Step Interventions and Market Integration: Tests in the U.S., U.K., and Australian Property Markets

Market integration implies the existence of some long-run equilibrium relationship between markets such that movements in one market are transmitted to movements in another. It is an interesting observation of much of the literature regarding a possible relationship between real estate and stock markets that there is relatively scant attention given to the possible existence of structural breaks and the impact that such breaks may have on tests for market integration. Other research has shown that failure to take into account structural breaks in various macroeconomic data series may have yielded misleading results on cointegration (in particular, unit root tests on individual series). In this article we examine the issue of whether the stock market and real estate markets are stationary or nonstationary in the presence of structural breaks. We adopt the techniques of Perron (1989), Zivot and Andrews (1992), and Perron and Vogelsang (1992). Each of these tests is based on different assumptions and therefore may yield differing results. In general, the results do not support cointegration of domestic property and equity markets or cointegration of markets internationally.     

A note on the long-run benefits from international equity diversification for a Taiwan investor diversifying in the US equity market

This note provides evidence that long-run benefits exist for Taiwanese investors diversifying into the US equity market over the period of January 5, 1995 to February 16, 2001. The evidence is based on tests for pairwise cointegration between the Taiwanese national equity index and the equity index for the US. We use five cointegrating tests, namely, the Multivariate Trace statistic, Harris-Inder approach, the Johansen method, the KSS approach, and the partial structural model of Bai and Perron [Bai, J., & Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 18, 1-22]. The results from these five tests are consistent and suggest that the Taiwanese stock market is not pairwise cointegrated with the US stock market. This finding should prove valuable to individual investors and financial institutions holding long-run investment portfolios in these two markets.     

Do the stock and CDS markets price credit risk equally in the long-run?

In this paper, we examine the existence and stability of the long-run equilibrium relation between the price of credit risk in the stock and CDS markets for a sample of non-financial iTraxx Europe companies during the 2004–2017 period. We show that standard cointegration tests with no breaks frequently fail to detect cointegration. Once we formally account for the breaks in the cointegrating vector, we are able to detect cointegration over the entire sample period for the vast majority of the companies considered. An application of these results to CDS-equity trading shows that the profitability of traditional trading strategies crucially depends on the presence of cointegration and on the stability of the cointegrating vector. Finally, we find that CDS illiquidity factors decrease the likelihood of the stock and CDS market cointegration.     

Changing integration of EMU public property markets

This paper examines the impact of the European Monetary Union (EMU) on European public property market integration. Results indicate that the property markets are long-run independent and show little evidence of short-run relationships prior to the formation of the EMU. However, the degree of interdependence and the extent of convergence among the largest property markets have intensified substantially after the launch of the Euro as the common currency in January, 1999. Moreover, each of the property markets under consideration is endogenous in that none is found to “dominate” the others toward long-run equilibrium. Short-run results indicate substantial interrelationships among the markets after the adoption of the Euro. Finally, the study shows that stock markets, bond markets, and public property markets follow similar convergence patterns.     

Dynamic linkages between emerging European and developed stock markets: Has the EMU any impact?

This paper investigates the short- and long-run behavior of major emerging Central European (Poland, Czech Republic, Hungary, Slovakia), and developed (Germany, US) stock markets and assesses the impact of the EMU on stock market linkages. Evidence of one cointegration vector in both a pre- and a post-EMU sub-period indicates market comovements towards a stationary long-run equilibrium path. Central European markets tend to display stronger linkages with their mature counterparts, whereas the US market holds a world leading influential role. No dramatic post-EMU shock is detected in stock market dynamics. The empirical findings have important implications for the effectiveness of domestic policy decisions, as the emerging Central European states have recently joined the EU and local stock markets may become less immunized to external shocks.     

Equity market integration in emerging Balkan markets

This paper examines long-run relationships among five Balkan emerging stock markets (Turkey, Romania, Bulgaria, Croatia, Serbia), the United States and three developed European markets (UK, Germany, Greece), during the period 2000-2009. Conventional, regime-switching cointegration tests and Monte Carlo simulation provide evidence in favour of a long-run cointegrating relationship between the Balkan emerging markets within the region and globally. Moreover, we apply the Asymmetric Generalized Dynamic Conditional Correlation (AG-DCC) multivariate GARCH model of Cappiello et al. (2006), in order to capture the impact of the 2007-2009 financial crisis on the time-varying correlation dynamics among the developed and the Balkan stock markets. Results show that stock market dependence is heightened, supporting the herding behaviour during the 2008 stock market crash period. Our findings have important implications for international portfolio diversification and the effectiveness of domestic policies, as these emerging markets are exposed to external shocks.     

