Do oil futures prices predict stock returns?

This paper explores stock return predictability by exploiting the cross-section of oil futures prices. Motivated by the principal component analysis, we find the curvature factor of the oil futures curve predicts monthly stock returns: a 1% per month increase in the curvature factor predicts 0.4% per month decrease in stock market index return. This predictive pattern is prevailing in non-oil industry portfolios, but is absent for oil-related portfolios. The in- and out-of-sample predictive power of the curvature factor for non-oil stocks is robust and outperforms many other predictors, including oil spot prices. The predictive power of the curvature factor comes from its ability to forecast supply-side oil shocks, which only affect non-oil stocks and are hedged by oil-related stocks.     

Does oil price have similar effects on the exchange rates of BRICS?

Motivated by the crucial status of oil price and exchange rates in world finance and economy, we apply daily data from August 2005 to February 2019 to investigate the impact of oil price shocks on the exchange rate of BRICS countries. This paper first adopts a new framework and EEMD method to decompose oil shocks and exchange rate series, respectively. With these econometric methods, the final research variables in this paper are constructed, including two types of oil shocks and three kinds of exchange rate series. The ARDL approach and VAR model are then employed to detect the influence of oil shocks on exchange rates in different frequencies, corresponding to the stationarity of series. The evidence, based on the original exchange rate series reveals that two oil price shocks can produce different effects on net oil-importing countries and net oil-exporting countries, while the results from different frequencies show that exchange rates will have a significant response to oil shocks only at a high frequency. It is worth noting that China is a unique case in BRICS, the relations between its exchange rate and oil price shocks is far insignificant than that of the other countries.     

The effect of CEO luck on the informativeness of stock prices: Do lucky CEOs improve stock price informativeness?

CEOs are “lucky” when they are granted stock options on days when the stock price is lowest in the month of the grant, implying opportunistic timing and severe agency problems (Bebchuk et al., 2010). Using idiosyncratic volatility as our measure of stock price informativeness, we find that lucky CEOs improve the informativeness of stock prices significantly. In particular, CEO luck raises the degree of informativeness by 4.39%. Powerful CEOs who can circumvent governance mechanisms and successfully practice opportunistic timing of options grants are so secured in their positions that they have fewer incentives to conceal information, thereby improving informativeness.     

Do sovereign rating changes trigger spillover effects?

This paper examines whether changes in a particular country's sovereign ratings provided by Standard and Poor's and Moody's trigger a spillover effect on other countries. The analysis focuses on two sets of countries namely where there are trade links between the countries and where there are links between the financial markets of each country. The findings indicate that there are more significant results when the links in financial markets are analysed compared to trade links. Moreover, the results are dependent on which rating is under analysis, that is, Standard and Poor's Local Currency, Standard and Poor's Foreign Currency, Moody's Bank Deposit or Moody's bonds and notes. Finally, there does appear to be a contamination effect for both upgrades and downgrades among the countries.     

Do investors prefer round stock prices? Evidence from Israeli IPO auctions

We find round number clustering in orders submitted by investors in Israeli IPO auctions. Explanations offered for price clustering, such as dealer collusion or implicit agreement to simplify negotiations, cannot explain price clustering in this market. Therefore, this is direct evidence that investors prefer round numbers.     

Do external political pressures affect the Renminbi exchange rate?

This paper investigates whether external political pressure for faster Renminbi appreciation affects both the daily returns and the conditional volatility of the Renminbi central parity rate. We construct several political pressure indicators pertaining to the Renminbi exchange rate, with a special emphasis on the US pressure, to test the hypothesis. After controlling for Chinese macroeconomic surprise news, we find that US and non-US political pressure does not have a significant influence on Renminbi's daily returns. However, evidence suggests that political pressures, and especially those from the US, have statistically significant impacts on the conditional volatility of the Renminbi. Furthermore, we conduct the same exercise on the 12-month Renminbi non-deliverable forward rate. We find that the non-deliverable forward market is highly responsive to macroeconomic surprise news and there is some evidence that Sino-US bilateral meetings affect the conditional volatility of the Renminbi non-deliverable forward rate.     

Do stock prices influence corporate decisions? Evidence from the technology bubble

We study the capital investment, stock issuance, and cash savings behavior of non-tech manufacturers (old economy firms) during the 1990s technology bubble. Our empirical results show that high stock prices affect corporate policies because they relax financing constraints. During the tech bubble, constrained non-tech firms' investment responded strongly to “high stock prices” (specifically, the component of price that is not captured by fundamentals). They also issued stock in response to that overvaluation effect, saving part of the proceeds in their cash accounts. We find no such patterns for unconstrained non-tech firms, nor for tech firms. Our findings are not consistent with the notion that managers systematically issue overvalued stocks and invest in ways that transfer wealth from new to old shareholders. More broadly, they suggest that what appears to be overvaluation in one sector of the economy may have positive externalities for other sectors.     

