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Article
Publication date: 7 July 2020

Jingshan Liu

The purpose of this study is to investigate the effects of uncertainty, namely, macroeconomic uncertainty (MU) and financial uncertainty (FU) on foreign exchange market

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Abstract

Purpose

The purpose of this study is to investigate the effects of uncertainty, namely, macroeconomic uncertainty (MU) and financial uncertainty (FU) on foreign exchange market stability, specifically on foreign exchange market pressure (EMP) and jump risk (RJV).

Design/methodology/approach

The latent threshold time-varying parameter VAR (LT-TVP-VAR) econometric approach is used in estimations to solve structural breaks.

Findings

The relationship of uncertainties and China's foreign exchange market stability is latent threshold nonlinear dynamic time-varying. In China's renminbi (RMB) appreciation stage, both MU and FU weaken the appreciation pressure of RMB. Moreover, MU and FU significantly increase the RJV, while MU significantly affects the RJV of the foreign exchange market. In the RMB depreciation stage, both MU and FU strengthen the EMP.

Research limitations/implications

Findings based on data in China's foreign exchange market can be considered for other global markets in future research.

Practical implications

An increase in MU and FU has a negative effect on foreign exchange stability. Regulators can prevent the economic system uncertainty shocks on foreign exchange market stability through observation and judgment of MU and FU, which helps prevent and relieve financial risks. Investors can reduce foreign exchange risk as the exchange rate rebounds after hedging behavior during high uncertainty periods.

Originality/value

The effect of MU on the foreign exchange market stability is greater than that of FU, regardless of whether EMP or RJV occurs in the foreign exchange market.

Details

China Finance Review International, vol. 11 no. 1
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 6 January 2021

Rexford Abaidoo

This study examines dynamics of global and regional financial market efficiency; and how specific features of the market and other conditions influence variability in such…

Abstract

Purpose

This study examines dynamics of global and regional financial market efficiency; and how specific features of the market and other conditions influence variability in such efficiency.

Design/methodology/approach

The study employs fixed effects statistical approach in its examination of how specific features of financial markets influence variability in its efficiency.

Findings

This study finds that individual IMF defined economic regions tend to exhibits significantly different financial market efficiency characteristics given specific market features and conditions. In regional level comparative analysis (e.g. Europe, Africa, Asia–Pacific etc.) this study finds that incidence of financial market uncertainty is the dominant condition with significant effect on financial market efficiency across all the IMF regions. In the global level analysis, empirical estimates presented suggest that financial market uncertainty, financial institutional depth and financial institutional efficiency tend to have significant positive influence on global financial market efficiency all things being equal. In the same analysis however, this study finds that financial market and financial institutional access growth has significant negative impact on financial market efficiency.

Originality/value

The uniqueness of this study compared to related ones found in the literature stems from its focus on financial market efficiency at the global, and IMF defined regional block level instead of on a specific economy as often found in the literature. Additionally, in contrast to other related studies, this study further examines the role of global financial market uncertainty in its financial market efficiency analysis. Financial market uncertainty variable may be unique to this study because the variable is derived through an econometric process from a base variable.

Details

American Journal of Business, vol. 36 no. 3/4
Type: Research Article
ISSN: 1935-5181

Keywords

Article
Publication date: 19 January 2021

Fatma Alahouel and Nadia Loukil

This study examines co-movements between global Islamic index and heterogeneous rated/maturity sukuk. It tests the impact of financial uncertainty on these movements.

Abstract

Purpose

This study examines co-movements between global Islamic index and heterogeneous rated/maturity sukuk. It tests the impact of financial uncertainty on these movements.

Design/methodology/approach

Firstly, we conduct a bivariate wavelet analysis to assess the co-movements between stocks and sukuk indexes. Secondly, we use General dynamic factor model and stochastic volatility to construct financial uncertainty index from Islamic stock indexes. Finally, we run regression analysis to determine the impact of uncertainty on the obtained correlations.

Findings

Our results suggest the absence of flight to quality phenomenon since correlations are positive especially at a short investment horizon. There is evidence of contagion phenomena across assets. Financial uncertainty may be considered as a determinant of stock-sukuk co-movements. Our results show that a rise in financial uncertainty induces correlation to move in the opposite direction in the short term, (exception for correlation with AA-Rated sukuk). However, the sign of stock market uncertainty becomes positive in the long term, which leads sukuk and stocks to move in the same direction (exception for 1–3 Year and AA Rated sukuk).

Practical implications

Investors may combine sukuk with 1–3 Year maturity and AA Rated when considering long holding periods. Further, all sukuk categories provide diversification benefit in time high financial uncertainty expectation for AA Rated sukuk when considering short holding periods.