Chaebol-affiliated analysts: Conflicts of interest and market responses

Some Korean business groups, or chaebols, have a large stake in securities firms that issue analysts’ reports on their member companies. This structure is unique in that industrial companies and securities firms are affiliated and operate within the same group. We investigate the informational content of earnings forecasts, stock recommendations and target prices made by the chaebol-affiliated analysts, using data collected between 2000 and 2008. The chaebol analysts tend to make more optimistic earnings forecasts for the member companies. The mean EPS forecast error (5.36%) of the affiliated analysts for the same chaebol company are significantly larger than that (3.23%) of other chaebol and independent analysts. The chaebol analysts also assign better recommendations by almost one level and set target prices 2.5% higher to the member companies after controlling for company and analyst characteristics. These results are consistent with the hypothesis that chaebol analysts’ reports are biased by conflicts of interest. Stock market reactions do not differ in response to announcements of stock recommendations issued by affiliated vs. non-affiliated analysts. This suggests that capital markets do not recognize the conflicts of interest inherent in chaebol analysts’ reports.     

On the asymmetric relationship between stock market development,energy efficiency and environmental quality: A nonlinear analysis

It has been widely documented in the literature that financial development drives up the impact of CO₂ emissions through increases in real economic activities and the consumption of polluting fossil fuel energy. However, when dealing with stock market development, such upward effects on economic growth, energy efficiency, and carbon emissions seems to give away to a positive impact especially in emerging markets. This paper contributes to this debate by exploring both the symmetric and asymmetric responses of CO₂ emission to changes in stock market development indicators. Using both the panel linear and nonlinear ARDL, our results demonstrate the asymmetric effects of stock market development indicator son carbon emissions in the context of emerging markets. In particular, the long-run elasticities results suggest that positive and negative shocks on stock market indicator decreases environmental quality by increasing carbon emissions. Based on these empirical findings, this study offers some crucial policy implications. Especially, policy makers should implement strong environmental policies in emerging markets economies to reduce carbon emissions of industrial companies without significantly affecting the development of financial markets.     

Volatility spillovers between oil prices and the stock market under structural breaks

This paper employs univariate and bivariate GARCH models to examine the volatility of oil prices and US stock market prices incorporating structural breaks using daily data from July 1, 1996 to June 30, 2013. We endogenously detect structural breaks using an iterated algorithm and incorporate this information in GARCH models to correctly estimate the volatility dynamics. We find no volatility spillover between oil prices and US stock market when structural breaks in variance are ignored in the model. However, after accounting for structural breaks in the model, we find strong volatility spillover between the two markets. We compute optimal portfolio weights and dynamic risk minimizing hedge ratios to highlight the significance of our empirical results which underscores the serious consequences of ignoring these structural breaks. Our findings are consistent with the notion of cross-market hedging and sharing of common information by financial market participants in these markets.     

The Causal Relationship Between Real Estate and Stock Markets

This paper examines the dynamic relationship that exists between the US real estate and S&P 500 stock markets between the years of 1972 to 1998. This is achieved by conducting both linear and nonlinear causality tests. The results from these tests provide a number of interesting observations which primarily show linear relationships to be spuriously affected by structural shifts which are inherent within the data. Linear test results generally show a uni-directional relationship to exist from the real estate market to the stock market. However, these results are not consistent with financial theory and for all sub-samples of the data. In contrast, the nonlinear causality test shows a strong unidirectional relationship running from the stock market to the real estate market, and is consistent in the presence of any structural breaks.     

