to define properly value-sorted portfolios due to the inaccuracy of book-to-market ratios available for Italian listed stocks. Using more accurate data, we implement portfolios sorting based on value and growth stocks, to assess the relevance of the value factor in the Italian stock market. We find that the capital asset pricing model fails to explain the cross-section of returns on the different strategies while the Fama and French three-factor model provides a better fit. The results show that all three factors are significant in explaining Italian stock returns during the sample period. Unlike previous studies, which either found no value effect at all or no clear-cut results when testing the book-to-market variable, we find that the value factor is statistically significant and the associated risk premium is of a considerable size.     

The Performance of Market‐Timing Strategies of Italian Mutual Fund Investors

In this paper, we show that simple buy‐and‐hold strategies over‐perform market‐timing strategies effectively used by Italian investors in equity mutual funds. We estimate returns from market‐timing strategies using aggregate data on net flows for a large sample of equity mutual funds, available to Italian investors, that buy stocks in the following markets: Europe and the euro area, the United States and Emerging markets. In all cases, buy‐and‐hold over‐performs market‐timing with extra returns that go from 0.24 per cent per quarter (Europe and euro area) to 0.87 per cent per quarter (US market). These differences are not explained by differences in risk and risk exposure. Investors should re‐consider their investment strategies and choose cheaper, in terms of fees and simpler, in terms of portfolio allocation, passive strategies.     

Seasoned equity offerings by all-equity firms

Previous studies on the announcement effect of seasoned equity offerings document an average two-day common stock abnormal return of approximately −3%. The overall results from these studies suggest that capital structure hypothesis, information hypothesis, and/or price-pressure hypothesis offers a potential explanation for the abnormal reaction around the announcement date. This paper controls for capital structure related effects by examining the announcement effect of seasoned equity offerings made by all-equity firms. Our results show that the average two-day common stock abnormal return is −0.82% (significant at 5% level). This result suggests that capital structure related effects constitute a major portion of the announcement effect of seasoned equity offerings studied in the previous literature. Furthermore, the negative abnormal returns following equity issues cannot be attributed entirely to capital structure related effects. Our cross-sectional tests indicate that the information hypothesis is significant in explaining the abnormal reaction. While our results do not support the price-pressure hypothesis, we find that the negative reaction around the announcement date is significantly mitigated if a firm has issued stock more frequently during our sample period.     

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.     

The impacts of bank-specific and macroeconomic variables on the capital adequacy ratio: evidence from Islamic banks

The study investigates the relationship between the capital adequacy ratio (CAR) and different bank-specific and macroeconomic variables for 28 Islamic banks. We document that there is a statistically significant positive relationship between the CAR and the bank-specific and macroeconomic variables. In particular, bank-specific variables such as ROA, ROE, leverage, credit risk and size show a strong association with the CAR, while on the macroeconomic side, inflation, market capitalization and exchange rate have an impact on the average Islamic bank in our sample study. Furthermore, we run another model (equity to assets ratio) as dependent, with similar control variables, and the results reveal that, except for inflation, all the variables that have a significant effect on the CAR also influence the equity to assets ratio.     

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.     

Macroeconomic environment,country risk and stock market performance: Evidence for Brazil

The paper aims at providing empirical evidence about (i) the influence of macroeconomic variables and economic policies on country risk and (ii) the influence of macroeconomic variables and country risk on the main Brazilian index of the stock market (Ibovespa). The study analyzes the role that macroeconomic fundamentals plays, but also the role that the credibility of the regime of inflation targeting and the reputation of the central bank play in lessening country risk and in the improvement of the stock market performance. The empirical evidence was obtained through the application of ordinary least squares (OLS), generalized method of moments (GMM) and GMM systems. The results found suggest that monetary policy and public debt management, as well as credibility and reputation affect country risk and the performance of the Brazilian stock market.     

The Behaviour of Banking Stocks During the Financial Crisis and Recessions. Evidence from Changes‐in‐Changes Panel Data Estimations

This paper examines the impact of the financial crisis and economic recessions on bank shares compared to the overall stock market index for 18 OECD countries from 1993 to 2015. The empirical methodology utilizes the changes‐in‐changes approach. We compare and contrast the returns of the banking stock price index (treatment group) in each country with their general stock price index (control group), which experiences smaller changes. Our results suggest that bank returns on average perform significantly worse than that of the general stock price index during recessions. In addition, we also find significantly greater volatility in bank share returns.     

