Volatility transmission to the fine wine market

The goal of this paper is to explore volatility transmission from various markets to the fine wine market. Knowledge of these channels for transmitting volatility to the wine market allows practitioners to anticipate the future volatility and the consequences of a shock on the wine market, to develop their investment strategy and diversify their risk. We especially analyse the impact of U.S. markets (i.e. art, commodities, credit, financial and real estate) during the 2007–2017 period. We shed additional light on how the volatility of the fine wine market varies during an extended period including a financial crisis. Our results indicate that, in the short-term, volatility is transmitted with a negative effect through the financial and commodity markets and with a positive effect through the art, residential real estate, and credit default markets. In the long-term, the wine market is impacted by all other markets. We show that correlations are time-varying.     

Dynamic Correlation Analysis of Asian Stock Markets

This paper examines the stock market linkages within the Asia-Pacific region and between Asian markets and the U.S. market over the period of January 2000 to June 2010, employing the dynamic conditional correlation GARCH model. Our results show that there exist very high correlations among the stock markets during the 2008 financial crisis. Therefore, consistent with the finding in literature, there are no diversification benefits during the financial crisis. However, our results show that there are still substantial opportunities for global investors to improve the risk-return performance between China and other markets during the sample period. In addition, we find evidence that the U.S. market significantly affects the stock markets in the Asia-Pacific region. Using T-GARCH model, there is a strong evidence of an asymmetric effect on conditional variance except stock markets in China and Malaysia.     

China's liberalizing stock market,crude oil,and safe-haven assets: A linkage study based on a novel multivariate wavelet-vine copula approach

China is the world's largest oil importer, and therefore the correlations between stock indices and highly volatile oil prices deserve close examination when investing in China's gradually liberalizing stock market. Another concern for international investors is whether safe-haven assets can reduce portfolio risks for investment in China. The paper makes two main contributions. First, we develop a novel method of examining a multivariate dependence structure by combining wavelet analysis with the vine copula model. Second, we apply the proposed methodology to study the correlations between China's liberalizing stock market, petroleum, and safe-haven assets at different frequencies. We find that the multidimensional dependence of these assets has been altered as a result of the 2008 global financial crisis. Moreover, the vine structures exhibit dependence patterns that vary over time horizons, indicating that the multidimensional dependence is sensitive to time scales.     

Financialization of agricultural commodities: Evidence from China

Speculation in the commodity futures market distorts commodity prices, driving them away from rational levels. This phenomenon, which is known as the financialization of commodities, has raised significant concerns in recent years. Particularly, in the agricultural market, ‘financialized’ commodities have been blamed for high world food prices. In this paper, we examine the financialization of agricultural commodities in China. To do so, a time-varying copula is employed to investigate the dependence structure between commodities and stock markets. Four insightful results are obtained. First, positive correlations between agricultural commodities and stock markets demonstrate the financialization of agricultural commodities. Second, the identified correlations are time-varying and idiosyncratic with respect to products. Third, the agricultural commodity market is more closely correlated with the domestic stock market than with the overseas market. Fourth, a growing dependence between commodities and the stock markets is detected and the co-movement became stronger after the global financial crisis.     

Did Baltic stock markets offer diversification benefits during the recent financial turmoil? Novel evidence from a nonparametric causality-in-quantiles test

Motivated by financial liberalization investors seek for new investment opportunities through international portfolio diversification. To this end we explore any asymmetric causal relationship between developed European stock markets (Germany, France and UK) and emerging Baltic markets namely; Estonia, Latvia and Lithuania. Our analysis focuses on the period before and after countries’ EU accession and pre- and post the global financial crisis. For this purpose, both the standard parametric test for causality and a novel nonparametric test for causality-in-quantiles are employed. The results of both the parametric and nonparametric Granger causality test support a causal relationship in mean that runs from all of the major markets to the Baltic markets across both samples. The results imply the existence of significant nonlinear return and volatility spillover from European markets to Baltic markets. Policy implications for international investors are also discussed.     

Should emerging market investors buy commodities?

One reason that investors hold commodities is to receive diversification benefits. However, while an extensive set of existing studies demonstrate diversification benefits when investors hold international stocks or bonds, they are generally silent on the implications of holding commodities. Using an asset pricing framework, we investigate the benefits to investors from holding commodities, both individually and in portfolios. Generally, commodity and stock markets are integrated, although there are time-varying benefits to investors that are subject to sample period selection and investment horizon. We show that Asian investors receive positive risk adjusted returns in gold and rice markets but not in any of the other commodity markets investigated. The risk adjusted returns are time-varying: during the Asian financial crisis risk adjusted returns were negative – a penalty for investing in commodities – whereas during the global financial crisis the reverse was true and investors earned positive excess returns. The time-varying nature of the benefits that arise from diversification in commodities and their breakdown during periods of crisis, highlight the problems that investors may face when using commodities for long-term investment in addition to traditional holdings of stocks and bonds.     

