International stock return predictability: Is the role of U.S. time-varying?

This study investigates the predictability of 11 industrialized stock returns with emphasis on the role of U.S. returns. Using monthly data spanning 1980:2–2014:12, we show that there exist multiple structural breaks and nonlinearities in the data. Therefore, we employ methods that are capable of accounting for these and at the same time date stamping the periods of causal relationship between the U.S. returns and those of the other countries. First we implement a subsample analysis which relies on the set of models, data set and sample range as in Rapach et al. (J Finance LXVIII(4):1633–1662, 2013). Our results show that while the U.S. returns played a strong predictive role based on the OLS pairwise Granger causality predictive regression and news-diffusion models, its role based on the adaptive elastic net model is weak. Second, we implement our preferred model: a bootstrap rolling window approach using our newly updated data on stock returns for each countries, and find that U.S. stock return has significant predictive ability for all the countries at certain sub-periods. Given these results, it would be misleading to rely on results based on constant-parameter linear models that assume that the relationship between the U.S. returns and those of other industrialized countries are permanent, since the relationship is, in fact, time-varying, and holds only at specific periods.     

Environmental regulation and MNEs location: Does CSR matter?

We investigate whether firms with relatively low environmental standards are more often located in countries that are poor, corrupt or have weak environmental regulations. We find new empirical evidence in favor of the Pollution Haven Hypothesis, which states that MNEs are transferring their dirty operations to countries with weak environmental regulation. Our findings suggest that these are not necessarily the poorest or most corrupt countries. We establish that MNEs with strong social responsibility avoid locating their operations in countries with weak environmental regulation.     

Expropriation risk and FDI in developing countries: Does return of capital dominate return on capital?

Previously reported effects of institutional quality and political risks on foreign direct investment (FDI) are mixed and, therefore, difficult to interpret. We present empirical evidence suggesting a relatively clear, statistically robust, and intuitive characterization. Institutional factors that affect the likelihood of an abrupt and total loss of foreigners’ capital (i.e., return of capital) dominate factors that affect rates of return conditional on a strictly positive terminal investment value (i.e., return on capital). The evidence is consistent with the hypothesis that expropriation risk is most important among the available measures of different dimensions of institutional quality. A one-standard-deviation reduction in expropriation risk is associated with a 72% increase in FDI, which is substantially larger than the effects of any other dimensions of institutional quality as simultaneously estimated in our empirical models of expected FDI inflows. We show that this evidence is consistent with the predictions of a standard theory of FDI under imperfect contract enforcement and multiple dimensions of political risk.     

International bonds and the currency risk: How do macroshocks affect returns?

The currency translation risk borne by international investors and the riskiness of returns on long-term bonds both affect international investors' decisions. For the U.S. investor, excess returns on German, Japanese, Canadian, and U.K. bonds have been positively correlated with the respective excess local currency returns (1978–1997). However, for investors who measure their performance in the currencies of these countries, the comparable correlation between U.S. bond returns and positions in U.S. dollars has been negative. Traditional interest rate or portfolio flow models fail to explain the asymmetry. A sticky-price model with spillover effects from the U.S. to other countries is used to explore the effect of macroshocks on these returns.     

Stock return autocorrelations and predictability in the Chinese stock market—Evidence from threshold quantile autoregressive models

This paper applies the threshold quantile autoregressive model to study stock return autocorrelations and predictability in the Chinese stock market from 2005 to 2014. The results show that the Shanghai A-share stock index has significant negative autocorrelations in the lower regime and has significant positive autocorrelations in the higher regime. It attributes that Chinese investors overreact and underreact in two different states. These results are similar when we employ individual stocks. Besides, we investigate stock return autocorrelations by different stock characteristics, including liquidity, volatility, market to book ratio and investor sentiment. The results show autocorrelations are significantly large in the middle and higher regimes of market to book ratio and volatility. Psychological biases can result into return autocorrelations by using investor sentiment proxy since autocorrelations are significantly larger in the middle and higher regime of investor sentiment. The empirical results show that predictability exists in the Chinese stock market.     

Do China and oil exporters influence major currency configurations?

This paper analyses the impact of the shift away from a US dollar focus of systemically important emerging market economies (EMEs) on configurations between the US dollar, the euro and the yen. Given the difficulty that fixed or managed US dollar exchange rate regimes remain pervasive and reserve compositions mostly kept secret, the identification strategy of the paper is to analyse the market impact on major currency pairs of official statements made by EME policy-makers about their exchange rate regime and reserve composition. Developing a novel database for 18 EMEs, we find that such statements not only have a statistically but also an economically significant impact on the euro, and to a lesser extent the yen against the US dollar. The findings suggest that communication hinting at a weakening of EMEs’ US dollar focus contributed substantially to the appreciation of the euro against the US dollar in recent years. Interestingly, EME policy-makers appear to have become more cautious in their communication more recently. Overall, the results underscore the growing systemic importance of EMEs for global exchange rate configurations.     

