Momentum and contrarian strategies in international stock markets: Further evidence

Previous studies have shown that market participants underestimate earnings growth for past winner stocks, and that growth stocks are more sensitive to earnings surprises. These findings suggest implementing momentum strategies with growth stocks. This study investigates linkages between value versus growth investment styles and momentum strategies in international markets. In addition, we extend Jegadeesh and Titman (2001)-type tests, which attempt to distinguish between competing explanations of the momentum phenomenon, to international market indices. Our full sample results show that momentum profits are concentrated in the growth indices, and that there is evidence of short-term overreaction in these and other indices that is subsequently corrected. Our subsample results are mixed; there is some evidence that the profitability of momentum (but not contrarian) strategies persists in the post-December 1987 period. However, unlike the earlier period, there is no evidence that markets overreact and that these overreactions are subsequently corrected.     

Pacific Basin stock markets and international capital asset pricing

In this paper, we follow Harvey (1991) to investigate whether rates of return on Pacific Basin stock markets can be explained by conditional version of International Capital Asset Pricing Model (ICAPM), which allows for time-varying expected returns, variances, and covariances. The results show that most individual Pacific Basin markets can be described by the conditional ICAPM. However, the multiple markets' tests do not support the conditional ICAPM formulation, and the estimates of world reward to risk ratio are not the same across these markets. Furthermore, the Ghysels and Hall test (Ghysels & Hall, 1990a, 1990b) shows that the estimates of parameter are also unstable in the conditional ICAPM formulation. This implies that it is difficult to use world return to describe the relationship between expected return and risk for the Pacific Basin stock markets.     

Term structure of return correlations and international diversification: evidence from European stock markets

The paper examines the term structure of correlations of weekly returns for the stock market in the US, Japan and nine European countries between 1988 and 1994. Stock indices are decomposed into permanent and temporary components using a canonical correlation analysis and then short- and long-horizon return correlations are calculated from these two price components. The empirical results reveal that the relationships of return correlations among these stock markets are not stable across return horizons. While correlations, in general, tend to increase with return horizons, there are several cases showing that correlations decline when investment horizons increase.     

Management forecasts and the cost of equity capital: international evidence

We examine international differences in the effect of management forecasts (which we use to proxy for voluntary disclosure) on the cost of equity capital (COC) across 31 countries. We find that the issuance of management forecasts is associated with a lower COC worldwide but that the effect of management forecasts on the COC depends on country-level institutional factors. Specifically, management forecasts have a stronger effect on the COC in countries with stronger investor protection and better information dissemination and a weaker effect in countries with higher mandatory disclosure requirements. Further analyses reveal that these relations are more pronounced when management forecasts are more frequent, more precise, and more disaggregated. Overall, our findings suggest that the ability of management forecasts to reduce firms’ COC derives not only from country-level factors that enhance the credibility of their forecasts but also from factors that reflect the quality of the information environment in terms of the distribution of news and the availability and quality of alternative information. Thus, investor protection, media penetration, and mandatory disclosure requirements have an important effect on the ability of management forecasts to lower the COC.     

Liquidity and short-run predictability: Evidence from international stock markets

This study investigates the determinants of short-run predictability in international stock markets, where predictability is defined as the accuracy of the best-combined daily forecasts. Contrary to popular belief, illiquid markets, characterized by high transaction costs and large price impact, are not necessarily highly predictable. Instead, markets with larger trading volume are more predictable, especially after the global financial crisis and in emerging markets. Those with larger market capitalization, steeper upward trends, and positively skewed returns are less predictable. Company financial strength has limited influence. During the COVID-19 pandemic the markets have become more predictable, with stronger price trends. Emerging markets are less predictable when relatively over- or undervalued.     

Portfolio selection and skewness: Evidence from international stock markets

This paper finds that the returns of the world's 14 major stock markets are not normally distributed, and that the correlation matrix of these stock markets was stable during the January 1988–December 1993 time period. Polynomial goal programming, in which investor preferences for skewness can be incorporated, is utilized to determine the optimal portfolio consisting of the choices of 14 international stock indexes. The empirical findings suggest that the incorporation of skewness into an investor's portfolio decision causes a major change in the construction of the optimal portfolio. The evidence also indicate that investors trade expected return of the portfolio for skewness.     