How index investment impacts commodities: A story about the financialization of agricultural commodities

This paper focuses on the impact of financial investors on agricultural prices, a phenomenon known as the financialization. In this aim, we check whether financial mechanisms drive extreme values and the mean of agricultural returns in the same way. Relying on the Threshold AutoRegressive Quantile (TQAR) methodology, we find evidence of reinforcement linkages between equity and agricultural markets since 2004, corresponding to the rise in inflows of institutional investors in commodity markets. These results show that agents impact more deeply commodity markets when the commodity index value is high. In addition, in extreme quantiles (0.75 and 0.90) of agricultural returns, the relationship between agricultural and stock returns is always significant when the commodity index return is in the higher regime. This finding suggests that, stock markets had a greater impact on agricultural price dynamics during the extreme movements which occurred during the 2007–2008 financial crisis, highlighting a potential influence of financial markets on the financialization of commodities.     

The impact of subprime mortgage on correlation between stock and FX markets

Our researching period contains the American subprime mortgage crisis, an insignificant financial crisis and the Asian financial crisis periods. We analyse and compare the interrelations between the stock and Foreign Exchange (FX) markets in Taiwan by the daily data of stock prices and NTD/US exchange rates. The empirical results found that there is no effect on the long-term equilibrium between the stock and FX markets during the American subprime mortgage crisis. It also shows that, whether financial crisis occurs or not, there is no cointegration between the stock and FX markets. Furthermore, the results find that there exists bidirectional causality between the stock and FX markets among the American subprime mortgage crisis and the Asian financial crisis period. However, there is only unidirectional relationship from stock prices to exchange rates during insignificant financial crisis period. Such results imply that two financial crises do significantly affect the short-term interrelationships between the stock and FX markets and lead to more importance for the connection between two markets.     

Conditional volatility and correlations of weekly returns and the VaR analysis of 2008 stock market crash

Modelling of conditional volatilities and correlations across asset returns is an integral part of portfolio decision making and risk management. Over the past three decades there has been a trend towards increased asset return correlations across markets, a trend which has been accentuated during the recent financial crisis. We shall examine the nature of asset return correlations using weekly returns on futures markets and investigate the extent to which multivariate volatility models proposed in the literature can be used to formally characterize and quantify market risk. In particular, we ask how adequate these models are for modelling market risk at times of financial crisis. In doing so we consider a multivariate t version of the Gaussian dynamic conditional correlation (DCC) model proposed by Engle (2002), and show that the t-DCC model passes the usual diagnostic tests based on probability integral transforms, but fails the value at risk (VaR) based diagnostics when applied to the post 2007 period that includes the recent financial crisis.     

The transmission from equity markets to commodity markets in crises periods

This article investigates the transmission from equity markets to commodity markets during two major financial crises, namely the Subprime Mortgage and the Sovereign Debt Crises. We perform an analysis on sub-stages from 3 January 2003 to 31 October 2013 to capture the price behaviour of both equity and commodity markets. Two financial crises indicators, VIX and CDS, are used to represent fear of a crisis. We find that correlations between commodity and equity markets are time-varying and highly volatile during a financial crisis. While sharing some common features, commodities cannot be considered a homogeneous asset class. Segmentation characteristics of commodity markets disappear in times of financial crises, reducing their substitutability as an investment portfolio for asset diversification purposes. Through our test for Granger causality, we find the existence of transmission during a financial crisis. Volatility spillover effect also plays a major role as transmission mechanisms. After the collapse of Lehman Brothers, commodities decoupled from the VIX rather soon, and there is an increase in correlation with the CDS. In addition, we find the decoupling effect of most commodities show insignificant correlations with the Dow Jones, VIX and CDS after the Greek debt restructuring.     

