Risk and return in the Tehran stock exchange

This paper analyzes market index returns in the Tehran stock exchange (TSE) within the context of three variants of the Capital Asset Pricing Model: the static international; the constant-parameter intertemporal; and a Markov-switching intertemporal CAPM, which allows for time-varying degree of integration with regional and international equity markets. We find that TSE returns are CAPM-efficient at monthly frequency with respect to several international market indices. Moreover, we find evidence in support of international integration of the TSE with respect to international markets. In addition, we conduct an extensive investigation for the direction of causality between TSE returns, international market index returns, and those in neighboring countries.     

Press freedom and jumps in stock prices

Press freedom varies substantially across countries. In a free environment, any news immediately becomes public knowledge through mediums including various electronic media and published materials. However, in an unfree environment, (economic) agents would have more discretionary powers to disclose good news immediately, while hiding bad news or releasing bad news slowly. We argue that this discretion affects stock prices and that stock markets in countries with a free press should be better processors of economic information. Using an equilibrium asset-pricing model in an economy under jump diffusion, we decompose the moments of the returns of international stock markets into a diffusive risk and a jump risk part. Using stock market data for a balanced panel of 50 countries, our results suggest that in countries with a free press, the better processing of bad news leads to more frequent negative jumps in stock prices. As a result, stock markets in those countries are characterized by higher volatility, driven by higher jump risk and more negative return asymmetry. The results are robust to the inclusion of various controls for governance and other country- or market-specific characteristics. We interpret these as good stock market characteristics because a free press improves welfare and increases economic growth.     

Why do firms cross-list? International evidence from the US market

Using a modified international asset-pricing model we find strong evidence that publicly quoted firms cross-list when exhibiting strong performance in their domestic market and wish to take advantage of this situation. After cross-listing, this advantage disappears. Our sample consists of daily data for 1165 firms from 47 countries that have cross-listed on the US equity markets over the period 1976–2007. Within the context of this model we provide tests of the validity of the main hypotheses of capital market segmentation and investor protection, which provide explanations for equity cross-listing and investigate whether the nature of the market (regulated or unregulated) and the accompanying legal framework (common or civil law) can account for the impact of cross-listing on returns. Supporting the segmentation hypothesis, we report a decrease in local market risk after cross-listing. However, we find that the magnitude of such a decrease is diminishing over time as international markets become more integrated. On the other hand, we do not find any change in the global market risk after cross-listing, except for firms that cross-listed between 2001 and 2007, where their exposure to international market risk decreases. Furthermore, we find no evidence to support the investor protection hypothesis.     

Volatility analysis of precious metals returns and oil returns: An ICSS approach

This study examines volatility persistence on precious metals returns taking into account oil returns and the three world major stock equity indices (Dow Jones Industrial, FTSE 100, and Nikkei 225) using daily data over the sample period January 1995 to May 2008; the aim is to analyze market relationships before the global financial crisis. We first determine when large changes in the volatility of each market returns occur by identifying major global events that would increase fluctuations in these markets. The Iterated Cumulative Sums of Squares (ICSS) algorithm was used to identify the existence of structural breaks or sudden changes in the variance of returns. In each market the standardized residuals were obtained through the GARCH(1,1) mean equation. Our main results identify a clear relationship between precious metals returns and oil returns, while the interaction between precious metals and stock returns seems to be an independent one in the case of gold with mixed results for silver and platinum. In relation to volatility persistence, the results show clear evidence of high volatility persistence between these markets, especially during times when markets were affected by excessive volatility due to economic and financial shocks.     

