Transmission channels of international financial crises to African stock markets: the case of the euro sovereign debt crisis

This article investigates the effects of the European sovereign debt crisis on African stock markets within a Bayesian shrinkage VAR framework. This method allows us to consider both North African and Sub-Saharan African stock markets, and provides a flexible parsimonious specification. The results reveal varying reactions of the impulse response functions. The most exposed African stock markets are those of Egypt, South Africa and Mauritius, while the least affected stock market is, surprisingly, that of Ivory Coast. Our analysis shows that, in addition to direct transmission, several macroeconomic and market channels, such as commodities, exports, and exchange rates, are relevant. Specifically, countries with strong commercial links to European countries will be most impacted by the crisis. The severity of transmission also depends on the country’s dependence on commodities.     

Regional spillovers across transitioning emerging and frontier equity markets: A multi-time scale wavelet analysis

The episodic wave of crises experienced across the global financial markets over the past two decades has raised questions surrounding the vulnerability of transitioning emerging and frontier equity markets to exogenous shocks. These markets, by design, have lacked the institutional or financial architecture supporting their capital base compared to more established markets. We make the initial attempt to examine four such stock markets (Saudi Arabia, UAE, South Africa and Israel). We perform multi-timescale analysis using wavelet-based time and frequency decompositions in order to investigate (i) whether the shocks transmitted were pure contagion or fundamental-based and (ii) also whether the dynamic evolution of stock market integration was mainly short-term or long-term. We find that prior to the 2008/09 US subprime crisis, the shocks generated pure contagion in contrast to the subprime crisis that reveals evidence supportive of fundamental-based contagion. Further, when exploring the dynamics of market integration, we find that integration strengthens over time as opposed to any immediate short-term outcome. This supports policies engendered to promote stock market resiliency and stability.     

Return and volatility transmission between world oil prices and stock markets of the GCC countries

This paper investigates the return links and volatility transmission between oil and stock markets in the Gulf Cooperation Council (GCC) countries over the period 2005-2010. We employ a recent generalized VAR-GARCH approach which allows for transmissions in return and volatility. In addition, we analyze the optimal weights and hedge ratios for oil-stock portfolio holdings. On the whole, our results point to the existence of substantial return and volatility spillovers between world oil prices and GCC stock markets, and appear to be crucial for international portfolio management in the presence of oil price risk.     

Consumption and stock markets in Asian economies

This paper investigates the causal links between stock market performance and consumption for five Asian economies by applying the bound tests of Pesaran et al. and lag augmented VAR of Toda and Yamamoto . We find two‐way causal relationships between stock market performance and consumption in the cases of Hong Kong and Taiwan in the long run. The existence of such two‐way causal links indicates that stock market performance and consumption mutually affect each other, implying that the previous studies may have overestimated the wealth effect of the stock markets without taking account of the reverse causation from consumption to the stock markets. The short‐run effect of the stock market on consumption is more visible than the long‐run effect in most of the sample economies, suggesting that changes in consumption directly reflect stock market fluctuations.     

Exact arbitrage, well-diversified portfolios and asset pricing in large markets

For a market with an atomless continuum of assets, we formulate the intuitive idea of a “well-diversified” portfolio, and present a notion of “exact arbitrage”, strictly weaker than the more conventional notion of “asymptotic arbitrage”, and necessary and sufficient for the validity of an APT pricing formula. Our formula involves “essential” risk, one based on a specific index portfolio constructed from factors and factor loadings that are endogenously extracted to satisfy an optimality property involving a finite number of factors. We illustrate how our results can be translated to markets with a large but finite number of assets.     

Environmental disclosure and stock market liquidity: evidence from Arab MENA emerging markets

The objective of this study is to examine the impact of environmental disclosure levels on the stock market liquidity of Arab Middle Eastern and North African (MENA) companies. For that, a self-constructed disclosure index was applied to the annual reports for the years 2010, 2011 and 2012 and the bid-ask spread was used as a proxy for stock market liquidity. Results indicate that levels of environmental disclosure in MENA companies are quite low. In addition, using a sample of 276 firm-year observations, multivariate analysis shows that the higher the level of environmental disclosure provided in the annual reports, the lower the spread between the market bid and ask prices, thereby indicating an increase in stock market liquidity.     