Monetary policy and stock prices – Cross-country evidence from cointegrated VAR models

This study applies the Cointegrated Vector-Autoregressive (CVAR) model to analyze the long-run relationships and short-run dynamics between stock markets and monetary policy across five developed and three emerging economies. Our main aim is to check whether monetary policy plays an important role for stock market developments. As an innovation, monetary policy enters the analysis from three angles: in the form of a broad monetary aggregate, short-term interest rates and net capital flows. Based on this framework, we analyze whether central banks are able to influence stock market developments. Our findings suggest different patterns and causalities for emerging and industrial economies with the stock markets of the former economies more frequently related to monetary aggregates and capital flows. A direct long-run impact from short-term interest rates on stock prices is only observed for 3 out of 8 economies.     

On the stability of long-run relationships between emerging and US stock markets

While most studies have found no cointegration between emerging and US stock markets, some recent studies do find a long-run relationship exists between these markets. In view of these mixed findings, this study examines the stability of long-run relationships between a number of emerging stock markets and the US stock market using recursive cointegration analysis. The results show that no long-run relationship exists between emerging markets and the US market over most of the sample period throughout 1997. However, we do find clear evidence of cointegration in response to the recent global emerging market crisis in 1997–1998. We conclude that significant crisis events can change the degree of cointegration between international stock markets and, therefore, need to be taken into account in studies of long-run relationships between international stock markets.     

The joint response of stock and foreign exchange markets to macroeconomic surprises: Using US and Japanese data

This paper investigates the joint response of stock and foreign exchange (FX) market returns to macroeconomic surprises, employing a system method of estimation that allows for the cross-country and cross-market interaction for asset returns and risk premia. Using US and Japanese data, we find that US stock markets are asymmetrically responsive to domestic developments in output growth and interest rates but are not influenced by macroeconomic surprises from Japan. The surprise in the FX market seems to affect stock markets in the US and Japan, respectively. In particular, we find that the interest rate surprise in the US and inflation surprise in Japan tend to overstate the impact that these surprises would have on the respective stock market. The impact of the surprises would appear smaller if macroeconomic developments induced by the FX market were incorporated into the model.     

Baltic stock markets and the financial crisis of 2008–2009

This study presents new evidence on stock market integration by investigating the linkages between developed European stock markets and emerging stock markets. We focus on three countries in the Baltic region, namely Estonia, Latvia and Lithuania with particular attention to the recent financial crisis of 2008–2009. The study is motivated by traditional stock market studies of integration, which show that developed stock markets are highly integrated, while emerging markets may be segmented. How integrated these emerging stock markets are in a crisis period with respect to the EUROSTOXX50 stock index is an empirical question investigated in this study. While the results of this study demonstrate that the Baltic stock markets were apparently segmented before the crisis, they were highly integrated during the crisis. The results of the variance decomposition analysis show that a large proportion of the forecast variance of the Baltic stock markets can be explained by the EUROSTOXX50 during the crisis. The results from the quantile regressions demonstrate that during the crisis the returns of the lowest quantile were most sensitive to the EUROSTOXX50 stock index. All these results imply less diversification benefits during crises when investors would need them the most.     

Volatility dependences of stock markets with structural breaks

We develop a Vector Heterogeneous Autoregression model with Continuous Volatility and Jumps (VHARCJ) where residuals follow a flexible dynamic heterogeneous covariance structure. We employ the Bayesian data augmentation approach to match the realised volatility series based on high-frequency data from six stock markets. The structural breaks in the covariance are captured by an exogenous stochastic component that follows a three-state Markov regime-switching process. We find that the stock markets have higher volatility dependence during turmoil periods and that breakdowns in volatility dependence can be attributed to the increase in market volatilities. We also find positive correlations between the Asian stock markets, the European stock market, and the UK stock market. The US stock market has positive correlations with all other markets for most of the sample periods, indicating the leading position of US stock market in the global stock markets. In addition, the proposed three-state VHARCJ model with Dynamic Conditional Correlation (DCC) and break structure under student-t distribution has a superior density forecast performance as compared to the competing models. The forecast models with structural breaks outperform those without structural breaks based on the log predicted likelihood, the log Bayesian factor, and the root mean square loss function.     

