Bond rating changes and stock returns: evidence from the Spanish stock market

This study analyzes the effect of corporate bond rating changes by international agencies on stock prices. This topic has not yet been analyzed for the Spanish stock market, despite the growing importance of ratings in Spanish financial markets. On an efficient market, rating changes will only have an effect if they contain some new information. The results from an event study indicate that rating actions cause significant negative abnormal returns in issuing firms around the date of the announcement. This evidence indicates an informational effect related to downgrades, which supports the hypothesis that credit rating agencies provide information that may reduce the asymmetric information problem between firms and investors. In the case of upgrades, our results are compatible with a redistribution of wealth between bondholders and owners or with the reputation hypothesis.      

The effects of monetary policy changes on market interest rates in Greece: An event study approach

The operational procedures of the Bank of Greece underwent major changes during the 1990s. These shifts in operational strategy made interest rates the main tool of monetary policy for the first time in Greece. This paper examines the effects of changes in the bank's operational interest rates on market interest rates at eight maturities and for different operational regimes. A major feature of our study is the application of the event study methodology used in finance, which has not been employed in any previous study on this subject. We find that changes in official interest rates had a significant influence on short-term and intermediate-term rates and that this relationship was affected by the changes in the bank's operational procedure.     

Sources of earnings inequality: Estimates from an on-the-job search model of the US labor market

Since the early 1980s the labor market in the United States has seen a substantial increase in earnings dispersion. We study the issue by developing an on-the-job search model of the US labor market that allows for wage and employment mobility as a result of optimal individual behavior. We estimate its structural parameters on PSID data at different points in time to clarify the sources of the evolution of earnings inequality and instability between 1987 and 1996. This procedure allows to: compute lifetime measure of inequality on top of the usual cross-sectional measure of inequality and provide counterfactual experiments that evaluate the contribution of different parameters to changes over time by taking into account some equilibrium effects. We find that the increase in lifetime inequality and in cross-sectional inequality have been generated by different sources and that these sources are different by skills: changes in the wage offer distribution are the main determinant of the increase in inequality for skilled workers while both mobility changes and wage offer distribution changes are needed to explain changes for the unskilled.     

The effects of the Paris climate agreement on stock markets: evidence from the German stock market

We investigate the effects of the 2016 Paris Climate Agreement on the German stock market by considering the impact of 20 announcements pertaining to the Agreement on 17 industries. The event study methodology is used for this purpose, together with several robustness tests, such as the nonparametric rank test and non-parametric conditional distribution approach. The change in systematic risk following the announcements is captured by using various risk models. In general, we find that the Paris Climate Agreement is achieving its objectives in the short run. Our results show that the announcements affected polluting industries in terms of risk and return. Furthermore, we observe two distinct diamond risk structures when (1) Conference of the Parties (COP) 21 took place, and (2) the Agreement came into force.     

Overflow effect of credit rating announcements on stock exchange based on event study

This study is aimed to identify the impact of credit rating announcements on the stock returns in stock markets and for this purpose, four different sectors of Pakistan stock exchange were selected and from each of these four sectors, different business organizations were selected, i.e. total 32 business organizations were selected. The credit rating announcement data were collected for these 32 business organizations belonging to four different sectors. Totally 101 credit rating announcements were selected and the time period for which the credit rating warnings were selected include last three years period, i.e. from 2014 to 2016. The collected data were analysed by calculating abnormal returns for each of the selected security and average abnormal returns, and cumulative average abnormal returns were calculated for four different sectors. Event study methodology was applied, and t-test and t-stats value were calculated and results were analysed on the basis of t-statistics. The results of analysis identified that credit rating announcements have a significant impact on stock prices and investors and other market participants are earning abnormal returns during two-day period after the announcements are made. In addition, these abnormal returns were either negative or positive, depending upon the nature of credit ratings announced. If the credit rating announced was upgraded, investors enjoyed positive abnormal returns while in case when credit rating announcements were downgraded, then investors bear negative abnormal returns. Finally, the findings of the study identified the applicability of random walk hypothesis on the Pakistan Stock Exchange and Pakistan Stock Exchange confirms the efficient market hypothesis with its semi-strong form of efficiency.     

Herding on lottery-type stocks: evidence from the Chinese stock market

Previous studies have provided evidence that investors have gambling propensity in the stock market and exhibit a preference for lottery-type stocks. In this study, we use high total skewness and high maximum daily return (MAX) to measure lottery-type stocks and examine whether investors do exhibit distinct herding pattern in these stock types. Empirical results show that investors display stronger herding among lottery-type stocks, thereby indicating that such stocks induce correlated behaviour with the investors. In addition, we find that stocks with the highest skewness exhibit stronger herding under upmarkets, whereas stocks with the lowest skewness display stronger herding under downmarkets. Regarding the highest MAX portfolio, no significant herding asymmetry is seen between upmarket and downmarket. The results reported in this article demonstrate that comovement in stock returns may be partly attributed to the nonstandard preferences of investors in the stock market.     