Do heterogeneous oil price shocks really have different effects on earnings management?

Under the modern corporate governance structure, there is a knowledge gap in how companies' financial reporting practices respond to oil price shocks in China. To fill this gap, we employ China's A-share listed companies and follow Kilian (2009) study to investigate how the three types of classical oil shocks affect corporate earnings management heterogeneously. We also consider the role of oil implied volatility in this relationship and further examine the possible heterogeneity between energy-related and non-energy-related subsamples. The empirical results show that there are variant effects among the heterogeneous oil price shocks on earnings management. Specifically, oil supply shocks stimulate firms to manipulate more accrual and real earnings, and firms are more likely to carry out accrual earnings management downward. Oil aggregate demand shocks weaken the degree of accrual earnings manipulation and mainly reduce the negative accrual earnings manipulation. Oil-specific demand shocks constrain the earnings management behavior of companies and improve their accounting quality. Besides, the increased uncertainty of oil price weakens the promotion effect of oil supply shocks on earnings manipulation, and the moderating effect occurs mainly in downward earnings management. Furthermore, the subsample estimated results reveal that oil price shocks do not affect the degree of accrual earnings management of energy-related companies. Instead, they impact the non-energy-related companies. Overall, our findings provide a series of targeted policy recommendations to mitigate the principal-agent problems and cope with energy price volatility risks.     

Do institutional investors have superior stock selection ability in China?

This paper uses unique data on the shareholdings of both institutional and individual investors to directly investigate whether institutional investors have better stock selection ability than individual investors in China. Controlling for other factors, we find that institutional investors increase (decrease) their shareholdings in stocks that subsequently exhibit positive (negative) short- and long-term cumulative abnormal returns. In contrast, individual investors decrease (increase) their shareholdings in stocks that subsequently exhibit positive (negative) short- and long-term cumulative abnormal returns. These findings indicate that institutional investors have superior stock selection ability in China.     

Do stock prices reflect undisclosed financial statement information? Evidence from the OTCBB

I exploit a regulatory change that mandated that Over-the-Counter Bulletin Board (OTCBB) firms must comply with the reporting requirements of the 1934 Securities Exchange Act. I use this change to examine the association between equity values and financial statement data in voluntary and mandatory disclosure environments. Before the change, disclosure of financial statement information was voluntary for most of these firms. I study firms that initiate SEC filing after the change and classify them as disclosing and nondisclosing based on whether they voluntarily disclosed financial statement information before the regulatory change. In these firms’ initial SEC filings after the eligibility rule, they retroactively disclose financial statement information for the year prior to compliance with the rule. Thus I can observe previously withheld financial data. I find that the choice to voluntarily disclose is negatively associated with firm characteristics related to proprietary costs and with situations in which accounting information plays a less important role in resolving information asymmetry. For nondisclosing firms, I find evidence that equity values reflect financial statement data, even though this information was not publicly available, and that compliance with mandatory SEC disclosure requirements strengthens this association. For disclosing firms, I find evidence that suggests investors viewed their voluntary disclosure of financial statement data as credible and fail to find evidence that compliance with mandatory reporting requirements enhances this association.     

Do bond rating changes affect the information asymmetry of stock trading?

Using a sample of 279 upgrades and 310 downgrades from 1996 to 2004, we find that bond rating changes affect the information asymmetry of stock trading and other measures of information risk. Specifically, when a firm's bond rating is upgraded, its stock information asymmetry and its analysts' earnings forecast dispersion are significantly reduced, while the institutional equity holdings of its shares are significantly increased. The reverse is true for a downgrade. In addition, the degree of change in stock information asymmetry is positively associated with the magnitude of the bond rating changes.     

Are imputation credits capitalised into stock prices?

We investigate whether imputation tax credits are capitalised into Australian stock prices by utilising discounted cash‐flow valuation models and examining the relation between earnings yields and imputation credit yields. While imputation credits are valuable to many investors, the evidence that they are reflected in share prices is at best mixed and largely unconvincing. Our results reveal that imputation credits fail to lower realised returns casting doubts over whether imputation credits are priced from the perspective of longer‐term buy‐and‐hold investors. If so, such investors can expect to fully benefit from their imputation credits, and imputation effects may not impact on the cost of capital.     

Can trade costs explain why exchange rate volatility does not feed into consumer prices?

If countries specialize in imperfectly substitutable goods, trade costs increase the share of expenditure devoted to domestic output, reducing the exposure of consumer price inflation to exchange rate changes. I present a multi-country flexible-price model where expenditure shares are inversely related to trade costs through a gravity equation. In this setting, consumer price inflation can be approximated as an expenditure-share-weighted average of the contributions to inflation from all countries. I use data from 24 OECD countries, 1970-2003, to estimate a structural gravity model. I combine the fitted expenditure shares from the estimation with actual data on exchange rates to construct predictions of inflation. The behavior of these predictions indicates that trade costs can explain both qualitatively and quantitatively the failure of exchange rate volatility to feed into inflation.     

