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The purpose of this paper is to examine herding in four frontier markets in the Balkan region, namely, Bulgaria, Croatia, Romania and Slovenia, from October 2000 to December 2016.
Abstract
Purpose
The purpose of this paper is to examine herding in four frontier markets in the Balkan region, namely, Bulgaria, Croatia, Romania and Slovenia, from October 2000 to December 2016.
Design/methodology/approach
The author employs Chang et al.’s (2000) cross-sectional dispersion approach to capture herding, while also testing for the global financial crisis’ effects and the European Union (EU)/Euro zone accession effects over herding. Potential asymmetric herding effects conditional on market performance, domestic volatility, German and US investor sentiment are also examined. Finally, the cross-market herding dynamics of the region are also explored.
Findings
Overall, Romania exhibits the most extensive evidence of herding across various estimations. The empirical results indicate that cross-market herding dynamics within the region generate stronger herding (compared to the herding observed within each stock market individually), suggesting that Balkan stock exchanges’ growing financial integration leads their herding to be “imported”, rather than domestically motivated.
Practical implications
The findings provide useful insights for regulators in frontier markets, considering the destabilising potential of herding; they are also of particular interest to the investment community for reasons of international asset allocation, diversification and hedging strategies.
Originality/value
This study contributes to the limited herding literature regarding frontier markets and provides novel findings regarding the herding dynamics in the Balkan region, the EU/Euro zone accession’s effect and global factors’ impact on herding estimations.
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Tihana Škrinjarić and Boško Šego
The purpose of this paper is to empirically evaluate risk spillovers between selected CESEE (Central, Eastern and South-Eastern Europe) stock markets in order to evaluate the…
Abstract
Purpose
The purpose of this paper is to empirically evaluate risk spillovers between selected CESEE (Central, Eastern and South-Eastern Europe) stock markets in order to evaluate the possibilities of an international diversification of a portfolio.
Design/methodology/approach
The VAR model and the Diebold and Yilmaz (2009, 2012) spillover index are used, with rolling indices estimation over time in order to observe dynamics, which is important for investment strategies. Data are monthly and include selected CESEE stock market indices which were available to the researcher.
Findings
The empirical analysis for the period of January 2012–June 2019 indicates that some country risks were the net emitter of shocks in the system (Slovenia and Czech Republic), whereas some were net receivers (Croatia and Ukraine). The results are robust with respect to changing the length of the rolling window analysis, which means that investors could utilize such an approach in a dynamic portfolio selection.
Research limitations/implications
Observing only selected markets due to data (un)availability.
Practical implications
The paper shows how international investors can utilize the aforementioned methodology in order to make a more detailed analysis of the dynamics of stock markets connectedness so that international portfolios can be rebalanced according to the results and investors’ preferences.
Originality/value
This is the first such research which focuses on CESEE countries, since existing research is focused on more developed stock markets. Moreover, the empirical analysis extends to commenting the pairwise net indices over time, which is important for the dynamic portfolio rebalancing over time.
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Muzammil Khurshid and Berna Kirkulak-Uludag
This study aims to examine the volatility spillover effects between oil and stock returns in the emerging seven economies.
Abstract
Purpose
This study aims to examine the volatility spillover effects between oil and stock returns in the emerging seven economies.
Design/methodology/approach
In this study, the Granger causality test and vector autoregression-generalized autoregressive conditional heteroskedasticity approach to analyze the volatility spillover from 1995 to 2019 were used. The findings provide evidence of significant volatility spillover between oil and Brazil, China, India, Indonesia, Mexico, Russia and Turkey (E7) stock markets.
Findings
All emerging seven stock markets exhibit positive and low constant conditional correlations with oil assets. The magnitude of the correlation changes in respond to the country’s net position in the crude oil market. While a relatively high level of correlation exists between oil and the stock markets of net oil-exporting countries, a relatively low level of correlation exists between oil and the stock markets of net oil-importing countries.
