A High‐Frequency Investigation of the Interaction between Volatility and DAX Returns

One of the most noticeable stylised facts in finance is that stock index returns are negatively correlated with changes in volatility. The economic rationale for the effect is still controversial. The competing explanations have different implications for the origin of the relationship: Are volatility changes induced by index movements, or inversely, does volatility drive index returns? To differentiate between the alternative hypotheses, we analyse the lead‐lag relationship of option implied volatility and index return in Germany based on Granger causality tests and impulse‐response functions. Our dataset consists of all transactions in DAX options and futures over the time period from 1995 to 2005. Analyzing returns over 5‐minute intervals, we find that the relationship is return‐driven in the sense that index returns Granger cause volatility changes. This causal relationship is statistically and economically significant and can be clearly separated from the contemporaneous correlation. The largest part of the implied volatility response occurs immediately, but we also observe a smaller retarded reaction for up to one hour. A volatility feedback effect is not discernible. If it exists, the stock market appears to correctly anticipate its importance for index returns.     

Is VIX an investor fear gauge in BRIC equity markets?

This study examines the intertemporal relationships between CBOE market volatility index (VIX) and stock market returns in Brazil, Russia, India, and China (BRIC), and between VIX and U.S. stock market returns, to uncover if VIX serves as an investor fear gauge in BRIC and U.S. markets. We conduct the VIX-returns analysis for the 1993–2007 period.Our results suggest a strong negative contemporaneous relation between daily changes (innovations) in VIX and U.S. stock market returns. This relation is stronger when VIX is higher and more volatile. A significant negative contemporaneous relation between VIX and equity returns also exists for China and Brazil during 1993–2007 and for India during 1993–1997. Similar to the U.S. market, the immediate negative relation between the Brazilian stock returns and VIX changes is much stronger when VIX is both high and more volatile. Our results also indicate a strong asymmetric relation between innovations in VIX and daily stock market returns in U.S., Brazil, and China, suggesting that VIX is more of a gauge of investor fear than investor positive sentiment. However, the asymmetric relationship between stock market returns and VIX is much weaker when VIX is large and more volatile. These results have potential implications for portfolio diversification and for stock market and option trading timing in the equity markets of Brazil, India, and China. Overall, our results indicate that VIX is not only an investor fear gauge for the U.S. stock market but also for the equity markets of China, Brazil, and India.     

Accounting Ratios and the Cross‐section of Expected Stock Returns

Under clean‐surplus accounting, the log return on a stock can be decomposed into a linear function of the contemporaneous log return on equity, the contemporaneous log dividend–price ratio (if the stock pays a dividend), and both the contemporaneous and lagged values of the log book‐to‐market equity ratio. This paper studies the implications of this decomposition for the cross‐section of conditional expected stock returns. The empirical analysis reveals that the log accounting ratios capture cross‐sectional variation in both the conditional mean and conditional variance of log stock returns, which is consistent with the decomposition. It also brings fresh insights to the relation between firm size (market equity) and conditional expected stock returns. The evidence indicates that the conditional median return increases with firm size, while the conditional return skewness decreases with firm size. Empirically, the skewness effect outweighs the median effect, leading to the well‐documented inverse relation between size and average returns. The results of out‐of‐sample tests suggest that investors could use the information provided by the observed values of the log accounting ratios to formulate more effective portfolio strategies.     

Momentum strategies and stock returns: Chinese evidence

This paper investigates the profitability of momentum investment strategies for equities listed in the Shanghai Stock Exchange. We also investigate the role of trading volume to examine whether there is any relationship between stock returns and past trading volume for Chinese equities. We find evidence of substantial momentum profits during the period 1995 to 2005 and that momentum is a pervasive feature of stock returns for the market investigated in this paper.Our findings suggest that investors can generate superior returns by investing in strategies unrelated to market movements. We also investigate the potential of past volume to explain momentum profits, and find no strong link between past volume and momentum profits. Our findings also show a strong momentum effect around earnings announcements but the magnitude of these returns is small in relation to the average monthly returns earned in the early months following portfolio formation.     

The US financial crisis,market volatility,credit risk and stock returns in the Americas

We employ the multivariate DCC-GARCH model to identify contagion from the USA to the largest developed and emerging markets in the Americas during the US financial crisis. We analyze the dynamic conditional correlations between stock market returns, changes in the general economy’s credit risk represented by the TED spread, and changes in the US market volatility represented by the CBOE Volatility Index^® (VIX). Our sample includes daily closing prices from January 1, 2002 to December 31, 2015, for the USA and stock markets in Argentina, Brazil, Canada, Chile, Colombia, Mexico, and Peru. We first identify that increases in VIX have a negative intertemporal and contemporaneous relationship with most of the stock returns, and these relationships increase significantly during the US financial crisis. We then find evidence of significant increases in contemporaneous conditional correlations between changes in the TED spread and stock returns. Increases in conditional correlations during the financial crisis are associated with financial contagion from the USA to the Americas. Our findings have policy implications and are of interest to practitioners since they illustrate that during periods of financial distress, US stock volatility and weakening credit market conditions could promote financial contagion to the Americas.

