Dependence dynamics of stock markets during COVID-19

Stock markets have exhibited increased returns connectedness during the COVID-19 period. We examine the returns dependence among 42 stock markets classified under various emerging and developed groupings. We apply several dependence measures to examine the returns connectedness among the markets. Our results show that stock markets from the G-7 and Emerging Frontier and Asian (EFA) region exhibit high connectedness with other international markets, while Middle East and North African (MENA) and Latin American (LA) stock markets offer high diversification opportunities through low returns connectedness. The returns coherence of Central and East European (CEE) and G-7 markets increase significantly during the COVID-19 period which supports the hypothesis of contagion. However, during the pandemic MENA stock markets (excluding Greece) and most EFA markets (excluding China, Singapore and Korea) remain less cointegrated with other international equity markets. Our results have implications for individual and institutional investors, fund managers and other financial market stakeholders.     

Spillover Effects among European,the US and Moroccan Stock Markets before and after the Global Financial Crisis

ABSTRACT

This paper assesses return and volatility spillovers among stock markets in Morocco, the US, UK, France and Germany represented respectively by MASI, S&P 500, FTSE 100, CAC 40 and DAX 30 indices, both before and after the global financial crisis (GFC) of 2008. The daily frequency data cover the period from January 2nd, 2002 to June 30th, 2016. Using the Diebold and Yilmaz approach, the results show varying financial connectedness between the Moroccan and the above mentioned developed stock markets. In fact, the significant increase of spillover index during the post-financial crisis period demonstrates that the US and European stock markets were the most affected. On the other hand, despite a relative increase of spillover effects coming from the US and German equity markets, our results show decline in the total net spillovers experienced by the Moroccan market after the recent financial crisis. These findings may provide some useful information to support decision-making and trading strategies for international investors.     

Time and frequency connectedness of uncertainties in cryptocurrency,stock, currency,energy, and precious metals markets

This paper examines the connectedness of uncertainty in cryptocurrency, stock, currency, and commodity markets. We use the novel news-based cryptocurrency uncertainty indices of Lucey et al. (2021) and global implied volatility indices as uncertainty proxies for stock, currency, energy, and precious metals markets. We analyze weekly data between January 2014 and May 2021, employing the time and frequency connectedness measures of Diebold and Yilmaz (2012) and Baruník and Křehlík (2018). Our results show a low degree of uncertainty connectedness between cryptocurrency and other markets. The results imply long-term diversification opportunities and highlight the distinct dynamics of the cryptocurrency markets.     

Spillovers and connectedness among BRICS stock markets,cryptocurrencies, and uncertainty: Evidence from the quantile vector autoregression network

In this study we advance the understanding of the spillovers and connectedness network among conventional and Islamic BRICS stock markets, cryptos (Bitcoin, Ethereum, Litecoin) and various global uncertainties, using a quantile vector autoregression method and daily data covering the period October 8, 2016, to May 28, 2021. Further, the study uses a network and sensitivity analyses to assess the nexus, examines risk causes, and the transfer paths in these markets under bearish, normal, and bullish markets. The evidence offers major findings. First, the overall static and dynamic connectedness is very high and more intense at extreme events. Second, the network connectedness structure shows that the markets have played both roles: net transmitters and receivers of shocks under several market states. Finally, the sensitivity to quantiles analysis shows switching behavior of net transfer spillovers over the quantiles. This could be beneficial to investors aiming at optimizing hedging strategies. Policymakers should consider carefully the overall network connectedness in the market system and formulate appropriate policies to conceive stock market price sensitivity.     

Interconnectedness and systemic risk of China's financial institutions

We investigate the interconnectedness and systemic risk of China's financial institutions by constructing dynamic tail-event driven networks (TENETs) at 1% risk level based on weekly returns of 24 publicly-listed financial institutions from 2008 to 2016. Total connectedness reaches a peak when the system exhibits stress, especially during the recent period from mid-2014 to end-2016. Large commercial banks and insurers usually exhibit systemic importance, but some small firms are systemically important due to their high level of incoming (outgoing) connectedness. Our results provide useful information to regulators when they assess systemic risk of financial institutions and formulate macroprudential supervision policy.     

The role of financial investors in determining the commodity futures risk premium

I develop and test a model to study the interaction between the commodity and stock markets. This study attempts to clarify the debate about the effect of financialization on commodity markets. Theoretically, the futures risk premium is determined by hedging pressure, stock market returns, and the commodity–equity correlation. Empirically, the effect of the stock market on the energy market became significantly greater for the futures risk premium in the period following the 2008 crisis. Furthermore, hedging pressure is a strong explanatory variable for the futures risk premium in various circumstances.     

