Herding in the bad times: The 2008 and COVID-19 crises

The objective of this paper is to analyze the imitation behavior of investors in especially convulsed periods, such as the 2008 financial crisis and the recent global pandemic, both of which could affect investors' emotions and behavior, although both have different characteristics and might have different implications. The cross-sectional dispersion of returns is used to measure the level of herding in the markets of Spain and Portugal, using a survivorship-bias-free dataset of daily stock returns during the period January 2000–May 2021, in turn divided into several sub-periods classified as pre-2008 crisis, 2008 crisis, post-2008 crisis, Covid-19 and post Covid-19. Additionally, the existence is studied of differences between days of positive and negative returns, or between days of high volatility compared to the rest, and whether the cross-sectional dispersion of returns in one market is affected by the cross-sectional dispersion of returns in the other market. The results indicate that herding appears with greater intensity in periods prior to the crisis, disappearing during the financial crisis and reappearing, although with less intensity, after it, while it is not generally detected in Covid-19 times. However, herding behavior can be observed in the market during the pandemic on high volatility days.     

Equity market contagion during the global financial crisis: Evidence from the world's eight largest economies

The global financial crisis (2007–2009) saw sharp declines in stock markets around the world, affecting both advanced and emerging markets. In this paper we test for the existence of equity market contagion originating from the US to advanced and emerging markets during the crisis period. Using a latent factor model, we provide strong evidence of contagion effects in both advanced and emerging equity markets. In the aggregate equity market indices, contagion from the US explains a large portion of the variance in stock returns in both advanced and emerging markets. However, in the financial sector indices we find less evidence of contagion than in the aggregate indices, and this is particularly the case for the advanced markets. The results suggest that contagion effects are not strongly related to high levels of global integration.     

Wavelet coherence analysis of returns,volatility and interdependence of the US and the EU money markets: Pre & post crisis

This research analyse the US and the EU money markets interdependence from 2004 to 2018. The study explains to what extent the volatility of the chosen money markets instruments in two regions is inter-correlated before, during and after the financial crisis of 2008. We apply the econometric analysis and estimate time-series models of class GARCH to study the historical dynamics of interbank rates and bond returns. The study demonstrates that correlation between returns of analogous money market instruments in the EU and US is not stable over time. We find that correlation rises in periods when countries are exposed to the same external shocks as global financial crisis. Wavelet coherence analysis suggests that investors do not get any advantages of portfolio diversification investing only in US treasuries with different maturities for more than 256 days and do not get any advantages at all investing only in European bonds.     

Economic policy uncertainty effects for forecasting future real economic activity

Recently introduced measures for economic policy uncertainty (EPU), included in the data from 1997 to 2016, have a role in forecasting out-of-sample values for future real economic activity for both the euro area and UK economies. The inclusion of EPU measures, either for the US, the UK or for overall European economies, improves the forecasting ability of models based on standard financial market information, especially for the period before the 2008 global crisis. However, during and after the crisis period, the slope of the yield curve and excess stock market returns improves the out-of-sample forecast performance the most compared to an AR-benchmark model. Hence, the EPU information is important in times of normal business cycles, but might contain similar information components to financial market return variables during turbulent crisis periods in the financial markets and in the real economy.     

Testing for financial spillovers in calm and turbulent periods

In this paper, we investigate financial spillovers between stock markets during calm and turbulent periods. We explicitly define financial spillovers and financial contagion in accordance with the literature and construct statistical models corresponding to these definitions in a Markov switching framework. Applying the new testing methodology based on transition matrices, we find that spillovers from the US stock market to the UK, Japanese and German markets are more frequent when the latter markets are in a crisis regime. However, we reject the hypothesis of strong financial contagion from the US to the other markets.     

Dependence structures between Chinese stock markets and the international financial market: Evidence from a wavelet-based quantile regression approach

In this study, we investigate the dependence structures between six Chinese stock markets and the international financial market including possible safe haven assets and global economic factors under different market conditions and investment horizons. The research is conducted by combining a quantile regression approach with a wavelet decomposition analysis. Although we find little or insignificant dependence under short investment horizons, we detect the strong asymmetric dependence of oil prices and the US dollar index on the six Chinese stock markets in the medium and long terms. Moreover, not only is crude oil not a safe haven, it may damage Chinese stock markets as it increases over the long term, even in bull markets. Meanwhile, appreciation of the US dollar (depreciation of RMB) damages (boosts) Chinese stock markets during bull (bear) market conditions under long investment horizons. Moreover, we find that VIX (volatility index)-related derivatives may serve as good risk management tools under any market condition, while gold is a safe haven asset only during crisis periods.     