Excess stock returns and news: evidence from European markets

This paper aims at decomposing the forecast error variance of excess returns in five major European stock markets into the variance of news about future excess returns, dividends and real interest rates. Special emphasis is given on the issue of stationarity and structural breaks in the unconditional mean of dividend yields and their implications for variance decompositions. Empirical results indicate that in some markets the dividend yield is subject to structural breaks in the mean. Evidence from Monte Carlo simulations suggests that this kind of structural breaks cause small-sample bias in variance decompositions of a magnitude comparable to bias introduced by unit roots. Our results constitute a warning about return decompositions that, in particular, use variables in the forecasting equations that may be nonstationary or contain a structural break.     

Managerial characteristics and stock market investment: evidence from China

We examine the effect of managerial characteristics on investment in the stock market by listed firms in China. Our empirical findings suggest that higher levels of cash‐based compensation may increase both the propensity of investing in the stock market and the total amount of investment. On the other hand, managerial holdings discourage managers from investing in stock markets and also lead to a decrease in the amount of investment. This study sheds light on managerial risk‐taking incentives. Moreover, this study fills the gap in the literature by providing evidence for the determinants of listed firms’ stock market investment.     

Firm ratings, momentum strategies, and crises: evidence from the US and Taiwanese stock markets

This paper investigates whether there is a link between momentum profitability and firm ratings. We follow traditional and practical (non-) investment-grade classifications to divide into three rating groups, high, median, and non investment-grade group (HIG, MIG, and NIG) since firm ratings express risk in relative rank order to contain valuable information. This study considers the US and Taiwanese stock markets. We find that firm ratings momentum strategies can even earn positive profits, larger than na?ve momentum, supporting that firm ratings can be used to strengthen naive momentum effects. By comparisons, the US firm ratings momentum with NIG produces larger profits than HIG but opposite in direction and V-shaped pattern in Taiwan. With an examination of crises on firm ratings momentum, we find that firm ratings momentum indeed helps increase the payoff during (non-)crises although firm ratings momentum profits should be strong following non-crises states and weak following crises states. However, firm ratings momentum profits partially result from the predictability of business cycle, calendar months, and information asymmetries. Our results highlight the critical importance of using firm ratings screens in empirical momentum studies.     

Risk contagion among international stock markets

We develop a stochastic volatility model with jumps in returns and volatility to analyze the risk spillover from the U.S. market and the regional market to a number of European countries’ equity markets. The key advantage of this approach compared to the earlier approaches is that it enables us to identify jumps and investigate spillover of extreme events across borders. We find that a large part of the jumps in the local markets are due to the U.S. market and the regional market. The U.S. contribution to the variances is in general below the contribution from the regional market. In general, we observe an increasing integration during the last two decades, which, to some extent, can be related to the advancement of the European Union. Furthermore, we show that the identification of the jumps can be used as a useful signal for portfolio reallocation.     

World capital markets and Finnish stock returns

The paper explores issues related to time-varying global equity market integration from a Finnish perspective. Finland is an interesting market since profound economic changes and financial deregulation have taken place since the mid-1980s. Using Finnish firm size ranked portfolios and a conditional four-factor asset pricing model, several restrictions on asset behaviour are examined. It is found that a proxy for changing market integration — lagged foreign equity ownership — has a significant impact on the relative importance of local and global risk factors. Significant differences are found between the pricing of shares that were freely-available to all (unrestricted shares) and domestic investors only (restricted shares). Results also suggest that major capital market reforms profoundly affect the degree of market integration, but local risk factors do not become redundant.     

On the long-term or short-term dependence in stock prices: Evidence from international stock markets

This study examines the short- and long-term dependence in the United States and 21 international equity market indexes. Two heteroscedastic-robust testing methods, the modified rescaled range analysis and the rescaled variance ratio test, are employed to test for the existence of dependence. The evidence consistently reveals the absence of long-term dependence in these 22 stock returns indexes. The random walk hypothesis for most, but not all, stock returns indexes is not rejected. When the random walk hypothesis is rejected, the evidence supporting the rejection is weak and the stochastic dependence occurs mainly in short-horizon, rather then long-horizon holding period returns.     