Foreign direct investment and financial markets influences: Results from the United States

This paper investigates the linkages among Foreign Direct Investment (FDI-greenfield and mergers and acquisitions (M&A)) decisions and equity market returns and volatilities. The central premise is that FDI decisions by Multinational Enterprises (MNE) are influenced, among other factors, by risk and uncertainty indicated by equity market returns and volatilities in the destination (host) countries. This is because of the events on the stock markets in general, and their volatilities, in particular, signal the vitality of the investment climate of the target country. Including capital market variables among the determinants of FDI is important for assessing the cost of capital and for evaluating direct investment and asset allocation decisions.Secondary time-series data (quarterly) were used on incoming US FDI from 1994 to 2018 along with data on independent variables such as exchange rates, inflation, market size, equity market returns, and equity market volatilities. Thus, the paper endeavors to contribute to the International Business literature by highlighting the role played of equity returns and volatilities in FDI decisions and therewith attempts to integrate finance (capital markets) with International Business/Strategic Decision making. Several different regression specifications (OLS, Fixed, and random-effects and VAR) were utilized to analyze the data, and capital market variables (stock returns and volatilities) were found to influence the location of production facilities by a multinational enterprise (MNE). In other words, the share of production capacity optimally located abroad, as well as M&A decisions, are influenced by capital market returns and volatilities.     

Equity market contagion during the global financial crisis: Evidence from the world's eight largest economies

The global financial crisis (2007–2009) saw sharp declines in stock markets around the world, affecting both advanced and emerging markets. In this paper we test for the existence of equity market contagion originating from the US to advanced and emerging markets during the crisis period. Using a latent factor model, we provide strong evidence of contagion effects in both advanced and emerging equity markets. In the aggregate equity market indices, contagion from the US explains a large portion of the variance in stock returns in both advanced and emerging markets. However, in the financial sector indices we find less evidence of contagion than in the aggregate indices, and this is particularly the case for the advanced markets. The results suggest that contagion effects are not strongly related to high levels of global integration.     

A Respecified Fama French Three‐Factor Model for the New European Union Member States

This study uses factor models to explain stock market returns in the Eastern European (EE) countries that joined the European Union (EU) in 2004. In line with other studies, we find that the market value of equity component in the Fama French (1993) three‐factor model performs poorly when applied to our emerging markets dataset. We propose a significant amendment to the standard three‐factor model by replacing the market value of equity factor with a term that proxies for accounting manipulation. We show that our three‐factor model is able to explain returns in the EE EU nations significantly better than the Fama French (1993) three‐factor model, hereby offering an alternative model for use in the numerous markets in which previous studies have found little correlation between market value of equity and equity returns.     

Institutional investors,corporate governance and the performance of the corporate sector

Proportions of equity held by institutional investors—pension funds, insurance companies and mutual funds—are rising across all OECD countries. Meanwhile institutions are becoming more influential in corporate governance, even in bank-dominated countries, inter alia due to international investment, pension reform and EMU. We provide two forms of evidence on the effects of institutional corporate governance on corporate performance. First we offer a literature survey on micro evidence, the outcome of which is mixed, but on balance suggesting a positive effect on equity returns. We contend that these micro studies face a difficulty that they cannot capture effects of governance initiatives whose effects go wider than “target firms”. Accordingly, we present results for the reduced form empirical relationship between institutional share holding and corporate sector performance at an economy-wide level. These are consistent with significant effects which differ between “Anglo-Saxon” and “relationship banking” countries. For example, institutions appear to accompany lower investment and higher dividends in the former.     

Risk spillover analysis across worldwide ESG stock markets: New evidence from the frequency-domain

With the increasing global awareness of green environmental protection, the international environmental, social, and governance (ESG) stock markets are developing rapidly together with rising risk linkages across worldwide markets. Therefore, this study explores the risk spillover characteristics of international ESG stock markets in the time and frequency domains and constructs a risk linkage network to further explore the risk contagion mechanism. The results show that in most cases, the developed North American market is the core of outward risk spillover in international ESG stock markets. The entire system presents a small-world structure, and the internal regions display different risk spillover characteristics. Moreover, international ESG markets generally have strong time–frequency spillover and medium-frequency (a month to a year) spillover. In contrast, the high- (a day to a month) and low-frequency (more than one year) spillovers are located at relatively low levels, but they will rise significantly under sudden financial events. The empirical results expand the ESG stock market's theoretical framework and provide a reference for investors and market regulators to reduce the investment risk of ESG.     