Dynamic linkages between exchange rates and stock prices: Evidence from East Asian markets

This study examines dynamic linkages between exchange rates and stock prices for seven East Asian countries, including Hong Kong, Japan, Korea, Malaysia, Singapore, Taiwan, and Thailand, for the period January 1988 to October 1998. Our empirical results show a significant causal relation from exchange rates to stock prices for Hong Kong, Japan, Malaysia, and Thailand before the 1997 Asian financial crisis. We also find a causal relation from the equity market to the foreign exchange market for Hong Kong, Korea, and Singapore. Further, while no country shows a significant causality from stock prices to exchange rates during the Asian crisis, a causal relation from exchange rates to stock prices is found for all countries except Malaysia. Our findings are robust with respect to various testing methods used, including Granger causality tests, a variance decomposition analysis, and an impulse response analysis. Our findings also indicate that the linkages vary across economies with respect to exchange rate regimes, the trade size, the degree of capital control, and the size of equity market.     

Threshold effect in the relationship between investor sentiment and stock market returns: a PSTR specification

This article verifies whether the hypothesis of heterogeneous agent modelling and the behavioural heterogeneity framework can reproduce recent stylized facts regarding stock markets (e.g. the 1987 crash, internet bubble, and subprime crisis). To this end, we investigate the relationship between investor sentiment and stock market returns for the G7 countries from June 1987 to February 2014. We propose an empirical non-linear panel data specification based on the panel switching transition model to capture the investor sentiment-stock return relationship, while enabling investor sentiment to act asymmetrically, non-linearly, and time varyingly according to the market state and investor attitude towards risk. Our findings are twofold. First, we show that the hypotheses of efficiency, rationality, and representative agent do not hold in reproducing stock market dynamics. Second, investor sentiment affects stock returns significantly and non-linearly, but its effects vary with the market conditions. Indeed, the market appears predominated by fundamental investors in the first regime. In the second regime, investor sentiment effect is positively activated, increasing stock returns; however, when their overconfidence sentiment exceeds some threshold, this effect becomes inverse in the third regime for a high threshold level of market confidence and investor over-optimism.     

Oil shocks,US economic uncertainty,and emerging stock markets

This paper investigates the impacts of oil price shocks and US economic uncertainty on emerging equity markets within a structural VAR model. I find that both precautionary oil demand and US economic uncertainty shocks have significant negative effects on emerging stock returns, whereas aggregate demand shocks cause a sustained rise of the returns. In particular, the direct effects of oil shocks on emerging stock returns are amplified by the endogenous response of US economic uncertainty. Variance decomposition analysis shows that oil market fundamentals and US economic uncertainty are an important determinant of emerging equity returns, accounting for 35% and 24% of their long-term variations, respectively. The heterogeneous impacts of structural shocks on individual emerging markets, however, suggest that a well-diversified portfolio can be obtainable.     

Extreme returns and the idiosyncratic volatility puzzle: African evidence

We examine the cross-sectional relationship between the expected stock return and both the maximum daily return (MAX) and the idiosyncratic volatility (IVOL) in the five largest emerging African stock markets over the period from 2001 to 2015. First, we find that there is a robust and significantly negative MAX effect in the pooled African stock markets. Second, though we initially document a negative IVOL effect, it disappears after controlling for MAX. Finally, the negative MAX effect is only significant in the small-SIZE, high-illiquidity and high-skewness portfolios. Our results suggest risk-seeking behaviour among African investors similar to that in other parts of the world.     

International stock markets comovements: the role of economic and financial integration

The contribution of economic and financial integration to international stock markets comovements are investigated by means of a large scale macroeconometric model, set in the factor vector autoregressive framework (F-VAR). The findings point to a relevant role for both economic and financial integration in explaining international stock markets comovements for the G-7 countries. While economic integration would exercise its effects through the common response of stock markets to global economic shocks, financial integration would operate through financial shocks spillovers, particularly at the regional level.      