Acquirer's return and the choice of acquisition targets: does acquisition experience matter?

We study a sample of 6503 UK acquisitions completed between 1985 and 2004 and control for previous deals similarities. Returns for frequent acquirers decrease constantly but they remain positive through high-order deals. We do not detect an improving pattern of returns but, at best, a stable one when the deal is settled for cash. Using ‘characteristics-based’ experience variables, our multivariate analysis shows that the acquirers’ returns are unaffected by prior acquisition experience. However, we find solid evidence for acquirers drawing inferences from prior experience in designing the method of payment, selecting the organizational form of the target firm and engaging in focused acquisitions, which is consistent with learning through acquisitions. The results are robust to various consistency checks.     

Global reserve currency system: Why will the dollar standard give way to a tripolar currency order?

The recent financial crisis highlighted some of the underlying defects in the dollar-based reserve system. This paper argues that the era of the US hegemonic stability and unipolarity, which provided the foundation for the dollar’s sustenance as the pre-eminent global reserve currency, has already peaked and the global economy of the future will revolve around a multipolar order. The rise of China, along with other emerging markets, is rapidly redrawing the traditional Western dominated global economic system. The structural challenges facing the American economy along with the extraordinary expansion of Federal Reserve’s balance sheet and the explosion of the US government debt will diminish the attractiveness of the dollar standard going forward. Our analysis suggests that a tripolar currency order—consisting of the dollar, the yuan and the euro—will replace the dollar standard in the coming decades.     

Corruption and total factor productivity: level or growth effects?

This paper adopts a productivity-based perspective in order to study how corruption conditions the efficiency levels of the economies and their TFP growth rate. It attempts to identify the channels through which corruption can influence productivity growth, whether by conditioning improvements in relative efficiency levels or by shifting the production frontier. The results point out that corruption negatively affects both the levels of efficiency at which the economies perform and the growth rate of TFP, suggesting that the negative impact of corruption on technological progress manifest through its influence on human capital.     

Banking,currency, stock market and debt crises in Spain, 1850–1995

What type of crisis is generated when debt increases? We extend the literature by framework by introducing currency and stock market crises in the analysis. We apply our proposal to the case of Spain, since this is a country that has experienced a very important amount of financial crises from the nineteenth century onwards. We find the same results as the previous literature for the determinants of banking and debt crises but substituting external and public debt with perpetual debt and where perpetual debt has a less important role than crises in the private sector. Moreover, we find evidence in favour of the hypothesis that currency crises depend strongly and positively on financial centre crises and negatively and mildly on perpetual debt. We justify the negative relalionship due to an inflation tax. We also find evidence in favour of the hypothesis that stock market crises depend only positively and strongly on financial centre crises.     

Long horizon predictability of exchange rates: Is it for real?

This paper reexamines recent results on the predictability of nominal exchange rate returns by means of fundamental models. Using a monthly sample of the post-Bretton Woods period we show that the in-sample fit between long-horizon exchange rate returns and various models is not significant if we correct for the persistence that is caused by overlapping data and spurious regression phenomena. The long horizon out-of-sample predictive power of the fundamental exchange rate models is found to be very weak. This is especially the case when we conduct the out-of-sample forecasting tests for a longer time span than that of earlier papers. We show that this failure in forecasting performance, resulting from extending the time span, is due to the absence of cointegration between exchange rates and structural exchange rate models. First version received: September 1997/final version received: November 1998     

A case for complements? Location and attendance in Major League Soccer

As Major League Soccer (MLS) continues to award expansion franchises throughout North America, the league must be considerate of how new clubs may impact attendance levels at nearby clubs. Regardless of whether new MLS clubs are awarded to cities with strong North American Soccer League histories, league officials must be mindful of the effect that geographically close competitors can have on attendance. Perhaps stemming from the limited number of clubs in competition, MLS teams currently appear to operate as strategic complements to one another, increasing season-long attendance as teams locate closer to one another.     

Does the currency board matter? US news and Argentine financial market reaction

Using a Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model, we study the effects of the US monetary policy and macroeconomic announcements on Argentine money, stock and foreign exchange markets over the period January 1998 to July 2007. We show, first, that both types of news have a significant impact on all markets. Second, there are noticeable differences in reaction for different subsamples: Argentine money markets were more dependent on US news under the currency board than after it was abandoned as the floating exchange rate partly absorbs spillover effects from the US. Finally, we find that the US-dollar-denominated assets react less to US news than peso-denominated assets, which suggests that the currency board was not completely credible during its final years.     