International financial integration: Stock return linkages and volatility transmission between Vietnam and advanced countries

This paper investigates the interdependence between the Vietnamese stock market and other influential equity markets in terms of return linkage and volatility transmission covering the period including pre, during and post the 2008 Global Financial Crisis. A VAR model is utilized to estimate the conditional return linkage among these indices and a GARCH-BEKK model is employed to investigate the volatility transmission. We find evidence of statistically significant correlation, return spillover and volatility linkage between Vietnamese stock market with other leading equity markets of the US, Hong Kong and Japan. Moreover, we find that during the financial crisis, stock markets become more interrelated.     

Speculative pressure

The paper investigates the information content of speculative pressure across futures classes. Long-short portfolios of futures contracts sorted by speculative pressure capture a significant premium in commodity, currency, and equity markets but not in fixed income markets. Exposure to commodity, currency, and equity index futures’ speculative pressure is priced in the broad cross-section after controlling for momentum, carry, global liquidity, and volatility risks. The findings are confirmed by robustness tests using alternative speculative pressure signals, portfolio construction techniques, and subperiods interalia. We argue that there is an efficient hedgers-speculators risk transfer in commodity, currency, and equity index futures markets.     

The global financial crisis: An analysis of the spillover effects on African stock markets

This paper examines the relative importance of the global and regional markets for financial markets in developing countries, particularly during the US financial crisis and the European sovereign debt crisis. Specifically, we examine the way in which the degree of regional (seven African markets combined), global (China, France, Germany, Japan, the UK and the US), commodity (gold and petroleum), and nominal effective exchange rate (Euro and US dollar) spillovers to individual African countries evolved during the two crises through the econometric method introduced by Diebold and Yilmaz (2012). We find that African markets are most severely affected by spillovers from global markets and only modestly from commodity and currency markets. Conversely, regional spillovers within Africa are smaller than global ones, and hence, African markets are insulated from global crises. We also find that the aggregated spillover effects of European countries to the African markets exceeded the corresponding effects of the US, even in the wake of the US financial crisis.     

Commodity tail risks

In this study, we investigate the cross-section of option-implied tail risks in commodity markets. In contrast to findings from equity markets, left and right tail risks implied by option markets are both large. Commodity-specific variables exert the largest influence on tail risk, while there is no evidence of systematic commodity factors that are linked to tail risk. Additionally, we find strong links to the equity markets, but also comovements to macroeconomic factors. Left or right tail risks are largely independent of variance risk premiums. Finally, both left and right tail risks are priced in the cross-section of commodity futures returns.     

Mexico's integration into the North American capital market

We explore a model of time varying regional market integration that includes three factors for the North American equity market, the local Mexican equity market and the peso/dollar exchange rate. We argue that a useful instrument for the degree of integration is the sovereign yield spread. Applying our methodology to Mexico over the 1991–2002 period, we show that the degree of market integration was higher at the end of the period than at the beginning but that it exhibited wide swings that were related to both global as well as local events. We also discover that Mexico's currency risk is priced. Further, the currency returns process reveals strongly significant asymmetric volatility that is strongly related to the asymmetric volatility of the Mexican equity market returns process. A plausible reason for these results is that currency devaluations in emerging markets like Mexico can cause default-risk crises in local banking systems that mismatch local-currency assets and hard currency liabilities, whereas appreciations produce no such problems. Devaluations that destabilize banking systems are, therefore, more likely than appreciations to increase the volatilities of both the currency's and the equity market's returns.     

Growth,integration and trends in equity markets in Asia

The objective of this paper is to examine the growth and development in the Asian financial markets and then focus on equity-market developments in the Asian economies. Asian equity markets have grown exponentially over the last two decades. The trauma of the Asian crisis crystallized transformations in Asia's financial architecture. Equity markets were, in turn, no exceptions. Despite these problems, these markets slowly began expanding again. Attracted by rapid and sustained regional growth in Asia, international institutional investors and fund managers began investing in Asian equities. This inexorably led to an increase in market capitalization. However, growth in the equity markets was far from steady and uniform. This paper has dwelt on the performance of important equity markets in Asia and highlighted the diversity in them.     

