Regime-Dependent Effect of Crude Oil Price on BRICS Stock Markets

In this study, the dynamic relation between global crude oil prices and stock prices is investigated in terms of crude oil-exporting and -importing countries. The relationship between crude oil prices and stock prices is examined for BRICS countries (Brazil, Russia, India, China, and South Africa) for the periods of January 1995 to December 2016 by means of the Markov Switching Vector Autoregression (MS-VAR) model. The impulse-response analysis results suggest that the responses of the stock market to an oil price shock vary over the regimes for all countries. Specifically, we find that the responses of the stock market to an unexpected oil price shock are positive and statistically significant in the high-volatility regime in all countries except for China, and these results suggest that the increase in oil prices may be evaluated by demand-side shock in these countries.     

Financial and monetary policy responses to oil price shocks: evidence from oil-importing and oil-exporting countries

In this study, we investigate the financial and monetary policy responses to oil price shocks using a Structural VAR framework. We distinguish between net oil-importing and net oil-exporting countries. Since the 80s, a significant number of empirical studies have been published investigating the effect of oil prices on macroeconomic and financial variables. Most of these studies though, do not make a distinction between oil-importing and oil-exporting economies. Overall, our results indicate that the level of inflation in both net oil-exporting and net oil-importing countries is significantly affected by oil price innovations. Furthermore, we find that the response of interest rates to an oil price shock depends heavily on the monetary policy regime of each country. Finally, stock markets operating in net oil-importing countries exhibit a negative response to increased oil prices. The reverse is true for the stock market of the net oil-exporting countries. We find evidence that the magnitude of stock market responses to oil price shocks is higher for the newly established and/or less liquid stock markets.     

Oil prices implied volatility or direction: Which matters more to financial markets?

We examine the impact of oil price uncertainty on US stock returns by industry using the US Oil Fund options implied volatility OVX index and a GJR-GARCH model. We test the effect of the implied volatility of oil on a wide array of domestic industries’ returns using daily data from 2007 to 2016, controlling for a variety of variables such as aggregate market returns, market volatility, exchange rates, interest rates, and inflation expectations. Our main finding is that the implied volatility of oil prices has a consistent and statistically significant negative impact on nine out of the ten industries defined in the Fama and French (J Financ Econ 43:153–193, 1997) 10-industry classification. Oil prices, on the other hand, yield mixed results, with only three industries showing a positive and significant effect, and two industries exhibiting a negative and significant effect. These findings are an indication that the volatility of oil has now surpassed oil prices themselves in terms of influence on financial markets. Furthermore, we show that both oil prices and their volatility have a positive and significant effect on corporate bond credit spreads. Overall, our results indicate that oil price uncertainty increases the risk of future cash flows for goods and services, resulting in negative stock market returns and higher corporate bond credit spreads.     

Footprints in the market: Hedge funds and the carry trade

This paper uses a new database provided by the Commodity and Futures Trading Commissions to examine the price impact of hedge fund carry trades in “hot” and “cold” markets. We find that hedge funds significantly increase their carry trade positions during hot markets (periods with very high currency returns). Consistent with currency overpricing, positions in hot markets are followed by exchange rate reversals. Optimism in the stock market seems to have a spillover effect on hedge fund speculation in the currency market: controlling for the variance risk premium fully accounts for the reversal effect. Overall, our results add to a growing body of empirical evidence that institutional demand can move asset prices.     

去伪存真:油价趋势与股票市场——来自“一带一路”35国的经验证据

油价波动深刻影响全球经济,严重时会造成全球股市动荡,甚至引发系统性金融风险。然而油价中的信息噪音严重阻碍国际油价对股票市场的预测效果。本文提出的移动平均法可有效减弱信息噪音,研究表明,本文基于移动平均法构建的油价趋势因子对“一带一路”沿线国家股票市场具有良好的样本内和样本外可预测性。进一步研究发现,国际油价波动对产油国和非产油国股票市场的影响存在非对称性。本文为国际油价冲击股票市场提供了新的有力证据,同时本文研究成果提示了油价风险,对维持我国股票市场稳定,保持金融稳定具有一定意义。     

