What are returns outside trading hours capturing for volatility of individual stocks?

This study is the first to harness the negative returns and squared returns outside trading hours, trading volume and leverage effects in an augmented heterogeneous autoregressive model for forecasting volatility of individual stocks. Besides significant leverage effects and trading volume impact, we find that an increase in the negative returns is associated with a decline in volatility, but an increase in the squared returns is associated with a rise in volatility. This new finding suggests that the negative returns and squared returns outside trading hours are capturing additional leverage effects and additional volatilities, respectively. Moreover, the relations display differences amongst various firm categories which arise from firm heterogeneity.     

Inequality and happiness: are Europeans and Americans different?

We study the effect of the level of inequality in society on individual well-being using a total of 123,668 answers to a survey question about “happiness”. We find that individuals have a lower tendency to report themselves happy when inequality is high, even after controlling for individual income, a large set of personal characteristics, and year and country (or, in the case of the US, state) dummies. The effect, however, is more precisely defined statistically in Europe than in the US. In addition, we find striking differences across groups. In Europe, the poor and those on the left of the political spectrum are unhappy about inequality; whereas in the US the happiness of the poor and of those on the left is uncorrelated with inequality. Interestingly, in the US, the rich are bothered by inequality. Comparing across continents, we find that left-wingers in Europe are more hurt by inequality than left-wingers in the US. And the poor in Europe are more concerned with inequality than the poor in America, an effect that is large in terms of size but is only significant at the 10% level. We argue that these findings are consistent with the perception (not necessarily the reality) that Americans have been living in a mobile society, where individual effort can move people up and down the income ladder, while Europeans believe that they live in less mobile societies.     

Are Islamic stock markets efficient? A time-series analysis

This article investigates the weak-form informational efficient hypothesis for three major Islamic stock markets (world, emerging and developed). Unlike previous studies, we applied different parametric and nonparametric tests to investigate efficiency in the short and long horizons. Using recent data over the period May 2002–June 2012, we developed a time-series analysis of Islamic stock price dynamics in the context of the recent global financial crisis (2008–2009). Our analysis offers two interesting results. First, emerging Islamic stock markets seem to be less efficient than developed Islamic markets, suggesting interesting investment opportunities and diversification benefits from this region in both the short run and the long run. Second, nonrejection of the cointegration hypothesis for developed Islamic markets and the global conventional stock market point to efficiency for the former in the long term, even if it is inefficient in the short term. This finding has at least two economic and political implications: (i) investors who seek moderate risk would do well to opt for Islamic funds in developed countries, particularly as they share the same tendency and provide similar expected returns in the long term as conventional funds, (ii) Islamic financial systems can offer a useful model that can help to reform and remodel conventional financial institutions.     

Are momentum traders different? Implications for the momentum puzzle

This article examines the puzzlingly high unexploited momentum returns from a new perspective. We analyse characteristics of momentum traders in a sample of 692 fund managers. We find that momentum traders are ‘defined’ by their short-term horizon, by a behavioural view on the market and by a somewhat lower degree of risk aversion, whereas they are like other fund managers with respect to sophistication. This is consistent with the interpretation that momentum returns may compensate for the risk of momentum trading on short-term horizons and that the short-term oriented momentum traders are not in a position to perform long-term arbitrage.     

Fiscal policy and the current account: are microstates different?

This article examines the empirical link between fiscal policy and the current account focusing on microstates defined as countries with a population of less than 2 million between 1970 and 2009. This article employs panel regression and Panel Vector Autoregression (PVAR) on 155 countries of which 42 are microstates. Panel regression results show that a percentage point improvement in the fiscal balance improves the current account balance by 0.4 percentage points of Gross Domestic Product (GDP). The real effective exchange rate has no significant impact on the current account in microstates but the coefficient is significant in the global sample. PVAR results show that an increase in government consumption results in real exchange appreciation, but the effect on the current account after an initial deterioration dies out quicker in microstates than in the global sample. The result implies that fiscal policy has little effect on the current account in microstates beyond its direct impact on imports. Overall, the results suggest that the weak relative price effects make the effect of fiscal adjustment on the current account much more difficult in microstates.     

Public attention to “Islamic terrorism” and stock market returns

Does public attention to Islamic terrorism affect the performance of Islamic and conventional indices? We answer this question by empirically examining the effects of US public attention to Islamic terrorism on returns of US Islamic and conventional indices between 2004 and 2017. US public attention to Islamic terrorism is measured using Google Search Volume, which reflects active public attentiveness, and media coverage, which measures passive attentiveness. We test its effect on the stock returns of Islamic and conventional indices by using difference-in-difference analysis. The results indicate that US public attention to Islamic terrorism negatively affects US Islamic indices, suggesting that investors may make amalgams between terrorism and Islamic finance. These clichés may lead them to sell Sharia-compliant assets when US public attention to Islamic terrorism is high. Taken together, our findings provide new evidence and financial implications for investors and providers of Islamic financial products.     

Evolutionary game theory and evolutionary economics: are they different species?

