A note on cointegration of international stock market indices

Cointegration is frequently used to assess the degree of interdependence of financial markets. We show that if a stock's price follows a stock specific random walk, market indices cannot be cointegrated. Indices are a mere combination of n different random walks which itself is non-stationary by construction. We substantiate the theoretical propositions using a sample of 28 stock indices as well as a simulation study. In the latter we simulate stock prices, construct indices and test whether these indices are cointegrated. We show that while heteroscedasticity misleads cointegration tests, it is not sufficient to explain the high correlation between stock market index returns. A common random walk component and correlated price innovations are necessary to reproduce this feature.     

International money and stock market contingent claims

We develop a unified approach with closed-form solutions for pricing bonds, stocks, currencies and their derivatives. The specification assumes a fundamental risk factor represented by a stochastic positive definite matrix following a Wishart autoregressive (WAR) process. By assuming a volatility-in-mean specification for the domestic stock returns and the relative changes of exchange rates, and a domestic stochastic discount factor exponential affine with respect to the fundamental risk, it is possible to derive closed form solutions for the term structures of interest rates and for the risk-neutral probabilities while keeping the flexibility of the model. In particular:

i) The domestic and foreign term structures are jointly affine and correspond to Wishart quadratic term structures, which can ensure the positivity of interest rates;

ii) In this framework where the stock price follows a model with stochastic volatility, we obtain explicit or quasi-explicit formulas for futures and forward contracts, swaps and options. This extends results by

Heston (1993)

and

Ball and Roma (1994)

.

International stock market leadership and its determinants

We study time-varying price leadership between international stock markets using a Markov switching causality model. We demonstrate variations in the causality pattern over time, with the US being the dominant country in causing other markets. We examine the factors which determine a country’s role in the causal relationship. For country-specific factors, we show that trades openness increases price leadership. We also find that the lead–lag relationship between the stock markets is weaker during crisis periods, confirming the “wake-up call” hypothesis, with markets and investors focusing substantially more on idiosyncratic, country-specific characteristics during the crisis.     

Dynamic European stock market convergence: Evidence from rolling cointegration analysis in the first euro-decade

The introduction of the euro epitomizes European economic integration. This paper assesses the dynamic process of convergence among four major European stock markets in the first euro-decade. Using tests that allow for endogenously determined breaks in cointegrating relationships and rolling cointegration analysis, we show that although some convergence has been taking place over time, it is very much an ongoing process. There is also evidence that the German and French markets appear to be the ones with a higher degree of convergence while the dominant position of Germany within the eurozone seems to be (re)affirmed by tests conducted herein.     

Macroeconomic determinants of stock market capitalization in an emerging market: fresh evidence from cointegration with unknown structural breaks

This article explores the macroeconomic determinants of stock market development in an emerging market (Pakistan) over the period of 1974–2010. We have applied Zivot–Andrews unit root test for integrating properties of the variables and the autoregressive distributed lag bounds testing for cointegration. The direction of causality between the variables is investigated by applying the vector error-correction model Granger causality approach. Our results revealed that variables are cointegrated for long run relationship. Economic growth, inflation, financial development and investment increase stock market development, but trade openness decreases it. The causality analysis confirms that stock market development is a Granger cause of economic growth, inflation, financial development, investment and trade openness. This article indicates the importance of trade openness while formulating a comprehensive financial policy.     

社保基金投资的国际之借鉴

前不久,中国国内一场有关养老金要不要入市的讨论,引起了广泛关注。关于这个问题,国际上的经验值得借鉴。日本AIJ事件就是一个典型案例,对中国而言不啻为一个值得警醒的反面教材,从中可以得出诸多新教训,请看本栏目文章《AIJ事件:伤不起的日本养老金之殇》;关注社保基金,就不能不关注福利制度盛行的欧洲     

Modeling the joint dynamics of risk-neutral stock index and bond yield volatilities

This study examines the joint evolution of risk-neutral stock index and bond yield volatilities by using the Chicago Board Option Exchange S&P500 volatility index (VIX) and the Bank of America Merrill Lynch Treasury Option Volatility Estimate Index (MOVE). I use bivariate regime-switching models to investigate the alternation of “high-risk” and “low-risk” markets, where the high-risk regime is characterized by higher and more volatilities with weaker cross-market linkages. Common information about economic and financial conditions appears to drive VIX and MOVE fluctuations between the two risk regimes. Two-regime specifications also distinguish between information spillover and common information effects. Ignoring regime shifts leads to spurious extreme persistence and incomplete inferences about asymmetric volatility. The findings carry important implications for asset allocation.     

通胀背景下的股市投资

未来一段时间,物价会持续上涨,也就是说,证券市场处于温和通胀环境中。而通货膨胀改变资源配置方式,是造成投资机会变化的主要原因。如何在这种通胀环境下选择投资机会,是投资者面临的主要问题。     

International stock return predictability under model uncertainty

This paper examines return predictability when the investor is uncertain about the right state variables. A novel feature of the model averaging approach used in this paper is to account for finite-sample bias of the coefficients in the predictive regressions. Drawing on an extensive international dataset, we find that interest-rate related variables are usually among the most prominent predictive variables, whereas valuation ratios perform rather poorly. Yet, predictability of market excess returns weakens substantially, once model uncertainty is accounted for. We document notable differences in the degree of in-sample and out-of-sample predictability across different stock markets. Overall, these findings suggest that return predictability is neither a uniform, nor a universal feature across international capital markets.     

International comovement of stock market returns: A wavelet analysis

The assessment of the comovement among international stock markets is of key interest, for example, for the international portfolio diversification literature. In this paper, we re-examine such comovement by resorting to a novel approach, wavelet analysis. Wavelet analysis allows one to measure the comovement in the time–frequency space. In this way, one can characterize how international stock returns relate in the time and frequency domains simultaneously, which allows one to provide a richer analysis of the comovement. We focus on Germany, Japan, UK and US and the analysis is done at both the aggregate and sectoral levels.     

