The influence of cultural distance on the volatility of the international stock market

Along with the development of cultural dimensions and cultural distance, the influence of cultural variables on the stock market is attracting more and more attention. In this study, we propose an improved gravity model to examine the relationship between culture and the volatility of the international stock market. Firstly, based on Hofstede's cultural dimensions theory, a model of the impact of cultural dimensions on the volatility of the national stock market is presented. Secondly, cultural distance is incorporated into the extended gravity model. Then, models of the impact of cultural distance on fluctuations in the international stock market and on foreign securities investment are proposed. Finally, the results of case studies using samples of national stock market indices indicate that different cultural dimensions have different influences on the volatility of national stock markets. The smaller the cultural distance between countries, the more similar the level of volatility in those countries' stock markets. Greater cultural similarity promotes increased securities investment between countries.     

Improving market timing of time series momentum in the Chinese stock market

ABSTRACT

This paper is the first study to present firm-level evidence that the time-series momentum (TSMOM) strategies with look-back-period k of 10 to 200 days outperform the buy-and-hold strategy (BH) on individual stocks in the Chinese stock market. We document that the optimal k* generating the best performance is different across assets and varies over time. We hence propose a model to predict the asset-specific and time-dependent k*, and examine the performance of the TSMOM strategies with the predicted k*. Our analysis shows that using the time-varying predicted k* substantially improves the predictability of the TSMOM strategies. Our new model and findings shed the light on trading strategy for both academia and applied investment practitioners.     

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.     

Information asymmetry,cluster trading,and market efficiency: Evidence from the Chinese stock market

This study investigates the effect of asymmetry information and illiquidity related to cluster trading on information integration efficiency in the Chinese stock market. The results show that information asymmetry and illiquidity related to cluster trading both negatively affect market efficiency in the Chinese stock market. While the effect of information asymmetry on market efficiency dominates in the informational period, the effect of illiquidity related to cluster trading dominates in other periods, when trading is less concentrated. Noise trading has a positive effect on market efficiency by greatly reducing the illiquidity related to cluster trading; however, its effect on information asymmetry is not significant. Our results provide insight into investors’ trading strategies.     

Crude oil and BRICS stock markets under extreme shocks: New evidence

In this paper, we propose an extreme Granger causality analysis model to uncover the causal links between crude oil and BRICS stock markets. Instead of analyzing the average causal relationship, as is usually done, we first decompose the data into three cumulative components and investigate the causality between different combinations of extreme positive, extreme negative and normal shocks. These types of combinations can describe all facets of the interactions between crude oil and BRICS stock markets, especially under extreme shocks. In contrast to the results obtained by the traditional Granger causality test, our empirical findings demonstrate that the effect of oil price changes on the stock markets is stronger under extreme circumstances than under normal circumstances. Furthermore, large upward or downward oil price changes have an asymmetric impact on extreme upward or downward stock price changes. Finally, robustness checks verify the rationality and validity of the extreme Granger causality analysis.     

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.     

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.     

The effect of financial ratios, firm size, and cash flow from operating activities in the interim report to the stock return

The objective of this study is to examine the value relevance of accounting information in explaining stock return. The study uses profitability, liquidity, leverage, market ratio, size and cash flow as proxies of accounting information. Cumulative abnormal return and market adjusted return are used as stock return variables. The samples of the study are listed companies in manufacturing industries that actively trading between 2003-2006 in Indonesia Stock Market. The study finds that profitability, turnover and market ratio has significant impact to the stock return. The result consistent with previous studies Hobart （2006）, Utama and Santoso （1998） and Restraningsih （2007）.     

The impact of news,oil prices,and global market developments on Russian financial markets1

This paper analyses the impact of news, oil prices, and international financial market developments on daily returns on Russian bond and stock markets. First, regarding returns, energy news affects returns, while news from the war in Chechnya is not significant. Market volatility does not appear to be sensitive to either type of news. Second, a significant effect of the growth in oil prices on Russian stock returns is detected. Third, the international influence on Russian financial markets depends upon the degree of financial liberalization. The higher the degree of financial liberalization, the stronger is the impact of US stock returns on Russian financial markets. In addition, banking reform and interest rate liberalization efforts seem to dictate the globalization of Russian stock markets, while it is the progress in liberalizing securities markets and non‐bank financial institutions that matters more for the globalization of Russian bond markets.     