The performance of hedge funds and mutual funds in emerging markets

Use of short selling and derivatives is limited in most emerging markets because such instruments are not as readily available as they are in developed capital markets. These limitations raise questions about the value added provided by hedge funds, especially compared to traditional mutual funds active in these markets. We use five existing performance measurement models plus a new asset-style factor model to identify the return sources and the alpha generated by both types of funds. We analyze subperiods, different market environments, and structural breaks. Our results indicate that some hedge funds generate significant positive alpha, whereas most mutual funds do not outperform traditional benchmarks. We find that hedge funds are more active in shifting their asset allocation. The higher degree of freedom that hedge funds enjoy in their investment style might thus be one explanation for the differences in performance.     

Dependences and volatility spillovers between the oil and stock markets: New evidence from the copula and VAR-BEKK-GARCH models

This paper examines the dynamic relationship between the oil market and stock markets from two perspectives: dependence between the crude oil market (WTI) and stock markets of the US and China, and volatility spillovers between them during 1991–2016. We further analyze structural breaks of market dependences and consider the extent of their influence on such relationships. Our vine-copula results show that the dependences between the three paired markets, WTI-US, WTI-China and US-China, vary dynamically across the six identified structural break periods. In particular, the dependence between WTI-US is stronger and more volatile than that between WTI-China during most of the periods. The dependence between US-China remains at a lower level in the earlier periods, but increases in the final period. Our VAR-BEKK-GARCH results demonstrate distinctive volatility spillovers across these periods, with varying directionality, in response to the structural changes. Overall, our results indicate that the oil market stimulates rapid and continual fluctuations in market dependences, which become manifest most acutely in the aftermath of the Financial Crisis of 2007–08, demonstrating the increasing interdependence between the oil and stock markets. Further, the growing influence of China on the dynamics of these relationships, in the period following the Great Recession, presents evidence that it begins to assume an increasingly important role in global economic recovery.     

Testing for international equity market integration using regime switching cointegration techniques

Using MSCI total return index data, this paper analyses the degree of international equity market integration using modern cointegration techniques. The existence of a long run equilibrium across equity markets is important since it implies a violation of weak form market efficiency. Short run deviations away from equilibrium can be expected to reverse, thereby implying a degree of market predictability. This analysis adds to the existing literature by considering a regime switching cointegration relationship that allows for multiple structural breaks over time. The analysis provides scant evidence in favour of market integration with a single regime treatment. There is, however, significant evidence to support a two-regime Markov switching long-run equilibrium relationship that has evolved since the 1970s.     

Excess stock returns and news: evidence from European markets

This paper aims at decomposing the forecast error variance of excess returns in five major European stock markets into the variance of news about future excess returns, dividends and real interest rates. Special emphasis is given on the issue of stationarity and structural breaks in the unconditional mean of dividend yields and their implications for variance decompositions. Empirical results indicate that in some markets the dividend yield is subject to structural breaks in the mean. Evidence from Monte Carlo simulations suggests that this kind of structural breaks cause small-sample bias in variance decompositions of a magnitude comparable to bias introduced by unit roots. Our results constitute a warning about return decompositions that, in particular, use variables in the forecasting equations that may be nonstationary or contain a structural break.     

The Asymmetric Wealth Effect in the US Housing and Stock Markets: Evidence from the Threshold Cointegration Model

Previous studies commonly use a linear framework to investigate the long-run equilibrium relationship between the housing and stock markets. The linear approaches may not be appropriate if adjustments from disequilibrium are asymmetric in both markets. Nonlinear adjustments are likely to be observed since the two markets respond rather differently to negative shocks where the stock market is more volatile but price rigidity is found in the housing market. In this paper, we firstly propose two hypotheses on the long-run equilibrium relationship of the US housing and stock markets, and then employ the threshold cointegration model to investigate the potential asymmetric relationships between the two markets. Our empirical results reveal that cointegration exists among the markets, but adjustments toward its long-run equilibrium are asymmetric. Further evidence points out that a rapid mean reversion occurs in one regime where the stock price outperforms the housing price, and no significant reversion is found in the other regime, supporting the hypothesis of the existence of an asymmetric wealth effect among the two markets in the US. Furthermore, evidence from the asymmetric vector error correction model shows that significant error corrections toward the equilibrium exist in the short run only when the stock price exceeds the real estate price by the estimated threshold level, reassuring the finding of the asymmetric wealth effect.