Crude oil shocks and African stock markets

In this paper, we investigate the impact of crude oil shocks on selected African stock markets using a Structural Vector Autoregressive model and a two-state regime smooth transition regression framework on monthly data from January 2000 to July 2018. The study is timely given the fast-growing energy sector and stock markets in Africa as well as the place of Africa in international trade. Selected markets are classified into oil-exporting (Nigeria, Tunisia, and Egypt) and oil-importing (Botswana, South Africa, Kenya, and Mauritius). The key findings are as follows: global demand shock does not really matter in oil-importing countries; there is little evidence that oil supply shock affects the real stock return for oil-exporting and oil-importing countries; oil-specific shock is significant for most countries investigated; negative price shocks have more impact than positive price shocks. The findings from this study have important implications for investors whose portfolios may comprise of assets from African stock markets and crude oil. Given the importance of oil in the global market, one would typically avoid equities that suffer from its shock. This study provides the indicators to inform that decision.     

Exchange Rate Exposure at the Firm and Industry Level

Previous work on the exposure of firms to exchange rate risk has primarily focused on U.S. firms and, surprisingly, found stock returns were not significantly affected by exchange‐rate fluctuations. The equity market premium for exposure to currency risk was also found to be insignificant. In this paper we examine the relation between Japanese stock returns and unanticipated exchange‐rate changes for 1,079 firms traded on the Tokyo stock exchange over the 1975–1995 period. Second, we investigate whether exchange‐rate risk is priced in the Japanese equity market using both unconditional and conditional multifactor asset pricing testing procedures. We find a significant relation between contemporaneous stock returns and unanticipated yen fluctuations. The exposure effect on multinationals and high‐exporting firms, however, is found to be greater in comparison to low‐exporting and domestic firms. Lagged‐exchange rate changes on firm value are found to be statistically insignificant implying that investors are able to assess the impact of exchange‐rate changes on firm value with no significant delay. The industry level analysis corroborates the cross‐sectional findings for Japanese firms in that they are sensitive to contemporaneous unexpected exchange‐rate fluctuations. The co‐movement between stock returns and changes in the foreign value of the yen is found to be positively associated with the degree of the firm's foreign economic involvement and inversely related to its size and debt to asset ratio. Asset pricing tests show that currency risk is priced. We find corroborating evidence in support of the view that currency exposure is time varying. Our results indicate that the foreign exchange‐rate risk premium is a significant component of Japanese stock returns. The combined evidence from the currency exposure and asset pricing analyses, suggests that currency risk is priced and, therefoe, has implications for corporate and portfolio managers.     

The non-linear relationship between oil prices and stock prices: Evidence from oil-importing and oil-exporting countries

This paper investigates the long-run dynamics between stock and oil prices over the period from March 13, 2001 to August 25, 2017 using the Rafailidis and Katrakilidis (2014) approach, which includes the structural breaks in the relationship between the variables in a Dynamic Ordinary Least Squares model. The approach verifies the existence of cointegration and asymmetry. The main results indicate that when using nonlinear approaches, we can find cointegration and asymmetry. For oil-exporting countries, a positive long-term relationship was found between oil and stock prices. In this case, the wealth effect prevailed for these countries. For oil-importing countries with developed economies, a negative signal was found, confirming that in these economies the business cost channel prevailed. However, oil-importing countries with emerging economies have experienced a positive sign in the long-term relationship, probably due to the economic cycle. In addition, only the United States has seen asymmetric adjustments in the long-term relationship between oil and stock prices.     

ON THE DYNAMIC RELATION BETWEEN STOCK PRICES AND EXCHANGE RATES

Abstract In this study we apply recent advances in time-series analysis to examine the intertemporal relation between stock indices and exchange rates for a sample of eight advanced economies. An error correction model (ECM) of the two variables is employed to simultaneously estimate the short-run and long-run dynamics of the variables. The ECM results reveal significant short-run and long-run feedback relations between the two financial markets. Specifically, the results show that an increase in aggregate domestic stock price has a negative short-run effect on domestic currency value. In the long run, however, increases in stock prices have a positive effect on domestic currency value. On the other hand, currency depreciation has a negative short-run and long-run effect on the stock market.     