Co-movement of ASEAN stock markets: New evidence from wavelet and VMD-based copula tests

This paper aims to study the co-movement and the volatility fluctuation between stock markets in the Association of Southeast Asian Nations (ASEAN) countries from a new perspective. The analyses also delve more deeply into the effect of ASEAN trading link establishment on the short-term interdependency. By applying three-dimensional continuous wavelet transform (CWT) on daily returns of stock markets for the period 2009 to 2016, the interdependence level and lag-lead relationship among ASEAN trading link participants are estimated. The degree of interdependence in ASEAN stock markets is found to be stronger in the short term, especially following particular external shocks. A Variational Modes Decomposition (VMD)-based copula estimation shows that the effect of economic shock – in our case, ASEAN trading link establishment – on the stock markets’ level of comovement is only temporary and will progressively diminish within approximately two years. Only Indonesia and Malaysia display strong fundamental linkages between each other. Both the CWT and Copula methods consistently show that Vietnam (Indonesia) has the lowest (highest) interdependence with the rest of ASEAN trading link participants, as opposed to previous empirical evidence obtained from conventional methods. Investors who want to construct optimal portfolios and policymakers who aim to make effective macroeconomic policies should take these findings into account.     

Asymmetric effects of oil price shocks on stock returns: evidence from a two-stage Markov regime-switching approach

The asymmetric effects of oil price shocks on stock returns have attracted the attention of many researchers in the past several decades. Most of these researchers’ studies, however, do not separate out the sources of oil price shocks when examining the asymmetric effects. In this article, we address this limitation using a two-stage Markov regime-switching approach. Our results indicate that oil supply and demand shocks have a null or minimal impact on stock returns in a low-volatility regime and a statistically significant impact in a high-volatility regime. We observe that oil demand shocks affect stock returns significantly more than oil supply shocks. A positive aggregate demand shock significantly increases stock returns, whereas a positive oil-specific demand shock markedly decreases stock returns. These results have important implications for policymakers and investors.     

The effects of haze pollution on stock performances: evidence from China

Haze pollution has become the most important environmental issue in China in recent years. Using the data of PM_2.5 concentration and stocks of listed companies located in Beijing between 2010 and 2014, this article investigates the effects of haze pollution on stock performances. Empirical results indicate that haze pollution has significant negative effects on stock returns and significant positive effects on stock volatilities, through the channel of investors’ mood. Furthermore, the effects of haze pollution on stock returns emerge gradually and the effects of haze pollution on stock volatilities weaken gradually over time during a trading day.     

Uniform testing and portfolio strategies for single and multifactor asset pricing models in the Pacific Basin markets

We test and implement portfolio strategies for three major asset pricing models, under uniform diagnostic measures using the PACAP data set containing all current listing and de-listing of firms for the local stock exchange in several Pacific Basin countries. Compared to the often used MSCI database that include only a subset of the (large) firms in the local markets, the more complete coverage of our database allows for more robust testing of current multifactor asset pricing models since the possible effects of additional factors such as size and book to market may not show up correctly using less comprehensive data sets. Our data set also provides a natural packet of nonUS data for addressing the issue of whether the results of recent asset pricing research are sample specific. Our overall results provide multi-country (sample nonspecific) support for the additional asset pricing risk factors of the Fama-French three-factor model but not for the momentum factor of the Carhart model. We additionally find that the size risk factor is more prominent than value risk factor in the Pacific Basin markets. Finally, we find strong evidence that portfolio strategies implemented to capture value and size effects are profitable in the Pacific Basin stock markets.     

Herding Behavior in CEE Stock Markets Under Asymmetric Conditions: A Quantile Regression Analysis

This article investigates herding behavior in ten Central and East European (CEE) stock markets by using daily data on stock prices for 384 companies from January 2, 2003, to December 31, 2013. Our study is based on the methodology developed by Chang, Cheng, and Khorana [2000 Chang, Eric, Joseph Cheng, and Ajay Khorana. “An Examination of Herd Behavior in Equity Markets: An International Perspective.” Journal of Banking and Finance, 24, (2000), pp. 1651–1679.[Crossref], [Web of Science ®] , [Google Scholar]], adapted to detect herding behavior under different market conditions. The authors use quantile regression analysis as an estimation method and find evidence of herding behavior in all CEE countries, except for Poland and Romania. When the market is up and the trading volume increases, investors become enthusiastic and optimistic, neglecting their own information and following each other in buying transactions. Conversely, when the market declines, driven by panic and fear, investors follow the market consensus and engage in overselling transactions.     

