Does measurement error matter in volatility forecasting? Empirical evidence from the Chinese stock market

Based on methods developed by Bollerslev et al. (2016), we explicitly accounted for the heteroskedasticity in the measurement errors and for the high volatility of Chinese stock prices; we proposed a new model, the LogHARQ model, as a way to appropriately forecast the realized volatility of the Chinese stock market. Out-of-sample findings suggest that the LogHARQ model performs better than existing logarithmic and linear forecast models, particularly when the realized quarticity is large. The better performance is also confirmed by the utility based economic value test through volatility timing.     

Investors’ fear and herding in the stock market

ABSTRACT

In this article, we examine herding in three developed stock markets testing for the impact of investors’ ‘fear’ on herding estimations. To this end, we employ daily data of all listed stocks from USA, UK and Germany from January 2004 to July 2014. We examine herd behaviour applying the cross-sectional dispersion approach. Moreover, we investigate the asymmetric herding behaviour under different market states and sub-periods. The stock markets under examination provide comparable implied volatility indices which are used as a proxy for fear. As a result, apart from the standard herding estimations within and across markets, we also augment the benchmark model with the fear indicator. Our empirical results document the statistically significant impact of fear on herding estimations. Moreover, there is evidence of cross market herding as well as evidence of herding in the UK during specific sub-periods.     

Analyst coverage and stock return synchronicity: evidence from regulation changes in China’s IPO market

This article investigates the relation between analyst coverage and stock return synchronicity in the IPO market. Using a unique data set in China from 2005 to 2012, we find a significantly different effect of analyst coverage on synchronicity before and after the implementation of important 2009 IPO regulation changes in China. Specifically, we document that analyst coverage reduces synchronicity but that this effect is significant only after 2009. In addition, we extend this research to further distinguish the information production role of underwriter and independent analysts. We find that prior to 2009, underwriter analysts’ coverage decreases synchronicity but independent analysts’ coverage does not. However, in the post-2009 period, both types of analyst coverage are significantly and inversely associated with synchronicity. Overall, our results support analysts’ role as producers of firm-specific information in an emerging IPO market and shows that this role depends on the institutional environment.     

The profitability of financial analysts’ recommendations: evidence from an emerging market

This article aims at measuring recommendation value on the Tunisian market and uses a hand-collected database of 6646 recommendations (2005–2009). We apply the methodology of calendar–time portfolio analysis. This consists of simulating a portfolio that would include stocks depending on the recommendations issued by financial analysts. In order to measure abnormal (or ‘excess’) returns, the raw return of the portfolio is then compared to the evolution of the stock index and to the prediction of the Capital Asset-Pricing Model. Some of the portfolios we build earn a positive significant excess risk-adjusted return of 1.19% per month. Beyond the results that are in line with the literature, we provide two original results. First, ‘sell’ signals are informative, whereas ‘buy’ signals are not. We suggest that it is related to large (small) firms having more ‘buy’ (‘sell’) recommendations and to the direction of the market trend over the period. Second, the fact that recommendation levels have more impact than recommendation changes is explained by the specific informational context on that market, which is that recommendations are systematically disclosed each month, whereas on other markets, recommendations are produced only when the analyst has some new information to disclose.     

The relationship between trading activity and stock market volatility: Does the volume threshold matter?

This paper examines whether trading activity conveys valuable information about changes in market volatility dynamics. We use a modelling framework, in which the market smoothly switches from one state to another, according to the volume level. Results show that large volume drives the high volatility regime for most of the markets, quite consistently with the disagreement-in-beliefs hypothesis. The volume decomposition into normal trading activity and surprising information arrival reveals a reverse threshold linkage for emerging markets. Results support the sequential information arrival hypothesis and highlight the key role of asymmetric information and thin trading in modelling the volume-volatility relationship. The proposed volume-based models provide significant forecast improvements over competing models and offer scope for investors to earn substantial profits.     

