Resurrecting the size effect: Evidence from a panel nonlinear cointegration model for the G7 stock markets

Firm size is known to be an important factor affecting stock returns. This study proposes a panel threshold cointegration model to investigate the impact of the size effect on stock returns for the panel of G7 countries: Canada, France, Germany, Italy, Japan, the U.K., and the U.S. over the period 1991:1–2012:12. The empirical analysis is based upon the nonlinear cointegration framework using the asymmetric ARDL cointegration methodology (Shin et al., 2011). This methodological approach permits a much richer degree of flexibility in the dynamic adjustment process toward equilibrium, than in the classical linear model. Our findings indicate the presence of asymmetric adjustment around a unique long-run equilibrium. In particular, the empirical analysis provides evidence of asymmetric effects between stock returns and the size effect, while controlling for the book-to-market ratio and the price-to-earnings ratio.     

Testing for long-run PPP in a system context: Evidence for the US,Germany and Japan

This paper extends the current literature on PPP by re-examining the validity of the PPP hypothesis for the three key currencies of the recent floating exchange rate period, in a multilateral framework. We argue that PPP testing is more adequate in a system context, which takes into account the dynamic interactions of exchange rates and prices of more than two economies, simultaneously. In the system analysis framework, some form of causality among the variables under consideration is also assessed empirically with the aid of weak exogeneity tests. The results illustrate the importance of the multilateral testing. Positive evidence for PPP is found: long-run PPP is supported for the US and Germany but also for the US and Japan, in contrast to evidence of earlier empirical studies. In addition, causality is found running from the US prices to the exchange rates and German and Japanese prices.     

A test of purchasing power parity for emerging economies

The concept of purchasing power parity (PPP) is examined here for its applicability to the soft currencies of a large group of emerging/developing economies. PPP is tested through the use of the technique of cointegration. Based on data covering the period of 1975–1997, cointegration tests of price indices and exchange rates are conducted for 27 countries (against the U. S.). The results provide relatively strong evidence (for 14 countries) in favor of the long-term applicability of PPP as a cointegration concept. Further tests on real exchange rates indicate that the symmetry and proportionality conditions implied by PPP are rejected in all but one case. The latter tests also show that departures from long-term exchange values can last for several years and that a priori restrictions imposed on the cointegrating vector can lead to a false rejection of the PPP concept.     

Fractional Cointegration Analysis of Securitized Real Estate

This paper uses fractional cointegration analysis to examine whether long-run relations exist between securitized real estate returns and three sets of variables frequently used in the literature as the factors driving securitized real estate returns. That is, we examine whether such relationships are characterized by long memory (long-range dependence), short memory (short-range dependence), mean reversion (no long-run effects) or no mean reversion (no long-run equilibrium). The forecasting implications are also considered. Empirical analyses are conducted using data for the U.S., the U.K., and Australia. We find strong evidence of fractional cointegration between securitized real estate and the three sets of variables. Such relationships are mainly characterized by short memory although long memory is sometimes present. The use of fractional cointegration for forecasting purposes proves particularly useful since the start of the financial crisis.     

Beyond the purchasing power parity: testing for cointegration and causality between exchange rates, prices, and interest rates

This paper reexamines the causality between the dollar and the yen in a multivariate framework with the aid of cointegration and error-correcting modeling for the 1951–94 period. The Phillips-Perron tests and Johansen's tests are performed. While causality from interest rates to exchange rates is found in the short run, no causality between prices and exchange rates is found in the short run. However, causality is found running from relative prices to exchange rates along with interest rates between the U.S. and Japan in the long run, which supports the long-run PPP hypothesis.     

Contagion in international financial markets: A recursive cointegration approach

This study utilizes the recursive cointegration technique to analyze the dynamic interdependence among ten major equity markets throughout North America, Europe, Latin America and Asia. Results indicate that the international equity markets are integrated and that the degree of integration among these markets has increased over time. A scrutiny of the various crisis periods reveals that a major financial crisis had an effect of increasing the level of convergence among these markets. Moreover, the recursive cointegration technique is able to pinpoint and capture the approximate timing of a major global crisis. In addition, the study finds that the U.S., Japan, India, China, U.K., and Germany lead the other markets with the U.S. contributing most heavily to the common trend. Overall, the results indicate that profitable opportunities from portfolio diversification are limited across major markets and that these benefits are further reduced during episodes that are marked by a global financial turmoil.     