Evolutionary game theory and evolutionary economics seem to inhabit different academic spheres and have little collaboration with one another. Neither side cites much research by the other. Does this de facto academic separation impede fruitful possibilities for mutual inspiration and joint development? This paper addresses this question by considering (1) the different origins and research orientations of the two genres, (2) to what extent evolutionary economists could make use of evolutionary game theory, and (3) what evolutionary game theorists might learn from other, less formal, modes of theorising. The paper concludes that while significant possibilities for collaboration exist, the foremost test is whether they can help enhance our understanding of structures and causal processes in the real world.     

How Islamic are Islamic banks? A non-linear assessment of Islamic rate – conventional rate relations

In this paper, we perform a non-linear assessment of Islamic rate – conventional rate relations for the case of Malaysia. Using monthly data covering the period January 1999 to November 2016, we find strong evidence supporting non-linear reactions of the Islamic investment rates to conventional rates in the long run and/or short-run for all matched maturities. More precisely, the Islamic investment rates exhibit faster upward movement (slower downward movement) in responses to conventional deposit rate increases (decreases). The asymmetric pricing behaviour of Islamic banks however tends to weaken as maturity lengthens. Accordingly, we infer that Islamic banks do not rigidly peg their investment deposit rates to conventional deposit rates as some have claimed in questioning the Islamicity of Islamic banks.     

The real exchange rate and economic growth: are developing countries different?

Recent research has found a positive relationship between real exchange rate (RER) undervaluation and economic growth. Different rationales for this association have been offered, but they all imply that the mechanisms involved should be stronger in developing countries. Rodrik (2008 Rodrik, D. 2008. The real exchange rate and economic growth. Brookings Papers on Economic Activity, 2: 365–412.  [Google Scholar]) explicitly analyzed and found evidence that the RER–growth relationship is more prevalent in developing countries. We show that his finding is sensitive to the criterion used to divide the sample between developed and developing countries. Using alternative classification criteria and empirical strategies to evaluate the existence of asymmetries between groups of countries, we find that the effect of currency undervaluation on growth is indeed larger and more robust for developing economies. However, the relationship between RER undervaluation and per capita GDP is non-monotonic, and is limited largely to the least developed and richest countries. This discontinuity constitutes a puzzle that calls for closer analysis.     

Business cycles in EU new member states: How and why are they different?

This paper uses the business cycle accounting framework to investigate the differences between economic fluctuations in Central and Eastern European (CEE) countries and the euro area. We decompose output movements into the contributions of four economic wedges, affecting the production technology, the agents’ intra- and intertemporal choices, and the aggregate resource constraint. We next analyze the observed cross-country differences in business cycles with respect to these four identified wedges. Our results indicate that business cycles in the CEE countries do differ from those observed in the euro area, even though substantial convergence has been achieved after the eastern EU enlargement. The major differences concern the importance of the intra- and intertemporal wedges, which account for a larger proportion of output fluctuations in the CEE region and also exhibit relatively little comovement with their euro area counterparts.     

Islamic financial markets and global crises: Contagion or decoupling?

This paper investigates the contagion effects of the global financial crisis (GFC) and Eurozone sovereign debt crisis (ESDC) on Islamic equity and bond markets. Using a sample of Islamic stock indices from various developed and emerging markets and the global Islamic stock and bond (sukuk) indices, we explore asymmetric conditional correlation dynamics across stable and crisis periods and across the two crises. The results fail to provide strong contagion evidence between conventional and Islamic equity and bond indices, supporting the decoupling hypothesis of the Islamic securities. Our findings imply that Islamic equities and bonds may provide a cushion against risk and instability, particularly in periods of turmoil. The small number of contagion cases mostly relates to the ESDC and developed Islamic stock indices. The findings also show that the Islamic emerging stock indices in the BRICS provide the most effective international portfolio diversification benefits compared to the Islamic developed indices.     

What (if any) are the returns to computer use?

Using North American data, we revisit the question first broached by Krueger (1993 Krueger, AB. 1993. How computers have changed the wage structure: evidence from microdata. Quarterly Journal of Economics, 108: 33–60. [Crossref], [Web of Science ®] , [Google Scholar]) and re-examined by DiNardo and Pischke (1997 DiNardo, JE and Pischke, J-S. 1997. The returns to computer use revisited: have pencils changed the wage structure too?. Quarterly Journal of Economics, 112: 291–303. [Crossref], [Web of Science ®] , [Google Scholar]) of whether there exists a real wage differential associated with computer use. Employing a mixed effects model with matched employer–employee data to correct for the fact that workers and workplaces that use computers are self-selected, we find that computer users enjoy an almost 4% wage premium over nonusers. Failure to correct for worker and workplace selection effect leads to a more than twofold overestimate of this premium.     

Housing,consumption and monetary policy: how different are the first-, second- and third-tier cities in China?