Exogenous shocks,dynamic correlations,and portfolio risk management for the Asian emerging and other global developed and emerging stock markets

ABSTRACT

This study examines the potential influence of exogenous shocks on time-varying correlations and portfolio strategies between the Asian emerging and other global stock markets including developed and other emerging markets. Using the ARMA-cDCC-FIEGARCH model with and without exogenous shocks, our results highlight the usefulness of including other global stock assets in the traditional portfolio for Asian emerging market investors. However, investors have limited opportunities to diversify their assets during the global financial crisis. Moreover, the shocks from the U.S. stock market have a greater influence on global stock markets compared to that from U.S. economic policy. Fortunately, the model with exogenous shocks improves its accuracy, which plays the same role of controlling structural breaks in the model. More importantly, incorporating exogenous shocks in our model also provides better value-at-risk performance results and hedging effectiveness. These results have several important implications for investors, researchers, and policymakers.     

Dynamic correlation and equicorrelation analysis of global financial turmoil: evidence from emerging East Asian stock markets

This study investigates the dynamic conditional correlations (DCCs) between eight emerging East Asian stock markets and the US stock market and analyses the dynamic equicorrelation among these nine stock markets. We find a significant increase in the conditional correlations and equicorrelation in the first phase of the global financial crisis. We refer to this finding as contagion from the US stock market to the emerging East Asian markets. We also find an additional significant process of increasing correlations and equicorrelation (herding) in the second phase of the global financial crisis. Further, we employ two new models, namely DCCX-MGARCH (a DCC Multivariate GARCH model with exogenous variables) and DECOX-MGARCH (a dynamic equicorrelation multivariate GARCH model with exogenous variables), to identify the channels of contagion. We find that an increase in the VIX Index increases the conditional correlations and equicorrelation, while increases in TED spreads decrease the conditional correlations of six emerging East Asian countries with the USA. We compare the accuracy of the conditional correlation estimates of the DCC and DCCX models (or DECO and DECOX models) by constructing a loss function. We find that the DCCX (DECOX) model provides more accurate conditional correlation estimates than the DCC (DECO) model by extracting additional information from exogenous variables.     

Impact of macroeconomic factors and country risk ratings on GCC stock markets: evidence from a dynamic panel threshold model with regime switching

This study examines the non-linear relationship between stock markets in GCC countries and their country risk ratings as well as with major macroeconomic factors. Based on a dynamic panel threshold model with two and four regimes, the results provide evidence of short-term asymmetry between first-lagged GCC stock returns and the performance of GCC stock markets. In addition, only the financial risk (FR) rating has a significant positive effect on the performance of GCC stock markets according to the prevailing regimes for the GCC lagged returns and the Brent oil market. Among the macroeconomic factors, improvements in the global stock markets, the MSCI Global Islamic Index, and the oil price increased the performance of GCC stock markets, whereas increases in the gold price, the 3-month U.S. Treasury bill rate, and the U.S. Treasury bond rate reduced the performance of the GCC stock markets. These results have important implications for investors, policymakers, and portfolio managers.     

中国居民消费与资产收益:基于收入群体的分析

The equity premium puzzle is found during the test of the Consumption-based Capital Asset Pricing Model (CCAPM) with aggregate consumption data. Because of income disparity, many consumers lack financial assets to intertemporally allocate their consumptions under income constraints. Thus, it is likely to lead to a specification error by employing aggregate consumption data to test the CCAPM. This paper examines the impacts of the economically constrained (low-income) consumers and unconstrained (high-income) consumers on the CCAPM using urban consumption expenditures in China delineated by consumer income, and tests the income constraint hypothesis. The empirical results show that the CCAPM is not more consistent with the consumption pattern of the higher-income consumers. Including the income constraint into the analyses of the consumption and asset returns does not unravel the equity premium puzzle.