What drives the liquidity premium in the Chinese stock market?

This paper examines the dynamics of the liquidity premium in the Chinese stock market by adopting a multivariate decomposition approach to measure the individual contributions of various driving forces of the premium (such as firm size, idiosyncratic volatility, and market liquidity betas). By employing a wide range of liquidity measures, we show that liquidity premium is generally significant in the Chinese stock market. Furthermore, this premium is increasing in recent years starting from 2011; this observation is different from the United States market, in which the premium has declined over the years. Moreover, the multivariate decomposition approach highlights several asset pricing factors as the main driving forces of the premium. Based on the Amihud liquidity measure, the decomposition approach indicates that the size factor contributes 45–65% to the liquidity premium. However, the measure based on turnover suggests that idiosyncratic volatility accounts for at least 60% of the liquidity premium. In contrast, the global market liquidity beta does not significantly contribute to the premium. However, there is some evidence that the local market liquidity beta has become more significant in its impact on the premium during the period from 2011 to 2015. Our results imply that the findings on the liquidity premium in the Chinese stock market could be sensitive to the liquidity measure used and period of analysis.     

Should the monetary policy rule be different in a financial crisis?

This article reviews the finding that standard loss functions in output and inflation are higher during discretionary periods than in periods during which monetary policy is described by a rule, such as the Taylor rule. It shows that the finding is consistent with earlier research, but argues that we really do not know if the Taylor rule would have improved performance during the recent financial crisis. The article then considers modifications of policy rules to deal with changes in interest rate spreads, credit aggregates and banks׳ balance sheets.     

Does weather impact the stock market? Empirical evidence in Taiwan

Psychological evidence suggests close relationships between weather and mood. Individuals feel in a more positive frame of mind on sunny than cloudy days. This study applies GJR–GARCH to examine the relationship among weather, stock returns and risk in Taiwan from 2001 to 2007. The empirical results indicate that precipitation does not significantly influence stock return and risk; likewise, sunshine hours and temperature insignificantly influence stock return, but do significant impact stock risk. These findings demonstrate that weather effect really exist in stock market, and can help investors in making innovative investment and management decisions.     

Forecasting expected shortfall: Should we use a multivariate model for stock market factors?

Is univariate or multivariate modeling more effective when forecasting the market risk of stock portfolios? We examine this question in the context of forecasting the one-week-ahead expected shortfall of a stock portfolio based on its exposure to the Fama–French and momentum factors. Applying extensive tests and comparisons, we find that in most cases there are no statistically significant differences between the forecasting accuracy of the two approaches. This result suggests that univariate models, which are more parsimonious and simpler to implement than multivariate factor-based models, can be used to forecast the downside risk of equity portfolios without losses in precision.     

Risk reporting and stock return in the UK: Does market competition Matter?

This study examines the extent to which market competition influences risk reporting practice. It also explores how market competition affects the usefulness of risk reporting. The automated textual analysis measures the level of risk reporting [how much to report] and its tone [how it is reported] of UK FTSE 350 firms. The abnormal stock return is used as a proxy for the usefulness of risk reporting. In contrast to the proprietary cost hypothesis, our results indicate that the level of risk reporting is a positive function of market competition. Besides, UK firms are likely to disseminate more (less) negative (positive) news about their risks when market competition increases. However, after examining the informativeness of this reporting, we provide evidence that the level of reported risk information does not significantly enhance the abnormal stock returns of UK firms. Nevertheless, the tone of the reported risks carries incremental information indicative of a firm’s abnormal stock return, especially when market competition decreases. The findings suggest that firms are likely to alleviate their proprietary costs by framing their reporting of risk information in a way that deters potential competitors from entering their market and that market competition diminishes the perceived informativeness of such reporting. The results provide implications for investors as they should not acknowledge the disclosure of higher risk information when asking for more corporate transparency, as it lacks informativeness. Besides, policymakers may impose extra compulsory requirements on the UK firms to avoid reporting overly optimistic risk news to protect investors and avoid the adverse effects of this reporting.     

Is the government in danger of inflating a housing bubble?

Despite very strong inflation prior to the financial crisis, the correction in UK house prices has been relatively modest and much smaller than those in countries such as the US, Ireland and Spain. The relative resilience of the UK market appears to be a reflection of very tight supply which has effectively put a floor under prices.…     

Does the market perceive a difference in rating agencies?

