Eyes on the prize: How did the fed respond to the stock market?

Since the stock market boom of the 1990s, many have suggested the Federal Open Market Committee (FOMC) has adopted an unannounced policy goal of supporting equity values. This paper offers a new approach to disentangle the relationship between changes in equity values and monetary policy. Specifically, the paper distinguishes the FOMC's reaction to forecasts of traditional goal variables, which may depend on equity prices, from the FOMC's independent reaction to changes in equity prices. By using actual forward-looking variables examined by the FOMC before each action (the “Greenbook” forecasts), the authors find little evidence to support the proposition that the FOMC responds to stock values, except as filtered through a forecast of accepted monetary policy goal variables.     

What is the impact of wealth shocks on asset allocation?

I test the assumption of constant relative risk aversion using U.S. macroeconomic data and analyse the role of wealth shocks in generating transitory changes in asset portfolio composition. I show that the risky asset share exhibits cyclical behavior and it is significantly (and positively) affected by unexpected variation in wealth. Therefore, the empirical evidence suggests that risk aversion is counter-cyclical. I also find that the portfolio share of housing wealth falls when the agent is faced with a positive wealth shock, i.e. housing is a hedge against unfavorable wealth fluctuations. Finally, considering a variety of wealth definitions, the results show that: (i) wealth effects are stronger for direct holdings of risky assets than for indirect holdings, which highlights that investors do not typically trade some assets such as pension or mutual funds; (ii) although significant, wealth effects on asset allocation are mainly temporary as agents quickly rebalance the asset portfolio composition (i.e. there is weak evidence of inertia or slow adjustment in asset allocation); and (iii) changes in expected returns partially explain the variation in risky asset allocation.     

How do banks respond to shocks? A dynamic model of deposit-taking institutions

This paper proposes a dynamic model of the optimal choices of a bank that benefits from market power and takes into account the impact of the deposit generation process. Interbank lending/borrowing emerges as a buffer that assists the bank in smoothing intertemporal adjustments in interdependent loan and deposit choices. The bank smooths the impact of interest-rates shocks on its customers to minimize the adjustments over time of the stocks of deposits and loans. It does not, however, provide insurance against negative shocks of real origin that increase its expected default costs. The predictions of the model help to shed light on the available empirical evidence and to analyze some recent developments of the banking industry.     

How does the stock market react to the announcement of green policies?

We investigate the impact of 19 announcements of environmental regulation on the equities listed on the Australian Stock Exchange over the period 2005–2011. Using a well-established event study methodology, we assess whether these announcements are value constructive or destructive for equity investors. Additionally, we estimate the change in systematic risk following the announcements. Our results show that the Australian market was particularly sensitive to the carbon pollution reduction scheme (CPRS) announcement. A cumulative abnormal return of −31% was recorded in the alternative energy sector after Australia submitted its target range to the Copenhagen Accord. We observe that a move towards a greener nation has a mixed effect on abnormal returns with apparent sector-by-sector differences. Green policies appear to affect the long-term systematic risk of industries, leading to the diamond risk phenomenon.     

How do policy and information shocks impact co-movements of China’s T-bond and stock markets?

We investigate the impacts of policy and information shocks on the correlation of China’s T-bond and stock returns, using originally the asymmetric dynamic conditional correlation (DCC) model that allows for the coexistence of opposite-signed asymmetries. The co-movements of China’s capital markets react to large macroeconomic policy shocks as evidenced by structural breaks in the correlation following the drastic 2004 macroeconomic austerity. We show that the T-bond market and the bond–stock correlations bear more of the brunt of the macroeconomic contractions. We also find that the bond–stock correlations respond more strongly to joint negative than joint positive shocks, implying that investors tend to move both the T-bond and stock prices in the same direction when the two asset classes have been hit concurrently by bad news, but tend to shift funds from one asset class to the other when hit concurrently by good news. However, the stock–stock correlation is found to increase for joint positive shocks, indicating that investors tend to herd more for joint bullish than joint bearish stock markets in Shanghai and Shenzhen.     

The impact of derivatives hedging on the stock market: Evidence from Taiwan’s covered warrants market

We examine the impact of derivatives hedging on the spot market using accurate hedge ratios of covered warrants traded in the Taiwan Stock Exchange (TWSE). Results present significant positive abnormal returns and trading volumes before the announcement of a warrant’s issuance, and the effect is stronger when the hedging demand is larger. Moreover, a significantly positive relationship exists between stock return volatility and the price elasticity of hedging demand. Finally, we observe a significantly negative price effect upon the underlying stock after a call warrant has expired in-the-money due to the liquidation of hedging portfolios.     

