The nature and determinants of comovement between developed,emerging and frontier equity markets: Europe versus Asia‐Pacific

International investors are increasingly attracted towards emerging and frontier markets because of their potential to enhance diversification benefits of a global portfolio. This calls for a rigorous analysis of the nature and determinants of stock market comovement between developed, emerging, and frontier markets in Europe and Asia‐Pacific regions. The findings suggest that unlike their Asia‐Pacific counterparts, European developed, emerging, and frontier stock markets display a higher degree of comovement. Although Asia‐Pacific frontier markets provide good diversification opportunities, investors must be cautioned against their weak financial system. The volatility of returns, gross domestic product growth rate, and the 2008 global financial crisis (GFC) are the key determinants of stock market comovement in Europe. The mechanisms by which comovement in the Asia‐Pacific region is strengthened differ across markets. Comparative analysis of comovement and its determinants across different classes of equity markets and geographies is expected to provide valuable perspectives to global investors, portfolio managers, and policymakers.     

Diversification potential of Asian frontier,BRIC emerging and major developed stock markets: A wavelet-based value at risk approach

This study examines the portfolio risk and the co-movements between each of the BRIC emerging and South Asian frontier stock markets and each of the major developed stock markets (U.S., UK and Japan), using the wavelet squared coherence approach as well as the wavelet-based Value at Risk (VaR) method. The results show that the co-movements and diversification benefits between these markets vary over time and across frequencies. Additionally, the co-movements are intensified in the wake of the recent global financial crisis (GFC) and the Eurozone sovereign debt crisis (ESDC). More precisely, the wavelet-based VaR ratio indicates that including a BRIC or a South Asian (particularly Pakistan and Sri Lanka at both the short- and long-term) stock market in a portfolio of the developed stock markets reduces the resulting portfolio's VaR. Specifically, adding China in the medium term to this portfolio reduces risk in the pre- and during both the GFC and ESDC periods. By assigning optimal weights to the different market assets in the portfolio formulation, the analysis thus has implications for international investors.     

Volatility spillover and hedging effectiveness among China and emerging Asian Islamic equity indexes

We study the volatility spillover between China and Asian Islamic stock markets. We use a sample of six Islamic MSCI indices from the Asian region, namely China, India, Malaysia, Indonesia, Korea and Thailand obtained from MSCI (Morgan Stanley Capital International). In this paper we analyze the importance of considering spillover effects between emerging Asian Islamic indexes based on the Bivariate VARMA-BEKK-AGARCH model of McAleer et al. (2009), which includes spillover and asymmetric effects. We compute after the effectiveness of portfolio diversification based on the conditional volatility of returns series. Results show a significant positive and negative return spillover from China to selected Asian Islamic stock market and bidirectional volatility spillovers between China, Korea and Thailand Islamic market showing evidence of short-term predictability on Islamic Chinese stock market movements. However there is no short term volatility persistence in India, Indonesia and Malaysia. GARCH results show no persistence in volatility spillover effect in long term from Chinese to Indian, Indonesian and Korean Islamic stock market. Our findings are beneficial for international portfolio diversification for policy makers and investors since the results of portfolio management and hedging effectiveness ratio are different to previous studies.     

Is volatility risk priced in the securities market? Evidence from S&P 500 index options

The authors examine whether volatility risk is a priced risk factor in securities returns. Zero‐beta at‐the‐money straddle returns of the S&P 500 index are used to measure volatility risk. It is demonstrated that volatility risk captures time variation in the stochastic discount factor. The results suggest that straddle returns are important conditioning variables in asset pricing, and investors use straddle returns when forming their expectations about securities returns. One interesting finding is that different classes of firms react differently to volatility risk. For example, small firms and value firms have negative and significant volatility coefficients, whereas big firms and growth firms have positive and significant volatility coefficients during high‐volatility periods, indicating that investors see these latter firms as hedges against volatile states of the economy. Overall, these findings have important implications for portfolio formation, risk management, and hedging strategies. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:617–642, 2007     

Dependence dynamics of stock markets during COVID-19

Stock markets have exhibited increased returns connectedness during the COVID-19 period. We examine the returns dependence among 42 stock markets classified under various emerging and developed groupings. We apply several dependence measures to examine the returns connectedness among the markets. Our results show that stock markets from the G-7 and Emerging Frontier and Asian (EFA) region exhibit high connectedness with other international markets, while Middle East and North African (MENA) and Latin American (LA) stock markets offer high diversification opportunities through low returns connectedness. The returns coherence of Central and East European (CEE) and G-7 markets increase significantly during the COVID-19 period which supports the hypothesis of contagion. However, during the pandemic MENA stock markets (excluding Greece) and most EFA markets (excluding China, Singapore and Korea) remain less cointegrated with other international equity markets. Our results have implications for individual and institutional investors, fund managers and other financial market stakeholders.     

