The cross-section of stock returns in frontier emerging markets

We are the first to investigate the cross-section of stock returns in the new emerging equity markets, the so-called frontier emerging markets. Our unique survivorship-bias free data set consists of more than 1400 stocks over the period 1997 to 2008 and covers 24 of the most liquid frontier emerging markets. The major benefit of using individual stock characteristics is that it allows us to investigate whether return factors that have been documented in developed countries also exist in these markets. We document the presence of economically and statistically significant value and momentum effects, and a local size effect. Our results indicate that the value and momentum effects still exist when incorporating conservative assumptions of transaction costs. Additionally, we show that value, momentum, and local size returns in frontier markets cannot be explained by global risk factors.     

Modelling stock returns in Africa's emerging equity markets

We investigate the behaviour of stock returns in Africa's largest markets namely, Egypt, Kenya, Morocco, Nigeria, South Africa, Tunisia and Zimbabwe. The validity of the random walk hypothesis is examined and rejected by employing a battery of tests. Secondly we employ smooth transition and conditional volatility models to uncover the dynamics of the first two moments and examine weak form efficiency. The empirical stylized facts of volatility clustering, leptokurtosis and leverage effect are present in the African data.     

Sudden changes in volatility in emerging markets: The case of Gulf Arab stock markets

This article examines sudden changes in volatility for five Gulf area Arab stock markets using the iterated cumulative sums of squares (ICSS) algorithm and analyzes their impacts on the estimated persistence of volatility. This algorithm identifies large shifts in volatility of the stock markets during the weekly period 1994 to 2001. In contrast to Aggarwal et al. [Aggarwal, R., Inclan, C., & Leal, R., 1999, Volatility in emerging markets. Journal of Financial and Quantitative Analysis 34, 33-55], this paper found that most of the Gulf Arab stock markets are more sensitive to major global events than to local and regional factors. The 1997 Asian crisis, the collapse of oil prices in 1998 after the crisis, the adoption of the price band mechanism by OPEC in 2000, and the September 11th attack have been found to have consistently affected the Gulf markets. Accounting for these large shifts in volatility in the GARCH(1,1) models significantly reduces the estimated persistence of the volatility in the Gulf stock markets.     

The relationship between stock returns and volatility in international stock markets

This study examines the relationship between expected stock returns and volatility in the 12 largest international stock markets during January 1980 to December 2001. Consistent with most previous studies, we find a positive but insignificant relationship during the sample period for the majority of the markets based on parametric EGARCH-M models. However, using a flexible semiparametric specification of conditional variance, we find evidence of a significant negative relationship between expected returns and volatility in 6 out of the 12 markets. The results lend some support to the recent claim [Bekaert, G., Wu, G., 2000. Asymmetric volatility and risk in equity markets. Review of Financial Studies 13, 1–42; Whitelaw, R., 2000. Stock market risk and return: an empirical equilibrium approach. Review of Financial Studies 13, 521–547] that stock market returns are negatively correlated with stock market volatility.     

Integration of emerging stock markets with global stock markets

Financial integration for emerging economies should be seen as a long-term objective. In this paper, we examine stock market integration among five selected emerging stock markets (Brazil, China, Mexico, Russia and Turkey) and developed markets of the US, UK and Germany. The bounds testing approach to cointegration and error-correction modeling are used on monthly data from January 2001 to December 2014 to determine the short-run and long-run relationship between emerging stock market returns and the returns of the developed stock markets. The results show evidence of the existence of short-run integration among stock markets in emerging countries and the developed markets. However, the long-run coefficients for stock market returns in all emerging countries show a significant relationship only with Germany stock market return. The empirical findings in this study have important implications for academicians, international investors, and policymakers in emerging markets.     

