Further evidence on causality and feedback across international stocks

This study extends the previous research on interdependence of international stock markets by using Geweke's (1982) causality test on seventeen stock market indices. The impact of the stock market crash of October 1987 on other national stock markets is investigated by disaggregating the data into pre- and post-crash periods. Direction of causality and feedback is studied using standard causality tests. The results indicate very few stock markets (namely, the U.K. and the U.S.A.) influence other markets significantly. Almost all markets react to other markets' past and present movements. Traditional major markets (Japan, France, and Canada) do not seem to be influential at all.     

An empirical test of individual and institutional trading patterns in Japan, Hong Kong, and Taiwan

We examine the pattern of daily stock returns in Japan, Hong Kong, and Taiwan. Our results support the information-processing hypothesis: Average returns on Monday are lower than on other days of the week, particularly when the previous trading day’s return is negative. Our results also support the positive-feedback-trading hypothesis: Daily returns exhibit positive autocorrelation, particularly when the previous trading day’s return is positive. Further analysis reveals that institutional investors (Japan), individual investors (Taiwan), or both (Hong Kong) can cause these patterns. Our findings are consistent with the relative importance of institutional and individual investors in each of these markets. We thank three anonymous reviewers for helpful comments and suggestions.     

The outbreak of COVID-19 and stock market liquidity: Evidence from emerging and developed equity markets

The outbreak of the novel corona virus has heightened concerns surrounding the adverse financial effects of the outbreak on stock market liquidity and economic policies. This paper contributes to the emerging strand of studies examining the adverse effects of the virus on varied aspect of global markets. The paper examines the causality and co-movements between COVID-19 and the aggregate stock market liquidity of China, Australia and the G7 countries (Canada, France, Italy, Japan, Germany, the UK and the US), using daily three liquidity proxies (Amihud, Spread and Traded Value) over the period December 2019 to July 2020. Our empirical analysis encompasses wavelet coherence and phase-differences as well as a linear Granger causality test. Linear causality test results suggest that a causal relationship exists between the number of cases of COVID 19 infections and stock market liquidity. To quantitatively examine the degree of causality between COVID-19 outbreak and stock market liquidity, we employ the continuous wavelet coherence approach with results revealing the unprecedented impact of COVID-19 on stock market liquidity during the low frequency bands for countries that were hard hit with the COVID-19 outbreak, i.e., Italy, Germany, France, the UK and the US. Further, evidence shows that there is a heterogeneous lead-lag nexus across scales for the entire period of the study.     

International transmission of stock price movements: Evidence from the U.S. and five Asian-Pacific markets

Using a vector autoregressive analysis, this paper examines the structure of international transmissions in daily returns for six national stock markets— the U.S., Japan, Hong Kong, Singapore, Taiwan, and Thailand. Our results generally indicate that (1) the degree of interdependence among national stock markets has increased substantially after the 1987 stock market crash, (2) the U.S. market plays a dominant role of influencing the Pacific-Basin markets, (3) Japan and Singapore together have a significant persistent impact on the other Asian markets, and (4) the markets in Taiwan and Thailand are not efficient in processing international news.     

International market links and volatility transmission

This paper gauges volatility transmission between stock markets by testing conditional independence of their volatility measures. In particular, we check whether the conditional density of the volatility changes if we further condition on the volatility of another market. We employ nonparametric methods to estimate the conditional densities and model-free realized measures of volatility, allowing for both microstructure noise and jumps. We establish the asymptotic normality of the test statistic as well as the first-order validity of the bootstrap analog. Finally, we uncover significant volatility spillovers between the stock markets in China, Japan, UK and US.     

短期内机构投资者行为和股票价格的互作分析

研究短期内机构投资者行为与不同规模公司股价的相互影响.在机构投资者对股价的影响方面,阐释并论证了机构持股比例增量与当日股价的正相关关系,指出机构对大盘股的影响强于对小盘股的影响.机构资金流入(流出)的定性信息本身对股价上升(下降)有额外的促进作用;相对于撤资而言,股价对机构的注资行为更敏感;而对小盘股,该不对称性更加明显.此外,当日收益率和前三天内的机构资金流入存在负相关关系,且该种负关系在大盘股中的表现比在小盘股中更为明显.在股价对机构投资者行为的反馈作用方面,以实证结果阐明了股价上升(下降)的信息本身可对机构行为有缓冲作用,且该作用对小盘股影响大于对大盘股的影响.研究显示,在短期内机构更倾向于动量交易,这在小盘股中尤为明显.三天前收益率对当日机构行为的影响颇为明显,且与一天前的收益率的影响力相当;相对而言,两天前收益率对机构行为的影响不甚明显.     