On the impact of leverage constraints on asset prices and trading volume

Abstract. Researchers have used stylized facts on asset prices and trading volume in stock markets (in particular, the mean reversion of asset returns and the correlations between trading volume, price changes and price levels) to support theories where agents are not rational expected utility maximizers. This paper shows that this empirical evidence is in fact consistent with a standard infinite horizon – perfect information – expected utility economy where some agents face leverage constraints similar to those found in todays financial markets. In addition, and in sharp contrast to the theories above, we explain some qualitative differences that are observed in the price-volume relation on stock and on futures markets. We consider a continuous-time economy where agents maximize the integral of their discounted utility from consumption under both budget and leverage constraints. Building on the work by Vila and Zariphopoulou (1997), we find a closed form solution, up to a negative constant, for the equilibrium prices and demands in the region of the state space where the constraint is non-binding. We show that, at the equilibrium, stock holdings volatility as well as its ratio to stock price volatility are increasing functions of the stock price and interpret this finding in terms of the price-volume relation. We would like to thank the editor and two anonimous referees for valuable substantive comments. Our gratitude also to Franklin Allen, Kerry Back, Domenico Cuoco, Xavier Freixas, Sanford Grossman, Michel Habib, Lutz Hendricks, Richard Kihlstrom, Fernando Restoy, Mary Thomson, Jean-Luc Vila, participants to seminars at Birkbeck College, Carnegie-Mellon, Columbia, ESSEC, HEC, IAE, INSEAD, London Business School, London School of Economics, McGill, Michigan, National University of Singapore, Pompeu Fabra, North Carolina, Washington-St-Louis, Wharton, the Jornadas de Economía Financiera BBV, and the Meetings of the Society for Economic Dynamics and Control and the American Finance Association. Special thanks are due to Süleyman Basak for his enthusiastic support and many helpful suggestions. The usual disclaimer applies. We gratefully acknowledge the support of the BBV and Caja de Madrid Foundations and CREF (both authors) and of the Spanish Ministry of Education under DGICYT grant no. PB93-0388 (first author).     

R&D, risks and overreaction in a market with the absence of the book-to-market effect

Prior studies document that the book-to-market (BM) effect is absent in the Taiwan stock market. Using Taiwanese data covering from 1991 to 2006, we show that, after controlling for the size effect and the Fama and French's (1993) risk factors, the BM effect only exists for those firms with low R&D intensity essentially because these stocks suffer less from investors’ underreaction to R&D investment. The BM effect arises primarily from fundamental reversals acting as a proxy for investors’ overreaction.     

Investment behavior and the biased perception of limited loss deduction in income taxation

We use a laboratory experiment to study the extent to which investors’ choices are affected by limited loss deduction in income taxation. We first compare investment behavior in the no tax baseline to a tax control setting, in which the income from investments is taxed. We find that investors significantly reduce their risk-taking as predicted by theory. Next we compare the baseline investment choices to choices under three different types of income taxation. We observe that risk-taking is significantly increased with partial and with capped loss deduction, but is unaffected by a tax system that allows no loss deduction. Since in all these treatments the after tax outcomes of the prospects were identical, we conjecture that investors have a positively biased perception of partial and capped loss deduction that promotes their willingness to take risks.     

Consumption, Wealth, and Indebtedness in the Context of Uncertainty: The Consumption Function Meets Portfolio Theory

The objective of this paper is to provide a sound theoretical framework for the empirical analysis of consumer indebtedness, by integrating Portfolio theory with the Life-Cycle hypothesis (LCH) model of consumption. Modern versions of this LCH theory almost always assume that utility is additive over time, but in this study, the multiplicative Cobb–Douglas function is used. The new synthesis also explains the stochastic properties of consumption more fully and clearly than previous studies, in particular the uncertainty arising from rates of return on risky assets. The new theory will also help to improve the explanation of the surprise changes in consumption because these sources of risk are incorporated explicitly into the analysis.     

Income inequality,consumer debt,and prudential regulation: An agent-based approach to study the emergence of crises and financial instability

The paper presents an agent-based model to study the interaction between income inequality and prudential regulations in a macroeconomic framework characterized by consumer debt. Simulation results show that income inequality is detrimental to both macro and financial stability as it leads to higher credit demands, higher unemployment rates, economic volatility, and financial fragility. Besides the importance of consumers' leveraging, deleveraging externalities are found to be equally important for the emergence of crises and financial fragility because of the liquidity risk they entail. Minsky moments are also observed; they are related to consumers' prudential behavior and their beliefs about the macroeconomic conditions. Concerning the policy relevance of our investigation, simulations allow us to highlight that the effectiveness of prudential regulation depends on the phase of the business cycle and that there is not a “one-size-fits-all” regulation. This study emphasizes that regulatory constraints should take into account the features of the economic agents, such as the distribution of income and their willingness to borrow, in addition to the features of the financial sector.     

