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Article
Publication date: 20 July 2015

Menggen Chen

The purpose of this paper is to pay more attention to four different research questions at least. One is that this study intends to explore the changes of the risk-return…

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Abstract

Purpose

The purpose of this paper is to pay more attention to four different research questions at least. One is that this study intends to explore the changes of the risk-return relationship over time, because the institutions and environment have changed a lot and might tend to influence the risk-return regime in the Chinese stock markets. The second question is whether there is any difference for the risk-return relationship between Shanghai and Shenzhen stock markets. The third question is to compare the similarities and dissimilarities of the risk-return tradeoff for different frequency data. The fourth question is to compare the explanation power of different GARCH-M type models which are all widely used in exploring the risk-return tradeoff.

Design/methodology/approach

This paper investigates the risk-return tradeoff in the Chinese emerging stock markets with a sample including daily, weekly and monthly market return series. A group of variant specifications of GARCH-M type models are used to test the risk-return tradeoff. Additionally, some diagnostic checks proposed by Engle and Ng (1993) are used in this paper, and this will help to assess the robustness of different models.

Findings

The empirical results show that the dynamic risk-return relationship is quite different between Shanghai and Shenzhen stock markets. A positive and statistically significant risk-return relationship is found for the daily returns in Shenzhen Stock Exchange, while the conditional mean of the stock returns is negatively related to the conditional variance in Shanghai Stock Exchange. The risk-return relationship usually becomes much weaker for the lower frequency returns in both markets. A further study with the sub-samples finds a positive and significant risk-return trade-off for both markets in the second stage after July 1, 1999.

Originality/value

This paper extends the existing related researches about the Chinese stock markets in several ways. First, this study uses a longer sample to investigate the relationship between stock returns and volatility. Second, this study estimates the returns and volatility relationship with different frequency sample data together. Third, a group of variant specifications of GARCH-M type models are used to test the risk-return tradeoff. In particular, the author employs the Component GARCH-M model which is relatively new in this line of research. Fourth, this study investigates if there is any structural break affecting the risk-return relationship in the Chinese stock markets over time.

Details

International Journal of Emerging Markets, vol. 10 no. 3
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 17 August 2015

Vijay Kumar Vishwakarma

This paper aims to examine the risk premium for investors in a changing information environment in the Taiwan, New York and London real estate markets from March 2006 to November…

Abstract

Purpose

This paper aims to examine the risk premium for investors in a changing information environment in the Taiwan, New York and London real estate markets from March 2006 to November 2014. This study attempts to quantify behavioral expectations regarding (or motivation for) investment in the Taiwanese real estate in a changing information environment.

Design/methodology/approach

This paper uses the rolling generalised autoregressive conditionally heteroskedastic in mean (GARCH-M) methodology which fixes the problem of conventional GARCH-M methodology.

Findings

Empirical evidence suggests that the time-varying risk premium changed for the Taiwan real estate market with a new information set. The risk premium changed from 1.305 per cent per month to −7.232 per cent per month. The study also found persistent volatility shocks from March 2006 to November 2014. No such evidence was found for the New York and London real estate markets. Overall, this study finds evidence of a time-varying risk premium, partly explainable by governmental policies and partly unexplainable.

Research limitations/implications

The use of the index of Standard and Poor’s Taiwan Real Estate Investment Trusts to study the Taiwan real estate industry may have aggregation effects in result.

Practical implications

The present study will provide guidance to investors as well as policymakers regarding the Taiwan real estate market.

Originality/value

This study uses the rolling GARCH-M model, which is a first for the Taiwan real estate market.

Details

The Journal of Risk Finance, vol. 16 no. 4
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 11 May 2012

Samer AM Al‐Rjoub and Hussam Azzam

The purpose of this paper is to empirically examine stock returns behavior during financial crises for an emerging market from 1992 to 2009. The authors identify episodes of…

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Abstract

Purpose

The purpose of this paper is to empirically examine stock returns behavior during financial crises for an emerging market from 1992 to 2009. The authors identify episodes of significant price declines “crashes” and watch the stock price behavior during these episodes.

