Out-of-Sample Equity Premium Predictability in South Africa: Evidence from a Large Number of Predictors

This article uses a predictive regression framework to examine the out-of-sample predictability of South Africa’s equity premium, using a host of financial and macroeconomic variables. We employ various methods of forecast combination, bootstrap aggregation (bagging), diffusion index (principal component), and Bayesian regressions to allow for a simultaneous role of the variables under consideration, besides individual predictive regressions. We assess both the statistical and economic significance of the individual predictive regressions, combination methods, bagging, principal components, and Bayesian regressions. Our results show that forecast combination methods and principal component regressions improve the predictability of the equity premium relative to the benchmark autoregressive model of order one (AR[1]). However, the Bayesian predictive regressions are found to be the standout performers with the models outperforming the individual regressions, forecast combination methods, bagging and principal component regressions, both in terms of statistical (forecasting) and economic (utility) gains.     

A CEO roundtable on making mergers succeed

The announcement in January of the merger between America Online and Time Warner marked the convergence of the two most important business trends of the last five years--the rise of the Internet and the resurgence of mergers and acquisitions. M&A activity is at a fever pitch, spurred in large part by the breathtaking influx of capital into the Internet space. And all signs indicate the trend will only accelerate. Against this background, an impressive group of experienced deal makers came together to share their experiences of what makes mergers work. They were assembled in Scottsdale, Arizona, under the auspices of the M&A Group, a professional society formed in 1999 for CEOs interested in M&A as a business strategy. Participants included top executives from Internet start-ups like Teligent; venture capital firms like Baroda Ventures; financial institutions like Merrill Lynch and PricewaterhouseCoopers; and major corporations like Allstate, Tyco International, SmithKline Beecham, Rohm and Haas, VF, Crown Cork & Seal, and Hughes Space and Communications. The spirited and surprisingly frank discussion cut a wide swath, considering issues such as whether most mergers fail to pan out as well as expected, how to increase the odds of success, the nuts and bolts of the integration process, the trade-offs between acquiring a company and growing from within, the importance of cultural issues, and why anyone would want to be on the board of a merged company.     

A Quantitative Assessment of the Finance–Growth–Innovation Nexus in EEA Countries: Evidence from a Multivariate VECM

This paper uses country-level data of European Economic Area countries between 1989 and 2016 to examine the interactions between economic growth, innovation, and financial market activities, with specific reference to the bond and insurance markets. Our intent is to know whether causality runs among these variables both ways, or not at all. Using a vector error correction model, the study finds that financial market activities and economic growth determine innovation activities in these countries. Additionally, the study also finds bidirectional Granger causality between financial market activities and economic growth, as well as between innovation activities and economic growth.     

Despite unethical retail store practices,consumers at the bottom of the pyramid continue to be loyal

Research in the area of retail store loyalty agrees that consumers reward retailers when they are satisfied with its products, services, and its image. Moreover, one would agree that if the retailer engages in unethical practices, the customer would quickly defect and even engage in word of mouth to influence others to defect. But this might not be the case universally. One consumer group that continues to be loyal to a retailer despite widespread unethical practices is the poor. A growing stream of research under the label of bottom of pyramid (BoP) and subsistence consumers has increasingly pointed out the market attractiveness of this segment to multinational companies. These poor consumers are individuals who earn approximately $2 per day. In this paper, we explain the nature of widespread unethical retail practices prevalent amongst the neighborhood retail stores (or kirana as they are referred to in India) that serve the BoP consumer, types of patronage behaviors, and the reasons ‘why’ these consumers continue to support the kirana store. The data for this paper comes from a qualitative study conducted with 58 urban poor consumers in India. This study carries significant implications for both domestic and multinational companies that market fast-moving consumer goods in the BoP market.     

The relationship between healthcare expenditure and disposable personal income in the US states: a fractional integration and cointegration analysis

This paper analyses the empirical relationship between inflation and growth using a panel data estimation technique, multiple-regime panel smooth transition regression, which takes into account the nonlinearities in the data. By using a panel data set for 10 countries in the Southern African Development Community permitting us to control for unobserved heterogeneity at both country and time levels, we find that a statistically significant negative relationship exists between inflation and growth for inflation rates above the critical threshold levels of 12 and 32% which are endogenously determined. Furthermore, we remedy the cross-section dependence with the common correlated effects estimator.     

The role of news-based uncertainty indices in predicting oil markets: a hybrid nonparametric quantile causality method

A recent strand in the literature emphasizes the role of news-based economic policy uncertainty (EPU) and equity market uncertainty (EMU) as drivers of oil price movements. Against this backdrop, this paper uses a kth-order nonparametric quantile causality test, to analyse whether EPU and EMU predict stock returns and volatility. Based on daily data covering the period of 2 January 1986 to 8 December 2014, we find that, for oil returns, EPU and EMU have strong predictive power over the entire distribution barring regions around the median, but for volatility, the predictability virtually covers the entire distribution, with some exceptions in the tails. In other words, predictability based on measures of uncertainty is asymmetric over the distribution of oil returns and its volatility.     

International stock return predictability: Is the role of U.S. time-varying?

This study investigates the predictability of 11 industrialized stock returns with emphasis on the role of U.S. returns. Using monthly data spanning 1980:2–2014:12, we show that there exist multiple structural breaks and nonlinearities in the data. Therefore, we employ methods that are capable of accounting for these and at the same time date stamping the periods of causal relationship between the U.S. returns and those of the other countries. First we implement a subsample analysis which relies on the set of models, data set and sample range as in Rapach et al. (J Finance LXVIII(4):1633–1662, 2013). Our results show that while the U.S. returns played a strong predictive role based on the OLS pairwise Granger causality predictive regression and news-diffusion models, its role based on the adaptive elastic net model is weak. Second, we implement our preferred model: a bootstrap rolling window approach using our newly updated data on stock returns for each countries, and find that U.S. stock return has significant predictive ability for all the countries at certain sub-periods. Given these results, it would be misleading to rely on results based on constant-parameter linear models that assume that the relationship between the U.S. returns and those of other industrialized countries are permanent, since the relationship is, in fact, time-varying, and holds only at specific periods.