Valuation Ratios and Stock Return Predictability in South Africa: Is It There?

Using monthly South African data for January 1990 through October 2009, this paper, to the best of our knowledge, is the first to examine the predictability of real stock return based on valuation ratios, namely, price-dividend and price-earnings ratios. We cannot detect either short-horizon or long-horizon predictability; that is, the hypothesis that the current value of a valuation ratio is uncorrelated with future stock price changes cannot be rejected at both short and long horizons based on bootstrapped critical values constructed from linear representations of the data. We find, via Monte Carlo simulations, that the power to detect predictability in finite samples tends to decrease at long horizons in a linear framework. Although Monte Carlo simulations applied to exponential smooth-transition autoregressive models of the price-dividend and price-earnings ratios show increased power, the ability of the nonlinear framework in explaining the pattern of stock return predictability in the data does not show any promise at either short or long horizons, just as in the linear predictive regressions.     

Term structure of return correlations and international diversification: evidence from European stock markets

The paper examines the term structure of correlations of weekly returns for the stock market in the US, Japan and nine European countries between 1988 and 1994. Stock indices are decomposed into permanent and temporary components using a canonical correlation analysis and then short- and long-horizon return correlations are calculated from these two price components. The empirical results reveal that the relationships of return correlations among these stock markets are not stable across return horizons. While correlations, in general, tend to increase with return horizons, there are several cases showing that correlations decline when investment horizons increase.     

Stock Return Predictability and The Role of Monetary Policy

This article examines whether shifts in the stance of monetary policy can account for the observed predictability in excess stock returns. Using long-horizon regressions and short-horizon vector autoregressions, the article concludes that monetary policy variables are significant predictors of future returns, although they cannot fully account for observed stock return predictability. I undertake variance decompositions to investigate how monetary policy affects the individual components of excess returns (risk-free discount rates, risk premia, or cash flows).     

The Non-Stationarity of Share Price Volatility

This article examines first the changes over time in the variance of the market return on the Sydney Stock Exchange. It concludes that variance changes at a frequency greater than previously accounted for. Some of these changes coincide with political and economic events. Next the market returns are demonstrated to have a normal distribution. This result follows once the frequency of standardization is matched to the frequency of changes in variance.     

The Asymmetric Momentum Effect in the Chinese Class A Share Market Amid Market Swings

This paper investigates the asymmetric momentum effect over time periods following UP and DOWN market states in the Shanghai and Shenzhen Stock Exchanges of the Chinese Class A share market. We show that the post-UP-market momentum effect eclipses the post-DOWN-market momentum effect in unison in both market segments. Notably, the asymmetric pattern of the market-state-dependent momentum effect in the Shenzhen Stock Exchange is outpaced by that found in the Shanghai Stock Exchange. Furthermore, through decomposing momentum returns, we reveal that low liquidity, higher market return volatility, and weak under-reaction of share prices towards firm-specific news jointly contribute to the subdued asymmetry of market-state-dependent momentum returns in the Shenzhen Stock Exchange.     

EMPIRICAL EVIDENCE ON THE IMPACT OF THE BID-ASK SPREAD ON THE CHARACTERISTICS OF CRSP DAILY RETURNS

It is widely recognized that Center for Research in Security Prices (CRSP) returns may differ from “true” returns because of the bid-ask effect. Using a large sample of New York Stock Exchange and American Stock Exchange securities, I confirm a discernible bid-ask effect, the magnitude and importance of which decrease with the security's price level (increase with the spread). I find volatility estimates using CRSP returns to be greater than those based on quote returns. However, market model properties, such as β and R², are generally unaffected. Bid-ask effects are clearly apparent in event studies, but because of certain offsetting effects commonly used test statistics remain unaffected. Low-priced stocks (below $2.00) do not conform to these patterns. Finally, the evidence raises the possibility that the existing literature on filter rule tests may underestimate the bid-ask spread component of transaction costs.     

Predictability of stock markets with disequilibrium trading

This paper analyses the predictability of a hypothetical market with freely negotiated prices on which exists a censoring of one-period returns which are in excess of an arbitrary level (‘floor’ and ‘ceiling’). It is shown that the expected value of returns (adjusted for drift) conditional on last period information regarding the censoring are equal to zero (and therefore the market is not predictable in mean) if there is no intertemporal spillover on the market. A simple simulation model is proposed and applied for the analysis of the effects of intertemporal and cross-spillovers resulting from quantity constraints. Statistical predictability tests are proposed, based on the corrected Student-t statistic of a regression of returns of some information concerning the previous censoring. An illustrative empirical analysis of six main time series of returns on the Warsaw Stock Exchange confirms their ex-ante, but not ex-post, predictability.     