     

Exchange Rate Exposure at the Firm and Industry Level

Previous work on the exposure of firms to exchange rate risk has primarily focused on U.S. firms and, surprisingly, found stock returns were not significantly affected by exchange‐rate fluctuations. The equity market premium for exposure to currency risk was also found to be insignificant. In this paper we examine the relation between Japanese stock returns and unanticipated exchange‐rate changes for 1,079 firms traded on the Tokyo stock exchange over the 1975–1995 period. Second, we investigate whether exchange‐rate risk is priced in the Japanese equity market using both unconditional and conditional multifactor asset pricing testing procedures. We find a significant relation between contemporaneous stock returns and unanticipated yen fluctuations. The exposure effect on multinationals and high‐exporting firms, however, is found to be greater in comparison to low‐exporting and domestic firms. Lagged‐exchange rate changes on firm value are found to be statistically insignificant implying that investors are able to assess the impact of exchange‐rate changes on firm value with no significant delay. The industry level analysis corroborates the cross‐sectional findings for Japanese firms in that they are sensitive to contemporaneous unexpected exchange‐rate fluctuations. The co‐movement between stock returns and changes in the foreign value of the yen is found to be positively associated with the degree of the firm's foreign economic involvement and inversely related to its size and debt to asset ratio. Asset pricing tests show that currency risk is priced. We find corroborating evidence in support of the view that currency exposure is time varying. Our results indicate that the foreign exchange‐rate risk premium is a significant component of Japanese stock returns. The combined evidence from the currency exposure and asset pricing analyses, suggests that currency risk is priced and, therefoe, has implications for corporate and portfolio managers.     

The bivariate GARCH approach to investigating the relation between stock returns,trading volume,and return volatility

We use a bivariate GJR-GARCH model to investigate simultaneously the contemporaneous and causal relations between trading volume and stock returns and the causal relation between trading volume and return volatility in a one-step estimation procedure, which leads to the more efficient estimates and is more consistent with finance theory. We apply our approach to ten Asian stock markets: Hong Kong, Japan, Korea, Singapore, Taiwan, China, Indonesia, Malaysia, the Philippines, and Thailand. Our major findings are as follows. First, the contemporaneous relation between stock returns and trading volume and the causal relation from stock returns and trading volume are significant and robust across all sample stock markets. Second, there is a positive bi-directional causality between stock returns and trading volume in Taiwan and China and that between trading volume and return volatility in Japan, Korea, Singapore, and Taiwan. Third, there exists a positive contemporaneous relation between trading volume and return volatility in Hong Kong, Korea, Singapore, China, Indonesia, and Thailand, but a negative one in Japan and Taiwan. Fourth, we find a significant asymmetric effect on return and volume volatilities in all sample countries and in Korea and Thailand, respectively.     

Does Idiosyncratic Risk Really Matter?

Goyal and Santa‐Clara (2003) find a significantly positive relation between the equal‐weighted average stock volatility and the value‐weighted portfolio returns on the NYSE/AMEX/Nasdaq stocks for the period of 1963:08 to 1999:12. We show that this result is driven by small stocks traded on the Nasdaq, and is in part due to a liquidity premium. In addition, their result does not hold for the extended sample of 1963:08 to 2001:12 and for the NYSE/AMEX and NYSE stocks. More importantly, we find no evidence of a significant link between the value‐weighted portfolio returns and the median and value‐weighted average stock volatility.     

Oil shocks and stock markets: Dynamic connectedness under the prism of recent geopolitical and economic unrest

In this study we examine the dynamic structural relationship between oil price shocks and stock market returns or volatility for a sample of both net oil–exporting and net oil–importing countries between 1995:09 and 2013:07. We accomplish that, by extending the Diebold and Yilmaz (2014) dynamic connectedness measure using structural forecast error variance decomposition. The results for both stock market returns and volatility suggest that connectedness varies across different time periods, and that this time–varying character is aligned with certain developments that take place in the global economy. In particular, aggregate demand shocks appear to act as the main transmitters of shocks to stock markets during periods characterised by economic–driven events, while supply–side and oil–specific demand shocks during periods of geopolitical unrest. Furthermore, differences regarding the directions and the strength of connectedness can be reported both between and within the net oil–importing and net oil–exporting countries. These results are of particular importance to investors and portfolio managers, given the recent financialisation of the oil market.     