Sovereign rating changes—Do they provide new information for stock markets?

The purpose of this paper is to examine the impact of sovereign rating changes on international financial markets using a comprehensive database of 42 countries, covering the major regions in the world over the period 1995–2003. In general, we find that rating agencies provide stock and foreign exchange markets with new tradable information. Specifically, rating upgrades (downgrades) significantly increased (decreased) USD denominated stock market returns and decreased (increased) volatility. Whereas the mean response is contributed evenly by the local currency stock returns and exchange rate changes that make up the USD returns, only the foreign exchange volatility was behind the USD denominated return volatility. In addition, we find significant asymmetric effects of rating announcements. The market responses – both return and volatility – are more pronounced in the cases of downgrades, foreign currency debt, emerging market debt, and during crisis periods. This study has important policy implications for international investors’ asset allocation plans and for regulatory bodies such as the Basel Committee who increasingly rely upon Moody's, Standard and Poor's and Fitch's ratings for their regulatory regimes.     

Mutual excitation between OECD stock and oil markets: A conditional intensity extreme value approach

We analyze the degree of mutual excitation that exists between extreme events across the stock markets of OECD member nations and the Brent and WTI crude oil markets. For this analysis, marked point process models are proposed which are able to capture the dynamics of the intensity of occurrence and comovement during periods of crisis. The results show a significant, negative interdependence between most OECD markets, especially those of the USA, Japan and France. These major oil importing countries display links between equity market losses and positive returns in both oil markets. However, positive interdependence is not observed between any of the OECD countries except for South Korea. The great advantage of this methodology is that, apart from using the size distribution of extreme events, it also uses the occurrence times of extreme events as a source of information. With this information, these models are better able to capture the stylized facts of extreme events in financial markets such as clustering behavior and cross-excitation.     

Volatility analysis of precious metals returns and oil returns: An ICSS approach

This study examines volatility persistence on precious metals returns taking into account oil returns and the three world major stock equity indices (Dow Jones Industrial, FTSE 100, and Nikkei 225) using daily data over the sample period January 1995 to May 2008; the aim is to analyze market relationships before the global financial crisis. We first determine when large changes in the volatility of each market returns occur by identifying major global events that would increase fluctuations in these markets. The Iterated Cumulative Sums of Squares (ICSS) algorithm was used to identify the existence of structural breaks or sudden changes in the variance of returns. In each market the standardized residuals were obtained through the GARCH(1,1) mean equation. Our main results identify a clear relationship between precious metals returns and oil returns, while the interaction between precious metals and stock returns seems to be an independent one in the case of gold with mixed results for silver and platinum. In relation to volatility persistence, the results show clear evidence of high volatility persistence between these markets, especially during times when markets were affected by excessive volatility due to economic and financial shocks.     

Does oil price variability affect the long memory and weak form efficiency of stock markets in top oil producers and oil Consumers? Evidence from an asymmetric MF-DFA approach

This study examines the asymmetric multifractality and the market efficiency of the stock markets in the countries that are the top crude oil producers (USA, KSA, Canada and Russia) and consumers (Brazil, China, India, and Japan) using an asymmetric multifractal detrended fluctuation analysis (A-MF-DFA) method. The results show evidence of an asymmetric multifractal nature for all markets. Moreover, the multifractality is stronger in the upward movement of the market returns, except in China. The degree of efficiency of the stock markets is shown to be time-varying and experienced a decrease during the 2008 global financial crisis (GFC), but an upside trend occurred during the recent oil price crash followed a significant decline during COVID-19. The stock markets have an anti-persistent feature during GFC and COVID-19, whereas they exhibit a long-term persistent feature during oil price crash. More interestingly, the efficiency of the stock markets of crude oil producers is lower in general than that of oil consumers. Furthermore, the efficiency of the stock market is lower in the downward movement of the market returns than in the upward movement. Asymmetry and oil price uncertainty index are the key driver of the stock markets and can serve as predictor of the stock market dynamics of top oil producers and top oil consumers particularly during COVID-19 and oil price crash.     