Market Misvaluation,Managerial Horizon,and Acquisitions

This paper analyzes the impact of managerial horizon on mergers and acquisitions activity. The main predication is that acquiring firms managed by short-horizon executives have higher abnormal returns at acquisition announcements, less likelihood of using equity to pay for the transactions, and inferior postmerger stock performance in the long run. I construct two proxies for managerial horizon based on the CEO's career concern and compensation scheme, and provide empirical evidence supporting the above prediction. Moreover, I also demonstrate that long-horizon managers are more likely to initiate acquisitions in response to high stock market valuation.     

Earnings and Expected Returns

The aggregate dividend payout ratio forecasts excess returns on both stocks and corporate bonds in postwar U.S. data. High dividends forecast high returns. High earnings forecast low returns. The correlation of earnings with business conditions gives them predictive power for returns; they contain information about future returns that is not captured by other variables. Dividends and earnings contribute substantial explanatory power at short horizons. For forecasting long-horizon returns, however, only (scaled) stock prices matter. Forecasts of low long-horizon stock returns in the mid-1990s are caused not by earnings or dividends, but by high stock prices.     

The predictability of aggregate returns on commodity futures

This paper provides evidence that aggregate returns on commodity futures (without the returns on collateral) are predictable, both in-sample and out-of-sample, by various lagged variables from the stock market, bond market, macroeconomics, and the commodity market. Out of the 32 candidate predictors we consider, we find that investor sentiment is the best in-sample predictor of short-horizon returns, whereas the level and slope of the yield curve have much in-sample predictive power for long-horizon returns. We find that it is possible to forecast aggregate returns on commodity futures out-of-sample through several combination forecasts (the out-of-sample return forecasting R² is up to 1.65% at the monthly frequency).     

Intraday and interday volatility in the Japanese stock market

This paper characterizes the volatility in the Japanese stock market based on a 4-year sample of 5-min Nikkei 225 returns from 1994 through 1997. The intradaily volatility exhibits a doubly U-shaped pattern associated with the opening and closing of the separate morning and afternoon trading sessions on the Tokyo Stock Exchange. This feature is consistent with market microstructure theories that emphasize the role of private and asymmetric information in the price formation process. Meanwhile, readily identifiable Japanese macroeconomic news announcements explain little of the day-to-day variation in the volatility, confirming previous findings for US equity markets. Furthermore, by appropriately filtering out the strong intradaily periodic pattern, the high-frequency returns reveal the existence of important long-memory interdaily volatility dependencies. This supports recent results stressing the importance of exploiting high-frequency intraday asset prices in the study of long-run volatility properties of asset returns.     

STATISTICAL PROPERTIES OF DAILY RETURNS: EVIDENCE FROM EUROPEAN STOCK MARKETS

This paper attempts to model the distributional properties of daily stock returns on several European Stock Exchanges. The empirical findings reveal the presence of non-linear dependencies that cannot be captured by the random walk model. A model of return-generating process that fit the data empirically is the Generalized Autoregressive Conditional Heteroskedastic GARCH (1,1) process with a conditional student- t distribution.     

Non-linear long horizon returns predictability: evidence from six south-east Asian markets

Whilst the existence of long-horizon returns predictability has been a recurrent theme in empirical finance research, extant work has focused almost exclusively on the US, and more recent work has cast doubt over the validity of such potential predictability due to non-stationarity and serial correlation in the data. The present paper examines long-horizon returns predictability in six South-East Asian markets in the context of unit root tests conducted under corrections for serial correlation and heteroscedasticity. The analysis conducted also extends the investigation of long-horizon predictability to the non-linear setting, and examines whether any detected non-linear predictability is consistent with behavioural approaches to asset pricing which emphasise the role of noise traders. The results obtained suggest the following conclusions. First, long-horizon predictability is present in each of the six South-East Asian markets considered. Second, whilst forecast power increases with horizon, for the majority of series it is maximised for forecast horizons of between 12 and 48 months. Third, non-linear predictability is reported for all series, suggesting that positive and negative values of the (demeaned) dividend yield impart different levels of predictability for returns at different forecast horizons. However, there is no consistency in the pattern of non-linearity reported, and whilst the observed patterns are consistent with noise traders models for some of the markets considered, this is not true of all the markets considered. Nevertheless, the non-linear dynamics detected are suggestive of potential market inefficiencies in all six cases.     