The impact of FIFA’s official announcements on the stock market of Qatar: The case of the 2022 World Cup

This study examines the impact of the FIFA’s official announcements on Doha Stock Exchange (DSE) of Qatar with respect to the 2022 World Cup. Using the abnormal unsystematic volatility method of Hilliard and Savickas (2002), our empirical findings reveal that the DSE market is sensitive to FIFA’s announcements about the 2022 World Cup. We find that four out of six FIFA announcements act as primary drivers to the DSE market volatility. The significant reactions of the DSE market to these announcements unveil the investors’ sentiments about the fate of the governmental and private expenditures on medium- and long-term projects undertaken in anticipation of hosting the 2022 World Cup. The results have some implications to investors in this newly emerging market related to this global sporting event. Any future announcements, good or bad, are likely to impact share prices in DSE market and trigger portfolio reallocation by local and international investors, leading to increased volatility.     

When do investors gamble in the stock market?

Recent studies have uncovered gambling-motivated trading activities in financial markets in which investors seek lottery-type payoffs by using financial assets. Building on prospect theory, this study provides an important complement to prior research and investigates what period that investors make gambling-motivated trading in the stock market. Examining data from the Chinese stock market, investors are revealed to have asymmetric gambling preferences in gain and loss domains. Investors' gambling motivations are more easily triggered when the market is experiencing a loss. In such periods of time, investors may preferentially opt for lottery-type stocks that offer them a small chance to earn an extreme return at the risk of a likely small loss, simply due to their ‘aversion to a sure loss’.     

How do oil supply and demand shocks affect Asian stock markets?

This paper examines how oil market shocks affect Asian stock prices using the structural vector autoregression (VAR) approach. Global oil supply and demand shocks are disentangled using sign restrictions and elasticity bounds. Oil price increases are bad news only if the source is from oil-market-specific demand shifts. Northeast Asian stock markets are more resilient as investors’ expectation of continued economic growth outweighs the adverse effect of higher oil prices. Increased global economic activity also stimulates stock prices. Global oil shocks are more important in explaining variability in Asian stock returns compared with the United States, suggesting different dynamics in Asia.     

How do partial acquisitions affect the wealth of acquiring firms? The case of Japanese firms

This study examines how and why partial acquisitions affect the wealth of acquiring firms in Japan. Few studies have focused on acquiring firms in partial acquisitions, whereas many studies have investigated target firms. The empirical results show that the shareholder wealth of acquiring firms, which can increase through partial acquisitions, is much lower than that of target firms. In addition, acquiring firms and their targets differ in how they enhance their wealth from partial acquisitions—acquiring firms can enhance their wealth by exploiting the wealth of target firms, while target firms can enhance their wealth by obtaining support from acquiring firms.     

Does the stock market reward innovation? European stock index reaction to negative news during the global financial crisis

This study uses data on 27 European stock indices over the period from January 2007 to December 2012 to investigate the relationship between innovations and the market reaction to negative news during the financial crisis. We use the bivariate BEKK-GARCH approach to estimate time-varying betas and abnormal returns. We show that index prices of countries in the high (low) innovation groups experience significantly positive (negative) abnormal returns on and following the negative news announcement dates. We also find that index beta changes following the arrival of bad news is negatively associated with a country's innovativeness. This finding suggests that innovations promote economic stability and enhance investors' confidence in a country's ability to cope during difficult times. Thus, policy makers who are concerned with sustainable growth should encourage R&D investments by adopting effective policies and avoid unnecessary cuts in R&D expenditures even during times of crisis. A study of the pre-crisis period from January 2001 to December 2006, using the same methods, indicates that investors value innovation more during difficult times.     

How do commodity futures respond to macroeconomic news?

This paper investigates the impact of seventeen US macroeconomic announcements on two broad and representative commodity futures indices. Based on a large sample from 1989 to 2005, we show that the daily price response of the CRB and GSCI commodity futures indices to macroeconomic news is state-dependent. During recessions, news about higher (lower) inflation and real activity lead to positive (negative) adjustments of commodity futures prices. In contrast, we find no significant reactions during economic expansions. We attribute this asymmetric response to the state-dependent interpretation of macroeconomic news. Our findings are robust to several alternative business cycle definitions.