This article presents an empirical analysis of the relationship between house prices and the real economy in China’s first-, second- and third-tier cities. A Structural Vector Autoregression model is applied to study the impacts of monetary policy shocks and housing demand shocks on various housing markets across China. We also investigate the role of house prices in the transmission mechanism of monetary policy. The results reveal that in first-tier cities, raising interest rates has a stronger negative effect on house prices. Also, as house prices decrease in first-tier cities, private consumption declines sharply. There is a stronger role of housing markets in the transmission of monetary policy shocks in these cities. Our findings indicate that interest rate adjustment could effectively curb spikes in housing prices in the first-tier cities, but the impact of such adjustments on household consumption must also be considered.     

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.     

Idiosyncratic volatility and the cross-section of anomaly returns: is risk your Ally?

Due to arbitrage risk asymmetries, the relationship between idiosyncratic risk and expected returns is positive (negative) among overpriced (underpriced) stocks. We offer a new active anomaly-selection strategy that capitalizes on this effect. To this end, we consider 11 equity anomalies in the U.S. market for years 1963–2016. Buying (selling) long (short) legs of the anomaly portfolios with the highest idiosyncratic volatility produces monthly abnormal returns ranging from 0.97% to 1.14% per month, outperforming a naive benchmark that equally weights all the anomalies by 45–70%. The effect cannot be subsumed by any other established anomaly-return predictor, such as momentum or seasonality. The results are robust to many considerations, including different numbers of anomalies in the portfolios, subperiod analysis, as well as estimation of idiosyncratic risk from the alternative models and throughout different periods.     

Bank profitability and macroeconomic conditions: Are business models different?

The paper investigates the impact of macroeconomic conditions on the profitability of EU banks by testing for differential effects according to the business model. We group banks into three business models using a hierarchical cluster analysis and find that using clusters based on the share of assets invested in loans reveals heterogeneity in the sensitivity of bank profitability to economic growth across business models. Our main result is that GDP growth, credit growth, and the risk-free yield curve influence profitability as expected, but we also find that the effect of GDP growth is only significant for banks that have a high and medium share of assets invested in loans, and not for banks that hold large portfolios of securities. This difference depends on the impact of growth on asset write downs, especially those on loans and, to a lesser extent, on revenues. The results suggest that studies relating bank profitability to macroeconomic conditions should take the heterogeneity of business models into account.     

How do employee training and knowledge stocks affect product innovation?

The main purpose of this paper is to explore how interactions of knowledge flows and knowledge stocks could shape firms’ innovative performance. Knowledge flows are measured on the grounds of human resource training practices while different levels and forms of knowledge stocks (i.e. educational attainment, exporting activity, and firm age) are considered. We make use of two-period panel probit regressions and a rich data survey of the 524 largest Greek manufacturing firms conducted in two waves (2011 and 2013). Our findings suggest that the beneficial effects of knowledge flows strengthen when knowledge stocks accumulated by employees’ education and firm age are low. When knowledge stocks are limited, knowledge flows can act as a bridge for product innovation. On the contrary, when knowledge stocks are high, higher investments in knowledge flows may lead to diminishing returns and, thus, to decreased innovation performance beyond a certain point.     

Forecasting stock returns: Do less powerful predictors help?

This paper proposes a simple but efficient way to improve the predictability of stock returns. Instead of torturously constructing new powerful predictors, we readily select existing predictors that have low correlations and thus provide complementary information. Our forecasting strategy is to use the selected predictors based on a multivariate regression model. In our forecasting strategy, less powerful predictors are also useful for forecasting stock returns if they could provide complementary information. The empirical results show that our forecasting strategy outperforms not only the univariate regression models that use each predictor's information separately but also combination approaches that use all predictors jointly. We also document that our strategy extracts significantly more useful information from the complementary predictors than the competing models. In addition, from an asset allocation perspective, a mean-variance investor realizes substantial economic gains. Furthermore, the evidence based on Monte Carlo simulations supports the feasibility of our forecasting strategy.     

Can volume predict Bitcoin returns and volatility? A quantiles-based approach

Prior studies on the price formation in the Bitcoin market consider the role of Bitcoin transactions at the conditional mean of the returns distribution. This study employs in contrast a non-parametric causality-in-quantiles test to analyse the causal relation between trading volume and Bitcoin returns and volatility, over the whole of their respective conditional distributions. The nonparametric characteristics of our test control for misspecification due to nonlinearity and structural breaks, two features of our data that cover 19th December 2011 to 25th April 2016. The causality-in-quantiles test reveals that volume can predict returns – except in Bitcoin bear and bull market regimes. This result highlights the importance of modelling nonlinearity and accounting for the tail behaviour when analysing causal relationships between Bitcoin returns and trading volume. We show, however, that volume cannot help predict the volatility of Bitcoin returns at any point of the conditional distribution.     

Inequality and growth: What comes from the different inequality measures?

The objective of the paper is to verify if income inequality impedes the growth rates in OECD countries in the period of 1990–2014 and to reveal whether the choice of the income inequality measure determines the sign and the strength of the estimated relationship. We use system GMM to estimate parameters of a dynamic panel growth model. The research indicates that income inequality negatively affects economic growth. We also find evidence that various measures of inequality bring the different scale of consequences for economic growth, with measures that give more weight to the middle part of the distribution being the weakest predictor of GDP growth. Simultaneously, we present the test of weak instruments, which helps to explain these differences.