Efficient predictability of stock return volatility: The role of stock market implied volatility

This study examines the predictability of stock market implied volatility on stock volatility in five developed economies (the US, Japan, Germany, France, and the UK) using monthly volatility data for the period 2000 to 2017. We utilize a simple linear autoregressive model to capture predictive relationships between stock market implied volatility and stock volatility. Our in-sample results show there exists very significant Granger causality from stock market implied volatility to stock volatility. The out-of-sample results also indicate that stock market implied volatility is significantly more powerful for stock volatility than the oil price volatility in five developed economies.     

The impact of China's stock market reforms on its international stock market linkages

This paper investigates how China's stock market reforms have affected the stock market linkages between China and Korea, Japan and the US respectively. We firstly use a 4 × 4 asymmetric GARCH-BEKK model and a series of likelihood ratio tests to uncover China's regional and global linkages between 1992 and 2010 and during three sub-periods representing the stages of the Chinese reforms. The results show that Chinese stock market is linked to these overseas markets and the reforms permit spillovers to these markets from China. The subsequent regression analyses of the time-varying conditional correlations, in the presence of growing economic integration, exchange rate risk and financial turbulence, further indicate that the interdependences between China and the regional markets increase due to the implementation of liberalisation policies. However, the correlation between China and the global market remains weak even though this correlation responds positively to the institutional reforms on China's stock market additionally.     

Does oil price variability affect the long memory and weak form efficiency of stock markets in top oil producers and oil Consumers? Evidence from an asymmetric MF-DFA approach

This study examines the asymmetric multifractality and the market efficiency of the stock markets in the countries that are the top crude oil producers (USA, KSA, Canada and Russia) and consumers (Brazil, China, India, and Japan) using an asymmetric multifractal detrended fluctuation analysis (A-MF-DFA) method. The results show evidence of an asymmetric multifractal nature for all markets. Moreover, the multifractality is stronger in the upward movement of the market returns, except in China. The degree of efficiency of the stock markets is shown to be time-varying and experienced a decrease during the 2008 global financial crisis (GFC), but an upside trend occurred during the recent oil price crash followed a significant decline during COVID-19. The stock markets have an anti-persistent feature during GFC and COVID-19, whereas they exhibit a long-term persistent feature during oil price crash. More interestingly, the efficiency of the stock markets of crude oil producers is lower in general than that of oil consumers. Furthermore, the efficiency of the stock market is lower in the downward movement of the market returns than in the upward movement. Asymmetry and oil price uncertainty index are the key driver of the stock markets and can serve as predictor of the stock market dynamics of top oil producers and top oil consumers particularly during COVID-19 and oil price crash.     

Jump Interdependencies: Stochastic linkages among international stock markets

This study investigates the volatily jump contagion among the Asian, European (Germany, UK, & France) and US markets. In particular, it examines the stochastic linkages among the international stock markets and analyzes the self and cross-excitation of jumps. The discontinuities in the stochastic volatility of each market are identified and their structural inter-dependencies are analyzed. Our empirical results imply that negative jumps from the USA and Europe are transmitted to the domestic Asian markets, while positive jumps are majorly from the regional markets. Results also imply that the cross-market linkages vary with respect to markets and regimes. Our results have implications for risk management, investment and hedging decisions.     

Dynamic relationship between stock prices and exchange rates for G-7 countries

There are two major findings from our time-series estimations. First, we find that there is no long-run significant relationship between stock prices and exchange rates in the G-7 countries. This result interfaces with Bahmani-Oskooee and Sohrabian’s (1992) finding, but contrasts with the studies that suggest there be a significant relationship between these two financial variables. Our second finding is that the short-run significant relationship has only been found for one day in certain G-7 countries. For instance, currency depreciation often drags down stock returns in the German financial market, but it stimulates the Canadian and UK markets on the following day. However, an increase in stock price often causes currency depreciation the next day in Italy and Japan. In addition, we also find that the record of stock price and the value of the dollar cannot be depended on when predicting the future in the US, either in the short-run or long-run.     