Market Risk Disclosures and Investment Efficiency: International Evidence from the Gulf Cooperation Council Financial Firms

This study examines the association between market risk disclosures (MRDs) and the investment efficiency of financial firms from six emerging markets in the Gulf Cooperation Council (GCC) region. Based on a sample of 553 firm‐year observations over the 2007–2011 period, we find that MRDs are significantly and negatively associated with both under‐investment and over‐investment and that this association is more pronounced for larger firms. We also find that the association between MRDs and under‐investment is moderated during periods of economic distress such as the Global Financial Crisis of 2008 and that the association between MRDs and over‐investment is magnified during periods of reduced financial distress. Our results are consistent with the idea that MRDs reduce information asymmetry, which ultimately improves investment efficiency. We contribute to the literature in an emerging market context by providing empirical evidence on the association between MRDs and investment efficiency across six emerging GCC capital markets. This study also fills a gap in the literature by providing evidence on the factors affecting the investment efficiency of financial firms.     

Stock market reactions to upside and downside volatility of Bitcoin: A quantile analysis

We investigate how sensitive developed and emerging equity markets are to volatility dynamics of Bitcoin during tranquil, bear, and bull market regimes. Intraday price fluctuations of Bitcoin are represented by three measures of realized volatility, viz. total variance, upside semivariance, and downside semivariance. Our empirical analysis relies on a quantile regression framework, after orthogonalizing raw returns with respect to an array of relevant global factors and accounting for structural shifts in the series. The results suggest that developed-market returns are positively related to the realized variance proxy across various market conditions, while emerging-market returns are positively (negatively) correlated with realized variance during bear (normal and bull) market periods. The upside (downside) component of realized variance has a negative (positive) influence on returns of either market category, and the dependence structure is highly asymmetric across the return distribution. Additionally, we document that developed and emerging markets are more sensitive to downside volatility than to upside volatility when they enter tranquil or bull territory. Our results offer practical implications for policymakers and investors.     

Volatility spillovers among the U.S. and Asian stock markets: A comparison between the periods of Asian currency crisis and subprime credit crisis

This paper examines the changing nature of volatility spillovers among the U.S. and eight East Asian stock markets between two financial crises: the Asian currency crisis and the U.S. subprime credit crisis. Our empirical results suggest that volatility is not always spilled over from the directly affected markets to surrounding markets in crisis periods. The East Asian markets who directly suffered from the Asian currency crisis are the ones to which volatility is spilled over from other markets during the Asian currency crisis period, whereas uni-directional volatility spillovers from the U.S. market to other markets are observed during both crisis periods. This difference can be explained by a pre-determined hierarchy in which volatility spillovers tend to start from the U.S. market regardless of the geographical origin of the crisis. Furthermore, our results reveal that the markets in three major Asian financial hubs, i.e., Japan, Hong Kong and Singapore, are the markets to which volatility is spilled over uni-directionally from several other countries during the subprime credit crisis period, but not during the Asian currency crisis period. We attribute this difference to crisis-specific (currency or credit crisis), market-specific (credit derivatives market participation and foreign currency reserves), and time-specific (more integrated global market) factors.     

Individual stock sentiment beta and stock returns

Using the data in Chinese stock market, we measure the individual stock sentiment beta, which is defined as the sensitivity of individual stock returns to the individual stock sentiment changes. We demonstrate that stocks in the highest individual stock sentiment beta portfolio have significantly higher excess returns, CAPM alpha, Fama-French three-factor alpha and Fama-French five-factor alpha. Besides, we find that the high individual stock sentiment beta stocks are smaller, younger, more volatile stocks with higher price and higher market beta. After controlling for firm characteristic, the returns of High-Low individual stock sentiment beta portfolios are still significantly positive. Moreover, we show the effect of the individual stock sentiment beta on stock returns is positive and significant in different stock markets, in different sample periods, and in bull and bear market. Besides, the results of the Bayes-Stein individual stock sentiment beta are still stable.     

The Predictive Value of Earnings, Cash flows and Accruals in the Period Surrounding the Asian Financial Crisis: Evidence from Hong Kong, Malaysia, Singapore and Thailand

This paper examines the predictive value of earnings, operating cash flows and accruals in Hong Kong, Malaysia, Singapore and Thailand for the period 1994–2001. We also examine the impact of the Asian financial crisis of 1997 on the predictive power of the accounting performance measures. We regress future cash flows and future excess returns on earnings (or cash flows and accruals) for the periods 1994–1996 (pre‐crisis period), 1997–1998 (crisis period) and 1999–2001 (post‐crisis period). Our findings indicate that the accounting measures have explanatory power for 1‐year ahead cash flows. Our analyses of 1‐year ahead excess returns indicate that investors may have undervalued the accounting measures in the pre‐ and post‐crisis periods, and overvalued the measures during the crisis period.     