Foreign shocks and international cost of equity destabilization. Evidence from the MENA region

This paper investigates whether foreign financial shocks can destabilize the cost of equity in emerging markets. After a theoretical discussion, we develop annual metrics for the international cost of equity, financial integration, spillovers and shift-contagion vulnerability in a sample of 535 Middle East and North African firms from Egypt, Tunisia, Morocco and Jordan over the 1998–2011 period. We then analyze the impact of foreign shocks on the international cost of equity, using a set of SGMM and PVAR models. Our results indicate that external shocks can increase the cost of equity in mature emerging markets.     

International capital flows,returns and world financial integration

International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and bond markets. Such developments are often attributed to the increased integration of world financial markets. We present a model that allows us to examine how greater integration in world financial markets affects the behavior of international capital flows and financial returns. Our model predicts that international capital flows are large (in absolute value) and very volatile during the early stages of financial integration when international asset trading is concentrated in bonds. As integration progresses and households gain access to world equity markets, the size and volatility of international bond flows decline. This is the natural outcome of greater risk sharing facilitated by increased integration. This pattern is consistent with declining volatility observed during 1975–2007 period in the G-7 countries. We also find that the equilibrium flows in bonds and stocks predicted by the model are larger than their empirical counterparts, and are largely driven by variations in equity risk premia. The model also predicts that volatility of equity and bond returns decline with integration, again consistent with the data for G-7 economies.     

COVID-19 and tail risk contagion across commodity futures markets

This paper examines the impact of COVID-19 on tail risk contagion across commodity futures markets using a copula-based network method. We document a significant increase in the lower and upper tail contagiousness of commodities following the COVID-19 outbreak. Contagion shows an obvious clustering characteristic, that is, there is higher tail risk connectedness between commodities in the same category. Agricultural commodities are significantly less contagious than metals and energy commodities; soft commodities in particular can offer investors significant diversification benefits. There are several hub commodities in the contagion network, chief among them copper, which are good transmitters of shocks and should be treated with caution by investors and regulators. Although tail risk and contagiousness of individual commodities increase together during the pandemic, we find a negative cross-sectional relationship between tail risk and contagiousness, that is, commodities with high tail risk are not necessarily highly contagious and may even be less so.     

Chances for Africa’s trade in farm products

African LDCs are hard-hit by the decline in the world’s agricultural trade but there are still fair chances for increasing African farm produce exports. Yet instead of relying on commodity agreements and preferential tariffs, the countries of Africa ought to apply an offensive marketing strategy to certain products and improve trade in their home markets.     

The response of volume and returns to the information shocks in China's commodity futures markets

This study investigates the response of returns and volume to different information shocks in China's commodity futures markets using bivariate moving average representation (BMAR) and bivariate vector autoregression (BVAR) methodologies. Consistent with the conclusions from stock market studies that have used these methodologies, it is found that the informational/permanent components are the dominant components for returns movements, and the noninformational/transitory components are the dominant components for trading volume. It is also found that the market response of copper futures improved during the sample period, and the market responses of actively traded futures (copper and soybeans) are better than those of the less actively traded futures (aluminum and wheat). © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:893–916, 2005     

Forecasting equity returns: The role of commodity futures along the supply chain

This paper examines equity return predictability using the returns of commodity futures along the supply chain in China's financial market. We find that a considerable number of commodities exhibit significant in‐sample forecasting ability at the daily horizon, especially for supplier‐side equity returns. The macroeconomic risk premium effect, captured by the aggregate commodity prices, is an important source for this predictability. The out‐of‐sample results show that for most commodities, the predictability remains both statistically and economically significant, and the forecasting performance improves substantially during recessions or with economic constraints.     

Founder retention as CEO at IPO in emerging economies: The role of private equity owners and national institutions

We integrate the institutional perspective with research on the governance role of private equity firms in an investigation of Founder-CEO successions in Initial Public Offerings (IPOs) in emerging markets. Using a unique, hand-collected and comprehensive sample of 191 firms having undertaken IPOs in 21 markets across the African continent between January 2000 and August 2016, we apply instrumental variable (IV) Probit methodology and find that higher levels of private equity ownership are positively associated with the probability of the founder's retention as CEO, especially in the context of low-quality formal institutions. Further, in societies with high tribalism, higher private equity ownership is associated with an increased likelihood of founder retention. Voids in the institutional architecture underscore the importance of the founder as a key organizational resource for the firm and a source of institutionalized legitimacy, which in turn confers on the firm an ability to access required resources.