Runaway judges? Selection effects and the jury

Reports about runaway jury awards have become so common thatit is widely accepted that the U.S. jury system needs to be'fixed'. Proposals to limit the right to a jury trial and increasejudicial discretion over awards implicitly assume that judgesdecide cases differently than juries. We show that there arelarge differences in mean awards and win rates across juriesand judges. But if the types of cases coming before juries aredifferent from those coming before judges, mean award and winrates may differ even if judges and juries would make the samedecisions when faced with the same cases. We find that mostof the difference in judge and jury mean awards can be explainedby differences in the sample of cases coming before judges andjuries. On some dimensions, however, there remain robust andsuggestive differences between judges and juries.     

Location Choice of Multinational and Local Firms in Vietnam: Birds of a Feather Flock Together?

Vietnam enacted the Enterprises Act in 1999, leading to a sharp increase in the number of registered enterprises. Meanwhile, foreign direct investment (FDI) into the country continued to increase in the 2000s. Thus, this paper examines the location choice of multinational and local firms in Vietnam. We adopt the mixed logit model to conduct an empirical analysis of the possible interaction of neighbouring regions and attracting FDI. Using firm‐level data for the period 2000–2005, the results show that most provincial characteristics exert similar influences on foreign and domestic entrants, except for wage rates, which exhibit an opposing effect. The agglomeration of FDI entices foreign and domestic firms to locate in the same region, whereas the agglomeration of local firms is less relevant to the location choice of all firms. The spatial interdependence effect of attracting investment is particularly relevant to local entrants. Provinces with more foreign (domestic) firms reveal a complementary (competition) effect on the attractiveness of their neighbouring provinces.     

Post-crisis credit slowdown in South-East Europe: return to normality?

What explains the post-crisis slowdown in bank credit to private sector in the South-East European economies? We try to answer this question, by comparing the actual credit growth to the fundamental and equilibrium growths. The fundamental growth is defined as the growth justified by the fundamentals, the equilibrium growth—as the growth consistent with the economy being in medium-term equilibrium. Results suggest that the slowdown reflects both return of the credit activity to its fundamental value, and return of the fundamental values to their equilibrium levels, after years of excessiveness during the pre-crisis period. Rapid credit growth, as in the pre-crisis period, should not be expected in the near future.     

Is energy consumption sensitive to foreign capital inflows and currency devaluation in Pakistan?

This study investigates the relationship between foreign capital inflows and energy consumption by incorporating economic growth, exports and currency devaluation in energy demand function for the case of Pakistan. The long-run and short-run effects are examined via ARDL bounds testing procedure. Foreign capital inflows and currency devaluation (economic growth and exports) decrease (increase) energy consumption in long-run. The results confirm a feedback effect between foreign capital inflows and energy consumption. These findings would be helpful to policy makers in designing comprehensive economic and energy policies for utilizing foreign capital inflows as a tool for optimal use of energy sources to enhance economic development in long run.     

Banking on the Poor? Branch Location and Nonfarm Rural Development in Bangladesh

The geographic location of banks' branches is used to test whether they are responding to unexploited gains from nonfarm rural development in Bangladesh. The branch locations of Bangladesh's Grameen Bank are compared with those of traditional banks. The potential gains from switching out of farming are measured, allowing for heterogeneity in household characteristics conducive to success in nonfarm activities. It is found that many farmers are poorly equipped for success in nonfarm enterprises. Even so, seemingly feasible but unrealized gains from switching are revealed. Grameen Bank is attracted to areas where those gains favor the poor. Other banks appear to put higher weight on gains to those other than the poor.     

The illusive quest: Do international capital controls contribute to currency stability?

We investigate the effectiveness of capital controls in insulating economies from currency crises, focusing in particular on both direct and indirect effects of capital controls and how these relationships may have changed over time in response to global financial liberalization and the greater mobility of international capital. We predict the likelihood of currency crises using standard macroeconomic variables and a probit equation estimation methodology with random effects. We employ a comprehensive panel data set comprised of 69 emerging market and developing economies over 1975–2004. Both standard and duration-adjusted measures of capital control intensity (allowing controls to “depreciate” over time) suggest that capital controls have not effectively insulated economies from currency crises at any time during our sample period. Maintaining real GDP growth and limiting real overvaluation are critical factors preventing currency crises, not capital controls. However, the presence of capital controls greatly increases the sensitivity of currency crises to changes in real GDP growth and real exchange rate overvaluation, making countries more vulnerable to changes in fundamentals. Our model suggests that emerging markets weathered the 2007–2008 crisis relatively well because of strong output growth and exchange rate flexibility that limited overvaluation of their currencies.     

Where does return and volatility come from? The case of Asian ETFs

We analyze return and volatility of Asian iShares traded in the U.S. The difference in trading schedules between the U.S. and Asia offers a unique market setting that allows us to distinguish various return and volatility sources. We find Asian ETFs have higher overnight volatility than daytime volatility, explained by public information released during each local market's trading session. Local Asian markets also play an important role in determining each Asian ETF return. Nonetheless, returns for these funds are highly correlated with U.S. markets, indicative of the effects of investor sentiment and location of trade. Finally, returns in the U.S. market Granger-cause returns in all six Asian markets are analyzed.