Technological races and stock market value: evidence from the pharmaceutical industry

We provide estimates of the abnormal stock market returns associated with pharmaceutical firms’ announcements of technological and regulatory successes in drug development. On the basis of these estimates, we find empirical support for two key features of technological race models. First, we observe that leaders in the innovation race record higher abnormal returns than do latecomers when they announce a success. Hence, firms should indeed be racing to complete the innovation process before their rivals. Second, pharmaceutical firms are adversely affected by the technological and regulatory success of their rivals, implying that interfirm spillovers in drug development are not sufficient to offset technological rivalry. Additional results are also produced regarding the impact of competition on R&D racing and the extent of therapeutic competition.     

Herding behaviour and the declining value relevance of accounting information: evidence from an emerging stock market

This article sheds light on the underlying mechanisms behind the changes in the value relevance of accounting information in the Karachi Stock Exchange (KSE) during the 1999–2010 period. We find that neither changes in earnings quality nor the earnings lack of timeliness hypothesis can explain the decline in the value relevance of accounting information in the KSE. Based on the stylized facts associated with the growth of the KSE and the broader economics literature, we argue that the reduction in the explanatory power of accounting information vis-à-vis stock returns was caused by herding behaviour. Empirical estimates from state-space model of herding behaviour confirm the existence of herding, and we find that the value relevance of accounting information is significantly lower in periods characterized by herding behaviour. This article is also amongst the first attempts to empirically demonstrate that an expansionary monetary policy and increases in foreign portfolio investment lead to increased levels of herding.     

Capital structure and value of reported earnings: evidence from an emerging market

This article documents a nonlinear impact of capital structure on the value of reported earnings in India during the period between 2009 and 2015. Our results show that earnings reported by firms with moderate level of debt are more valuable than earnings reported by firms with low or high level of debt. Our results are robust across various proxies of capital structure and across various sub-samples. This article argues that moderate level of debt is associated with low-agency problems, while low and high level of debt is synonymous to high-agency problems. Differences in agency problems result in reported earnings that have very different levels of relevance.     

Stock Returns and Volatility: an empirical study of Chinese stock markets

This paper uses GARCH models to analyse the relationship between returns and volatility on the Shanghai and Shenzhen Stock Exchanges in China. Empirical estimates using the sample data from 21 May 1992 to 2 February 1996 suggest that the variances of the returns in the two markets are best modeled by the GARCH-M (1,1) specification. Volatility transmission between the two markets (the volatility spill-over effect) is also found to exist. The results of one month ahead ex ante forecasts show that the conditional variances of the returns of the two stock markets exhibit a similar pattern.     

Asymmetric effect of margin-trading activities on price crashes: evidence from Chinese stock market

Prior literature on the impact of margin-trading activity on stock price crashes is mixed and does not reach consensus. Using data from a Chinese margin-trading pilot programme initiated in 2010, this article employs both margin-buying and margin-covering activities to investigate the asymmetric impact on stock price crashes. We find that margin-buying activities are beneficial reducing the price crash prone, especially in bad times. In contrast, margin-covering activities amplify price crashes in both good times and bad times.     

The labour market and the distribution of earnings: an empirical analysis for Italy

Using four waves of data from the Participation Labour Unemployment Survey, a database of information on the Italian labour market supply, we address the question of earnings dispersion by applying a ‘nested’ decomposition procedure of the Theil inequality measure, which combines into a unified framework the standard decompositions by population subgroups and income sources. The empirical evidence obtained points to the key role played by the self-employees in shaping labour income inequality, especially at the upper extreme of the earnings distribution, and the emergence of non-standard forms of employment as an important feature of the contemporary workplace.     

Currency crises and the stock market: empirical evidence for another type of twin crisis

We explore the dependency between currency crises and the stock market in emerging economies. Our focus is two-fold. First, the risk of a currency crisis rises as the foreign stake in the domestic stock market increases. Successful economies with high capital flows into their booming stock markets especially are prone to stock market-induced currency crises. Second, we apply the dividend growth model to show that stock markets crash in the run-up to a currency crisis. This new type of twin crisis is empirically tested by employing a logit framework using quarterly data for 33 emerging economies for 1994Q1–2007Q4.     

Estimating the market value of Steve Jobs using an event study

Using an event study approach, we seek to estimate the value investors placed on Steve Jobs by investigating the stock market reactions to his death. In the three-day window surrounding his death, the estimated cumulative abnormal returns are ?5.76%. Given the market capitalization of Apple at the time, it can be inferred that investors valued Steve Jobs at 20 billion dollars. While tragic, the news about Jobs’ death is greeted favourably by Apple’s competitors. The competitors appear to be convinced that, without Steve Jobs, they can compete with Apple better.     