Design/methodology/approach

This paper examines seven historical episodes of stock market crashes and their aftermath in the ASE over the last 18 years. The authors examine the behavior of stock returns and volatility in ASE during global, regional and local events. For this purpose the GARCH‐M model is used to capture changes in variance. The data covers the period from January 1, 1992 to July 2, 2009 with different data frequency of daily, weekly and monthly closing prices for ASE general weighted price index. The authors use the crisis specification adopted by Mishkin and White where they define stock market crash as 20 percent decline in the stock market, and the one adopted by Patel and Sarker where they use a 35 percent or more fall in emerging stock market from its historical maximum as a definition of stock market crash, and the authors extend by adopting a third scenario to account only for the 2008‐2009 crisis.

Findings

The results show that crises in general have negative impact on stock returns for all sectors, with the banking sector being the most affected. The effect of the 2008‐2009 crash is the most severe, with the largest drop in stock prices and high volatilities. The paper provides an evidence of high persistence in volatility and strong reverse relationship between stock return and its volatility before and after the crises.

Research limitations/implications

The paper does not include rest‐of‐the‐world economies.

Practical implications

Stock return behavior change around financial crises, it can help the investment world and the academics predict stock return behavior and the dynamics of the first two moments during crises.

Originality/value

The authors use three crisis specifications in one paper adopted by Mishkin and White (2002), Patel and Sarker (1998) and extend by adopting a third scenario to account only for the 2008‐2009 crisis. The paper tests for robustness of the results using daily, weekly, and monthly frequencies. Few studies have examined the behavior of stock returns and volatility during financial crises with the majority of work done on developed markets.

Details

Journal of Economic Studies, vol. 39 no. 2
Type: Research Article
ISSN: 0144-3585

Keywords

Article
Publication date: 1 July 2006

Muhannad A. Atmeh and Ian M. Dobbs

To investigate the performance of moving average trading rules in an emerging market context, namely that of the Jordanian stock market.

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Abstract

Purpose

To investigate the performance of moving average trading rules in an emerging market context, namely that of the Jordanian stock market.

Design/methodology/approach

The conditional returns on buy or sell signals from actual data are examined for a range of trading rules. These are compared with conditional returns from simulated series generated by a range of models (random walk with a drift, AR (1), and GARCH‐(M)) and the consistency of the general index series with these processes is examined. Sensitivity analysis of the impact of transaction costs is conducted and standard statistical testing is extended through the use of bootstrap techniques.

Findings

The empirical results show that technical trading rules can help to predict market movements, and that there is some evidence that (short) rules may be profitable after allowing for transactions costs, although there are some caveats on this.

Originality/value

New results for the Jordanian market; use of sensitivity analysis to investigate robustness to variations in transactions costs.

Details

Studies in Economics and Finance, vol. 23 no. 2
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 7 August 2017

Frederick A. Adjei and Mavis Adjei

Using the economic policy uncertainty (EPU) index as a proxy for the level of EPU, we study the impact of the level of EPU on the conditional mean of market returns and we examine…

Abstract

Purpose

Using the economic policy uncertainty (EPU) index as a proxy for the level of EPU, we study the impact of the level of EPU on the conditional mean of market returns and we examine the predictive power of EPU on future market returns.

Design/methodology/approach

We employ a GARCH-in-Mean model with exogenous variables.

Findings

The results show that even after controlling for business cycle effects, EPU is inversely related to contemporaneous market returns. Particularly, the authors find that the negative impact of EPU subsists only during recessions or recessionary states of the economy, and has no discernible effects during expansionary periods.

Originality/value

This is the first study to examine the predictive power of EPU on future market returns.

Details

Journal of Financial Economic Policy, vol. 9 no. 3
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 1 June 2012

Ruchika Gahlot and Saroj Kumar Datta

The purpose of this paper is to examine the impact of the future of trading on volatility as well as the efficiency of the stock market of BRIC (Brazil, Russia, India and China…

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Abstract

Purpose

The purpose of this paper is to examine the impact of the future of trading on volatility as well as the efficiency of the stock market of BRIC (Brazil, Russia, India and China) countries. This study also investigates the presence of day‐of‐the‐week effect in BRIC countries' stock market.

