South African stock return predictability in the context data mining: The role of financial variables and international stock returns

In this paper, we examine the predictive ability, both in-sample and the out-of-sample, for South African stock returns using a number of financial variables, based on monthly data with an in-sample period covering 1990:01 to 1996:12 and the out-of-sample period of 1997:01 to 2010:04. We use the t-statistic corresponding to the slope coefficient in a predictive regression model for in-sample predictions, while for the out-of-sample, the MSE-F and the ENC-NEW tests statistics with good power properties were utilised. To guard against data mining, a bootstrap procedure was employed for calculating the critical values of both the in-sample and out-of-sample test statistics. Furthermore, we use a procedure that combines in-sample general-to-specific model selection with out-of-sample tests of predictive ability to further analyse the predictive power of each financial variable. Our results show that, for the in-sample test statistic, only the stock returns for our major trading partners have predictive power at certain short and long run horizons. For the out-of-sample tests, the Treasury bill rate and the term spread together with the stock returns for our major trading partners show predictive power both at short and long run horizons. When accounting for data mining, the maximal out-of-sample test statistics become insignificant from 6-months onward suggesting that the evidence of the out-of-sample predictability at longer horizons is due to data mining. The general-to-specific model shows that valuation ratios contain very useful information that explains the behaviour of stock returns, despite their inability to predict stock return at any horizon. The model also highlights the role of multiple variables in predicting stock returns at medium- to long run horizons.     

Stock exchange mergers and weak form of market efficiency: The case of Euronext Lisbon

This exploratory paper is among the first to examine the impact of stock exchange mergers on informational market efficiency. We focus on the merger of Bolsa de Valores de Lisboa e Porto (Portuguese Stock Exchange) with Euronext in 2002 (that created Euronext Lisbon). To investigate this question we perform numerous statistical tests: serial correlation test (ACF test), runs test, unit root test (Kwiatkowski, Philips, Schmidt, & Shin, 1992), multiple variance ratio test (Chow & Denning, 1993) and ranks and signs test (Wright, 2000).The results indicate that the Portuguese Equity Market is inefficient in weak form during pre-merger period implying that investors possessed an opportunity to earn abnormal returns though small in magnitude. The results, sensitive to the methodology used, indicate a mixed evidence of improvement in market efficiency during the post-merger period. Although the findings are mixed, yet most tests show a tendency of improved efficiency.     

Partial identification in binary response models with nonignorable nonresponses

This study investigates the identification of parameters in semiparametric binary response models of the form y=1(x^′β+v+ε>0)$y=1(x^{\prime }\beta +v+\epsilon >0)$ when there are nonignorable nonresponses. We propose an estimation procedure for the identified set, the set of parameters that are observationally indistinguishable from the true value β$\beta$, based on the special regressor approach of Lewbel (2000). We show that the estimator for the identified set is consistent in the Hausdorff metric.     

Semiparametric binary random effects models: Estimating two types of drinking behavior

I propose a new estimator for cross-section semiparametric regressions containing unobserved binary random effects and apply it to alcohol consumption. The random effects (health consciousness) explain a significant proportion of otherwise unexplained variation in alcohol consumption. Education positively correlates with health consciousness.     

An Afriat Theorem for the collective model of household consumption

We provide a nonparametric ‘revealed preference’ characterization of rational household behavior in terms of the collective consumption model, while accounting for general individual preferences that can be non-convex. Our main result is the Collective Afriat Theorem, which parallels the well-known Afriat Theorem for the unitary model. First, it provides a characterization of collectively rational consumption behavior in terms of collective Afriat inequalities. Next, it implies the Collective Axiom of Revealed Preference (CARP) as a testable necessary and sufficient condition for data consistency with collective rationality. Finally, the theorem has some interesting testability implications. With only a finite set of observations, the nature of consumption externalities (positive or negative) in the intra-household allocation process is non-testable. The same non-testability conclusion holds for privateness (with or without externalities) or publicness of consumption. By contrast, concavity of individual utility functions (representing convex preferences) turns out to be testable. In addition, monotonicity is testable for the model that assumes all household consumption is public.     

Product market competition and boundaries of the firm

Abstract .  This paper studies the effects of product market competition on firm boundaries. In a duopoly setting, each retailer is associated with a manufacturer who must decide how to allocate property rights over a retail asset. Delegating property rights over the retail asset to an indepedent retailer ('disintegration') transfers incentives from the manufacturer to the retailer and has the benefit of increasing product quality and profits, owing to the retailer's superior efficiency. However, it also forces the manufacturer to forfeit part of the profits. Competition increases the net benefit from delegation and leads to more efficient, vertically disintegrated structures.     

Estimation of relative average treatment effects with misclassification

This paper identifies and estimates the relative average treatment effect in the presence of misclassification. We propose consistent estimators based on nonparametric methods. The simulation results reported illustrate the performance of the proposed estimators.     

Real-time data revisions and the PCE measure of inflation

This paper tracks data revisions in the Personal Consumption Expenditure using the exclusions-from-core inflation persistence model. Keeping the number of observations the same, the regression parameters of earlier vintages of real-time data, beginning with vintage 1996:Q1, are tested for coincidence against the regression parameters of the last vintage of real-time data, used in this paper, which is vintage 2008:Q2 in a parametric and two nonparametric frameworks. The effects of data revisions are not detectable in the vast majority of cases in the parametric model, but the flexibility of the two nonparametric models is able to utilize the data revisions.     