Stock returns,trading volume,and volatility: The case of African stock markets

The presence of the African Stock Markets (ASMs) in the global frontier markets indices confirms their global portfolio diversification role. This study investigates the asymmetric and intertemporal causality among the stock returns, trading volume, and volatility of eight ASMs. Results based on the linear model reveal that return generally Granger cause trading volume. However, evidence from the quantile regression shows that lagged trading volume has a negative causal effect on returns at low quantiles and positive causal effects at high quantiles. This evidence is consistent with volume-return equilibrium models, disposition and overconfidence models, and information asymmetry models. The positive causal effects of volatility on volume support the dispersion of beliefs model. In contrast, intertemporal evidence of contemporaneous and lagged causal relationships from trading volume to volatility supports the mixture of distribution hypothesis, sequential information acquisition hypothesis, and dynamic efficient market hypothesis. Volume-return and return-volume causality dynamics are quantile-specific and therefore driven by market conditions. However, the volume-volatility causality is dependent on volatility regimes. The linear model results confirm how model misspecification can distort and even reverse empirical evidence relative to nonlinear models.     

Predictable risk and returns in emerging markets

The emergence of new equity markets in Europe, Latin America,Asia, the Mideast and Africa provides a new menu of opportunitiesfor investors. These markets exhibit high expected returns aswell as high volatility. Importantly, the low correlations withdeveloped countries' equity markets significantly reduces theunconditional portfolio risk of a world investor. However, standardglobal asset pricing models, which assume complete integrationof capital markets, fail to explain the cross section of averagereturns in emerging countries. An analysis of the predictabilityof the returns reveals that emerging market returns are morelikely than developed countries to be influenced by local information.     

Crossing the lines: The conditional relation between exchange rate exposure and stock returns in emerging and developed markets

This paper examines the importance of exchange rate exposure in the return generating process for a large sample of non-financial firms from 37 countries. We argue that the effect of exchange rate exposure on stock returns is conditional and show evidence of a significant return impact to firm-level currency exposures when conditioning on the exchange rate change. We further show that the realized return to exposure is directly related to the size and sign of the exchange rate change, suggesting fluctuations in exchange rates as a source of time-variation in currency return premia. For the entire sample the return impact ranges from 1.2 to 3.3% per unit of currency exposure, and it is larger for firms in emerging markets compared to developed markets. Overall, the results indicate that foreign exchange rate exposure estimates are economically meaningful, despite the fact that individual time-series results are noisy and many exposures are not statistically significant, and that exchange rate exposure plays an important role in generating cross-sectional return variation. Moreover, we show that the relation between exchange rate exposure and stock returns is more consistent with a cash flow effect than a discount rate effect.     

Idiosyncratic risk and expected returns in frontier markets: Evidence from GCC

We investigate the pricing of idiosyncratic volatility of seven frontier markets in six GCC countries. We find a significant (marginal) negative relationship between expected returns and lagged idiosyncratic volatility for individual stocks in Saudi Arabia (Qatar) but none in Kuwait and Abu Dhabi. However, when we estimate conditional idiosyncratic volatility either by EGARCH or AR Models, the relationship turns positive. Introducing unexpected idiosyncratic volatility as an explanatory variable to control for any unexpected returns uncovers the true relationship between expected idiosyncratic volatility and expected returns. The evidence turns out to be robust for return reversals and other control variables. Moreover, the pricing of idiosyncratic risk is less evident in higher country governance and seems to be unrelated to the degree of financial development.     

Momentum in stock returns: evidence from an emerging stock market

This study examines the presence and sources of momentum profits in the Dhaka stock exchange (DSE). Although the short-term reversal and intermediate-term momentum are found to be evident, short-term reversal is not as consistent and significant as intermediate-term momentum. Further examination shows that momentum profits in the DSE cannot be explained by the rational source like market factor but can be explained by the size factor. We argue that presence of large number of small stocks and lack of arbitrage opportunity could be the possible causes of momentum effect in the DSE.     