Does Trading Volume Contain Information to Predict Stock Returns? Evidence from China's Stock Markets

This paper examines empirical contemporaneous and causal relationships between trading volume, stock returns and return volatility in China's four stock exchanges and across these markets. We find that trading volume does not Granger-cause stock market returns on each of the markets. As for the cross-market causal relationship in China's stock markets, there is evidence of a feedback relationship in returns between Shanghai A and Shenzhen B stocks, and between Shanghai B and Shenzhen B stocks. Shanghai B return helps predict the return of Shenzhen A stocks. Shanghai A volume Granger-causes return of Shenzhen B. Shenzhen B volume helps predict the return of Shanghai B stocks. This paper also investigates the causal relationship among these three variables between China's stock markets and the US stock market and between China and Hong Kong. We find that US return helps predict returns of Shanghai A and Shanghai B stocks. US and Hong Kong volumes do not Granger-cause either return or volatility in China's stock markets. In short, information contained in returns, volatility, and volume from financial markets in the US and Hong Kong has very weak predictive power for Chinese financial market variables.     

Commodity Prices and Stock Market Behavior in South American Countries in the Short Run

Using Geweke feedback measures, we present empirical evidence that largely supports the hypothesis that the stock markets of South American countries are highly affected by changes in commodity prices after controlling for changes in exchange rates, interest rates, and North American stock market changes. In total, six different Goldman Sachs commodity price indexes are tested against the unexplained variation in stock market returns for Argentina, Brazil, Chile, Colombia, Peru, and Venezuela, covering the period 1995-2007. The Argentinian, Brazilian, and Peruvian stock markets are significantly affected by changes in commodity prices the same day. Venezuela's stock market, however, does not react to changes in commodity prices, even including energy prices. Stock market returns for Chile show a contemporaneous relation with energy and metals prices, whereas Colombia's equity market is affected by price changes for agricultural and industrial metals. In all cases, we find a contemporaneous relation and no indication of a lead or lag relationship.     

Trading volume,time-varying conditional volatility,and asymmetric volatility spillover in the Saudi stock market

Despite the well known importance of volatility–volume relationship, there is a paucity of research on this topic in emerging markets. We attempt to partially fill this gap by investigating volatility–volume relationship in the most important exchange market in the Middle East. We test the effect of trading volume on the persistence of the time-varying conditional volatility of returns in the Saudi stock market. Overall our results support the mixture of distribution hypothesis at the firm level. We also use two different proxies for information arrival, intra-day volatility, and overnight indicators. We find that these are good proxies for information and are important as contemporaneous volume in explaining conditional volatility. We also test for the volatility spillover direction between large- and small-cap portfolios. Our results show that the spillover effect is larger and statistically significant from large to small companies.     

“好”的不确定性、“坏”的不确定性与股票市场定价——基于中国股市高频数据分析

不确定性并不是都是“坏”的,“好”的不确定性也同样存在。本文采用Barndorff-Nielsen et al.(2010)提出的已实现半方差作为股票市场“好”的不确定性和“坏”的不确定性的代理指标,并在此基础上构建了相对符号变差(RSV),分析RSV对中国股市定价的影响。基于2007-2017年中国A股5分钟高频数据的实证研究发现:(1)与理论解释相一致,RSV与股票收益之间呈现负相关关系。无论是基于单变量分组、双变量分组还是公司层面的截面回归,这种影响在经济上和统计上都显著。(2)RSV是独立于已实现偏度的一个重要定价因子,且RSV对股票的定价能力强于已实现偏度的定价能力。(3)RSV对中国股市的影响是状态依存的,相对于经济景气程度高的状态,在经济景气程度低的状态下RSV定价影响更大。(4)基于RSV构建的投资组合的表现明显优于市场超额收益率组合、SMB组合和HML组合的表现。     

Has momentum lost its momentum?

We evaluate the robustness of momentum returns in the US stock market over the period 1965–2012. We find that momentum profits have become insignificant since the late 1990s. Investigations of momentum profits in high and low volatility months address the concerns about unprecedented levels of market volatility in this period rendering momentum strategy unprofitable. Momentum profits remain insignificant in tests designed to control for seasonality, up or down market conditions, firm size and liquidity. Past returns, can no longer explain the cross-sectional variation in stock returns, even following up markets. Investigation of post holding period returns of momentum portfolios and risk adjusted buy and hold returns of stocks in momentum suggests that investors possibly recognize that momentum strategy is profitable and trade in ways that arbitrage away such profits. These findings are partially consistent with Schwert (Handbook of the economics of finance. Elsevier, Amsterdam, 2003) that documents two primary reasons for the disappearance of an anomaly in the behavior of asset prices, first, sample selection bias, and second, uncovering of anomaly by investors who trade in the assets to arbitrage it away. In further analyses we find evidence that suggest two other possible explanations for the declining momentum profits, besides uncovering of the anomaly by investors, that involve decline in the risk premium on a macroeconomic factor, growth rate in industrial production in particular and relative improvement in market efficiency.     