基于Copula函数的国际原油价格与股票市场收益的相关性研究

针对国际原油价格与金砖五国股票市场收益之间的相关性问题,使用 AR(p)-GARCH(1,1)-Copula 模型进行检验。运用广义误差分布(GED)获取收益残差序列,对 WTI 原油价格和金砖五国股市收益之间的相关性进行实证分析。研究结果表明,国际原油价格与中国股市收益呈现微弱的相关关系,而与其他四国股市收益的相关关系较为明显。用时变 SJC Copula 模型刻画国际原油价格与金砖五国股票市场收益的相关性最为合适。     

Exchange Rates and the Conversion of Currency‐Specific Risk Premia

How do the risk factors that drive asset prices influence exchange rates? Are the parameters of asset price processes relevant for specifying exchange rate processes? Most international asset pricing models focus on the analysis of asset returns given exchange rate processes. Little work has been done on the analysis of exchange rates dependent on asset returns. This paper uses an international stochastic discount factor (SDF) framework to analyse the interplay between asset prices and exchange rates. So far, this approach has only been implemented in international term structure models. We find that exchange rates serve to convert currency‐specific discount factors and currency‐specific prices of risk – a result linked to the international arbitrage pricing theory (IAPT). Our empirical investigation of exchange rates and stock markets of four countries presents evidence for the conversion of currency‐specific risk premia by exchange rates.     

High-frequency information content in end-user foreign exchange order flows

This article considers the impact of foreign exchange (FX) order flows on contemporaneous and future stock market returns using a new database of customer order flows in the euro-dollar exchange rate market as seen by a leading European bank. We do not find clear contemporaneous relationships between FX order flows and stock market changes at high frequencies, but FX flows do appear to have significant power to forecast stock index returns over 1–30 min horizons, after controlling for lagged exchange rate and stock market returns. The effects of order flows from financial customers on future stock market changes are negative, while the effects of corporate orders are positive. The latter results are consistent with the premise that corporate order flows contain dispersed, passively acquired information about fundamentals. Thus, purchases of the dollar by corporate customers represent good news about the state of the US economy. Importantly, though, there also appears to be extra information in corporate flows which is directly relevant to equity prices over and above the impact derived from stock prices reacting to (predicted) exchange rate changes. Our findings suggest that financial customer flows only affect stock prices through their impact on the value of the dollar.     

Local risk factors in emerging markets: Are they separately priced?

We provide new evidence on the pricing of local risk factors in emerging stock markets. We investigate whether there is a significant local currency premium together with a domestic market risk premium in equity returns within a partial integration asset pricing model. Given previous evidence on currency risk, we conduct empirical tests in a conditional setting with time-varying prices of risk. Our main results support the hypothesis of a significant exchange risk premium related to the local currency risk. Exchange rate and domestic market risks are priced separately for our sample of seven emerging markets. The empirical evidence also suggests that although statistically significant, local currency risk is on average smaller than domestic market risk but it increases substantially during crises periods, when it can be almost as large as market risk. Disentangling these two factors is thus important in tests of international asset pricing for emerging markets.     

Systematic risk, and oil price and exchange rate sensitivities in Asia-Pacific stock markets

This paper examines the relationship between beta risk and realized stock index return in the presence of oil and exchange rate sensitivities for 15 countries in the Asia-Pacific region using the international factor model. Thirteen of the 15 countries have the expected beta signs and show significant sensitivity to domestic risk when the world stock market is in both up and down modes. In terms of oil sensitivity, only the Philippines and South Korea are oil-sensitive to changes in the oil price in the short run, when the price is expressed in local currency only. Basically no country shows sensitivity to oil price measured in US dollar regardless whether the oil market is up or down. Nine countries are affected by changes in the exchange rate. In terms of relative factor sensitivity distribution, one is willing to conclude that these stock markets are more conditionally sensitive to local currency oil price changes than to beta risk wherever the relationships are significant.     