Nonlinearity in the stock price–dividend relation

We provide empirical evidence of nonlinearities in the present value (PV) model of stock prices. We test for nonlinearity both in the contemporaneous and in the dynamic stock price–dividend relation for the UK, the US, Japan, and Germany. We employed three nonlinear nonparametric techniques, namely nonlinear cointegration, locally-weighted regression, and nonlinear Granger causality tests. Whilst there is no evidence of linear cointegration and Granger causality for any country, there is significant evidence of nonlinear cointegration and nonlinear Granger causality for all four countries. Furthermore, out-of-sample forecasts obtained from the locally-weighted regression are more accurate than out-of-sample forecasts obtained from the linear model for the UK, the US, and Japan. These results are robust to sub-period analysis. The results are in line with empirical evidence that expected stock returns are time-varying.     

Applications of the Integrated Approach to International Portfolio Optimization

In a recent paper, we used a stock-bond integrated model to construct aninternationally diversified portfolio using historical data of stocksand bonds of Japan and the U.S. The result of computational experiments using this integrated approach showed that it can serve as a morereliable and lessexpensive method than the traditional asset allocation strategy. In this paper, we present the results of subsequent experiments using the dataof more than 700 stocks and bonds of six countries: U.S., U.K., Germany, France, Hong Kong, and Japan. In these experiments, we compared the direct historical data method and the betapricing method in order to estimate the expected rate of return of assets. Anotherimportant feature is the use of a new strategy for hedging the exchange raterisk by using historical data to calculate the hedge rate on currencies. Computational experiments show a remarkable improvement over the resultspresented in [9]. Also, the result of the simulation shows that the beta pricing model leads to a better and more stable performance than the direct historical data method.     

Cash holdings and share repurchases: International evidence

In this study, we examine the patterns and determinants of share repurchases using firm-level data from seven major countries—Australia, Canada, France, Germany, Japan, the U.K., and the U.S.—over the period 1998–2006. We find that while non-U.S. firms do not repurchase shares as much as U.S. firms do, both U.S. and non-U.S. firms display a common set of share repurchase behaviors. For example, across countries, firms use share repurchases as a flexible means of distributing cash. More importantly, large cash holdings are significantly associated with the amount of share repurchases in all countries. There is evidence that large cash holdings held by repurchasing firms represent excess cash. Firms tend to experience substantial increases in cash holdings prior to share repurchase as a result of reductions in capital expenditures. Overall, our evidence lends support to two hypotheses: (i) firms discharge excess capital to reduce agency conflicts and (ii) firms use repurchases to distribute temporary cash flows.     

Bank-based and market-based financial systems: Time-series evidence

In this paper, we reexamine the relative merits of bank-based and market-based financial systems in promoting long-run economic growth, which has been debated since the 19th century. We find that in the U.S., the U.K., and Japan, the stock market played an important role in financing economic growth, whereas the banking sector played a more important role in Germany, France, and Korea. A more detailed subsample analysis shows that for all countries, the banking sector played an important role in the early years of economic growth. Regarding the causal relation between financial systems and economic growth, except for Korea, all countries show that the financial system leads economic growth. A further analysis shows that the banking sector and the stock market in each country were complementary to each other in each country in the process of economic growth except for the U.S., where the two sectors were mildly substitutable.     

Government Bond Market Seasonality, Diversification, and Cointegration: International Evidence

Using government bond market data for the United States, Canada, the United Kingdom, Germany, France, and Japan, I investigate several hypotheses. Market efficiency is investigated by testing for seasonality and cointegration. The seasonality results are mixed. In regression tests, a January effect is detected in several markets (United States, Germany, France, United Kingdom, and Canada) using local currencies. However, in a nonparametric test, the January effect is supported only for France. When U.S. dollar returns are used, regression results also reveal a January effect for several markets (United States, Germany, France, and United Kingdom). These results are not confirmed by a nonparametric test. Correlation analysis shows considerable diversification opportunities for short‐term investors. Cointegration tests indicate that several of the markets share cointegrating vectors, increasing the possibilities of using other endogenous bond markets to better predict movements in a particular market.     