How do auditors respond to accounting restatements? Evidence on audit staff allocation

Review of Quantitative Finance and Accounting - We examine how auditors respond to accounting restatements using audit input data from Japan. We find that audit fees, the number of Certified Public...     

Why do individuals not participate in the stock market?

We use a representative survey to study economic and non-economic factors that affect stock market participation. We find that many individuals suffer from inertia in the sense that they do not want to take the time and effort to invest in stocks. Inertia also explains stock market participation in addition to earlier documented factors such as actual and perceived financial literacy, trust, and the personal equity risk premium (PERP). A high percentage of non-investors (66%) assert that they will never invest in stocks. We find that inertia affects this assertion both directly and indirectly through factors such as age and gender.     

Why do companies delist voluntarily from the stock market?

We analyse the motives and market valuation of voluntarily delisting from the London Stock Exchange. We show that firms that delist voluntarily are likely to have come to the market to rebalance their leverage rather than to finance their growth opportunities. During their quotation life, their leverage and insider ownership remained very high, they did not raise equity capital, and their profitability, growth opportunities, and trading volume declined substantially. They also generate negative pre-event and announcement date excess returns. These results hold even after controlling for agency, asymmetric information, and liquidity effects, and suggest that firms delist voluntarily when they fail to benefit from listing. Overall, these firms destroyed shareholder value and they should not have come to the market.     

State uncertainty in stock markets: How big is the impact on the cost of equity?

We propose a novel Bayesian framework to incorporate uncertainty about the state of the market. Among others, one advantage of the framework is the ability to model a large collection of time-varying parameters simultaneously. When we apply the framework to estimate the cost of equity we find economically significant effects of state uncertainty. A state-independent pricing model overestimates the cost of equity by about 4% per annum for a utility firm and by as much as 3% for industries. We also observe that the expected return, volatility, risk loading, and pricing error all display state-dependent dynamics that coincide with the business cycle. More interestingly, the forecasted market and Fama–French factor risk premiums can predict the future real GDP growth rate even though the model does not use any macroeconomic variables, which suggests that the proposed Bayesian framework captures the state-dependent dynamics well.     

How is illiquidity priced in the Chinese stock market?

This study investigates the liquidity premium in the Chinese stock market. We found that the expected stock returns increase monotonically with the quintile sort on characteristic liquidity with descending patterns. The characteristic liquidity premium ranges from 0.82% to 1.28% per month, which is much higher than that of their US counterparts. Moreover, our multivariate decomposition approach highlights that characteristic illiquidity premiums can be explained mainly by size, idiosyncratic volatility and momentum. The net systematic liquidity premium reaches 0.84% per month, driven mainly by commonality beta. The finding shows that a liquidity-based strategy forecasts cross-section and time-series expected returns.     

Does financial market liberalization increase the degree of market efficiency? The case of the Athens stock exchange

In this paper we assess if the financial market liberalization introduced in the beginning of the 1990s in Greece has changed the degree of market development (efficiency) by studying time-varying global Hurst exponents. Our results suggest that changes in financial market liberalization have important positive implications on the degree of development of stock markets. These results have important policy implications for the development of stock markets around the world.     

How do auditors respond to low annual report readability?

We show that increased audit effort is associated with lower annual report readability to compensate for a perceived increase in the risk of financial misstatement for United States (US) firms. In particular, we find that lower annual report readability is associated with longer audit delays and higher audit fees for Form 10-K for US auditors, suggesting that auditors spend more effort auditing clients when annual reports have lower readability. We also find that low readability increases the likelihood of auditors using more explanatory language in unqualified audit reports.     

How do banks price liquidity? The role of market power.

We empirically examine the effects of different measures of liquidity on interest margins of a sample of U.S. commercial banks from 2001 to 2018. Overall, the results reveal that liquidity ratios exert a positive influence on bank margins. Furthermore, the study investigates the role of market power in the relationship between liquidity and interest margins. It is documented that dominant banks incorporate the costs associated with investing in liquidity into the bank margins to a lesser extent than banks with less market power, suggesting that the cost of complying with regulatory liquidity standards is reduced when the competition in the banking sector is less intense. The study highlights that market competition might be important in the design and implementation of liquidity regulations.