Design/methodology/approach

This study uses closing prices of IBrx‐50 for Brazil, RTSI for Russia, Nifty for India and CSI300 for China to represent the stock market of BRIC countries. The Run and ACF tests are used to see impact on market efficiency. GARCH M model is used to see the impact on volatility and day‐of‐the week effect.

Findings

The insignificant coefficient of variance in the conditional mean equation of GARCH M implies that the market doesn't provide higher returns during the high volatility period. The results of the Run test showed that the Russian stock market became efficient after introduction of future trading. However, ACF showed no effect of introduction of future trading on autoregressiveness of stock returns. The result of GARCH M indicates that future trading led to reduction in the volatility of the Indian stock market. There are some evidences of presence of day‐of‐the‐week effect in the Indian stock market.

Practical implications

This paper will help regulators to form appropriate policies as the market would have to pay a certain price, such as loss of market efficiency, for the sake of market stabilization. This will also help investors to make investment decisions, especially investing in these indices as the existence of the significant day‐of‐the‐week effect and the inefficiency in the stock market would be very useful for developing investment strategies.

Originality/value

This paper will be useful for both investors and regulators in decision making.

Details

Studies in Economics and Finance, vol. 29 no. 2
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 18 May 2015

Fawzan Abdul Aziz Al Fawzan

– The purpose of this paper is to examine volatility and the weak-form efficient market hypothesis (random walk) of world spot crude oil market.

Abstract

Purpose

The purpose of this paper is to examine volatility and the weak-form efficient market hypothesis (random walk) of world spot crude oil market.

Design/methodology/approach

The study uses the generalized autoregressive conditional heteroskedasticity (GARCH-M), exponential generalized autoregressive conditional heteroskedasticity (EGARCH), and threshold GARCH (TGARCH) models. The data are selected from three markets: Dubai Vetch (DV), West Texas Intermediate, and Europe Brent Spot Price.

Findings

The weak-form efficient market (random walk) hypothesis was rejected for all estimated GARCH-M, EGARCH, and TGARCH models, indicating that these markets are inefficient and predictable. For daily data, the empirical results showed the presence of asymmetric effects, and the conditional variance process was found to be highly persistent.

Originality/value

This study is unique in its nature as it examines three markets on three continents. In addition, one of these markets (DV) was not carried out by the previous study. This work takes into account the market location.

Details

Journal of Economic and Administrative Sciences, vol. 31 no. 1
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 1 August 2016

Shahan Akhtar and Naimat U. Khan

The current paper aims to fill a gap in the literature by analyzing the nature of volatility on the Karachi Stock Exchange (KSE) 100 index of the KSE, and develop an understanding…

Abstract

Purpose

The current paper aims to fill a gap in the literature by analyzing the nature of volatility on the Karachi Stock Exchange (KSE) 100 index of the KSE, and develop an understanding as to which model is most suitable for measuring volatility among those used. The study contributes significantly to the literature as, compared with the limited previous studies of Pakistan undertaken in the past, it covers three types of data (i.e. daily, weekly and monthly) for the whole period from the introduction of the KSE 100 index on November 2, 1991 to December 31, 2013. In addition, to analyze the impact of global financial crises upon volatility, the data have been divided into pre-crisis (1991-2007) and post-crisis (2008-2013) periods.

Design/methodology/approach

This study has used an advanced set of volatility models such as autoregressive conditional heteroskedasticity [ARCH (1)], generalized autoregressive conditional heteroskedasticity [GARCH (1, 1)], GARCH in mean [GARCH-M (1, 1)], exponential GARCH [E-GARCH (1, 1)], threshold GARCH [T-GARCH (1, 1)], power GARCH [P-GARCH (1, 1)] and also a simple exponentially weighted moving average (EWMA) model.