Founders' Characteristics,Venture Capital Syndication and Governance in Entrepreneurial IPOs

Using a unique sample of 444 entrepreneurial IPOs in the UK and France this paper examines links between founders' characteristics, venture capital (VC) syndication and the development of effective boards in entrepreneurial firms. It argues that VC-backed IPOs suffer from two sets of agency problems which are related to principal-agent and principal-principal relationships between the founders and members of the VC syndicate. The empirical evidence shows that there is a curvilinear relationship between the intensity of founders' external ties and VC syndication. Founders' retained share ownership is negatively associated with VC syndication. We also find that in syndicated IPOs there is a higher involvement of passive private equity firms and “business angels” investing alongside VC firms, both in terms of their number and equity presence. VC-syndicated IPOs have more independent boards than IPOs with no VC involvement. Board independence is negatively associated with founders' retained equity. These results are consistent with the assumption that board independence is used to mitigate agency costs associated with VC involvement in IPO firms. Our findings also identify significant differences in governance characteristics between the UK and France. While French IPOs have less independent boards, they involve more VC backing in general and syndicated VC funding in particular, than UK IPOs.     

Predictability of tail risks of Canada and the U.S. Over a Century: The role of spillovers and oil tail Risks☆

We examine the tail risk spillovers between Canada and U.S. stock markets using over a century data, and also account for the roles of tail risks of other advanced economies (France, Germany, Japan, Italy, Switzerland, and the UK) and oil-market tail risk. We use the “best” tail risk measure obtained from different variants of the Conditional Autoregressive Value at Risk (CAViaR) model developed by Engle and Manganelli (2004) in the predictive model and compare its performance with that of an AR(1) benchmark model. We find strong evidence of risk spillovers between the two stock markets. We find contrasting evidence for the predictability of oil-market tail risk, with positive predictability in case of the net oil exporter and negative in case of the net oil importer. Further results using tail risks of other advanced economies (combined) support possible diversification potential for Canadian stocks in the presence of market risks of advanced economies other than the U.S. Our findings have implications for investors and are robust to various out-of-sample forecast horizons, alternative data frequencies, data splits, and 1% and 5% VaRs.     

Risk spillovers and portfolio management between developed and BRICS stock markets

This paper investigates spillover effects and portfolio diversification between the four major developed stock markets (USA, Europe, Japan and Asia) and five of the most important emerging stock markets known as the BRICS (Brazil, Russia, India, China and South Africa). To this end, we apply the multivariate DECO-FIEGARCH model to daily spot indices during the period 1998–2016. The results reveal a significant and asymmetric long memory process for both the developed and the BRICS markets. Moreover, we find a significant variability in the time-varying conditional correlations between the considered markets during both bull and bear markets, particularly from early 2007 to summer 2008. Additionally, we analyze the optimal portfolio weights, time-varying hedge ratios and hedging effectiveness based on the estimates of the model. The results underline the importance of overweighting the optimal portfolios with stocks from the developed countries over those from the BRICS. Finally, we assess the practical implications for mixed developed-BRICS stock portfolios, based on finding strong evidence of diversification benefits and downside risk reductions that confirm the usefulness of using developed market stocks in the BRICS stock portfolio risk management.     

Influence of institutional investors' participation on flipping activity of Malaysian IPOs

This paper examines the influence of institutional investors’ participation on flipping activity of Malaysian IPOs. Measured as the percentage of trading volume on the first trading day against the total number of shares offered, flipping is the quickest way to gain huge profits from IPOs. However, excessive flipping activity has significant potential to create artificial downward pressure on the price of IPOs. One way to reduce such an adverse effect is by strategically allocating a larger proportion of new shares to institutional investors. This is because institutional investors are normally assumed to be long-term investors. As such, they are less likely to flip their allocated IPOs in the immediate aftermarket. The long-term investment argument is consistent with institutional investors’ preference for a steady income stream in the form of dividends. Drawing upon this argument, the greater participation of institutional investors during an IPO is expected to be an effective strategy to control aggressive flipping activity. The Malaysian IPO market offers an excellent opportunity to examine this hypothesis because data regarding the allocation of new shares to institutional investors can be traced conveniently through a type of IPO referred to as “private placement”. Based upon an examination of 248 IPOs listed on Bursa Malaysia between January 2000 and December 2012, this study finds a negative relationship between institutional investors’ participation and flipping activity. This result lends strong support to the argument concerning the effectiveness of institutional investors’ participation in controlling flipping activity in the Malaysian IPO market.     

COVID-19 and asymmetric volatility spillovers across global stock markets

In this study, I improve the assessment of asymmetry in volatility spillovers, and define six asymmetric spillover indexes. Employing Diebold-Yilmaz spillover index, network analysis, and my developed asymmetric spillover index, this study investigates the time-varying volatility spillovers and asymmetry in spillovers across stock markets of the U.S., Japan, Germany, the U.K., France, Italy, Canada, China, India, and Brazil based on high-frequency data from June 1, 2009, to August 28, 2020. I find that the global markets are well connected, and volatility spillovers across global stock markets are time-varying, crisis-sensitive, and asymmetric. Developed markets are the main risk transmitters, and emerging markets are the main risk receivers. Downside risk dominates financial contagion effects, and a great deal of downside risk spilled over from stock markets of risk transmitters into the global markets. Moreover, during the coronavirus recession, the total degree of volatility spillover is staying at an extremely high level, and emerging markets are the main risk receivers in the 2020 stock markets crash.     