Local persistence and the PPP hypothesis

This paper examines the statistical properties of the bilateral real exchange rates of the U.S. vs. France, Germany, and the U.K. during the Post-Bretton-Woods period, and draws implications on the Purchasing Power Parity (PPP) hypothesis. Contrary to traditional studies that consider only unit root and stationary processes to describe the real exchange rate behavior, this paper considers an in-between process, the locally persistent process. The empirical results demonstrate the following two findings: (1) Locally persistent processes describe the real exchange rate movements better than unit root and stationary processes, which implies that PPP reversion occurs and PPP holds in the long-run. (2) The confidence intervals for half-life deviations from PPP under local persistence tend to be narrower than those obtained by assuming the ADF and the local-to-unity models.     

Testing the Purchasing Power Parity Hypothesis for the New Member and Candidate Countries of the European Union: Evidence from Lagrange Multiplier Unit Root Tests with Structural Breaks

This paper investigates the validity of purchasing power parity (PPP) for the eleven Central and East European transition countries and three market economy countries, Cyprus, Malta, and Turkey. Unlike previous studies on PPP, this study uses Lagrange multiplier (LM) unit root tests that incorporate structural breaks in the data series. The findings indicate that in cases of one and two structural breaks, for a U.S. dollar-based real exchange rate series, there is little evidence supporting the validity of PPP. For a deutsche mark-based real exchange rate series, for the cases of both one and two breaks, there is evidence of stationarity of real exchange rates for eight sample countries, which is consistent with PPP. The results also indicate that the estimated half-life of a shock to the real exchange rate ranges from 1.25 (15.05 months) to 2.72 (32.72 months) years across countries. The empirical findings may provide direction for policy makers to coordinate monetary policies for the process of European monetary integration.     

How Does the Corporate World Cope with Mega‐Terrorism? Puzzling Evidence from Terrorism Insurance Markets

Terrorist attacks that have succeeded abroad since 2001, as well as others that were prevented, indicate that the threat of a large‐scale attack is real and will be with us for a long time. Focusing on the United States, the United Kingdom, and Germany, this article analyzes the role that insurance can play in providing commercial enterprises with financial protection against the economic consequences of major terrorist attacks. The article begins by explaining the design and key features of terrorism insurance programs operating today in each of the three countries (TRIA in the U.S., Pool Re in the U.K., and Extremus in Germany). The authors then provide a detailed comparative analysis of the evolution of prices and take‐up rates (based on as yet unpublished data), with particular attention to financial institutions. For those who think the U.S. is the most likely target for mega‐terrorism, the findings are somewhat puzzling. On average, for example, companies in the U.S. do not pay even half as much for comparable coverage under TRIA as companies pay in Germany under Extremus, which raises the questions: Is terrorism coverage under the U.S. insurance program now drastically underpriced? If so, what would be the likely consequences of another large‐scale attack in the U.S.? On the demand side, the authors observe a dramatic increase in take‐up rates in the U.S. since 2003, revealing increased corporate concern. By contrast, the market penetration in Germany remains remarkably low. A better understanding of these programs and of the recent evolution of terrorism insurance markets in the U.S. and Europe should help corporate and government decision makers develop more effective protection against the economic consequences of mega‐terrorism.     

Long-run purchasing power parity,prices and exchange rates in transition: The case of six Central and East European countries

This paper presents empirical results on the hypothesis of long-run purchasing power parity (PPP) with respect to the exchange-rate regimes in six Central and East European countries. The analysis employs cointegration theory to examine the movements of prices and exchange rates in transition to a market economy. Our results are based on system estimation procedures developed by Stock and Watson (1993) and Johansen (1991). We find moderate evidence to support long-run equilibria, however, the cointegrating vector values do not yield to easy interpretation and violate the symmetry and proportionality conditions suggested by PPP. We provide an explanation for such behavior and find that it is consistent with the existing literature on transition and foreign exchange markets.     