The sectoral effects of Brexit on the British economy: early evidence from the reaction of the stock market

We investigate the impact of the outcome of the EU referendum (Brexit) on various sectors of the British economy over the period June–July 2016. Using the event study methodology, we assess the effects of Brexit, relative to what had been anticipated, as measured by abnormal returns (ARs). The results show that the banking and travel and leisure sectors were affected negatively, with a cumulative AR of ?15.37% for the banking sector. We observe that Brexit has a mixed effect on ARs with apparent sector-by-sector differences.     

Economic policy uncertainty and the Chinese stock market volatility: Novel evidence

In this study, we investigate the impact of global economic policy uncertainty (GEPU) on Chinese stock market volatility. More importantly, for the first time, we explore the effects of directional GEPU based on the changing directions of GEPU and Chinese economic policy uncertainty (EPU). We make several noteworthy findings. First, the in-sample estimated results show that up and down GEPU can lead to substantially high stock market volatility for China. Second, the out-of-sample estimated results support the contention that the GEPU index is helpful for predicting volatility. Moreover, compared to GEPU alone, directional GEPU can provide more useful information that can increase the forecast accuracy. Third, we empirically find that directional GEPU is more effective in predicting Chinese stock market volatility when GEPU and EPU rise in the same month.     

Economic policy uncertainty and the Chinese stock market volatility: new evidence

This study investigates the impacts of the economic policy uncertainty (EPU) indexes of China and the G7 countries on Chinese stock market volatility and further constructs a new diffusion index based on these indexes using principal component analysis (PCA) to achieve enhanced predictive ability. The in-sample results indicate that the EPU indexes of China and some of the G7 countries show a significantly negative impact on future volatility. Moreover, our constructed diffusion index also has a significantly negative impact. Furthermore, the out-of-sample results show that this diffusion index exhibits a significantly higher forecast accuracy than the EPU itself and combination forecasts. Finally, various robustness checks are consistent with our main conclusions. Overall, we construct a new and useful indicator that can substantially increase forecast accuracy with respect to the Chinese stock market.     

Relationships between oil price shocks and stock market: an empirical analysis from Greater China

Although a lot of empirical research has studied the relationship between changes in oil price and economic activity, it is surprising that little research has been conducted on the relationship between oil price shocks and the Greater China region (China, Hong Kong and Taiwan). Therefore, the main goal of this article is to apply detailed monthly data from 1997/7 to 2008/9 to fill this gap. Compared to the effect of US stock market returns described by Kilian (2009 Kilian, L. 2009. Not All oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review, 99: 1053–69. [Crossref], [Web of Science ®] , [Google Scholar]) and Kilian and Park (2009 Kilian, L. and Park, C. 2009. The impact of oil price shocks on the US stock market. International Economic Review, 50: 1267–87. [Crossref], [Web of Science ®] , [Google Scholar]), we found that the impact of oil price shocks on stock prices in Greater China has been mixed. First, the impact of oil price shocks on Taiwan's stock market is very similar to that on the US stock market. Additionally, all three shocks have had significantly positive impacts on Hong Kong's stocks, partially in contrast to the effects on the US stock market. However, in contrast to the effect in the US stock market, we found that only global oil supply shock has a significantly positive impact on China's stock returns, but global oil demand shock and the oil specific demand shock have no significant impacts. The reason for the lack of significant impacts is that the positive expectation effect of China's fast economic growth may be just offset by the negative effect of a precautionary demand-driven effect. This result is also consistent with the previous empirical findings that the segmented and integrated China stock market is mixed, and it implies that the China stock market is ‘partially integrated’ with the other stock markets and oil price shocks.     

The impact of public and semi-public information on cotton futures market

This study estimated the impact of all major public and semi-public reports on the cotton futures market from 1995 through 2012. The estimation was based on the event study approach with the events measured by the release of five major reports: Export Sales, Crop Progress, World Agricultural Supply and Demand Estimates (WASDE) and Prospective Plantings (public reports from US Department of Agriculture) and Cotton This Month (semi-public report from International Cotton Advisory Committee). The best-fitting IGARCH(1,1)-t model that accounted for the day-of-week, seasonality and stock levels was used to measure the report effects on daily nearby cotton close-to-close futures returns. Prospective Plantings and WASDE reports appeared to be the most important sources of information in the cotton markets moving the conditional standard deviation of returns by an average of 14.4 and 9.6 percentage points, respectively. However, significant market reaction was not found for the other three reports. Our analysis revealed that, in the presence of clustering, ignoring the impact of other reports would have resulted in about 18% overestimation of WASDE impact.     

Regional wages and market potential in the enlarged EU: an empirical investigation

This article empirically analyses the link between market potential and regional wages in the enlarged EU. We contribute to the existing literature in several ways: (1) we analyse the link between market potential and wages for the EU27 and (2) deconstruct total market potential into several geographical components and analyse their respective contributions to explaining the geographical wage structure. We correct for existing spatial autocorrelation and endogeneity by using an instrumental variable generalized spatial two-stage least squares (IV GS2SLS).