London calling: Nonlinear mean reversion across national stock markets

This paper revisits empirical evidence of mean reversion of relative stock prices in international stock markets. We implement a strand of univariate and panel unit root tests for linear and nonlinear models of 18 national stock indices from 1969 to 2016. Our major findings are as follows. First, we find strong evidence of nonlinear mean reversion of the relative stock price with the UK index as the reference, calling attention to the stock index in the UK, but not with the US index. Our results imply an important role of the local common factor in the European stock markets. Second, panel tests yield no evidence of linear and nonlinear stationarity when the cross-section dependence is considered, which provides conflicting results from those of the univariate tests. Last, we show how to understand these results via dynamic factor analysis. When the stationary common factor dominates nonstationary idiosyncratic components in small samples, panel tests that filter out the stationary common factor may yield evidence against the stationarity null hypothesis in finite samples. We corroborate this conjecture via extensive Monte Carlo simulations.     

Institutional Ownership, Strategic Choices and Corporate Efficiency: Evidence from Japan

Based on the tenets of capital allocation systems theory, stewardship theory, and 'going concern' concept of business, institutional ownership is proposed to affect corporate productivity, both directly and indirectly, in large Japanese corporations through a set of four firm-level choices: product/market development, R&D intensity, capital intensity, and leverage. Using data on 118 corporations drawn from five industry sectors in Japan, and applying a partial mediation technique, this study tests an integrated, causal model of the relationships among these variables. Results show mixed support for the model. No direct relationship between institutional ownership and productivity is observed. However, institutional ownership affects productivity indirectly through R&D intensity and leverage. Although product/market development and capital intensity also affect productivity, institutional ownership has no significant relationship with them.     

Governance and stock market performance

This study uses international asset pricing models to investigate the link between the quality of government institutions and the performance of global stock markets. The results demonstrate a significant positive association between stock market performance measures and the quality of the institutional environment. Performance measures examined for the cross-section of countries were the average monthly stock index excess returns and the Sharpe ratio. All measures of performance were adjusted for global and local risk factors known to explain their international variation. The quality of governance is also found to be negatively associated with stock market total risk and idiosyncratic risk, consistent with the notion that stable institutions are linked to reduced variations in equity returns. These findings suggest countries with better-developed governance systems have stock markets with higher returns on equity and lower levels of risk. The results lend support for the view that a precondition for financial market development is the improvement of the institutions which govern the process of exchange.     

Evaluating inflation targeting based on the distribution of inflation and inflation volatility

In this paper the Financial Development Index (FDI) is used to rank 57 of the world's leading financial systems. Its calculation is based on the following 7 economic pillars: (1) Institutional environment, (2) Business environment, (3) Financial stability, (4) Banking financial services, (5) Non-banking financial services, (6) Financial markets, and (7) Financial access. Pillar (4) is constructed from bond markets, stock markets, foreign exchange markets, and derivative markets. Pillar (5) includes a country's IPO activity, namely the IPO market share, IPO proceeds amount, and IPOs share of world IPOs. The stock market index provides a short-term account of financial activities, whereas the FDI provides a long-term broader account of the financial structure and health of an economy. As the performance and success of a given monetary policy would less likely be judged on short-term dynamics, it seems sensible to use the annual FDI as one of several economic and country attributes in a policy evaluation of Inflation Targeting. The paper offers a potential outcomes analysis of the impact of inflation targeting on inflation and inflation volatility, and focuses on advanced economies that adopt ⿿inflation targeting⿿ as a formal monetary policy. In order to deal with the counterfactual question, namely what would be the inflation rate for an adopting country had it not adopted this policy, the paper offers a new matching technique that subsumes the traditional propensity scores methods as a special case. The paper has different proposals for assessing ⿿matching⿿ based on the whole distribution of any ⿿scores⿿. Additionally, the paper goes beyond the Average Treatment Effect (ATE) and examines the entire distribution of inflation and its ⿿variability⿿. It is found that the adoption of inflation targeting has helped lower inflation (not just the mean) for the targeting countries. However, it is shown that exact numerical quantification of this policy effect is as highly subjective as choosing ideal social welfare functions. The paper also finds no evidence of a larger gain for ⿿late adopters⿿ of inflation targeting. As for inflation variability, there is some robust evidence of small and often statistically insignificant reduction in variability due to targeting.