Originality/value

To the best of our best knowledge, our study is the first investigation of the impact of financial uncertainty on Stock-sukuk co-movements and provides recommendation considering sukuk with different characteristics.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Book part
Publication date: 4 October 2018

Pym Manopimoke, Suthawan Prukumpai and Yuthana Sethapramote

This chapter examines dynamic connectedness among emerging Asian equity markets as well as explores their linkages vis-à-vis other major global markets. We find that…

Abstract

This chapter examines dynamic connectedness among emerging Asian equity markets as well as explores their linkages vis-à-vis other major global markets. We find that international equity markets are tightly integrated. Measuring connectedness based on a generalized Vector Autoregressive (VAR) model, more than half of all total forecast error variance in equity return and volatility shocks come from other markets as opposed to country own shocks. When examining the degree of connectedness over time, we find that international stock markets have become increasingly connected, with a gentle upward trend since the Asian financial crisis (AFC) but with a rapid burst during the global financial crisis (GFC). Despite the growing importance of Asian emerging markets in the world economy, we find that their influence on advanced economies are still relatively small, with no significant increase over time. During the past decade, advanced markets have been consistently net transmitters of shocks while emerging Asian markets act as net receivers. Based on the nature of equity shock spillovers, we also find that advanced countries are still tightly connected among themselves while intraregional connectedness within Asia remains strong. By investigating whether uncertainty plays an important role in explaining the degree of stock market connectedness, we find that economic policy uncertainty (EPU) from the US is an important source of financial shock spillover for the majority of international equity markets. In contrast, US financial market uncertainty as proxied by the VIX index drives equity market spillovers only among advanced economies.

Details

Banking and Finance Issues in Emerging Markets
Type: Book
ISBN: 978-1-78756-453-4

Keywords

Article
Publication date: 29 June 2022

Hedi Ben Haddad, Sohale Altamimi, Imed Mezghani and Imed Medhioub

This study seeks to build a financial uncertainty index for Saudi Arabia. This index serves as a leading indicator of Saudi economic activity and helps to describe…

15

Abstract

Purpose

This study seeks to build a financial uncertainty index for Saudi Arabia. This index serves as a leading indicator of Saudi economic activity and helps to describe economic fluctuations and forecast economic trends.

Design/methodology/approach

This study adopts an extension of the Jurado et al. (2015) procedure by combining financial uncertainty factors with their net spillover effects on GDP and inflation to construct an aggregate financial uncertainty index. The authors consider 13 monthly financial variables for Saudi Arabia from January 2010 to June 2021.

Findings

The empirical results show that the constructed financial uncertainty estimates are good leading indicators of economic activity. The robustness analysis suggests that the authors’ proposed financial uncertainty estimators outperform the alternative estimates used by other existing approaches to estimate the financial conditions index.

Originality/value

To the best of the authors’ knowledge, this is the first attempt at constructing a financial uncertainty index for Saudi Arabia. This study extends the empirical literature, from which the authors propose a novel conceptual framework for building a financial uncertainty index by combining the approach of Jurado et al. (2015) and the time-varying connectedness network approach proposed by Antonakakis et al. (2020)

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 18 August 2021

Thomas D. Willett

This study aims to critically review recent contributions to the methodology of financial economics and discuss how they relate to one another and directions for further research.

Abstract

Purpose

This study aims to critically review recent contributions to the methodology of financial economics and discuss how they relate to one another and directions for further research.

Design/methodology/approach

A critical review of recent literature on new methodologies for financial economics.

Findings

Recent books have made important contributions to the study of financial economics. They suggest new approaches that include an emphasis on radical uncertainty, adaptive markets, agent-based modeling and narrative economics, as well as extensions of behavioral finance to include concepts such as diagnostic expectations. Many of these contributions can be seen more as complements than substitutes and provide fruitful directions for further research. Efficient markets can be seen as holding under particular circumstances. A major them of most of these contributions is that the study of financial crises and other aspects of financial economics requires the use of multiple theories and approaches. No one approach will be sufficient.

Research limitations/implications

There are great opportunities for further research in financial economics making use of these new approaches.

Practical implications

These recent contributions can be quite useful for improved analysis by researchers, private participants in the financial sector and macroeconomic and regulatory officials.

Originality/value

Provides an introduction to these new approaches and highlights fruitful areas for their extensions and applications.

Article
Publication date: 13 October 2021

Muhammad Saeed Meo, Kiran Jameel, Mohammad Ashraful Ferdous Chowdhury and Sajid Ali

The purpose of the research is to analyze the impact of world uncertainty and pandemic uncertainty on Islamic financial markets. For representing Islamic financial markets

Abstract

Purpose

The purpose of the research is to analyze the impact of world uncertainty and pandemic uncertainty on Islamic financial markets. For representing Islamic financial markets four different Islamic indices (DJ Islamic index, DJ Islamic Asia–Pacific index, DJ Islamic-Europe index and DJ Islamic-US) are taken.

Design/methodology/approach

The study employs quantile-on-quantile regression approach to see the overall dependence structure of variables based on quarterly data ranging from 1996Q1 to 2020Q4. This technique considers how quantiles of world uncertainty and pandemic uncertainty asymmetrically affect the quantiles of Islamic stocks by giving an appropriate framework to apprehend the overall dependence structure.

