The changing and relative efficiency of European emerging stock markets

The martingale hypothesis is tested for 15 European emerging stock markets located in Croatia, the Czech Republic, Estonia, Hungary, Iceland, Latvia, Lithuania, Malta, Poland, Romania, Russia, the Slovak Republic, Slovenia, Turkey and the Ukraine. For comparative purposes, the developed stock markets in Greece, Portugal and the UK are also included. Rolling window variance ratio tests based on returns and signs and with wild bootstrapped p-values are used with daily data over the period beginning in February 2000 and ending in December 2009. The fixed-length rolling sub-period window captures changes in efficiency and is used to identify events which coincide with departures from weak-form efficiency and to rank markets by relative efficiency. Overall, return predictability varies widely. The most efficient are the Turkish, UK, Hungarian and Polish markets; the least efficient are the Ukrainian, Maltese and Estonian stock markets. The global financial market crisis of 2007–2008 coincides with return predictability in the Croatian, Hungarian, Polish, Portuguese, Slovakian and UK stock markets. However, not all markets were affected: the crisis had little effect on weak-form efficiency in stock markets located in Greece, Latvia, Romania, Russia and Turkey.     

Are Asian stock markets efficient? Evidence from new multiple variance ratio tests

This paper tests for the martingale hypothesis in the stock prices of a group of Asian markets. We use new multiple variance ratio tests based on the wild bootstrap and signs. These are non-parametric finite sample tests, which do not rely on large sample theories for statistical inference. This paper also presents Monte Carlo results that these non-parametric tests show superior small sample properties to those of the conventional Chow–Denning test. Both weekly and daily data from 1990 are considered, while moving sub-sample windows are used for the latter to control the sensitivity of the results to a particular sample period. It is found that the Hong Kong, Japanese, Korean and Taiwanese markets have been efficient in the weak-form. The markets of Indonesia, Malaysia and Philippines have shown no sign of market efficiency, despite financial liberalization measures implemented since the eighties. We have also found evidence that the Singaporean and Thai markets have become efficient after the Asian crisis. In general, the results point toward the notion that the pricing efficiency of a market depends on the level of equity market development as well as the regulatory framework conducive of transparent corporate governance.     

International Stock Market Efficiency and Integration: A Study of Eighteen Nations

This study examines the relationships among stock prices in eighteen national stock markets by using unit root and cointegration tests for the period 1961--92. All the markets were analyzed individually and collectively in regions to test for market efficiency. The results from unit root tests suggest that the world equity markets are weak-form efficient. The cointegration test results show that there are only a small number of significant cointegrating vectors over the last three decades. However, the number of significant cointegrating vectors increases after the October 1987 stock market crash, a result that is consistent with the contagion effect.     

An Empirical Analysis of Stock Prices in Major Asian Markets and the United States

This study uses unit root and cointegration tests to examine the relationships among the stock markets in Hong Kong, South Korea, Singapore, Taiwan, Japan, and the United States. All the stock prices are analyzed both individually and collectively to test for international market efficiency. Unit roots in stock prices are found. Pairwise and higher-order cointegration tests indicate that there is no evidence of cointegration among the stock prices. The findings suggest that the stock prices in major Asian markets and the United States are weak-form efficient individually and collectively in the long run. It also implies that international diversification among the markets is effective.     

The risk–return relations in the Singapore stock market

This paper examines the risk–return relations in the Singapore stock market for the period April 1986 to December 1998. Though beta is significantly related to realized returns, the explanatory power is low. Adding other stock characteristics such as skewness and kurtosis provides limited incremental benefits. However, when a conditional framework based on up and down markets is introduced, the explanatory power increases more than 100 times and there is a significant positive (negative) relation between beta and returns when the market excess returns are positive (negative). The same relation applies when unsystematic risk, total risk and kurtosis are added separately to the beta–return relation during up and down markets with increased explanatory power. Our results indicate that other stock characteristics in addition to beta are also important in pricing risky assets and investors do not hold diversified portfolios. Our results are also checked and compared with another conditional model with time-varying betas conditional on a set of economic variables.     

Time-varying stock returns and labor income risks in the US and UK

I propose and estimate conditional asset pricing models where the risk premiums of the markets are related to the conditional covariance of the markets with labor income growth within and across countries and the volatility of the markets are related to the shocks and interactions of stock returns and labor income growth. I document that the risk premiums for the US and UK stock markets are more related to the conditional covariance of returns with the labor income growth within countries than across countries. I also find significant interactions of volatilities between stock returns and labor income within countries but not across countries. The results are consistent with the hypothesis that prices of domestic stocks are determined to a greater extent by stochastic discount factors of domestic investors than foreign investors and vice versa.     