Co-movements of GCC emerging stock markets: New evidence from wavelet coherence analysis

This paper examines the short term and long term dependencies between stock market returns for the Gulf Cooperation Council (GCC) Countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) during the period 2005–2010. Our empirical investigation is based on the wavelet squared coherence which allows us to assess the co-movement in both time-frequency spaces. Our results reveal frequent changes in the pattern of the co-movements especially after 2007 for all the selected GCC markets at relatively higher frequencies. We further note an increasing strength of dependence among the GCC stock markets during the last financial crisis signifying enhanced portfolio benefits for investors in the short term relative to the long term. On the financial side, we uncover that the strength of co-movement between GCC markets may impact the multi-country portfolio's value at risk (VaR) levels. These findings provide potential implications for portfolio managers operating in the GCC region who are invited to consider co-movement through both frequencies and time when designing their portfolios.     

Exogenous shocks,dynamic correlations,and portfolio risk management for the Asian emerging and other global developed and emerging stock markets

ABSTRACT

This study examines the potential influence of exogenous shocks on time-varying correlations and portfolio strategies between the Asian emerging and other global stock markets including developed and other emerging markets. Using the ARMA-cDCC-FIEGARCH model with and without exogenous shocks, our results highlight the usefulness of including other global stock assets in the traditional portfolio for Asian emerging market investors. However, investors have limited opportunities to diversify their assets during the global financial crisis. Moreover, the shocks from the U.S. stock market have a greater influence on global stock markets compared to that from U.S. economic policy. Fortunately, the model with exogenous shocks improves its accuracy, which plays the same role of controlling structural breaks in the model. More importantly, incorporating exogenous shocks in our model also provides better value-at-risk performance results and hedging effectiveness. These results have several important implications for investors, researchers, and policymakers.     

Do mutual fund flows affect the French corporate bond market?

We study whether investors’ withdrawals from mutual funds affect corporate bond prices. As mutual funds have become major players in the financial markets, they are likely to exert downward pressures on asset prices when facing investors’ redemptions, particularly in the less liquid markets such as corporate bonds. We use a novel dataset on the French bond funds and show that both flows in and out of mutual funds lead to a significant effect on the corporate bond yields. This effect is asymmetric as redemptions provoke a change in yields of greater magnitude than inflows. Moreover, all corporate bonds are not equally affected by investors’ withdrawals from funds: The more a bond is detained by funds, the higher the impact of redemptions on its yield. These three results are robust to various changes in econometric specifications.     

News and correlations of CEEC-3 financial markets

We employ DCC-MGARCH models to investigate conditional correlations between six CEEC-3 financial markets. In general, the highest correlations exist between Hungary and Poland in foreign exchange and stock markets. Short-term money markets are somewhat isolated from each other. We find that the associations of CEEC-3 exchange rates versus euro are weaker than those versus the US dollar. The persistence of the effect of shocks on the time-varying correlations is strongest for foreign exchange and stock markets, indicating a tendency toward contagion. In searching for the origins of financial market volatility in the CEEC-3, we uncover some evidence of Granger-causality on the foreign exchange markets. Finally, using a pool model, we investigate the impact of euro area, US, and CEEC-3 news on the correlations. Apart from ECB monetary policy news, we observe no broad effects of international news on correlations; instead, local news exerts an influence, which suggests a dominance of country- or market-specific circumstances.     

Global Integration of Central and Eastern European Financial Markets—The Role of Economic Sentiments

This paper examines the importance of different economic sentiments for the Central and Eastern European countries (CEECs) during the transition process. We first analyze the importance of economic confidence with respect to the CEECs' financial markets. Since the integration of formerly strongly‐regulated markets into global markets can also lead to an increase in the dependence of the CEECs' economies on global sentiments, we also investigate the relationship between global economic sentiments, domestic income, and share prices. Applying a restricted cointegrating VAR (CVAR) framework, which allows us to distinguish between the long‐run and the short‐run dynamics, our results for the short run suggest that economic sentiments are influenced by share prices but also offer some predictive power with respect to the latter. What is more, European sentiments play an important role in particular for the CEECs' income and sentiments.     

The asymmetric price adjustment between REIT and stock markets in Asia-Pacific markets