Are fewer firms paying more dividends?: The international evidence

This study examines aggregate patterns of dividends and earnings for the two largest equity markets outside of the U.S. over 1990–2001. Although aggregate U.K. and Japanese dividends exhibit modest increases, neither the magnitude nor the trend is comparable to the U.S. experience. Further, we note important differences in the level of aggregate dividends between keiretsu, independent and hybrid firms. This suggests the importance of corporate organizational form in understanding Japanese dividend behavior over time. We find evidence of dividend concentration in the U.K., but not in Japan. Fewer firms are paying more dividends, but not everywhere. We find evidence of earnings concentration in the U.K., but such consolidation in Japan is limited to independent firms. Our analysis offers mixed results for the relation between a firm's earnings and its ability to pay dividends. Few U.K. firms with negative earnings pay dividends while 73% of comparable Japanese firms do. The U.K. economy rather than the Japanese, increasingly resembles a two-tier system with a small set of very high earners providing a disproportional percentage of aggregate dividends. Finally, our evidence suggests that the general stability of Japanese and U.K. payout practices is inconsistent with a reduced propensity to pay dividends.     

发达国家科技型中小企业技术创新的经验与启示

创新是一个民族进步的灵魂,科技型中小企业技术创新能力的提高对增强市场竞争力和国民经济可持续发展都具有十分重要的作用。美国、日本、德国科技型中小企业发展的历史较长,积累了较为丰富的技术创新经验,学习和借鉴对我国科技型中小企业技术创新具有较高的指导意义。文章总结分析了美国、日本、德国科技型中小企业技术创新的经验,并得出健全法律法规体系、加强财政金融支持、完善社会服务体系、构建技术人才激励模式的启示。     

Testing PPP Hypotheses between Japan and the Six G7 Countries

The paper examines the purchasing power parity(PPP) theory of the foreign exchange rate of the yenagainst the currencies of the six G7 countries. We usethe error-corrected five-dimensional vectorautoregressive (VAR) model with structural changes inthe trend function. The data cover the period of thepost-Breton–Woods floating exchange rate system. Theresults reveal that the PPP relation alone determinesthe exchange rates for the USA, France, Germany, andItaly, while a linear combination of PPP and uncoveredinterest rate parity (UIP) relations determines that for Canada. Ina model without trend breaks, the PPP relations holdonly for Germany, which indicates that a correctspecification of the sampling distribution of data isimportant. The one-step prediction based on the errorcorrection model (ECM) outperforms the random walkmodel. The ECM is useful to predict the out-of-samplebehaviors of the exchange rates.     

Volatility Reversion and Correlation Structure of Returns in Major International Stock Markets

This paper investigates the stochastic behavior of weekly stock market returns in the U.S., Japan, and the U.K. during the period 1984 to 1994. The analysis is carried out using an augmented version of Bollerslev's [7] multivariate GARCH model with structural dummies to test for differences in the mean, volatility, and covariance structure of returns during the pre- and post-October 1987 crash periods. In addition, the paper explores the issue of the volatility reversion and time-varying behavior of correlation structure of returns in these markets. Mean-spillovers exist from the U.S. and Japan to the U.K. The magnitude of these spillovers is, however, low. Volatility spillovers exist from the U.S. and, to a lesser extent, from Japan to the U.K. Mean returns in all three markets and volatility in Japan and the U.K. are the same during the two periods, while volatility in the U.S. is lower during the post-crash period. With the exception of the correlation of returns between Japan and the U.K., which has doubled since the October 1987 crash, the remaining correlations are statistically similar during the two periods. Simulations performed indicate that volatility is reverting in the sense that, when it departs from its long-run equilibrium level, it tends to revert back to that level.     

MEAN AND VOLATILITY SPILLOVERS ACROSS MAJOR NATIONAL STOCK MARKETS: FURTHER EMPIRICAL EVIDENCE

This paper provides additional insight into the nature and degree of interdependence of stock markets of the United States, Japan, the United Kingdom, Canada, and Germany, and it reports the extent to which volatility in these markets influences expected returns. The analysis uses the multivariate GARCH-M model. Although they are considered weak, statistically significant mean spillovers radiate from stock markets of the U.S. to the U.K., Canada, and Germany, and then from the stock markets of Japan to Germany. No relation is found between conditional market volatility and expected returns. Strong time-varying conditional volatility exists in the return series of all markets. The own-volatility spillovers in the U.K. and Canadian markets are insignificant, supporting the view that conditional volatility of returns in these markets is “imported” from abroad, specifically from the U.S. Significant volatility spillovers radiate from the U.S. stock market to all four stock markets, from the U.K. stock market to the Canadian stock market, and from the German stock market to the Japanese stock market. The results are robust and no changes occur in the correlation structure of returns over time.