A 10-year retrospective on the determinants of Russian stock returns

We study factors influencing returns at the Russian stock market from 1995 to 2004, putting emphasis on how these evolved over time. We find that the relationship is highly unstable and this instability is not confined to financial crises alone. Most computed statistics exhibit constant ups and downs, but there has been recently a sharp rise in explainability of stock returns. Domestic factors have been playing a gradually diminishing role, while the importance of international factors has been increasing. In recent years, the effect of oil prices and foreign exchange rates has diminished, the impact of US stock prices and international and domestic interest rates has increased, while the influence of monetary aggregates such as gold reserves and credit balances has fallen to practically zero.     

On the relationship between exchange rates and equity returns: A new approach

This paper employs a new approach in order to investigate the underlying relationship between stock markets and exchange rates. Current approaches suggest that the relative equity market performance of two countries is linked to their exchange rate. In contrast, this study proposes an alternative approach where one global variable – global equity market returns – is believed to have an effect on exchange rates, with the relative interest rate level of a currency determining the sign of the relationship. Our empirical findings suggest that exchange rates and global stock market returns are strongly linked. The value of currencies with higher interest rates is positively related with global equity returns, whereas the value of currencies with lower interest rates is negatively related with global equity returns.     

石油美元面临的挑战与对策研究

石油美元,最初作为上世纪70年代中期石油输出国,由于石油价格大幅提高后增加的石油收入,在扣除用于发展本国经济和国内其他支出后的盈余资金而被人们熟悉,但其真正引起人们关注的是石油货币霸权的斗争。本文探讨了石油货币霸权的争夺以及石油美元循环的不可持续的宏观经济现状,通过对石油美元目前面临的挑战研究提出有益的应对策略。     

Time-varying impacts of demand and supply oil shocks on correlations between crude oil prices and stock markets indices

This paper investigates the time-varying impacts of demand and supply oil shocks on correlations between changes in crude oil prices and stock markets returns. The findings, obtained by means of a DCC-GARCH from June 2006 to June 2016, indicate that demand shocks positively affected the correlations between crude oil prices and stock market returns from late 2007 to mid-2008, during the apex of the financial markets volatility; from early 2009 to mid-2013, during global economy recovery from the financial crisis; and after 2015, when uncertainties about the Chinese growth and the US economy upturning arose. The dynamic conditional correlation, obtained after the removal of demand shocks effects, presented an average value of 0.13 when all economy sectors were considered and of 0.03 when the energy sector returns were excluded from the stock index. These correlations, still positive on average, suggest that exogenous supply oil shocks had little impact on US mainly enterprises cash flows over the last 10 years. Exceptions are the periods from 2006 to financial crisis and from 2014 until April 2016, when significant and unpredicted changes in oil market happened, considerably affecting the value of the main US companies.     

Crossing the lines: The conditional relation between exchange rate exposure and stock returns in emerging and developed markets

This paper examines the importance of exchange rate exposure in the return generating process for a large sample of non-financial firms from 37 countries. We argue that the effect of exchange rate exposure on stock returns is conditional and show evidence of a significant return impact to firm-level currency exposures when conditioning on the exchange rate change. We further show that the realized return to exposure is directly related to the size and sign of the exchange rate change, suggesting fluctuations in exchange rates as a source of time-variation in currency return premia. For the entire sample the return impact ranges from 1.2 to 3.3% per unit of currency exposure, and it is larger for firms in emerging markets compared to developed markets. Overall, the results indicate that foreign exchange rate exposure estimates are economically meaningful, despite the fact that individual time-series results are noisy and many exposures are not statistically significant, and that exchange rate exposure plays an important role in generating cross-sectional return variation. Moreover, we show that the relation between exchange rate exposure and stock returns is more consistent with a cash flow effect than a discount rate effect.     

Risk sharing in a financial market with endogenous option prices

This article investigates a financial market in which investors may trade in risk-free bonds, stock and put options written on the stock. In each period, stock and option prices are simultaneously determined by market clearing. While the introduction of put options will decrease the systematic risk in the financial market, it will increase the price of risk. Investors with mean-variance preferences will generally hold portfolios containing the primary asset and the put option and may use the option to increase the risk in their wealth position in exchange for higher returns. Aggregate wealth is unaffected by an option market when there are no spillover effects on stock prices, and it is shown that short selling of options will increase the volatility of individual wealth positions. Investors with erroneous beliefs may on average be better off not trading in put options.