Bankruptcy in the pulp and paper industry: market’s reaction and prediction

This paper examines North American pulp and paper company bankruptcies that occurred between 1990 and 2009. We demonstrate that shareholders suffer substantial losses (37 %) during the month a bankruptcy occurs. Encouragingly, we show that financial ratios are useful in predicting firm failure and that failed firms are less profitable, more liquidity constrained and higher in debt leverage. Using a binary logit model in the spirit of Ohlson (J Acc Res, 19, 109–131, 1980), we predict financial distress for pulp and paper firms 1 to 2 years ahead of the bankruptcy. We also adapt and re-estimate the empirical model on a sample of pulp and paper firms and perform in-sample and out-of-sample forecasts. For the out-of-sample analysis, our re-estimated Ohlson models correctly predict 93 % of bankruptcy and non-bankruptcy outcomes.     

Wealth,volume and stock market volatility: case of Hong Kong (1993–2001)

This article attempts to answer the question of whether the gain and loss in property market speculations and rate of information flow play a significant role in stock market volatility in Hong Kong. To test for our wealth–volume–volatility hypothesis, two different measures of volatility: absolute (absolute value of SD from mean with monthly dimension) and conditional (EGARCH) are used and results are compared. In both measures, we find evidence of a statistical presence of a wealth effect on stock market volatility, particularly in the investment of luxury class of property in Hong Kong. To account for this result, we apply the prospect theory, house money effect and the newly developed conditional confidence theory. Although we fail to establish a volume–volatility relationship in our estimation, we offer additional dimensions to the explanation of our observation.     

Does Benford’s Law hold in economic research and forecasting?

First and higher order digits in data sets of natural and socio-economic processes often follow a distribution called Benford’s law. This phenomenon has been used in business and scientific applications, especially in fraud detection for financial data. In this paper, we analyse whether Benford’s law holds in economic research and forecasting. First, we examine the distribution of regression coefficients and standard errors in research papers, published in Empirica and Applied Economics Letters. Second, we analyse forecasts of GDP growth and CPI inflation in Germany, published in Consensus Forecasts. There are two main findings: The relative frequencies of the first and second digits in economic research are broadly consistent with Benford’s law. In sharp contrast, the second digits of Consensus Forecasts exhibit a massive excess of zeros and fives, raising doubts on their information content.     

Exchange-rate volatility and export performance: Do emerging market economies resemble industrial countries or other developing countries?

Authors who do not distinguish between Emerging Market Economies (EMEs) and other developing countries, find evidence of negative and significant effects of exchange-rate volatility on trade. We investigate the effects of real exchange-rate volatility on exports of ten EMEs and eleven other developing countries that were not classified as EMEs over our estimation period. We use panel-data sets that cover the periods 1980:Q1–2006:Q4 for the EMEs and 1980:Q1–2005:Q4 for the other developing countries. We use two estimation methods — generalized method of moments (GMM) estimation and time-varying-coefficient (TVC) estimation. The TVC procedure removes specification biases from the coefficients, revealing the underlying stable parameters of interest. We obtain similar results as previous authors for only the eleven non-EME developing countries we consider. In contrast, our results for the EMEs do not show a negative and significant effect of exchange-rate volatility on the exports of the countries considered. Our findings suggest that the open capital markets of EMEs may have reduced the effects of exchange-rate fluctuations on exports compared with those effects in the cases of other developing countries.     

Accruals quality,managers’ incentives and stock market reaction: evidence from Europe

We investigate if accruals quality is a valuable indicator of earnings quality for stock market investors. Our particular focus is on the incremental informative value of taking into account managers’ incentives for using accruals. We propose a market-based approach for assessing the usefulness of this indicator to improve investors’ decisions. Specifically, we examine the association between accruals quality and information asymmetry among stock market participants. Our empirical study uses data on European firms and our results are consistent with a positive association between poor earnings quality and high information asymmetry. However, given some previous studies suggesting that accruals-based measures may be noisy indicators of earnings quality, we develop a method to increase the informational content of the accruals quality measure. Based on our results, we find that combining accruals quality with the dispersion in analysts’ forecasts provides a better indicator of earnings quality rather than only accruals quality.     