The geometry of crashes. A measure of the dynamics of stock market crises

This paper investigates the dynamics of stocks in the S&P 500 index for the last 30 years. Using a stochastic geometry technique, we investigate the evolution of the market space and define a new measure for that purpose that is a robust index of the dynamics of the market structure and provides information on the intensity and the sectoral impact of crises. With this measure, we analyse the effects of extreme phenomena on the geometry of the market. Nine crashes between 1987 and 2001 are compared by looking at the way they modify the shape of the manifold that describes the S&P 500 market space.     

Effects of market default risk on index option risk-neutral moments

We investigate the relative importance of market default risk in explaining the time variation of the S&P 500 Index option-implied risk-neutral moments. The results demonstrate that market default risk is positively (negatively) related to the index risk-neutral volatility and skewness (kurtosis). These relations are robust in the presence of other factors relevant to the dynamics and microstructure nature of the spot and option markets. Overall, this study sheds light on a set of economic determinants which help to understand the daily evolution of the S&P 500 Index option-implied risk-neutral distributions. Our findings offer explanations of why theoretical predictions of option pricing models are not consistent with what is observed in practice and provide support that market default risk is important to asset pricing.     

Afraid of the stock market

Review of Quantitative Finance and Accounting - This study demonstrates the way investors psychological traits influence their financial behaviors in the stock market. Results from the Health and...     

Volatility spillovers between oil prices and the stock market under structural breaks

This paper employs univariate and bivariate GARCH models to examine the volatility of oil prices and US stock market prices incorporating structural breaks using daily data from July 1, 1996 to June 30, 2013. We endogenously detect structural breaks using an iterated algorithm and incorporate this information in GARCH models to correctly estimate the volatility dynamics. We find no volatility spillover between oil prices and US stock market when structural breaks in variance are ignored in the model. However, after accounting for structural breaks in the model, we find strong volatility spillover between the two markets. We compute optimal portfolio weights and dynamic risk minimizing hedge ratios to highlight the significance of our empirical results which underscores the serious consequences of ignoring these structural breaks. Our findings are consistent with the notion of cross-market hedging and sharing of common information by financial market participants in these markets.     

Normality tests of option-implied risk-neutral densities: evidence from the small Finnish market

This study provides an empirical analysis of option-implied risk-neutral densities. The normality of the risk-neutral density is statistically assessed testing restrictions regarding the skewness and kurtosis of the implied distribution and by applying the traditional test approach involving a comparison of the pricing errors calculated using alternative models. It is found that both the approaches give similar results, whereas the former method has the advantage that the significance of the estimated parameters can be statistically tested. Using data from the small Finnish market, the normality of the distributions is soundly rejected as expected based on the theoretical framework by Damodaran [J. Financ. Quant. Anal. 20 (1985) 423].     

Government investment and the stock market

High rates of government investment in public sector capital forecast high risk premiums both at the aggregate and firm-level. This result is in sharp contrast with the well-documented negative relationship between the private sector investment rate and risk premiums. To explain the empirical findings, we extend the neoclassical q-theory model of investment and specify public sector capital as an additional input in the firm's technology. We show that the model can quantitatively replicate the empirical facts with reasonable parameter values if public sector capital increases the marginal productivity of private inputs.     

Overreaction in the Brazilian stock market

The overreaction hypothesis on a new set of data for the Brazilian stock market over the period 1970–1989 is investigated. Both market adjusted returns and the standard Sharpe-Lintner CAPM adjusted returns are used. Price reversals in 2-year returns are detected and the results contrast with the U.S. evidence in that the magnitude of the effect is more pronounced than in the U.S. The results also suggest that differences in risk, as measured by CAPM-betas using the method suggested by Chan (Chan K.C., 1988, On the contrarian investment strategy, Journal of Business 61, 147–163), cannot account for the overreaction effect. I also examine the issue of asymmetry versus symmetry in the overreaction effect. Using the criterion proposed by Dissanaike (Dissanaike G., 1992, Are stock price reversals really symmetric? University of Cambridge Department of Applied Economics Discussion Paper, AF series, No. 4) I find evidence that the price reversals are asymmetric.     

退市与破产

公司退市在中国一直是个大总是,从ST到PT,千方百计地,公司都要采取不同的形式,坚持在股市上继续挣扎。退市只是流于形式而已。同样,中国的公司也不愿意破产,特别是国有企业,有政府在背后撑着,必要时就政策扶植,实在不行了还会出面帮助重组。为了保证社会稳定,就是不能让企业破产。那么,中国的这种现状还有什么深层次问题吗?说到底,中国的企业不愿意退市、破产是与我们的文化背景有密切关系的。请看     

Sanctions and the Russian stock market

The article presents the robust estimates of extreme movements and heavy-tailedness properties for Russian stock indices returns before and after sanctions were introduced. The obtained results show that almost for all sectoral indices there was a statistically significant increase in volatility. At the same time there is not enough evidence of structural breaks in heavy-tailedness, though some indications of heavier both right and left tails in the post-imposition period can be observed for some indices. However, we cannot with complete certainty directly link the increase in heavy-tailedness with the imposed sanctions. The latter to a considerable extent could be caused by higher country-specific risks due to geopolitical tensions as well as oil prices volatility. Whatever is the cause, any increases in heavy-tailedness can have grave consequences for corporate management, economic modeling and financial stability analysis.     

Seasonalities in the German stock market

Financial Markets and Portfolio Management - This paper suggests innovative investment strategies drawing on return seasonalities. By means of an out-of-sample study of the German stock market, we...