Simultaneous monetary policy announcements and international stock markets response: An intraday analysis

This paper investigates the return and volatility response of major European and US equity indices to monetary policy surprises by utilizing extensive intraday data on 5-min price quotes along with a comprehensive dataset on monetary policy decisions and macroeconomic news announcements. The results indicate that the monetary policy decisions generally exert immediate and significant influence on stock index returns and volatilities in both European and the US markets. The findings also show that press conferences held by the European Central Bank (ECB) that follow monetary policy decisions on the same day have a clear impact on European index return volatilities. This implies that they convey additional important information to market participants. Overall, our analysis suggests that the use of high frequency data is critical to separate the effect of monetary policy actions from those of macroeconomic news announcements on stock index returns and volatilities.     

Dynamic linkages between emerging European and developed stock markets: Has the EMU any impact?

This paper investigates the short- and long-run behavior of major emerging Central European (Poland, Czech Republic, Hungary, Slovakia), and developed (Germany, US) stock markets and assesses the impact of the EMU on stock market linkages. Evidence of one cointegration vector in both a pre- and a post-EMU sub-period indicates market comovements towards a stationary long-run equilibrium path. Central European markets tend to display stronger linkages with their mature counterparts, whereas the US market holds a world leading influential role. No dramatic post-EMU shock is detected in stock market dynamics. The empirical findings have important implications for the effectiveness of domestic policy decisions, as the emerging Central European states have recently joined the EU and local stock markets may become less immunized to external shocks.     

Stock market contagion in Central and Eastern Europe: unexpected volatility and extreme co-exceedance

We examine whether there is contagion from the US stock market to six Central and Eastern European stock markets. We use a novel measure of contagion that examines whether volatility shocks in the US stock market coupled with negative returns are followed by higher co-exceedance between US and emerging stock markets. Using our approach and controlling for a set of market-related variables, we show that during the period from 1998 to 2014, financial contagion occurred, that is, unexpected negative events in the US market are followed by higher co-exceedance between US and Central and Eastern European stock markets. Even though contagion is stronger during the financial crisis, it also occurs in tranquil times.     

The determination and international transmission of stock market volatility

This paper extends the literature on low-frequency analysis of the causes and transmission of stock market volatility. It uses end-monthly data on stock market returns, interest rates, exchange rates, inflation, and industrial production for five countries (Britain, France, Germany, Japan, and the US) from July 1973 to December 1994. Efficient portfolios of world, European, and Japanese/US equity are first constructed, the existence of multivariate cointegrating relationships between them is demonstrated, and the transmission of conditional volatility between them is described. The transmission of conditional volatility from world equity markets and national business cycle variables to national stock markets is then modeled. Among the main findings are: first, world equity market volatility is caused mostly by volatility in Japanese/US markets and transmitted to European markets, and second, changes in the volatility of inflation are associated with changes of the opposite sign in stock market volatility in all markets where a significant effect is found to exist. To the extent that the volatility of inflation is positively related to its level, this implies that low inflation tends to be associated with high stock market volatility.     

The joint response of stock and foreign exchange markets to macroeconomic surprises: Using US and Japanese data

This paper investigates the joint response of stock and foreign exchange (FX) market returns to macroeconomic surprises, employing a system method of estimation that allows for the cross-country and cross-market interaction for asset returns and risk premia. Using US and Japanese data, we find that US stock markets are asymmetrically responsive to domestic developments in output growth and interest rates but are not influenced by macroeconomic surprises from Japan. The surprise in the FX market seems to affect stock markets in the US and Japan, respectively. In particular, we find that the interest rate surprise in the US and inflation surprise in Japan tend to overstate the impact that these surprises would have on the respective stock market. The impact of the surprises would appear smaller if macroeconomic developments induced by the FX market were incorporated into the model.     

Predicting the bear stock market: Macroeconomic variables as leading indicators

This paper investigates whether macroeconomic variables can predict recessions in the stock market, i.e., bear markets. Series such as interest rate spreads, inflation rates, money stocks, aggregate output, unemployment rates, federal funds rates, federal government debt, and nominal exchange rates are evaluated. After using parametric and nonparametric approaches to identify recession periods in the stock market, we consider both in-sample and out-of-sample tests of the variables’ predictive ability. Empirical evidence from monthly data on the Standard & Poor’s S&P 500 price index suggests that among the macroeconomic variables we have evaluated, yield curve spreads and inflation rates are the most useful predictors of recessions in the US stock market, according to both in-sample and out-of-sample forecasting performance. Moreover, comparing the bear market prediction to the stock return predictability has shown that it is easier to predict bear markets using macroeconomic variables.     

Joint dynamics of foreign exchange and stock markets in emerging Europe

This paper proposes an ideal specification for studying joint dynamics of emerging stock and foreign exchange markets, and applies it on European emerging markets where this interaction is of particular significance due to large external deficits. Results show that global developed and emerging stock market returns account for a large proportion of the (permanent) comovement between the stock index and currency value. The residual interaction after controlling for global indexes is small. The sign of the currency-stock market relationship is driven by dependence on foreign capital (predominantly positive for countries which are net receivers of foreign portfolio capital) and depth of the local stock market. Bank of Russia's intensive involvement in the currency market delays Ruble's response to global information. Emerging European currencies predict reversals in global equity indexes several months ahead.     