A frequent and recent topic in the financial press concerns the two major rating agencies, Moody’s and Standard & Poor’s. The reported perception is that Moody’s is less credible. In this study, we determine whether the market shares this perception and whether this perception carries an economic cost. Since there are many features attached to a bond issue that affect its yield, differences in bond rating cannot be tested in isolation. This paper estimates the impact of differences in ratings as well as several other key bond features (call and sinking fund features, and syndication) of public issues of corporate bonds using regression analysis over the period 1986 through 1996. All features tested except the sinking fund option for doubling and tripling the amount of funds retired are found to be significant including the variable measuring the market’s perception of the informational content of ratings from the two rating agencies. Thus, we conclude that the market finds value in the ratings from each agency, but that the value is not symmetrical between the two agencies. There is not enough evidence that the market values one agency over the other.     

Was the 2007 crisis really a global banking crisis?

We argue that the 2007 crisis was not a global banking crisis. Stock prices of banks in emerging countries faced a temporary shock but quickly recovered, while stock prices of banks located in industrial countries remained much lower than before the 2007 crisis. Our results also suggest that stock prices of large banks were affected more during the crisis than those of small banks. We also find that managerial efficiency, loan quality, leverage, and the volume of outstanding loans affect bank stock prices.     

Does the stock market really cause unemployment? A cross-country analysis

This study examines the relationship between the stock market and unemployment in 30 advanced and 11 developing and emerging countries. The results show that the unemployment rate and stock prices are cointegrated in all country groups; further, the causality between stock prices and unemployment appears in all country groups. Specifically, I found a particularly strong and one-way causal direction from stock prices to the unemployment rate in G7 countries. There is a strong bilateral causal relationship between stock prices and unemployment for other advanced countries. However, in the 11 developing and emerging countries, the causality test results indicate a strong Granger causality from unemployment to stock prices. The results for developing and emerging countries suggest that the unemployment rate can help forecast stock prices, but not vice versa. These findings complement existing studies and deliver useful implications for investors and policymakers, and suggest some new lines for future research.     

Does ethics improve stock market resilience in times of instability?

This paper compares the resilience of ethical (Islamic and socially responsible) indexes among five developed (US, UK, Japan, Canada, Australia) and three emerging markets (Brazil, India, South Africa) during the period following the 2008 subprime crisis. It relies on a multivariate CAPM-EGARCH model that accounts for sudden changes in volatility through the application of an iterated cumulative sums of squares (ICSS) algorithm on daily data over the sample period 2008–2014 to model time-varying volatility and ensure reliable estimates. The study confirms the lower systemic risk associated with Islamic indexes during the bearish period and reports that SRI, despite being more subject to systemic risk, offered higher alphas in highly integrated markets, while Islamic indexes performed better in less integrated ones. The evidence also reveals a very limited increase in the models’ predictability power from the integration of sudden changes in volatility into the EGARCH models during the full sample period. This limit is more marked during the bearish sub-period. Our findings have important implications for international investment and portfolio diversification perspectives in times of financial downturn.     

Predictable returns and asset allocation: Should a skeptical investor time the market?

We investigate optimal portfolio choice for an investor who is skeptical about the degree to which excess returns are predictable. Skepticism is modeled as an informative prior over the R²$R^2$ of the predictive regression. We find that the evidence is sufficient to convince even an investor with a highly skeptical prior to vary his portfolio on the basis of the dividend-price ratio and the yield spread. The resulting weights are less volatile and deliver superior out-of-sample performance as compared to the weights implied by an entirely model-based or data-based view.     

Can crude oil drive the co-movement in the international stock market? Evidence from partial wavelet coherence analysis

In this paper, we employ partial- and multiple-wavelet coherence analyses to examine co-movement between international stock markets by considering the influence of crude oil in a time domain perspective. Overall, we find that crude oil is a major factor driving co-movement between international stock markets in the median and long term. However, when considering the oil-importing and oil-exporting countries differently, we still find that crude oil is a driver for interdependence between oil-importing and oil-exporting countries. In contrast, the crude oil has relative lower impact on the co-movement in oil-importing or in oil-exporting countries, which indicates its co-movement is caused by other factors. In addition, Gulf Cooperation Council stock market may lead the stock markets of oil-importing countries in the long term. Our empirical results provide meaningful information for investors and policymakers.     