Can interest rate factors explain exchange rate fluctuations?

The level, slope, and curvature of the yield curve reflect time variation in investors’ risk premia and are known predictors of excess bond returns and economic activity. In this paper, I develop a term structure model under complete markets and no arbitrage to relate these interest rate factors to exchange rate fluctuations. The Gaussian properties of the stochastic discount factors imply non-linearities in exchange rate risk premia that are shown to account for up to half of the in-sample variation in one-year currency returns for different country pairs during the 1980s–2015 period. I find that interest rate factors help explain exchange rate fluctuations in and out of sample, particularly at longer horizons, and yield profitable currency portfolios relative to standard carry trade strategies.     

Does stock exchange consolidation improve market liquidity? A study of stock exchange acquisition in Russia

The last couple of decades have witnessed significant institutional and structural changes in financial sector within a worldwide trend toward consolidation. In the segment of organized trading stock exchanges merge and develop into large and diversified publicly traded companies. These processes are rather complicated in case of a transition economy like Russia. In December 2011 MICEX, the first largest and state-controlled stock exchange acquired RTS, the second largest and privately owned stock exchange primarily designed for foreign investors. We empirically investigate whether the acquisition resulted in improved liquidity of the Russian stock market which was one of the declared acquisition objectives. We use the Kolmogorov–Smirnov and the Wilcoxon tests to compare market-wide liquidity in several discrete periods pre and post acquisition. A deep and thorough insight into liquidity performance is ensured by assessing liquidity from limit order book data of tick frequency along three dimensions (tightness, immediacy, and elasticity).     

Assessing exchange rate dynamics of East Africa: fragmented or integrated?

This article investigates the dynamics of the currency markets of the East African Community, using forecast error variance decompositions from vector autoregressions. It shows that the exchange rates of Kenya, Tanzania and Uganda have been mainly driven by shocks to their own economies, while those of Burundi and Rwanda have been increasingly dictated by spillovers from the dollar and euro since the global financial crisis. Interactions within the region are limited, although there is some sign of elevation. This makes a clear contrast with European currency markets prior to the euro, where spillovers from the German mark dominated the markets.     

Sources of exchange rate fluctuations: Are they real or nominal?

I analyze the role of real and monetary shocks on exchange rate behavior using a structural vector autoregressive model of the US vis-à-vis the rest of the world. The shocks are identified using sign restrictions on the responses of the variables to orthogonal disturbances. These restrictions are derived from the predictions of a two-country DSGE model. I find that monetary shocks are unimportant in explaining exchange rate fluctuations. By contrast, demand shocks explain between 21% and 37% of exchange rate variance at 4-quarter and 20-quarter horizons, respectively. The contribution of demand shocks plays an important role but not of the order of magnitude sometimes found in earlier studies. My results, however, support the recent focus of the literature on real shocks to match the empirical properties of real exchange rates.     

Forecasting the exchange rate: A monetary or random walk phenomenon?

This paper evaluates the forecasting accuracy of monetary and random walk models of the exchange rate. Instrumental-variable estimates of the ‘simple’ monetary model are not supported by the data, while the full-information-maximum-liklihood estimates of its rational-expectations counterpart are. The rational-expectations monetary model is operationalized using the results of Hansen and Sargent (1980) and Flavin (1981) and Box-Jenkins time series techniques. Monthly data on the US and UK economics over the recent flexible exchange rate period serve as the case study.     

Monetary policy news and exchange rate responses: Do only surprises matter?

We use data from the Federal Funds Futures market to show that exchange rates respond to only the surprise component of an actual US monetary policy change and we illustrate that failure to disentangle the surprise component from the actual monetary policy change can lead to an underestimation of the impact of monetary policy, or even to a false rejection of the hypothesis that monetary policy impacts exchange rates. Unlike the recent contributions to the literature on exchange rates and monetary policy news, our testing method avoids the imposition of assumptions regarding exchange rate market efficiency. We also add to the debate on how quickly exchange rates respond to news by showing that the exchange rates under study absorb monetary policy surprises within the same day as the news are announced.     

Do monetary policy announcements affect stock prices in emerging market countries? The case of Thailand

We examine the effect of monetary policy announcements in Thailand, which is one of emerging market countries in Asia, on stock prices at the firm level. We find that the expected change, rather than the unexpected change, in interest rates affects stock prices. The stock price response to the interest rate announcement is asymmetric. For instance, the relation between interest rate surprises and stock prices is conditional on the direction of the interest rate change. In general, macroeconomic conditions and firm characteristics cannot explain the stock price reaction to the announcement. In addition, stock prices of firms in different industries appear to react heterogeneously to the interest rate announcement.