Sentiment dynamics and stock returns: the case of the German stock market

We use weekly survey data on short-term and medium-term sentiment of German investors in order to study the causal relationship between investors’ mood and subsequent stock price changes. In contrast to extant literature for other countries, a trivariate vector autoregression for short-run sentiment, medium-run sentiment, and stock index returns allows to reject exogeneity of returns. Depending on the chosen VAR specification, returns are found to either follow a feedback process caused by medium-run sentiment, or returns form a simultaneous systems together with the two sentiment measures. An out-of-sample forecasting experiment on the base of estimated subset VAR models shows significant exploitable linear structure. However, trading experiments do not yield convincing evidence of significant economic gains from the VAR forecasts, and it appears that predictability of returns from sentiment decreases during the recent market gyrations.     

Sukuk vs. conventional bonds: A stock market perspective

The last decade witnessed a wide expansion of Islamic finance in Middle Eastern and Southeast Asian countries. Sukuk issues, which are Islamic financial instruments structured to replicate the cash flows of conventional bonds, have notably proliferated, fuelling the debate on the similarity between Islamic and conventional finance. Using an event study methodology on a sample of Malaysian listed companies, we investigate whether stock market investors react differently to the announcements of sukuk and conventional bond issues. We find that the stock market is neutral to announcements of conventional bond issues, but it reacts negatively to announcements of sukuk issues. We attribute this finding to the excess demand for Islamic investment certificates and to an adverse selection mechanism that favors sukuk issuance by lower-quality debtor companies.     

How useful is yet another data-driven bandwidth in long-run variance estimation?: A simulation study on cointegrating regressions

This paper investigates how bandwidth choice rules in long-run variance estimation affect finite-sample performance of efficient estimators for cointegrating regression models. Monte Carlo results indicate that Hirukawa's (2010) bandwidth choice rule contributes bias reduction in the estimators.     

Intertemporal market division:: A case of alternating monopoly

In this paper, we report on an equilibrium with market dominance that exists in a simple two-firm model that features neither entry barriers nor sophisticated punishment strategies. This equilibrium induces an intertemporal market division in which the two firms alternate as monopolists - despite the fact that the model also sustains a Cournot duopoly. Even when initially both firms are active in the market, the alternating monopoly reveals itself rather quickly. Moreover, it Pareto dominates the Cournot equilibrium - as it is close to the cartel outcome. Several examples of what well may be such alternating monopolies are presented.     

Testing for structural breaks with local smoothers: A simulation study

By means of an extensive Monte Carlo simulation study based on the design of Chen and Hong (2012) we compare the performance of the tests they proposed for parameter stability with the linearity test of Li et al. (2002) and the functional form test of Li and Wang (1998). We find that the test of Li et al. (2002) test adapted to testing for parameter stability performs favorably well in terms of size and equally well in terms of power compared with the others, whereas the test by Li and Wang has no power.     

Innovation and stock market performance: A model with ambiguity-averse agents

Empirical evidence on stock prices shows that firms investing successfully in radical innovation experience higher stock returns. This paper provides a model that sheds light on the relationship between the degree of firm innovativeness and stock returns, the movements of which capture expectations on firm’s profitability and growth. The model is grounding on Neo-Schumpeterian growth models and relies on the crucial assumption of radical innovation, characterized by “ambiguity” or Knightian uncertainty: due to its uniqueness and originality, no distribution of probability can be reasonably associated with radical innovation success or failure. Different preferences (α-maxmin, Choquet) are here compared. Results show that the assumption of ambiguity-aversion is crucial in determining higher returns in the presence of radical innovation and that the specific definition of expected utility shapes the extent of the returns. This result holds also in the case of endogenous innovation; risk attitude plays no role.     

A waste management model for optimal recycling-landfilling policies under macroeconomic conditions

This research provides a waste management model in the presence of macroeconomic conditions. An optimal control problem which integrates the recycling-landfilling decision with industry supply-demand dynamics is designed to achieve the value-maximizing objective. The model simultaneously considers idiosyncratic technical and aggregate demand shocks, while the stoppage time for landfill use is assumed to follow a Cox process with the intensity function of a firm's total waste collection. The closed-form solution of the optimal recycling ratio is also derived. The results suggest that when macroeconomic effects are neglected, optimal recycling ratios tend to be underestimated.     

Network effects, market structure and industry performance

This paper analyzes oligopolistic markets with network externalities. Exploiting a minimal complementarity structure on the model primitives that allows for pure network goods, we prove existence of non-trivial fulfilled-expectations equilibrium. We formalize the concept of industry viability, investigate its determinants, and show that it improves with more firms in the market and/or by technological progress. These results enlighten some well-known conclusions from case studies in the management strategy literature. We also characterize the effects of market structure on industry performance, which depart substantially from ordinary markets. The approach relies on lattice-theoretic methods, supplemented with basic insights from nonsmooth analysis.     

Group insurance and lending with endogenous social collateral

We construct a dynamic model of self-enforcing insurance provision and lending to a community of borrowers who are connected by risk-sharing arrangements that are themselves subject to enforcement problems, as in Kocherlakota (1996). We show that an outside lender offering constant-consumption contracts can earn a higher profit if he conditions his repeated interactions with each borrower on the history of his interactions with all the group members (a joint liability contract), rather than on his history with that borrower only (individual liability contracts). This result holds even in the absence of informational asymmetries. The observation driving it is that with individual liability contracts, a joint welfare-maximizing group may prefer to have one or more group members default on their contracts, so that the group can consume a mix of outside funds and the defaulters' stochastic income. One contribution of our work is to give precise economic content to the concept of “social collateral” as the per-agent surplus from group risk-sharing over autarky. The group can deter its members from defaulting on their contracts with the principal by threatening to reduce that surplus.