How can investors build a better portfolio in small open economies? Evidence from Asia’s Four Little Dragons

This study investigates the role of hedging and portfolio design among stocks, exchange rates, and gold in small open economies (SOEs) from 4 January 2000 to 31 March 2020. We adopt the trivariate dynamic conditional correlation-fractionally integrated asymmetric power ARCH model and unconditional quantile regression model, and our findings show that the hedging role of the U.S. dollar (USD) and gold against stocks differs under regular and extreme market conditions. The USD can act as a powerful hedge asset for stocks in regular market periods. Moreover, during the global financial crisis and COVID-19 outbreak, the safe-haven effect of gold becomes stronger for almost all stocks, whereas the USD can serve as a strong safe haven against stock markets of Korea, Taiwan, and Singapore when stock returns are extremely low. In terms of portfolio designing, we find that adding the USD and gold to portfolios improves their hedging effectiveness, and the optimally weighted stock-USD-gold portfolio is the best portfolio strategy, irrespective of referring to return or risk.     

Animal Behavior in Capital markets: Herding formation dynamics,trading volume,and the role of COVID-19 pandemic

This paper provides new evidence on herding behavior. Using daily frequency data for 336 US listed firms over a five-year period, we investigate three important elements of financial herding behavior. First, trading volume, representing market interest, as a significant variable in capital markets apart from stock prices. Second, herding dynamics since herding formation is a dynamic process. Third, the reaction of possible financial herding to exogenous events-threats, as we use the pandemic event in order to investigate a market under stress. Even though the benchmark herding model used does not provide evidence of herding behavior, our results verify the significance of the above herding elements. We also find that trading volume and positive changes in trading volume result in increased cross-sectional absolute deviation (CSAD). Most importantly, we find that herding behavior is evident during the COVID-19 pandemic confirming that investors tend to herd during major crisis periods.     

Herding behavior,market sentiment and volatility: Will the bubble resume?

This paper aims to investigate herding behavior and its impact on volatility under uncertainty. We apply a cross-sectional absolute deviation approach as well as Quantile Regression methods to capture the herding behavior in daily and monthly frequencies in US markets over several time-periods including the global financial crisis. In a novel attempt we modify the empirical CSAD herding modeling by introducing implied volatility as a measure of agent risk expectations. Our findings indicate that herding tends to be intense under extreme market conditions, as depicted in the upper high quantile range of the conditional distribution of returns. During crisis periods herding is observed at the beginning of the crisis and becomes insignificant towards the end. The US market herding behavior exhibits time-varying dynamic trading patterns that can be attributed e.g., to overconfidence or excessive “flight to quality” features, mostly observed in the aftermath of the global financial crisis. Moreover, implied volatility reveals asymmetric patterns and plays a key role in enforcing irrational behavior.     

REALIZED BETA GARCH: A MULTIVARIATE GARCH MODEL WITH REALIZED MEASURES OF VOLATILITY

We introduce a multivariate generalized autoregressive conditional heteroskedasticity (GARCH) model that incorporates realized measures of variances and covariances. Realized measures extract information about the current levels of volatilities and correlations from high‐frequency data, which is particularly useful for modeling financial returns during periods of rapid changes in the underlying covariance structure. When applied to market returns in conjunction with returns on an individual asset, the model yields a dynamic model specification of the conditional regression coefficient that is known as the beta. We apply the model to a large set of assets and find the conditional betas to be far more variable than usually found with rolling‐window regressions based exclusively on daily returns. In the empirical part of the paper, we examine the cross‐sectional as well as the time variation of the conditional beta series during the financial crises. Copyright © 2014 John Wiley & Sons, Ltd.     

Volatility of Price Indices for Heterogeneous Goods with Applications to the Fine Art Market

Price indices for heterogeneous goods such as real estate or fine art constitute crucial information for institutional or private investors considering alternative investment decisions in times of financial markets turmoil. Classical mean‐variance analysis of alternative investments has been hampered by the lack of a systematic treatment of volatility in these markets. In this paper we propose a hedonic regression framework which explicitly defines an underlying stochastic process for the price index, allowing to treat the volatility parameter as the object of interest. The model can be estimated using maximum likelihood in combination with the Kalman filter. We derive theoretical properties of the volatility estimator and show that it outperforms the standard estimator. We show that extensions to allow for time‐varying volatility are straightforward using a local‐likelihood approach. In an application to a large data set of international blue chip artists, we show that volatility of the art market, although generally lower than that of financial markets, has risen after the financial crisis of 2008–09, but sharply decreased during the recent debt crisis. Copyright © 2013 John Wiley & Sons, Ltd.