Originality/value
The findings suggest that oil asset improves the risk-adjusted performance of a well-diversified portfolio of stocks. However, investors should invest a larger portion of their portfolios in E7 stock markets than in oil.
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Ajaya Kumar Panda and Swagatika Nanda
The present study examines the short term dynamism and long term equilibrium relationship between the stock markets of South and Central America. It also aims to capture the…
Abstract
Purpose
The present study examines the short term dynamism and long term equilibrium relationship between the stock markets of South and Central America. It also aims to capture the dynamic conditional correlations between the stock markets using weekly returns of market benchmark indices of the respective countries spanning from 2nd week of 1995 to 4th week of December 2015 are analyzed.
Design/methodology/approach
The Johansen and Juselius multivariate cointegration test, Granger causality test based vector error correction model (VECM) approach, and variance decomposition analysis were used to investigate the dynamic linkages between markets. GARCH-DCC is used to investigate the Correlation Dynamics.
Findings
This study identifies long run co-movements between the stock markets. Chile, Peru and Venezuela are the most dynamically interlinked. The empirical results VECM reveal that Argentina, Brazil, Chile and Venezuela stock market returns are significantly influenced by each other, suggesting a stronger linkages between national stock markets. Cointegration test confirms long-run equilibrium relationship. among the major stock markets of the region. The findings from GARCH-DCC provide evidence consistent with increasing market integration. Stocks exhibit asymmetries in conditional correlations. The results demonstrate that correlations are higher toward the end of the sample period than in the early phase.
Research limitations/implications
On the basis of the results produced by the study, we conclude that there exist opportunities for diversification and investors will benefit from reduction of diversifiable risk among the South and Central American countries in general, but in particular Chile, Peru and Venezuela have not shown the same outcome.
Originality/value
This study has been conducted for a longer period of time and also uses various tools to investigate the dynamic linkages between markets.VAR, VECM, Cointegration and GARCH-DCC altogether in a single study is a rare piece of work.
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– The purpose of this paper is to examine the level of capital market integration between the Montenegrin stock market and a number of European Union (EU) countries and the USA.
Abstract
Purpose
The purpose of this paper is to examine the level of capital market integration between the Montenegrin stock market and a number of European Union (EU) countries and the USA.
Design/methodology/approach
The authors use an equity data set at the daily frequency from 12 countries and 4 broad regions, spanning the period from March 2003 to September 2008. They investigate long-run and short-run dynamics using cointegration techniques, Granger causality tests and vector error correction models.
Findings
The authors provide evidence for the existence of a long-run equilibrium between Montenegro and the developed countries of Western Europe and the USA. The investigation of short-run dynamics reveals that Montenegro follows an autonomous path, influenced mainly by domestic developments.
Originality/value
This is the first study on the Montenegrin stock market which has been neglected by the academic community. Montenegro’s accession in the EU is imminent; thus the study of the level of its integration with the rest of EU countries, before its actual accession, is useful for regulators and policymakers. Various lessons of a more general nature can also be drawn from the analysis of this paper.
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Christian Dunis, Georgios Sermpinis and Maria Ferenia Karampelia
The purpose of this paper is to focus on the empirical dimension of financial integration among the five newest members of the European Monetary Union (Cyprus, Estonia, Malta…
Abstract
Purpose
The purpose of this paper is to focus on the empirical dimension of financial integration among the five newest members of the European Monetary Union (Cyprus, Estonia, Malta, Slovakia and Slovenia) and the euro area. The main objective is to study the level and the speed of integration between the stock markets of those European Union (EU) member states and the rest of the euro area, assessing in this way the role that the EU enlargement, the drive towards European Monetary Union and the actual adoption of the euro play in the process of European financial market integration.
Design/methodology/approach
This study will exclusively test the integration of the stock markets of EU member states that joined in 2004, when the EU expanded, but are already members of Economic and Monetary Union (EMU). Since there is limited evidence on the effects of EU and EMU enlargements or their announcements, it will be a useful addition to the examination of this issue. Given the small size of those emerging stock markets and the fact that they are part of a stable and well-regulated system, the degree to which they are integrated has implications for investors' portfolio allocation decisions, as they may offer diversification benefits without extreme risks. The case of integration will be examined using various econometric methodologies, two of which (beta- and sigma-convergence) have been given less formal attention and their application is rare, so as to detect both long- and short-run interdependencies and achieve robust results.