Pricing currency risk in the stock market: Evidence from Finland and Sweden 1970-2009

We investigate the role of currency risk on stock markets in two interlinked Nordic countries exhibiting a gradual move from fixed to floating exchange rates. We apply the Ding and Engle (2001) covariance stationary specification in a multivariate GARCH-M setup to test a conditional international asset pricing model. Using a sample period from 1970 to 2009, we find that the currency risk is priced in both stock markets, and that the price and the risk premium are lower after the floatation of the currencies, especially for Finland. We also find the cross-country exchange rate shock from Finland to affect the price of currency risk in Sweden, but not vice versa. Finally, we discuss some of the potential issues in applying multivariate GARCH-M specifications in tests of asset pricing models.     

Forecasting stock-return variance: toward an understanding of stochastic implied volatilities

We examine the behavior of measured variances from the optionsmarket and the underlying stock market. Under the joint hypothesesthat markets are informationally efficient and that option pricesare explained by a particular asset pricing model, forecastsfrom time-series models of the stock return process should nothave predictive content given the market forecast as embodiedin option prices. Both in-sample and out-of-sample tests suggestthat this hypothesis can be rejected. Using simulations, weshow that biases inherent in the procedure we use to imply variancescannot explain this result. Thus, we provide evidence inconsistentwith the orthogonality restrictions of option pricing modelsthat assume that variance risk is unpriced. These results alsohave implications for optimum variance forecast rules.     

An International Asset Pricing Model with Time-Varying Hedging Risk

This paper employs a two-factor international equilibrium asset pricing model to examine the pricing relationships among the world's five largest equity markets. In addition to the traditional market factor premium, a hedging factor premium is included as the second factor to explain the relationship between risks and returns in the international stock markets. Moreover, a GARCH parameterization is adopted to characterize the general dynamics of the conditional second moments. The results suggest that the additional hedging risk premium is needed to explain rates of return on international equities. Furthermore, the restriction that the coefficient on the hedge-portfolio covariance is one smaller than the coefficient on the market-portfolio covariance can not be rejected. This suggests that the intertemporal asset pricing model proposed by Campbell (1993) can be used to explain the returns on the five largest stock market indices.     

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.     

MARKET EFFICIENCY IN DEVELOPING COUNTRIES: A CASE STUDY OF THE NAIROBI STOCK EXCHANGE

This study extends evidence on the efficiency of stock markets in developing countries using data from the Nairobi Stock Exchange (NSE), and also addresses some methodological issues which have contributed to the sparseness of similar studies. Evidence is provided that small markets such as the NSE may provide empirical results consistent with weak-form efficiency. This evidence holds for the NSE irrespective of whether bid-, ask-, or market-price series are used in conducting the study.     

Exposure to the world and trading-bloc risks: A multivariate capital asset pricing model

This paper employs a capital asset pricing model that incorporates both world and trading-bloc factors to show that the recent trend of trade regionalism has led to segmentation of world stock markets. The model is developed within a multivariate GARCH framework. The conditional time-varying betas are derived to examine the dynamics of risk exposures to the world and trading-bloc factors. The results show risk exposure behaviour that is not revealed using static risk estimates.     

信息不对称、过度自信与股价变动

信息传导的非同步和投资者情绪变化是股票市场的两个典型特征,前者会引发投资者之间出现信息不对称问题,后者主要体现为投资者过度自信,两者共同作用影响股票价格变动。本文将信息不对称和投资者过度自信情绪置于同一个分析框架,建立两阶段动态序贯定价理论模型研究现实市场上信息传导过程中股价变动的内在机制。结果表明:(1)面临新信息的进入,投资者对股票收益预期的调整与均衡价格之间具有正相关关系;(2)面临有利消息时,过度自信投资者比例越大,股票的均衡价格越高,投资收益将越低;面临不利消息时则相反;(3)随着过度自信投资者比例以及过度自信程度升高,市场风险溢价将下降;(4)投资者群体在信息传导过程中出现分化,对股价变动形成异质信念,未获取信息和获取信息但未出现过度自信的投资者认为股价被高估,获取信息且出现过度自信的投资者认为价格被低估,促使更多的交易,引发市场成交量和股价变动;(5)过度自信投资者比例与过度自信程度提高均会对市场效率产生正向影响,而对市场深度具有负向效应。最后,基于理论结果对非对称性和持续性等典型的市场波动性特征进行解释。     

Nonlinear serial dependence and the weak-form efficiency of Asian emerging stock markets

The objective of this paper is to re-examine the weak-form efficiency of 10 Asian emerging stock markets. Using a battery of nonlinearity tests, the statistical results reveal that all the returns series still contain predictable nonlinearities even after removing linear serial correlation from the data. The next stage of sub-sample analysis using the Hinich [Hinich, M., 1996. Testing for dependence in the input to a linear time series model. Journal of Nonparametric Statistics 6, 205–221] bicorrelation test shows that the 10 Asian series follow a pure noise process for long periods of time, only to be interspersed with brief periods of strong nonlinear dependence. The exploratory investigation found that the cross-country differences in nonlinear departure from market efficiency can be explained by market size and trading activity, while the transient burst of nonlinear periods in each individual market can be attributed largely to the occurrence of economic and political events.     