Measuring the interconnectedness of financial institutions

This paper uses sophisticated empirical methodology to measure the interconnectedness of financial institutions in five developed economies – France, Germany, Japan, UK and USA – for the period January 2000 to November 2009. The study goes beyond the conventional use of first and second moments of returns and uses the timevarying equity price of risk methodology to measure the level of convergence of the financial sectors in the countries of interest. More specifically, Kalman filter convergence tests are applied to the weekly equity price of risk data to measure the interconnectedness between these countries’ and the US finance sectors. Results indicate the presence of short-term timevarying interconnectedness of the finance sectors of France, Germany and the UK with that of the US and steady-state longer term interconnectedness only between Germany and the US. Short-term and long-term steady-state interconnectedness between Japan and the US is not evident. We conclude that going forward in an environment of increased interconnectedness of international financial markets, a coordinated global financial regulatory policy with discretionary allocation of resources and execution strategy at a national level is the preferred regulatory structure to ensure sound operations of international financial systems.     

The behavior of MENA oil and non-oil producing countries in international portfolio optimization

It is well documented in developed economies that portfolio investment across national borders brings benefits of increasing returns and/or reducing risk. Dividing MENA stock markets into two main groups (oil producing and non-oil producing countries), this study examines the potential role of each group in providing diversification benefits for international investors. In addition, the behavior of the long and the short-run Efficient Frontiers (EFs) constructed by each of the sub-groups and the combined MENA markets is explored. Multi-objective international portfolio models are proposed under Mean-Variance and Mean-Lower Partial Moment frameworks, and the Multiple Fitness Function Genetic Algorithm (MFFGA) is used to find the EFs of optimal portfolios. The findings indicate that the stock markets of oil producing countries can be considered as a potential avenue for international portfolio diversification for investors not only from the same countries but also from the other MENA markets. It was also found that international portfolios constructed from the combination of MENA equity markets are more stable compared to the portfolios of sub-group markets. Further, the findings indicate that the behavior of short-term EFs in the MENA region cannot be predicted by the behavior of long-term EFs.     

The day-of-the-week effect revisited: international evidence

The aim of this study is to determine whether the DOW effect still exists, and to evaluate empirically the explanations of the DOW effect for international equity markets. Evaluating 51 markets in 33 countries for the period between January 2000 and December 2007, reveals that the DOW effect persists for a significant proportion of equity markets. Evaluating open-to-close returns, liquidity, size effect and possible spill-over effects, the DOW effect can be explained for almost of all the exchanges. Individual stock analysis, covering 37,631 stocks traded in 51 equity markets shows that a DOW effect in returns exists for a statistically significant proportion of individual stocks in almost all of the markets in the study. Even markets without a market-level DOW effect contain a surprisingly large proportion of stocks with individual-level DOW effects. Interestingly, this proportion is only marginally lower than that which is found in markets with a market-level DOW effect.     

President’s Tweets,US-China economic conflict and stock market Volatility: Evidence from China and G5 countries

This study provides empirical evidence that the tweets from US President Donald J. Trump influence the trading decisions of investors worldwide. We examine the effects of Trump’s tweets related to China on stock market volatility in China and the G5 countries. Our results show that Trump’s original tweets related to the US-China economic conflict expand volatility in stock markets worldwide, and the US-China trade friction intensifies this effect. Furthermore, Trump’s tweets with different sentiments have different impacts on the returns of global stock markets. Our findings confirm that international investors may make their investment decisions based on information conveyed in these tweets.     

Co-movement of oil and stock prices in the GCC region: A wavelet analysis

This paper examines the short term and long term dependencies between stock market returns and OPEC basket oil returns for the six Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) and two non-oil producing countries in the region (Egypt and Jordan), over the period 2002–2011. We utilize the wavelet coherency methodology in our empirical analyses. The empirical evidence indicates lack of market dependencies in the short term in these countries, indicating that oil and stock returns are not strongly linked in this interval. However, we show that oil returns and the stock markets returns co-move over the long term. The results also suggest that the long term dependencies are much stronger for OPEC oil returns and Jordan stock market returns relative to OPEC oil returns and Egypt stock market returns, implying a variation in the dependencies between oil prices and stock markets across countries. We further note an increasing strength in the market dependencies after 2007, signifying enhanced diversification benefit for investors in the short term relative to the long term.     