Findings

The results reveal that daily, weekly and monthly return series show non-normal distribution, stationarity and volatility clustering. However, the heteroskedasticity is absent only in the monthly returns making only the EWMA model usable to measure the volatility level in the monthly series. The P-GARCH (1, 1) model proved to be a better model for modeling volatility in the case of daily returns, while the GARCH (1, 1) model proved to be the most appropriate for weekly data based on the Schwarz information criterion (SIC) and log likelihood (LL) functionality. The study shows high persistence of volatility, a mean reverting process and an absence of a risk premium in the KSE market with an insignificant leverage effect only in the case of weekly returns. However, a significant leverage effect is reported regarding the daily series of the KSE 100 index. In addition, to analyze the impact of global financial crises upon volatility, the findings show that the subperiods demonstrated a slightly low volatility and the global economic crisis did not cause a rise in volatility levels.

Originality/value

Previously, the literature about volatility modeling in Pakistan’s markets has been limited to a few models of relatively small sample size. The current thesis has attempted to overcome these limitations and used diverse models for three types of data series (daily, weekly and monthly). In addition, the Pakistani economy has been beset by turmoil throughout its history, experiencing a range of shocks from the mild to the extreme. This paper has measured the impact of those shocks upon the volatility levels of the KSE.

Details

Journal of Asia Business Studies, vol. 10 no. 3
Type: Research Article
ISSN: 1558-7894

Keywords

Article
Publication date: 15 September 2022

Tom W. Miller

This study examines the dynamic responses of five different daily energy prices to a pulse shock affecting the daily price of oil.

Abstract

Purpose

This study examines the dynamic responses of five different daily energy prices to a pulse shock affecting the daily price of oil.

Design/methodology/approach

Daily data for energy prices from the Federal Reserve Economic Data (FRED) database for January 7, 1997, through February 8, 2021, are analyzed. A bivariate structural vector error correction model and generalized autoregressive conditionally heteroscedastic model are combined and extended by adding the volatility of the growth rate of daily oil prices as an explanatory variable for the growth rates of energy prices. This model is estimated and used to generate impulse responses for energy prices.

Findings

The empirical results show that the levels of the daily energy prices examined have unit roots, are integrated of order one, are cointegrated, and generally revert slowly to their long-term equilibrium relationships with the price of oil. The growth rates for the daily energy prices have autoregressive conditional heteroscedasticity, generally are positively related to the volatility of daily oil prices, respond quickly to a pulse shock to daily oil prices, and have cumulative responses that last at least one month.

Originality/value

This paper allows for simultaneous estimation of extended bivariate structural vector error correction and generalized autoregressive conditionally heteroscedastic models that include the volatility of oil as an explanatory variable and uses these models to generated cumulative impulse responses for the growth rates of daily energy prices to oil price shocks.

Details

Managerial Finance, vol. 49 no. 2
Type: Research Article
ISSN: 0307-4358

Keywords

Open Access
Article
Publication date: 28 February 2017

Dojoon Park, Young Ho Eom and Jaehoon Hahn

Finance theory such as Merton’s ICAPM suggests that there should be a positive relationship between the expected return and risk. Empirical evidence on this relationship, however…

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Abstract

Finance theory such as Merton’s ICAPM suggests that there should be a positive relationship between the expected return and risk. Empirical evidence on this relationship, however, is far from conclusive. Building on the recent econometric research on this topic such as Lundblad (2007) and Hedegaard and Hodrick (2016), we estimate the risk-return relation implied in the ICAPM using a long sample (1962~2016) of daily, weekly, and monthly excess stock returns in Korea. More specifically, we estimate various volatility models including GARCH-M using the overlapping data inference (ODIN) method suggested by Hedegaard and Hodrick (2016), as well as the traditional maximum likelihood estimation methodology. For the full sample period, we fail to find a positive risk-return relationship that is significant and robust. For the subsample period from 1998 to 2016, however, we find a significantly positive risk-return relation for GARCH-M model regardless of return intervals and estimation methods. This result is also robust to using other specifications such as EGARCH-M which includes the leverage effect of the variance process and EGARCH-M-GED whose conditional distribution has fatter tails. Our findings suggest that there is indeed a positive relationship between the expected return and risk in the Korean stock market, at least for the period after 1998.

Details

Journal of Derivatives and Quantitative Studies, vol. 25 no. 1
Type: Research Article
ISSN: 2713-6647

Keywords

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