Findings

The findings of the study confirm a strong negative impact of world uncertainty and world pandemic uncertainty on regional Islamic stock indices but the strength of the relationship varies according to economic conditions and across the regions. However, the world pandemic effect remains the same and does not change. Conversely, pandemic uncertainty has a larger effect on Islamic indices as compared to world uncertainty.

Practical implications

Our findings have significant implications for investors and policymakers to take proper steps before any uncertainty arise. A coalition of the central bank, government officials and investment bank regulators would be needed to tackle this challenge of uncertainty.

Originality/value

To the best of the authors' knowledge, none of the current works has considered the asymmetric impact of world and pandemic uncertainties on Islamic stock markets at both the bottom and upper quantiles of the distribution of data.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 6 May 2014

Garrett C.C. Smith

The purpose of this paper is to examine the effects of financial flexibility as represented by excess cash holdings and debt capacity upon firm returns after periods of…

1359

Abstract

Purpose

The purpose of this paper is to examine the effects of financial flexibility as represented by excess cash holdings and debt capacity upon firm returns after periods of high market uncertainty.

Design/methodology/approach

Days of high uncertainty are identified from 1987-2011 using the VXO Index (implied volatility of the S&P 100) yielding approximately 45,000 firm events. The main variables of interest are excess cash (Duchin et al., 2010) and debt capacity. Two financial constraint indexes are used as controls in a cross-sectional OLS regression.

Findings

The precautionary value of cash during and after times of uncertainty is beneficial. A positive relationship exists for periods of up to two years following the initial day of high uncertainty. Positive BHRs exist on a zero-cost trade investing in a portfolio of high excess cash firms and shorting a portfolio of cash constrained firms. The value of excess debt capacity, on the other hand, is harder to discern; positive profits are obtainable on a zero-cost trade while regression estimates are typically insignificant on average.

Originality/value

This paper expands the financial flexibility literature by testing the effects of financial flexibility on returns following days of high market uncertainty.

Details

Managerial Finance, vol. 40 no. 5
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 16 August 2011

Abdul Rashid

The purpose of this paper is to empirically examine the extent at which idiosyncratic and financial market uncertainty affect the UK private manufacturing firms'…

1057

Abstract

Purpose

The purpose of this paper is to empirically examine the extent at which idiosyncratic and financial market uncertainty affect the UK private manufacturing firms' investment decisions.

Design/methodology/approach

A firm‐level panel data covering the period from 1999 to 2008 drawn from the Financial Analysis Made Easy database was analyzed using the system‐generalized method of moments (GMM) technique to purge time‐invariant unobserved firm‐specific effects and to mitigate the potential endogeneity issues.

Findings

The results from the two‐step robust system‐GMM estimation indicate that firms significantly reduce their capital investment expenditures when uncertainty (measured by either form) increases. The findings also reveal that private firms' investment is more sensitive to idiosyncratic uncertainty than to financial market uncertainty. The results related to firm characteristics suggest that the firm‐specific variables such as debt‐to‐assets ratio, growth of sales and cash flow‐to‐assets ratio are also important in the determination of private firms' investment. The sensitivity analysis confirms that the findings are robust to an alternative method of estimation as well as to an alternative measure of idiosyncratic uncertainty.

Practical implications

The findings of the paper are useful for firms' investment decisions and authorities in designing effective fiscal and monetary policies.

Originality/value

The main value of this study is to investigate the effects of both idiosyncratic and financial market uncertainty on the investment decisions of private limited manufacturing firms.

Details

The Journal of Risk Finance, vol. 12 no. 4
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 6 March 2017

Geoffrey Loudon

This paper aims to investigate the effect of global financial market uncertainty on the relation between risk and return in G7 stock markets.

Abstract

Purpose

This paper aims to investigate the effect of global financial market uncertainty on the relation between risk and return in G7 stock markets.

Design/methodology/approach

Market uncertainty is quantified using a probability-based measure derived from a regime-switching model in which the state transition probabilities are time-varying in response to leading economic indicators. Time variation in the risk return relation is estimated using a GARCH-M model.

Findings

While the regime-switching model successfully distinguishes between crisis and normal states, there remains substantial variability through time in the level of uncertainty about which state prevails. Results show that a strong negative relation exists between this uncertainty and the reward-to-variability ratio across all G7 stock markets. This finding is qualitatively consistent at both monthly and weekly horizons.

Originality/value

Extant evidence on the risk-return relation is conflicting. Most papers assume the relation is time constant. Allowing the reward-to-variability ratio to vary through time in response to return regime uncertainty increases the understanding of asset pricing. It also has important implications for asset allocation decisions by investors.

Details

Studies in Economics and Finance, vol. 34 no. 1
Type: Research Article
ISSN: 1086-7376

Keywords

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