Time-varying comovement and changes of comovement structure in the Chinese stock market: A causal network method

The driving force for the comovement in stock returns is a long-standing debate between classical asset pricing theory and behavioral finance theory. It has become critically important recently for understanding systemic risk and risk contagion in the market. In this study, we propose complex networks enabled new methods to measure the causal comovement of individual stocks and the comovement structure of the market, which facilitate the examination of all kinds of hypotheses of comovement theories in a unified framework. Using a sample of the Chinese stock market from Jan. 1, 2006 to Dec. 31, 2016, we find that the degree of comovement generally intensifies over time, with a drastic increase from 2011 to 2015, while the comovement structure of the market changes with different market situations. Most importantly, our study reveals the driving force of causal comovement among individual stocks; that is, sentiment-based factors related to the market index indeed induce excess causal comovement in returns beyond that can be justified by fundamental factors including beta coefficient, book-to-market ratio, liquidity, profitability and volatility. Our study also reveals the determinants of comovement structure, which are attributable to the change of investors' behaviors in different periods. It turns out that investors in the Chinese stock market care about risk-return relationship in normal periods, while they seem to care only about risk in crisis periods.     

Global predictive power of the upside and downside variances of the U.S. equity market

Given the pace of increasing globalization and the pioneering role of the U.S. economy, we anlayze the global impact of the U.S. equity market’s uncertainty. The asymmetric impact of upside (downside) uncertainty, related with the upward (downward) movements of the underlying assets, has raised substantial concerns recently. We comprehensively analyze the global predictability of the upside and downside variances of the U.S. equity market, implied by S&P-500 calls and puts, respectively. We contribute to the literature on the asymmetric impacts of the upside and downside variances of the U.S. equity market in an international setting. Our study also complements the study on predicting international stock returns. Moreover, substantial economic value can be generated from the perspective of asset allocation. The main channel for the positive (negative) predictability of upside (downside) variance stems from its positive (negative) impacts on international investment, highlighting the leading role of the U.S. economy.     

Acquisition of Information and Share Prices: An Empirical Investigation of Cognitive Dissonance

Abstract. This paper deals with the determinants of agents' acquisition of information. Our econometric evidence shows that the general index of Italian share‐prices and the series of Italy's financial newspaper sales are cointegrated, and the former series Granger‐causes the latter, thereby giving support to the cognitive dissonance hypothesis: (non‐professional) agents tend to buy the newspaper when share prices are high and not to buy it when share prices are low. Instead, we do not find support for the hypothesis that the agents acquire information in order to trade in the stock market: we find no relationship between quantities exchanged in the market and newspaper sales, nor between stock market volatility and newspaper sales.     

Service sharing,profit mode and coordination mechanism in the Online-to-Offline retail market

How does the sharing economy affect the retail industry? This study investigates the impact of service sharing on the decisions and profits of two profit modes in the Online-to-Offline (O2O) retail market. We find that service sharing always improves the profit of the brand supplier as a service demander in both two profit modes, and improves the profit of the offline franchisee as a service provider in the profit-sharing mode under certain circumstances, but always reduces its profit in the non-profit-sharing mode. This is associated with the double marginalisation effect of the non-profit-sharing mode which leads to channel conflicts. Thus, a service-cost sharing mechanism is introduced to coordinate conflicts and achieve a win-win strategy, thereby improving the performance of the entire O2O supply chain.     

R&D, risks and overreaction in a market with the absence of the book-to-market effect

Prior studies document that the book-to-market (BM) effect is absent in the Taiwan stock market. Using Taiwanese data covering from 1991 to 2006, we show that, after controlling for the size effect and the Fama and French's (1993) risk factors, the BM effect only exists for those firms with low R&D intensity essentially because these stocks suffer less from investors’ underreaction to R&D investment. The BM effect arises primarily from fundamental reversals acting as a proxy for investors’ overreaction.     

The existence, uniqueness, and optimality of the terminal wealth depletion time in life-cycle models of saving under uncertain lifetime and borrowing constraint

In life-cycle models of saving under uncertain lifetime and borrowing constraint, the consumer's wealth must be depleted before the maximum lifetime. This paper investigates the existence, uniqueness, and optimality of the terminal wealth depletion time. It is proved that the optimal terminal wealth depletion time, if such exists, must be unique. If the equation that determines the optimal terminal wealth depletion has multiple solutions, then the location of the optimal solution will depend on the configuration of the solutions. An optimality test is developed to verify whether a candidate solution for the terminal wealth depletion time is indeed optimal. The paper introduces a method new to economics, the Dubovitskii-Milyutin adjoint equation, to analyze the properties of the optimal control problem.