The internationalization of emerging stock markets

Stock markets in developing countries today account for about 7 per cent of world equity market capitalization, and this share is rising rapidly. Foreign investors have in the past often faced restrictive barriers to access to these emerging markets. A growing number of developing countries have now started to dismantle these barriers, however, resulting in an increasing interest by international portfolio managers in these emerging stock markets.     

Volatilities in emerging MENA stock markets

This article examines the interrelationships among the emerging stock markets of the Middle East and North Africa (MENA) region, as well as the relationship between each MENA stock market and the larger and more developed markets of Europe and the United States. It explores whether MENA stock markets can offer international investors unique risk/return characteristics to diversify international and regional portfolios. This study adds to the existing literature by focusing—for the first time— on the dynamic relationships in the volatilities of the returns in MENA stock markets. The econometric part of the article uses the causality‐in‐variances GARCH model, the TARCH and ARCH‐M models, and VAR analysis to model conditional volatilities in stock market returns and the dynamic responses of volatilities to innovations in conditional variances. © 2006 Wiley Periodicals, Inc.     

Regional and global spillovers and diversification opportunities in the GCC equity sectors

This paper examines the international diversification benefits of bloc-wide equity sectors in the oil-rich Gulf Cooperation Council (GCC) countries by comparing alternative spillover models that encompass local, regional and global factors. Some GCC-wide equity sectors/subsectors are found to display segmentation from global markets during periods of high and extreme market volatility, and thus can serve as safe havens for international portfolio investors during such periods. The in- and out-of-sample portfolio analyses further suggest that supplementing global portfolios with positions in the GCC markets yields significant international diversification benefits, consistently offering much improved risk-adjusted returns across the alternative spillover models.     

Negativity Bias in Attention Allocation: Retail Investors’ Reaction to Stock Returns

We argue that negative stock market performance attracts more attention from retail investors than comparable positive performance. Specifically, we test and confirm the hypothesis that retail investors pay more attention to negative extreme returns than positive ones. We present a measure of attention at the aggregate and company‐specific levels using Google's internet search volume indexes. These measures correlate with, but are different from, existing proxies of attention. Our empirical results strongly support the position that investors display a negativity bias in attention allocation with respect to extreme stock returns. Across all specifications, lagged negative extreme returns are stronger predictors of high attention at the individual‐stock and stock market levels than positive ones.     

Volatility and shock interactions and risk management implications: Evidence from the U.S. and frontier markets

The study affords comprehensive evidence of shock and volatility interactions between stock markets of each of the twenty four frontier markets and the U.S. for the period 2006:01 to 2015:07. The results from the recent EDCC-GARCH model of Nakatani and Teräsvirta (2009), which permits for concurrent estimation of shock and volatility interactions as well as dynamic conditional correlations (DCC) across assets, shows unidirectional shock and volatility transmissions from the U.S. to the frontier markets. The conditional correlation between the U.S. and each frontier market is very low or negative, offering diversification benefits to U.S. investors. The DCC exhibits slow decay and is insignificantly impacted by previous period's shocks. The results are very intuitive for optimal portfolio allocations using the traditional capital-based as well as the risk-based allocations. The risk parity approach to portfolio management increases (reduces) allocations to lower (higher) risk assets to improve portfolio diversification while increasing the risk-adjusted returns.     

贝塔系数是风险的正确度量吗

在经典的投资组合理论中 ,假设所有资产的报酬率服从对数正态分布 ,因而只需要用收益的方差来度量风险就足够了 ,忽略了偏度的影响。资产收益的分布往往不是对称的 ,偏度是客观存在的 ,而且投资者具有正偏度的爱好。所以必须用方差和偏度来共同度量投资的风险 ,在这种情况下 ,贝塔系数不再是风险的正确度量 ,采用有效的修正方法 ,可以用来对资产进行正确的定价     

中国股市β系数稳定性研究

β系数是证券或证券组合与市场相互关联的一个概念和参数,它是衡量证券系统风险的重要指标,β系数的稳定性也一直是学术界和投资者特别关注的焦点。本文通过中国股票市场的31个行业数据的研究,得到中国股市样本β值在单位β值(1.00)附近上下波动并呈正态分布;也可以得到组合的β系数还是有较好的稳定性结论。     

Dependence of stock and commodity futures markets in China: Implications for portfolio investment

We examine the recent trends in dependence structure between the fast-growing commodity markets and the stock markets in China. We address this issue by using copula functions that allow for measuring both average and tail dependence. Our results provide evidence of low and positive correlations between these markets, suggesting that commodity futures are a desirable asset class for portfolio diversification. By comparing the market risks of alternative portfolio strategies, we show that Chinese investors can take advantage of commodity futures during different times to realize risk diversification and downside risk reduction benefits.     

The relationship between currency carry trades and U.S. stocks

The article examines the relationship between daily returns of currency carry trades and U.S. stocks from January 1995 through September 2010. Carry trade and stock returns are highly correlated with no Granger‐causality in either direction. An EGARCH model shows that significant volatility spillovers flow from the stock market to the carry‐trade market, but not vice versa. The markets are more correlated in periods of high volatility. Volatilities in both markets also increase more with negative innovations than positive innovations. A sectoral analysis of the index suggests that volatilities of cyclical stocks have more impact than noncyclical stocks on carry trades.     