Stochastic correlation across international stock markets

This paper examines the correlation across a number of international stock market indices. As correlation is not observable, we assume it to be a latent variable whose dynamics must be estimated using data on observables. To do so, we use filtering methods to extract stochastic correlation from returns data. We find evidence that the estimated correlation structure is dynamically changing over time. We also investigate the link between stochastic correlation and volatility. In general, stochastic correlation tends to increase in response to higher volatility but the effect is by no means consistent. These results have important implications for portfolio theory as well as risk management.     

Labor protection,ownership concentration,and cost of equity capital: international evidence

Review of Quantitative Finance and Accounting - In this study, we investigate how labor protection institutions and the presence of controlling shareholders interact to determine a firm’s...     

Dynamic volatility spillovers and investment strategies between the Chinese stock market and commodity markets

Building on the increased interest in the volatility spillover effects between Chinese stock market and commodity markets, this paper investigates the dynamic volatility spillovers of Chinese stock market and Chinese commodity markets based on the volatility spillover index under the framework of TVP-VAR. The result shows that there is a highly dependent relationship between the stock market and commodity markets. On average, the Chinese stock market is the net recipient of spillover, non-ferrous metals and chemical industry have a very obvious spillover impact on the stock market. The degree of total volatility spillover is different in different periods. After major crisis events, the volatility correlation between markets increases. Since the outbreak of COVID-19, the spillover effect of the stock market on the commodity market has been significantly enhanced. Then optimal portfolio weights and hedge ratios are calculated for portfolio diversification and risk management. The result shows that the ability of most commodities to hedge against risks is significantly reduced when the crisis occurs; NMFI (precious metals) and CRFI (grain) still have good hedging ability after the crisis, but the effectiveness of hedging risk is relatively low. Besides, the combination of CRFI and SHCI (the Shanghai composite index) is the most effective for risk reduction.     

Venture capital investment cycles: The impact of public markets

It is well documented that the venture capital industry is highly volatile and that much of this volatility is associated with shifting valuations and activity in public equity markets. This paper examines how changes in public market signals affected venture capital investing between 1975 and 1998. We find that venture capitalists with the most industry experience increase their investments the most when public market signals become more favorable. Their reaction to an increase is greater than the reaction of venture capital organizations with relatively little industry experience and those with considerable experience but in other industries. The increase in investment rates does not affect the success of these transactions adversely to a significant extent. These findings are consistent with the view that venture capitalists rationally respond to attractive investment opportunities signaled by public market shifts.     

Internal control and internal capital allocation: evidence from internal capital markets of multi-segment firms

We investigate the impact of internal control over financial reporting on management decisions in directing corporate resources to alternative investment projects in multi-segment firms. Results from cross-sectional and inter-temporal analyses indicate that internal control weaknesses (ICWs) are associated with distortionary internal capital allocations. The adverse impact on internal capital markets is more pronounced for firms with company-level ICWs. Our analyses also show that firms with weak existing governance mechanisms benefit more from maintaining effective internal control. We further document that the negative impact of ICWs on firms’ internal capital transfers manifests in a lower excess value of diversification.     

Liquidity and stock returns in pure order-driven markets: evidence from the Australian stock market

This paper examines the relationship between liquidity and stock returns in the pure order-driven stock market of Australia. The bid-ask spread, turnover rate, and amortized spread are used as proxies for liquidity. In addition to liquidity, other factors that have been found to influence stock returns, such as beta and size, are also considered. Seemingly unrelated regressions (SUR) and the cross-sectionally correlated timewise autoregressive (CSCTA) model form the methodological basis for this research. A small liquidity premium is found in the Australian market, which persists for the entire year. There is also strong evidence of a negative size effect.     

Common risk factors in international stock markets

Financial Markets and Portfolio Management - A major obstacle for research in international asset pricing and corporate finance has been a lack of reliable and publicly available data on...