Interest rate dynamic effect on stock returns and central bank transparency: Evidence from emerging markets

Interest rate dynamic effect on stock returns is examined under different levels of central bank transparency under an asset pricing context. Using a large set of emerging countries in a panel data framework, we provide evidence for a negative link between stock returns and interest rate differences. However, this negative effect is reduced significantly under a transparent central bank, underlying a non-linear impact on stock returns. Our study is focused on a period from 1998 to 2008 where fundamental changes in the level of central banks’ transparency were occurred. Our findings imply that restrictive monetary policies under high levels of transparency lead to smoother reductions on stock returns with significant benefits for financial stability.     

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.     

Predicting returns in the stock and bond markets

Several predetermined variables that reflect levels of bond and stock prices appear to predict returns on common stocks of firms of various sizes, long-term bonds of various default risks, and default-free bonds of various maturities. The returns on small-firm stocks and low-grade bonds are more highly correlated in January than in the rest of the year with previous levels of asset prices, especially prices of small-firm stocks. Seasonality is found in several conditional risk measures, but such seasonality is unlikely to explain, and in some cases is opposite to, the seasonal found in mean returns.     

Seasonality in returns on the Chinese stock markets: the case of Shanghai and Shenzhen

This paper investigates seasonal patterns in stock returns on the Shanghai and Shenzhen stock markets. The paper documents several interesting findings. First, unlike studies for other stock markets, the highest daily returns on both exchanges occur on Thursday rather than Friday. Second, price change limits exert an effect on the observed daily pattern of returns. Third, daily stock returns appear to be positively correlated with risk. This result is at odds with the majority of findings for other stock exchanges around the world. Finally, the paper documents other differences in seasonal patterns on the two exchanges.     

The impact of business and political news on the GCC stock markets

This paper investigates the impact of business and political news on stock market returns in the Gulf Cooperation Council (GCC) countries. For this purpose, it employs a Markov switching model including a separate index for each of the two categories of news considered. The results indicate the importance of news as drivers of GCC stock returns, with business news playing a more substantial role; further, news released in the largest financial markets in the regions are found to have significant cross-border effects.     

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.     

Classifying returns as extreme: European stock and bond markets

I consider extreme returns for the stock and bond markets of 14 EU countries using two classification schemes: One, the univariate classification scheme from the previous literature that classifies extreme returns for each market separately, and two, a novel multivariate classification scheme that classifies extreme returns for several markets jointly. The new classification scheme holds about the same information as the old one, while demanding a shorter sample period. The new classification scheme is useful.     

Global integration and emerging stock market excess returns

This article studies the effects of the global integration process on emerging stock market excess returns in a dynamic context. I improve the existing literature in four main directions. First, I show that the average excess returns rise as the level of financial and real integration rises. Second, I find overwhelming evidence that the financial liberalizations (i.e. de jure integration) of the late 1980s and early 1990s have not been simultaneously accompanied by a de facto integration. Third, I find that the percentage of variation in emerging excess returns explained by non-traded global risk factors rises as the level of market openness rises. Last, at the country level, I show that the correlation coefficient does not represent a robust measure of integration. Results also suggest that there are substantial cross-country differences in the dynamics of the degree of financial integration.     

Capital market seasonality: The case of stock returns

In this paper we present evidence on the existence of seasonality in monthly rates of return on the New York Stock Exchange from 1904–1974. With the exception of the 1929–1940 period, there are statistically significant differences in mean returns among months due primarily to large January returns. Dispersion measures reveal no consistent seasonal patterns and the characteristic exponent seems invariant among months. We also explore possible implications of the observed seasonality for the capital asset pricing model and other research.     

The value of stock analysts' recommendations: Evidence from emerging markets

This is the first study to empirically examine post-recommendation buy and hold abnormal returns in emerging markets. By analyzing a sample of 13 emerging countries over the decade from 1996 to 2005, we find that stock prices react strongly to stock analyst recommendations and revisions. We also find that there is a stronger positive bias in analyst recommendations and revisions in emerging markets compared with that in developed markets. In our cross-sectional analysis, we find that the Market-to-Book ratio is the primary indicator for Buy and Strong Buy recommendation regressions. This indicates that stock analysts in emerging markets prefer high growth stocks with attractive characteristics.