Stock returns and beta,firms size,E/P,CF/P,book-to-market,and sales growth: evidence from Singapore and Malaysia

Using data from Singapore and Malaysia for the period 1988–1996, this paper examines the relationship between stock returns and beta, size, the earnings-to-price ratio, the cash flow-to-price ratio, the book-to-market equity ratio, and sales growth (SG). We find the presence of anomalies in these emerging markets. There is a conditional relationship between beta and stock returns for both countries. During months with positive market excess returns, there is a significant positive relationship. We also find a negative relationship between beta and stock returns during months with negative market excess returns. We document the existence of a negative relationship between stock returns and size for both countries. For Singapore, we also document a negative relationship between returns and SG. For Malaysia, we find a positive relationship between returns and the E/P ratio. These relationships are only significant in non-January months.     

Modeling Time-Varying Volatility and Expected Returns: Evidence from the GCC and MENA Regions

The aim of this study is to investigate empirically the underlying nexus of stock market returns and volatility in the Gulf Cooperation Council (GCC) countries and Middle East and North Africa (MENA) region by using the GARCH-M model. We find that volatility is time-varying in all countries, which indicates substantial variation in the degree of risk across time. However, we do not find empirical support that this time-varying volatility significantly explains expected returns, except in the case of Kuwait, United Arab Emirates, and the MENA region portfolio. Our findings show that stock return volatility is negatively correlated with stock returns in these three markets under the assumption of investor risk aversion. This lends some support to the hypothesis of a volatility-driven negative relationship in the literature. The policy implications of our results are discussed.     

The relationship between stock returns and volatility in international stock markets

This study examines the relationship between expected stock returns and volatility in the 12 largest international stock markets during January 1980 to December 2001. Consistent with most previous studies, we find a positive but insignificant relationship during the sample period for the majority of the markets based on parametric EGARCH-M models. However, using a flexible semiparametric specification of conditional variance, we find evidence of a significant negative relationship between expected returns and volatility in 6 out of the 12 markets. The results lend some support to the recent claim [Bekaert, G., Wu, G., 2000. Asymmetric volatility and risk in equity markets. Review of Financial Studies 13, 1–42; Whitelaw, R., 2000. Stock market risk and return: an empirical equilibrium approach. Review of Financial Studies 13, 521–547] that stock market returns are negatively correlated with stock market volatility.     

The dynamic interaction between volatility and returns in the US stock market using leveraged bootstrap simulations

One of the most important stylized facts in finance is that stock index returns are inversely related to volatility. The theoretical rationale behind the proposition is still controversial. The causal relationship between returns and volatility is investigated in the US stock market over the period 2004-2009 using daily data. We apply a bootstrap test with leveraged adjustments that is robust to non-normality and ARCH. We find that the volatility causes returns negatively and returns cause volatility positively. The policy implications of our findings are discussed in the main text.     

Industry Concentration,Firm Efficiency and Average Stock Returns: Evidence from Australia

This study examines the relationship between industry concentration and level of firm efficiency and their effect on cross-sectional stock returns in Australian market. Our analysis shows that industry concentration and firm efficiency have independent effects on stock returns. By forming 25 double-sorted portfolios based on industry concentration and firm efficiency, INEFFICIENT firms in concentrated industry earn highest stock returns, while EFFICIENT firms in concentrated industry earn lowest stock returns. Also we find that industry concentration appears to be associated with market share while efficiency has a greater effect on firm earnings. In our cross-sectional regressions, industry concentration shows a positive relationship with average stock returns while firm efficiency shows a negative association with average stock returns. The concentration and efficiency effects are persistent throughout the sample period and is robust after controlling for size and book-to-market.     

Markowitz efficiency and size effect: evidence from the UK stock market

Academics and practitioners have frequently debated the relationship between market capitalization and expected return. We apply the Markowitz efficient frontier approach to develop a portfolio performance measure that compares the return of a portfolio to its optimal return, using data from the UK stock market over the period 1985–2012. Our results show that there is a negative relationship between portfolio size and portfolio return during the period under study. When comparing actual portfolio return with achievable return for the same level of risk, we find that as the portfolio size expands, underperformance of the portfolio increases, i.e. the larger the portfolio size, the greater the underperformance. This indicates that Markowitz efficiency is difficult to achieve, particularly in large portfolios. Changing model parameters leads to alternative efficient frontiers that impact upon the measurement of performance. However, the use of alternative efficient frontiers does not affect our result of the size effect on the relative performance of portfolios. Our study shows that the size effect is present over the full period. Our findings also suggest that the excess returns found in small portfolios are likely to be associated with higher levels of diversifiable risk in comparison with larger portfolios. Furthermore, in contrast to other studies, we find no evidence to support the size reversal effect in the data.