Does internationalization make a difference? Stock market reaction to announcements of international top executive appointments

In recent years, there has been an increasing scholarly and practical interest in the internationalization of top management teams. It is argued that international firms need international top managers to meet the challenges arising from operating across borders. However, the few existing studies that focus on the link between top managers’ internationalization and firm performance yield inconclusive results. Thus, it is an open question if and to what extent international firms can benefit from international top managers. Drawing on upper-echelons theory, resource-dependence theory, and signaling theory, this paper examines how the stock market reacts to the appointment of an international top manager. Our empirical study of German firms employs an event study to analyze the direct impact of internationalization on a firm's stock price. Piecewise regression analysis reveals that a top manager's internationalization needs to exceed a certain threshold before investors incorporate this individual characteristic into their investment decisions. Furthermore, our analysis shows an inverted U-shaped relationship between internationalization and abnormal returns, suggesting that internationalization may have both positive and negative effects on a firm's stock price. We present several explanations for our empirical findings and discuss future research directions.     

Regime switching in the reactions of stock markets in Saudi Arabia to oil price variations

The study revisits the stock–oil nexus by examining the reactions of equity markets to oil price shocks at national and sectoral levels for Saudi Arabia in a time‐varying framework by employing the Markov switching EGARCH model developed by Henry (2009, Journal of Banking and Finance, 33, 405). Based on weekly data, the findings reveal that the behaviour of all stock markets switches between an expansion regime and a recession regime, with more persistence for the expansion state. Additionally, influential international events associated with stock market drops are clearly identified in the recession regime. Furthermore, there is evidence of asymmetric reactions of the equity index returns and the probabilities of transition from one state to another to oil price variations, with heterogeneous impacts across sectors and regimes. The stock markets are more sensitive to oil price decreases than to oil price increases. Although the evidence of relatively slight differences in some findings across weekdays, the study allows investors and policymakers to understand well the interactions of stock sector markets vis‐à‐vis the world oil market in a regime‐switching framework, in order to make the right decision as regards portfolio diversification and regulation of the stock markets.     

Industry and country factors in emerging market returns: Did the Asian crisis make a difference?

Should investors diversify across emerging stock markets or across industries to achieve improvements in their risk–return tradeoffs especially during financial crisis periods? We examine the issue using individual firm data from a selection of emerging markets and including the period of the 1997 Asian financial crisis. We find that country effects were the dominant force behind the low co-movements among emerging stock market returns. There is evidence of increased industry effects beginning at the time of the Asian financial crisis, but this may have been a temporary phenomenon associated with contagion effects during the crisis.     

高波动股市下的条件相关与风险分散效果

在一般化误差分配假设下,利用风险值估计的方法分别求出台湾地区股票市场牛市与熊市的条件相关系数,以检验风险分散的效益。实证研究发现:在高波动期间,股市类股指数的条件相关性及非系统风险皆显著小于平常时期,显示股市的联动性及非系统风险在高波动期间会较低,此与过去文献的发现相反。然而,不论在高波动期间还是在平常期间,股市的联动性都偏高,投资者或基金经理人应该尽可能运用国际多角化的投资,以提高风险分散的效益。     

Cross-sectional regression analysis of return and beta in Japan

This paper investigates the relationship between return and beta using the cross-sectional regression method. Regression of return on beta without differentiating positive and negative market excess returns produces a flat relationship between return and beta. Taking into account the difference between positive and negative market excess returns yields significant conditional relationships between return and beta. The conditional relationship between return and beta is found to be in general better fit when the market excess return is negative than positive in terms of the goodness of fit measures such as R² and the standard error of the equation.     

Turnover and return in global stock markets

I study how growth affects liquidity of global stock exchanges and how liquidity determines cross-sectional returns on those stock exchange index portfolios. I measure portfolio liquidity by turnover ratio computed as value of shares traded over the market capitalization. I obtain data from FIBV, an association of global stock exchanges. In a multiple regression model for turnover ratio, I find age, size, type of exchange, competition for order flow, and growth rate to be significant determinants of portfolio liquidity; however, exchange- and time-specific effects are more appropriate for modeling portfolio liquidity. The time effects yield to three distinct regimes, while the exchange-specific effects are surrogates for the legal systems, English common law, and Civil laws of the countries. I estimate the parameters of a multiple regression model in a two-stage GLS framework in which index return is a function of turnover. The GLS method is preferable since a turnover ratio may have a non-stationary, random component. The significant determinants of index return are turnover and volatility, although some of the volatility effect may be a spillover from a January effect. Investors expect higher return from high turnover markets. However, the positive turnover expected return relation is true only in emerging markets; in developed markets expected return is a function of volatility. This result confirms existing empirical evidence that high turnover stock portfolios generate superior returns and further the sources and pricing of risk in emerging and developed markets are different.