The Relationship Between Economic Factors and Equity Markets in Central Europe

This paper investigates the possibility that newly-emerging equity markets in Central Europe exhibit semi-strong form efficiency such that no relationship exists between lagged values of changes in economic variables and changes in equity prices. We find that while there are connections between the real economy and equity market returns in Poland and Hungary, these links occur with lags, suggesting the possibility of profitable trading strategies based on public information and rejecting semi-strong efficiency. For the Czech Republic the situation is more complex. In recent periods, little connection exists between lagged economic variables and equity market returns. Although this finding might be viewed as consistent with semi-strong efficiency, in fact there is also little connection between current economic values and stock prices in the Czech Republic. Thus, instead of processing information efficiently, the Czech market appears to be entirely divorced from the real world. It is suggested that the difference in the current status of these markets may be due to the different methods by which they were created.     

Improving the predictability of the oil–US stock nexus: The role of macroeconomic variables

In this study, we revisit the oil–stock nexus by accounting for the role of macroeconomic variables and testing their in-sample and out-of-sample predictive powers. We follow the approaches of Lewellen (2004) and Westerlund and Narayan (2015), which were formulated into a linear multi-predictive form by Makin et al. (2014) and Salisu et al. (2018) and a nonlinear multi-predictive model by Salisu and Isah (2018). Thereafter, we extend the multi-predictive model to account for structural breaks and asymmetries. Our analyses are conducted on aggregate and sectoral stock price indexes for the US stock market. Our proposed predictive model, which accounts for macroeconomic variables, outperforms the oil-based single-factor variant as well as the constant returns (historical average) model for both in-sample and out-of-sample forecasts. We find that it is important to account for structural breaks in our proposed predictive model, although asymmetries do not seem to improve predictability. In addition, we show that it is important to pre-test the predictors for persistence, endogeneity, and conditional heteroscedasticity, particularly when modeling with high-frequency series. Our results are robust to different forecast measures and forecast horizons and are useful for making effective hedging decisions in the US stock market.     

The wealth effect and diamond risk structure of financial regulation

The objective of this article was to evaluate the effect of announcements of financial regulation on risk and return in the Vietnamese equity market. The techniques used for the purpose of analysing risk and return include event study and non-parametric tests, as well as asset pricing models supplemented with interaction variables and a variety of ARCH-like specifications such as GARCH, TARCH, EGARCH and PARCH. We find evidence for the wealth effect, the presence of delayed response and a risk shifting behaviour in the form of diamond risk structure. Our results show that abnormal returns are present around the announcements of operating rules and other stock market regulations. Abnormal returns can also be obtained after considering legal documents such as circulars and decisions.     

Fundamental variables and the cross-section of expected stock returns: the case of Hong Kong

Recent empirical evidence indicates that size and book-to-market ratios explain adequately a large part of average stock returns. This paper examines the association of a number of fundamental variables with the cross section of stock returns in the Hong Kong Stock Exchange. The results suggest that, during the 1990s, the small-firm effect has actually gone into reverse and that size and book-to-market equity have a statistically significant relationship with average returns. Beta has little or no role as an explanatory variable.     

Asset prices and economic fluctuations: The implications of stochastic volatility

This paper investigates whether the multi-factor stochastic volatility of stock returns is related to economic fluctuations and affects asset prices. We address these issues in a dynamic Fama-French three-factor volatility model framework. Consistent with the ICAPM with stochastic volatility (Campbell et al., 2017), we find that the conditional volatility of the size and value factors is significantly related to economic uncertainty. These volatilities are also significant pricing factors. The out-of-sample forecasting analysis further reveals that the conditional volatility can predict stock returns and deliver economic gain in asset allocation. Our analysis sharpens the understanding on the link between the stock market and economic fundamentals.     

STOCK‐BOND CO‐MOVEMENTS AND FLIGHT‐TO‐QUALITY IN G7 COUNTRIES: A TIME‐FREQUENCY ANALYSIS

This paper examines co‐movement between stock returns and changes in 10‐year government bond yields as well as flight‐to‐quality behaviour in G7 countries. We conduct the wavelet squared coherence analysis to explore the dynamics in both time and frequency domain. Our results provide evidence of positive co‐movements, which vary over time and across investment horizon. The higher co‐movement is found to be more concentrated in the lower frequency bands. We further analyse the dynamic nature of the scale‐dependent wavelet correlations and find that the correlations are highly volatile and significantly increase across different time scales during the episodes of equity market turbulence. The increase in correlations reflects flights from stocks to safer bond investments as a result of dramatic changes in investor sentiment and risk aversion at times of market stress.