To market,to market: imperial capitalism’s destruction of social capital and the family

The market, far from being the sine qua non for modern society in general, and the family in particular, has eroded the social fiber that gives shape and resilience to the experiences of individuals, families, and ultimately, the market itself. Reviewing both historical and feminist analysis of the family in a capitalist market society, it is clear that the modern market is imperial. Not only does it transform every human interaction into a transient market exchange, it undermines the basis for social reproduction through the family. Using the concept of social capital as a primary analytical tool, this paper argues that the distinction between home and market labor has been unnecessarily polarized, limiting policy options. Thus, society’s ability to produce and maintain long-standing social networks is put at risk, paradoxically reducing the market’s ability to perform efficiently.JEL Categories: D10; J22; J16     

Russia’s food self-sufficiency and food security: an assessment

The article differentiates between self-sufficiency and food security. The impact of Russia’s 2014 food embargo on the food system and food trade is analysed. Domestic production has increased and Russia has become more self-sufficient in food and seafood. In addition, food trading partners have changed. Western food and seafood trading partners have been replaced by trading partners from Asia and Central Asia. There is a high likelihood that the Russian food market has been lost to Western exporters for the foreseeable future. Even after sanctions and countersanctions end, it is difficult to see the pathway for Western food exporters to recapture market share in Russia.     

Africa’s industrialization and China’s OFDI in the manufacturing sector: rationales and practices

The article examines the rationales and practices for three types of manufacturing outward foreign direct investment (OFDI) into Africa in the context of the cooperation between Africa’s industrialization and China’s OFDI on manufacturing. African economies have achieved impressive growth in the new century, but sustainable economic growth in this vast continent is still constrained by lagging industrialization and weak manufacturing sector. While China’s economy has made great achievements in Gross Domestic Product growth and poverty reduction, it witnessed hikes of factor price such as wage, land and exchange rate at varying degrees in the recent decade, imposing pressure on economic restructuring. Against the background, the new trend of Chinese manufacturing OFDI provides new opportunities for Africa to solve structural problems of weak manufacturing. Policy implications of this study on China–Africa industrial capacity cooperation are briefly discussed.     

Welfare gain from quality and price development in the Japan’s LCD TV market

We estimate the welfare gain from innovations in the LCD TVs that prevailed during the period 2005–2007 in Japan, via consumer surplus that we measure with the aid of discrete choice methods, using market data obtained from an internet price comparison service (Kakaku.com). Further, by the measured implicit values of attributes, we evaluate in monetary terms, the qualitative transition embedded in the attributes through the iso-consumer surplus planes. We thereby disaggregate the welfare gain into the qualitative and the budgetary components, which we call the quality gain, and the budget gain, respectively. The estimates show, along with the evolved process of innovation, that the quality gain was in the order of 381 KJPY, while the budget gain was 94 KJPY negative, which gives about 287 KJPY of overall welfare gain per consumer, during the period.     

Expanded BSADF test in the presence of breaks in time trend – a further analysis on the recent bubble phenomenon in China’s stock market

Under the framework of time trend breaks, the popular BSADF (backward Sup-ADF) test easily misidentifies the bubble processes. As an extending analysis, we construct a t-statistic to further identify the data feature of the detected bubble periods in BSADF test. For the sake of application, we examine the bubble phenomenon related to recent stock market activity in China. We find that a bubble period estimated by the BSADF test is spurious; the rapid rise of stock market on this period is driven by trend changes and has a solid foundation.     

Isolating the systematic and unsystematic components of a single stock’s (or portfolio’s) standard deviation: a comment

In an article that recently appeared in this journal, Marshall (2015) argued that the systematic component of the SD of a stock or of a portfolio of stocks is its beta scaled by the SD of the market returns. She also contended that the beta mispredicts the actual systematic risk of a stock or of a portfolio of stocks. In this article, I dispute this conclusion, showing that it has been induced by an imperfection in the construction of the empirical application and by some misinterpretations of the results. A corrected replication of the empirical study of Marshall (2015) is provided, along with some comments. I conclude that both the beta and the systematic component in Marshall (2015) are effective measures of systematic risk.