Should we worry about the decline of the public corporation? A brief survey of the economics and external effects of the stock market

In recent years, the number of listed companies has been declining in many countries across the world. This paper provides a selective survey of the literature on the real economic effects of the stock market to assess the potential effects of this decline and determine whether it is likely to continue. The leading economic role of the stock market’s primary market, in which firms raise capital by issuing new shares, is to help growing firms secure financing. We discuss providing and certifying information, coordinating investors, and easing the redeployment of capital as the means through which capital allocation can be efficiently achieved. The main economic roles of the stock market’s secondary market, the trade in existing shares, is to provide liquidity to shareholders, to aid in price discovery and to provide diversification opportunities. Positive external effects from an active stock market may arise for consumers, labor and private firms due to increased corporate investment, more socially responsible business strategies and a more positive business climate. Negative external effects on capital allocation and productivity can arise from short-termism, market mispricing, and increased cross-ownership. Local stock markets can spur innovation and foreign direct investment (FDI) and reduce the risk of early cross-border acquisitions. Given the myriad of useful economic functions the stock market performs, a future entirely absent of public companies is difficult to imagine and the decline is therefore likely at some point to come to an end. Whether we need to worry about the decline depends on the relative importance of the positive and negative external effects, a topic we feel warrants more research.     

Has the Basel Accord improved risk management during the global financial crisis?

The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing from a variety of risk models, and discuss the selection of optimal risk models. A new approach to model selection for predicting VaR is proposed, consisting of combining alternative risk models, and we compare conservative and aggressive strategies for choosing between VaR models. We then examine how different risk management strategies performed during the 2008–09 global financial crisis. These issues are illustrated using Standard and Poor's 500 Composite Index.     

The role of the seller’s stock performance in the market reaction to divestiture announcements

Divestitures have the potential to create shareholder value. However, the extent of the market reaction should depend on the likelihood of finding more valuable uses for the divested assets or the ability on the part of the seller to eliminate negative synergies. We hypothesize that strong performers have less scope to achieve substantial improvements compared to poorly performing firms. Using the seller’s stock return in excess of the market return in the 1-year and 2-year periods preceding the divestiture announcement to expose the divesting firm’s inefficient use of its assets, we show that the market reaction to divestiture announcements is significantly higher for underperforming firms. The difference in abnormal returns can be as high as 4 %. In contrast, none of the accounting-based variables that have been used in previous studies are found to be significantly related to the announcement returns. These results suggest that the firm’s stock performance is a more useful indicator of the wealth effect associated with divestitures.     

Do actively managed mutual funds exploit stock market mispricing?

Constructing a proxy for mispricing with 15 well-known stock market anomalies, we examine whether actively managed mutual funds exploit mispricing. We find that, in the aggregate, mutual funds overweight overvalued stocks and underweight undervalued stocks relative to a passive benchmark, and this tendency is explained by the ill-motivated trades of agency-prone fund managers. In addition, we find that mutual funds with the highest weights in undervalued stocks outperform those with the highest weights in overvalued stocks by an annualized three-factor alpha of 2.12% (t = 2.38), implying that slanting portfolios based on our proxy helps mutual funds improve performance.     

Has recent financial crisis changed permanently the correlations between BRICS and developed stock markets?

The paper finds recent financial crisis has changed permanently the correlations between BRICS and developed U.S. and Europe stock markets. 70% of BRICS stock markets⿿ conditional correlation series demonstrate an upward long-run trend with the developed stock markets. Our results provide convincing evidence that the reducing diversification benefits are a long-run and world-wide phenomenon, especially after recent financial crisis.     

Forecasting stock market volatility: Can the risk aversion measure exert an important role?

In this paper, we predict realized volatility of stock return by utilizing time-varying risk aversion based on a simple linear autoregressive model. Our in-sample results suggest that time-varying risk aversion have significant impact for stock return volatility. In terms of out-of-sample forecasting performance, the empirical results indicate that the incorporation of time-varying risk aversion in the benchmark model can yield more accurate stock return volatility forecasts. Notably, the out-of-sample forecasting results confirm that our conclusions are robust when we apply alternative lag orders and alternative prediction evaluation periods. Finally, we study links between the prediction ability of time-varying risk aversion and the volatility of other stock indices and two kinds of crude oil, and find that the new predictor can effectively strengthen forecasting performance in most case. In view of the importance of volatility risk in the asset pricing process, our research is of great significance for financial asset participants.