Findings
The findings indicate an increasing degree of integration for Malta and Slovenia, while Estonia appears segmented. Cyprus and Slovakia exhibited a degree of integration after their accession into EU but this trend changes after they adopted the euro. Overall, the integration process accelerated after the accession in the EU but EMU does not seem to have the same positive impact on it.
Originality/value
Compared with previous studies, the authors' apply the concept of beta- and sigma-convergence, a methodology that will help us identify the speed of integration. Moreover, the period under study includes the recent crisis: this allows us to see if the worsened economic environment has had effect on the level and speed of integration of the countries under study. In the end, it is worth noting that previous studies focused on either advanced markets or neighbouring countries or states with a common history. This alone can create a level of interdependence between the countries under study and bias the results. In this paper, the markets under study have almost nothing in common except their small size and the fact that they are members of the EMU.
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Nerijus Mačiulis, Vaiva Lazauskaitė and Elias Bengtsson
The purpose of this paper is to evaluate and compare performances of three Nordic (Sweden, Denmark, Finland) and three Baltic (Lithuania, Latvia, Estonia) exchanges.
Abstract
Purpose
The purpose of this paper is to evaluate and compare performances of three Nordic (Sweden, Denmark, Finland) and three Baltic (Lithuania, Latvia, Estonia) exchanges.
Design/methodology/approach
Portfolio performance is estimated using two different approaches: traditional measures – Sharpe, Sortino and Treynor ratios; and alternative measures – reward to value‐at‐risk and reward to expected tail loss (RETL).
Findings
The findings highlight the differences and similarities in Nordic and Baltic stock exchanges and their performance trends after creation of common marketplace OMX. Returns of Baltic, like Nordic, exchanges are normally distributed. During the period of 2000‐2006, Baltic exchanges outperformed Nordic exchanges.
Research limitations/implications
The research is limited to six stock exchanges that are members of common marketplace OMX. Proposed alternative performance measures did not diverge from traditional approaches, because, apparently, Baltic exchanges offer normally distributed returns and should not be considered emerging markets. These measures should be further tested in developing and emerging markets.
Originality/value
The findings have both theoretical and practical implications. To the authors' best knowledge, it is the first public attempt to estimate performance of Baltic and Nordic exchanges in the context of modern portfolio theory and, alternatively, new science of risk management (value at risk and expected tail loss). The paper argues for the usage of an alternative measure for performance valuation – RETL. Furthermore, the paper discuses merits and limitations of different approaches to risk and performance measurement.
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Hakan Aygoren and Emrah Balkan
The aim of this study is to investigate the role of efficiency in capital asset pricing. The paper explores the impact of a four-factor model that involves an efficiency factor on…
Abstract
Purpose
The aim of this study is to investigate the role of efficiency in capital asset pricing. The paper explores the impact of a four-factor model that involves an efficiency factor on the returns of Nasdaq technology firms.
Design/methodology/approach
The paper relies on data of 147 firms from July 2007 to June 2017 to examine the impact of efficiency on stock returns. The performances of the capital asset pricing model (CAPM), Fama–French three-factor model and the proposed four-factor model are evaluated based on the time series regression method. The parameters such as the GRS F-statistic and adjusted R² are used to compare the relative performances of all models.
Findings
The results show that all factors of the models are found to be valid in asset pricing. Also, the paper provides evidence that the explanatory power of the proposed four-factor model outperforms the explanatory power of the CAPM and Fama–French three-factor model.
Originality/value
Unlike most asset pricing studies, this paper presents a new asset pricing model by adding the efficiency factor to the Fama–French three-factor model. It is documented that the efficiency factor increases the predictive ability of stock returns. Evidence implies that investors consider efficiency as one of the main factors in pricing their assets.
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