Market risks that change domestic diversification benefits

We study the options-implied market risks and correlations to identify factors that affect U.S. stock correlations during 2007–2018. We discover that U.S. stock- and bond-market uncertainty, equity tail risk, European equity risk, and global credit risk are dominant contributors to changing correlations. While correlations rise universally with rising U.S. and European stock-market uncertainty, other market risks show diverging effects on correlations in crisis and non-crisis periods. Rising equity tail risk and global credit risk raise correlations in crisis times. Our results disentangle the risks of stock and bond markets that change the domestic stock diversification benefits.     

Information dynamics effects from major world markets to SAARC nations

This paper investigates the impact of major world equity markets on four founding countries of the South Asian Association for Regional Cooperation (SAARC). With a population of 1.47 billion, SAARC is the largest regional organization in the world. However, the issue of global integration of equity markets of the SAARC nations has largely been ignored. This study fills this important gap, adding results towards the ongoing debate concerning the issue of global market integration. After the onset of the financial crises of 2008, this issue is imperative. VAR analysis is used to determine whether there is any dependency of SAARC return on the performance of world equity markets. Further, GARCH-in-mean modeling is used to determine whether there is any evidence of Volatility spillover. It is found that volatility in major world markets do not impact returns in SAARC nation, but ample evidence of volatility spillover is found for India, Bangladesh and Sri Lanka. Similar results are not obtained for Pakistan.     

The impact of COVID-19 on the G7 stock markets: A time-frequency analysis

We examine the co-movement of the G7 stock returns with the numbers of confirmed COVID-19 cases and causalities based on daily data from December 31, 2019 to November 13, 2020. We employ the wavelet coherence approach to measure the impact of the numbers of confirmed cases and deaths on the G7 stock markets. Our findings reveal that both the number of confirmed COVID-19 cases and the number of deaths exhibit strong coherence with the G7 equity markets, although we find heterogeneous results for the Canadian and Japanese equity markets, in which the numbers of COVID-19 cases and the deaths exhibit only a weak relationship. This evidence is more pronounced in the long-term horizon rather than the short-term horizon. Moreover, the lead-lag relationship entails a mix of lead-lag relations across different countries. We present the implications of these findings for both policymakers and the international investment community.     

Corporate governance and firm performance relationship: Implications for risk‐adjusted return behavior

We examine the impact of corporate governance on firm performance and stock return behavior using panel data for Indian listed firms for 2006 to 2015. Our results suggest that corporate governance improves firm performance. However, corporate governance information fails to provide excess risk‐adjusted returns to investors, as governance information is well assimilated in prevailing stock prices. In addition to extending the scant literature focused on emerging markets, our findings will prove useful to investors, fund managers, and rating agencies in making investment decisions and regulators in assessing the impact of governance norms.     

Firm size,economic risks,and the cross-section of international stock returns

Recent empirical evidence from developed markets indicates a negative relation between value premium and firm size. We find that the value premium in small stocks is consistently priced in the cross-section of international returns, whereas the value premium in big stocks is not. Based on US data, we show that the small-stock value premium is associated with business cycle news and reflects changes in macroeconomic, especially credit market related risks. Our results hold true for regional and global equity markets and remain valid after controlling for firm characteristics and prominent profitability and investment factors.     

What drives herding in oil-rich,developing stock markets? Relative roles of own volatility and global factors

The main goal of this paper is to formally establish the volatility-herding link in the developing stock markets of the oil-rich GCC countries by examining how market volatility affects herd behavior after controlling for global factors. Using a regime-switching, smooth transition regression model (STR), we find significant evidence of herding in all Gulf Arab stock markets, with the market volatility being the more paramount factor governing the switches between the extreme states of non-herding and herding. The global variables comprised of the U.S. stock market performance, the price of oil and the US interest rate as well as the risk indexes including the CBOE Volatility Index (VIX) and the St. Louis Fed's Financial Stress Index (FSI) are found to be significant factors governing the transition to herding states. The findings stress the effect of contagion in financial markets, despite the restrictions established by the GCC policymakers in order to protect their markets.