Time-varying risk premia and the cost of capital: An alternative implication of the Q theory of investment

Evidence suggests that expected excess stock market returns vary over time, and that this variation is much larger than that of expected real interest rates. It follows that a large fraction of the movement in the cost of capital in standard investment models must be attributable to movements in equity risk-premia. In this paper we emphasize that such movements in equity risk premia should have implications not merely for investment today, but also for future investment over long horizons. In this case, predictive variables for excess stock returns over long-horizons are also likely to forecast long-horizon fluctuations in the growth of marginal Q, and therefore investment. We test this implication directly by performing long-horizon forecasting regressions of aggregate investment growth using a variety of predictive variables shown elsewhere to have forecasting power for excess stock market returns.     

When machines read the news: Using automated text analytics to quantify high frequency news-implied market reactions

We examine high-frequency market reactions to an intraday stock-specific news flow. Using unique pre-processed data from an automated news analytics tool based on linguistic pattern recognition we exploit information on the indicated relevance, novelty and direction of company-specific news. Employing a high-frequency VAR model based on 20 s data of a cross-section of stocks traded at the London Stock Exchange we find distinct responses in returns, volatility, trading volumes and bid-ask spreads due to news arrivals. We show that a classification of news according to indicated relevance is crucial to filter out noise and to identify significant effects. Moreover, sentiment indicators have predictability for future price trends though the profitability of news-implied trading is deteriorated by increased bid-ask spreads.     

The Operating Performance of Firms that Switch Their Stock Listings

In this article we examine the operating performance of stocks that switch from NASDAQ to the American Stock Exchange (AMEX) or the New Stock Exchange (NYSE) and from AMEX to the NYSE. Specifically, we investigate whether post‐listing operating performance is consistent with the reported negative long‐term drift of post‐listing stock returns and whether there is evidence of self‐selection of the listing time. We find evidence of negative post‐listing changes in operating return on assets and sales, which, on a match‐adjusted basis, are significant for the relatively small NASDAQ stocks switching to AMEX. We also find evidence that firms self‐select the time of listing changes.     

On the long-term or short-term dependence in stock prices: Evidence from international stock markets

This study examines the short- and long-term dependence in the United States and 21 international equity market indexes. Two heteroscedastic-robust testing methods, the modified rescaled range analysis and the rescaled variance ratio test, are employed to test for the existence of dependence. The evidence consistently reveals the absence of long-term dependence in these 22 stock returns indexes. The random walk hypothesis for most, but not all, stock returns indexes is not rejected. When the random walk hypothesis is rejected, the evidence supporting the rejection is weak and the stochastic dependence occurs mainly in short-horizon, rather then long-horizon holding period returns.     

Noise and the Trading Mechanism: the Case of SETS

On 20 October 1997 the London Stock Exchange introduced a new trading system called SETS. This system was to replace the dealer system SEAQ, which had been in operation since 1986. Using the iterative sum of squares test introduced by Inclan and Tiao (1994) , we investigate whether there was a change in the unconditional variance of opening and closing returns, at the time SETS was introduced. We show that for the FTSE‐100 stocks traded on SETS, on the days following its introduction, there was a widespread increase in the volatility of both opening and closing returns. However, no synchronous volatility changes were found to be associated with the FTSE‐100 index or FTSE‐250 stocks. We conclude therefore that the introduction of the SETS trading mechanism caused an increase in noise at the time the system was introduced.     

The value relevance of timely information: The case of comparable store sales growth

Investors and analysts have called for more timely disclosure of corporate information. Responding to these demands, some retail firms issue comparable store sales (CSS) on a monthly or a quarterly basis in addition to an annual basis. This study examines whether a timely disclosure of CSS provides value-relevant information to market participants by examining investors' and financial analysts' responses at the time of CSS disclosures (short-horizon) and over the month or the quarter (long-horizon). We find that both monthly and quarterly CSS are associated with contemporaneous market returns and analyst forecast revisions. More importantly, we find that quarterly CSS news becomes less important to investors when firms provide more timely CSS information, indicating that monthly CSS reports may preempt the information content of quarterly CSS. Additional tests show that investors and analysts rely less on CSS if CSS news and earnings (sales) news are inconsistent.     

The Transmission of Pricing Information of Dually-Listed Stocks

We use the daily opening and closing prices of eighteen dually-listed Hong Kong companies to investigate the transfer of pricing information between the Stock Exchange of Hong Kong (SEHK) and the London Stock Exchange (LSE). Evidence shows that (1) SEHK overnight returns respond significantly to change in LSE intraday returns, but the transmission process is not completed at the opening of the SEHK; (2) LSE overnight returns respond significantly to changes in SEHK intraday returns, but the transmission process is not completed at the opening of the LSE, either; (3) the impact is stronger moving from the LSE to the SEHK. This evidence indicates that information transfer runs in both directions and that most of the transmitted information continues to be processed throughout the following trading day (JEL G15).