This paper applies the threshold error correction model to examine the relationship for real estate investment trusts (REITs) and stock, and their asymmetric adjustment behaviors in six Asian/Pacific financial markets: Australia, Japan, Singapore, Taiwan, Korea, and Hong Kong. Our results show that there has been long-term equilibrium in REIT and stock indices in most of these markets. To earn exceptional profits, it is recommended that investors can sell (buy) the REITs when the indices of REITs are lower (higher) than equilibrium in Australia, Singapore and Taiwan; on the other hand, they should sell (buy) when the REIT market goes up (down) in Hong Kong and Japan. A causality test revealed that previous information about stocks predicted changes in the REITs in all the Asian/Pacific markets. One can also find that the lead–lag relationships are significant. The threshold EC model predicts two-way causality under both the regimes for the financial markets in most countries during all the sample periods. In addition, the adjustment speeds for the stock indices are faster than that for the REIT indices as disequilibrium occurs. This paper also finds that the previous mentioned trading strategies generally remained the same during the period of sub-prime mortgage crisis. However, the threshold EC model predicts one-way causality for both the regimes for the financial markets in most countries during this crisis period. In addition, we also find that the severe shock in REIT markets led investors in Australia and Taiwan to be more conservative during this period. The REIT indices had more effect on stock indices after the sub-prime mortgage crisis. According to the empirical results, we can infer that the degree of market imbalance and the occurrence of the sub-prime mortgage crisis induce the changes in the investment behavior of market participants.     

The Impact of U.S. Individual and Institutional Investor Sentiment on Foreign Stock Markets

This study examines the degree to which U.S. individual and institutional investor sentiments are propagated abroad. Previous studies construe investor sentiments as fully irrational; we find contrary evidence that individual and institutional investor sentiments are driven by both rational and irrational factors, with distinct effects on domestic and international stock market returns. The generalized impulse response functions from VAR model estimations show that U.S. institutional investor sentiments have varying degrees of impact on the equity markets of the U.K., Mexico, and Brazil, and no effect on Chile. Specifically, the individual investor sentiment effect is statistically significant only for the U.K market. Not surprisingly, the two classes of investor sentiments have a strong significant effect on the U.S. stock market returns. The response of the U.S. to individual investor sentiments is relatively more erratic, while the response to institutional investor sentiments is smoother. This difference in pattern becomes more visible when we consider the response of the foreign stock markets. We find significant effects of rational sentiments of institutional investors on the U.S., the U.K., Mexico, and Brazil. However, there is an insignificant effect of the irrational sentiments on the same set of countries. A direct implication of our empirical evidence is that it is important for international asset pricing models to consider the role of rational sentiments of institutional and individual investors on developed and emerging markets.     

Contagion effects of the subprime crisis in the European NYSE Euronext markets

This paper presents three tests of contagion of the US subprime crisis to the European stock markets of the NYSE Euronext group. Copula models are used to analyse dependence structures between the US and the other stock markets in the sample, in the pre-crisis and in the subprime crisis periods. The first test assesses the existence of contagion on the relevant stock markets’ indices, the second checks the homogeneity of contagion intensities, and the third compares contagion in financial and in industrial sectors’ indices. Results suggest that contagion exists, and is equally felt, in most stock markets and that investors anticipated a spreading of the financial crisis to the indices of industrial sectors, long before such dissemination was observable in the real economy.     

Assessing downside and upside risk spillovers across conventional and socially responsible stock markets

Since the aftermath of the recent global financial crisis, socially responsible (SR) investments have become an alternative form of conventional finance, giving rise to further systemic risk between conventional and SR stock markets. In this paper, we assess this risk transmission using Value at Risk (VaR) modeling for the US, Europe and the Asia-Pacific region, over the period covering January 2004–December 2016. We find that socially responsible stock markets exhibit less risk than do conventional markets in terms of the risk hedging properties induced by the SR screening. Second, contributions to systemic risk vary across market phases and return distribution levels, with a larger contribution and spillover effect during the recent global financial crisis. For example, at the downside of the distribution (CoVaR at 5%), the conventional European index shows the highest contribution to the world market’s systemic risk, while the US stock market shows the highest contribution at the upside of the distribution (CoVaR at 95%). This finding is justified by the difference in the risk aversion of investors that varies with the market state as well as the disparities in the development of SR markets.     

Liquidity in Asian markets: Intensity of Regional and global linkages

This study investigates cross-market linkages and the intensity of liquidity spillovers across nine Asian markets and five developed markets during 2006 to 2016. Further, the study examines the contagion caused by recent global financial crisis and its impact on the market liquidity. The direction and intensity of spillovers has been measured using forecast error variance decomposition method as suggested by Diebold and Yilmaz (2012). Among the developed markets, the United States, Germany and the United Kingdom significantly affect liquidity changes in Asian countries like India, China, Singapore and Japan. The results revels that on average, each Asian market receives 7% spillover from the global markets and 16% from regional markets. During the financial crisis, the average regional spillover increased to 20% and the global spillover increased to 11%. Thus, in Asia, the regional spillover is higher than the global spillover. Our results support the demand side hypothesis and suggest that it is the trade and portfolio investments that drive the liquidity spillovers. Our findings have potential implications for international investors, policy makers and market regulators.