Linkages among European and world stock markets

Causal relations and dynamic interactions among equity returns in ten countries for the period 1983–1994 are analysed. An innovation accounting approach based on a multivariate vector autoregressive (VAR) model is used to estimate the proportion of each market return's forecast error attributable to innovations in foreign market returns. Three major results appear. The variance decompositions indicate a strong degree of economic interaction among stock markets. The US stock market has a considerable influence on stock market performance in almost every country, while there is no substantial inter-continental influence from the European stock markets on the world's two largest equity markets in New York and Tokyo. Finally, the pattern of the impulse-response functions illustrates a rapid international transmission of stock market events, supporting the hypothesis of international stock market efficiency.     

Volatility dependences of stock markets with structural breaks

We develop a Vector Heterogeneous Autoregression model with Continuous Volatility and Jumps (VHARCJ) where residuals follow a flexible dynamic heterogeneous covariance structure. We employ the Bayesian data augmentation approach to match the realised volatility series based on high-frequency data from six stock markets. The structural breaks in the covariance are captured by an exogenous stochastic component that follows a three-state Markov regime-switching process. We find that the stock markets have higher volatility dependence during turmoil periods and that breakdowns in volatility dependence can be attributed to the increase in market volatilities. We also find positive correlations between the Asian stock markets, the European stock market, and the UK stock market. The US stock market has positive correlations with all other markets for most of the sample periods, indicating the leading position of US stock market in the global stock markets. In addition, the proposed three-state VHARCJ model with Dynamic Conditional Correlation (DCC) and break structure under student-t distribution has a superior density forecast performance as compared to the competing models. The forecast models with structural breaks outperform those without structural breaks based on the log predicted likelihood, the log Bayesian factor, and the root mean square loss function.     

Do industries lead stock markets?

We investigate whether the returns of industry portfolios predict stock market movements. In the US, a significant number of industry returns, including retail, services, commercial real estate, metal, and petroleum, forecast the stock market by up to two months. Moreover, the propensity of an industry to predict the market is correlated with its propensity to forecast various indicators of economic activity. The eight largest non-US stock markets show remarkably similar patterns. These findings suggest that stock markets react with a delay to information contained in industry returns about their fundamentals and that information diffuses only gradually across markets.     

Persistence characteristics of the Chinese stock markets

Using advanced signal processing, this paper identifies the lack of ergodicity, stationarity, independence and the degree of persistence of the Shanghai (SHI) stock market and Shenzhen A shares (SZI) and B shares (SZBI), before and after the various deregulations and reregulations. Their lack of stationarity and ergodicity are ascribed to (1) the initial interventions in these stock markets by the Chinese government by imposing various daily price change limits, and (2) the changing trading styles, after the Chinese government left these equity markets to develop by themselves. The SHI, SZI, and SZBI are moderately persistent with Hurst exponents slightly greater than the Fickian 0.5 of the Geometric Brownian Motion. These stock markets were considerably more persistent before the deregulations, but they now behave more like Geometric Brownian Motions, i.e., efficiently. Thus, the Chinese stock markets are gradually and properly being integrated into one Chinese stock market. Our results are consistent with similar empirical findings from Latin American, European, and other Asian emerging financial markets.     

Scheduled domestic and US macroeconomic news and stock valuation in Europe

This paper investigates whether investors on European stock markets regard news announcements about domestic and US macroeconomic variables as an important source of information when valuing stocks. To assess the importance of scheduled domestic and US macroeconomic news announcements, implied volatilities are analyzed on the German and Finnish stock markets. The results show that the US employment report and the Federal Open Market Committee (FOMC) meeting days have a significant impact on implied volatility on both European markets. The domestic news announcements have no effect on implied volatility on either of the markets. The results indicate that the US macroeconomic news announcements are valuable sources of information on European stock markets while domestic news releases seem to be unimportant.     

Intraday Seasonalities and Macroeconomic News Announcements

Using a data set consisting of more than five years of 5‐minute intraday stock index returns for major European stock indices and US macroeconomic surprises, conditional means and volatility behaviour in European markets were investigated. The findings suggest that the opening of the US stock market significantly raises the level of volatility in Europe, all markets responding in an identical fashion. Furthermore, US macroeconomic surprises exert an immediate and major impact on both the European stock markets’ intraday returns and volatilities. Thus, high frequency data appear to be critical for the identification of news impacting the markets.     

An empirical analysis of herd behavior in global stock markets

This paper examines herding behavior in global markets. By applying daily data for 18 countries from May 25, 1988, through April 24, 2009, we find evidence of herding in advanced stock markets (except the US) and in Asian markets. No evidence of herding is found in Latin American markets. Evidence suggests that stock return dispersions in the US play a significant role in explaining the non-US market’s herding activity. With the exceptions of the US and Latin American markets, herding is present in both up and down markets, although herding asymmetry is more profound in Asian markets during rising markets. Evidence suggests that crisis triggers herding activity in the crisis country of origin and then produces a contagion effect, which spreads the crisis to neighboring countries. During crisis periods, we find supportive evidence for herding formation in the US and Latin American markets.     