Granger-causality in quantiles between financial markets: Using copula approach

This paper considers the Granger-causality in conditional quantile and examines the potential of improving conditional quantile forecasting by accounting for such a causal relationship between financial markets. We consider Granger-causality in distributions by testing whether the copula function of a pair of two financial markets is the independent copula. Among returns on stock markets in the US, Japan and U.K., we find significant Granger-causality in distribution. For a pair of the financial markets where the dependent (conditional) copula is found, we invert the conditional copula to obtain the conditional quantiles. Dependence between returns of two financial markets is modeled using a parametric copula. Different copula functions are compared to test for Granger-causality in distribution and in quantiles. We find significant Granger-causality in the different quantiles of the conditional distributions between foreign stock markets and the US stock market. Granger-causality from foreign stock markets to the US stock market is more significant from UK than from Japan, while causality from the US stock market to UK and Japan stock markets is almost equally significant.     

The world price of sentiment risk

This paper examines whether sentiment can be considered a priced source of risk on international financial markets. We investigate whether residual sentiment is rewarded with a risk premium if added to a model with macroeconomic fundamentals and analyze the time-variation of the respective risk premia. The analysis is performed in the framework of a conditional multiple-beta pricing model and focusses on the excess returns of the G7 stock markets in the period from February 1999 to February 2012. The obtained results indicate that sentiment indeed earns a significant risk premium of around 2% p.a. on the considered markets.     

Efficiency in index options markets and trading in stock baskets

Researchers have reported mispricing in index options markets. This study further examines the efficiency of the S&P 500 index options market by testing theoretical pricing relationships implied by no-arbitrage conditions. The effect of a traded stock basket, Standard and Poor’s Depository Receipts (SPDRs), on the link between index and options markets is also examined. We find that pricing efficiency within option markets improves but there is little evidence to support the hypothesis that a stock basket enhances arbitrage across markets. When transactions costs and short sales constraints are included, very few violations of inter-market pricing relationships such as put–call parity are reported. However, violations of within market pricing relationships such as the box spread remain frequent. Extensive analysis suggests that the results are robust.     

Profitability of momentum strategies in international markets: The role of business cycle variables and behavioural biases

The paper investigates whether business cycle variables and behavioural biases can explain the profitability of momentum trading in three major European markets. Unlike previous studies, the paper nests both risk-based and behavioural-based variables in a two-stage model specification in an attempt to explain momentum profits. The findings show that, although momentum profitability in European markets is unexplained by conditional asset pricing models, it is attributable to asset mispricing that systematically varies with global business conditions. In addition, behavioural variables do not appear to matter much. Thus risk factors, which are undetected thus far and are largely attributable to the business cycle, could explain the momentum payoffs in European stock markets.     

Foreign exchange risk pricing and equity market segmentation in Africa

This work is the first to investigate simultaneously the occurrence of unconditional currency risk pricing and equity market segmentation in Africa’s major stock markets. The multi-factor asset pricing theory provides the theoretical framework for our model. We find strong evidence suggesting that Africa’s equity markets are partially segmented. However, we find insufficient evidence to reject the hypothesis that foreign exchange risk is not unconditionally priced in Africa’s stock markets. This result is robust to alternative foreign exchange rate-adjusted return measures. These findings suggest that international investors can diversify into Africa’s equity markets without worrying about unconditional risks associated with foreign exchange rate fluctuations.     

Stock–bond dependence and flight to/from quality

This paper investigates the stock–bond dependence structure using a dependence-switching copula model. The model allows stock–bond dependence to switch between positive dependence regimes (contagions or crashes of the two markets during downturns or booms in both markets during upturns) and negative dependence regimes (flight-to-quality from stock markets to bond markets or flight-from-quality from bond markets to stock markets). Using data from four developed markets including the US, Canada, Germany, and France for the period between January 1985 and August 2022, we find that the within-country stock–bond (extreme) dependence could be both positive and negative. In the positive dependence regimes, the stock–bond dependence is asymmetric with stronger left tail dependence than the right tail dependence, giving evidence of a higher likelihood of joint stock–bond market crashes or contagions during market downturns than the collective stock–bond market booms. Under the negative dependence regimes, we find both flight-from-quality and flight-to-quality, with flight-to-quality being more dominant in the North American markets while flight-from-quality is more prominent in the European markets. Further, the dependence switches between positive and negative regimes over time. Moreover, the dependence is mainly in the positive regimes before 2000 while mostly in the negative regimes after that, indicating contagions mostly before 2000 and flights afterwards. Further, the dependence switches between positive and negative regimes around financial crises and the COVID-19 pandemic. These results greatly enrich the findings in the existing literature on the co-movements of stock–bond markets and are important for risk management and asset pricing.