Monetary environments and international stock returns

Previous research documents that US stock returns are related to the US monetary environment. The focus of this paper is to determine whether stock returns in foreign markets are associated with both local and US monetary environments. Consistent with the US market results, we find that foreign stock returns are generally higher in expansive US and local monetary environments than they are in restrictive environments. Further, these higher returns are generally not accompanied by increases in risk. Interestingly, several of the stock markets are more strongly related to the US monetary environment than to local monetary conditions. For seven of the 15 foreign countries examined, the local and US monetary environment explain 4% or more of the variation in monthly stock returns.     

Volatility and correlation in international stock markets and the role of exchange rate fluctuations

This paper develops a direct, explicit model for the role of exchange rate fluctuations in international stock markets and examines how and to what extent volatility and correlations in equity markets are influenced by exchange rate fluctuations. Evidence presented in this paper indicates that a higher foreign exchange rate variability mostly increases local stock market volatility but decreases volatility for the US stock market. The extent to which stock market volatility is influenced by foreign exchange variability is greater for local markets than for the US market, due to the fact that exchange rate changes are more strongly correlated with local equity market returns than the US market returns. We find that a higher exchange rate fluctuation marginally decreases the US/local equity market correlation. While exchange rate fluctuations held a relatively large fraction of the variation in local stock market returns, there was no significant influence on the US/local equity market correlation.     

Baltic stock markets and the financial crisis of 2008–2009

This study presents new evidence on stock market integration by investigating the linkages between developed European stock markets and emerging stock markets. We focus on three countries in the Baltic region, namely Estonia, Latvia and Lithuania with particular attention to the recent financial crisis of 2008–2009. The study is motivated by traditional stock market studies of integration, which show that developed stock markets are highly integrated, while emerging markets may be segmented. How integrated these emerging stock markets are in a crisis period with respect to the EUROSTOXX50 stock index is an empirical question investigated in this study. While the results of this study demonstrate that the Baltic stock markets were apparently segmented before the crisis, they were highly integrated during the crisis. The results of the variance decomposition analysis show that a large proportion of the forecast variance of the Baltic stock markets can be explained by the EUROSTOXX50 during the crisis. The results from the quantile regressions demonstrate that during the crisis the returns of the lowest quantile were most sensitive to the EUROSTOXX50 stock index. All these results imply less diversification benefits during crises when investors would need them the most.     

Non-linear dynamics in international stock market returns

Recent empirical finance research has reported non-linear dynamics within asset returns. However, much of this extant research has focussed upon asset markets within the US and UK. This paper examines whether such dynamics are also present in a series of six international equity index returns. Using empirical models which are consistent that the theoretical behavioural finance noise trader motivation of non-linearity, whereby market dynamics differ between small and large returns, our results suggest these models improve the in-sample fit and out-of-sample forecast over linear alternatives. Further, the point of regime transition differs between positive and negative returns indicating that noise traders are more likely to engage in trend-chasing behaviour in up markets and anchoring behaviour in down markets. Finally, the forecast gain in the Asia-Pacific markets is greater than in the European markets suggestive that limits to arbitrage are greater perhaps as fundamental traders knowledge of market dynamics and noise trader behaviour is still evolving.     

Spillover of fear: Evidence from the stock markets of five developed countries

This study investigates the spillover effect in five leading stock markets (i.e., the United States, the United Kingdom, Germany, Japan, and France). It estimates the spillover indices of these countries and finds that information transmission between these stock markets increases considerably after 1998. Germany and the United States are the main stock markets conveying information to other international markets. Germany primarily influences the French stock market, and the United States significantly influences many other stock markets. Results show that the US stock market shows three periods during which its net spillover effect exceeds zero: the period prior to 1997, the dot-com bubble from 2000 to 2002, and the subprime mortgage crisis and Lehman Brothers bankruptcy from 2007 to 2008. The fear index correlates significantly with the spillover of the US stock market into other markets. The spillover effect of the US stock market demonstrates asymmetry and the likelihood to spread positive fundamental information and non-fundamental information (e.g., fear).     

Political crises and the stock market integration of emerging markets

This paper investigates the role of political crises in explaining the degree of stock market integration in emerging markets over the period 1991-2006. Using the International Crisis Behavior database, which contains detailed information on political crises around the world, and employing data on more than 15,500 firms, we assess whether political crises affect stock market integration in 19 emerging markets in South and East Asia, Latin America, and Central and Eastern Europe. We conclude that crises with certain characteristics generally reduce the level of stock market integration in these regions. In particular, the beginning of a political crisis, its severity, the involvement of the US in the conflict, and the number of parties involved in a crisis all have impacts on the level of stock market integration in these markets.