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Article
Publication date: 25 February 2022

Dezhong Xu, Bin Li and Tarlok Singh

The purpose of this study is to investigate the relationship between gold–platinum price ratio (GP) and stock returns in international stock markets. The study addresses three…

Abstract

Purpose

The purpose of this study is to investigate the relationship between gold–platinum price ratio (GP) and stock returns in international stock markets. The study addresses three empirical questions: (1) Does GP have robust predictive power in international stock markets? (2) Does GP outperform other macroeconomic variables in international stock markets? (3) What is the relationship between GP and stock market returns during economic recessions?

Design/methodology/approach

The study mainly uses OLS regressions to perform empirical tests for a comprehensive set of 17 advanced international stock markets and overall world market. The monthly data is used for the period January 1978 to July 2019, 499 observations for each market.

Findings

The study finds that the first-difference of GP (ΔGP), not the initial-level of GP, has strong predictive power for stock returns, both in short- and long-time horizons. The results remain robust after controlling for a number of macroeconomic predictors. The out-of-sample test results are significant, confirming the robustness of the predictive power of ΔGP.

Originality/value

This study is the first to examine the ability of the ΔGP to predict stock returns, and provide novel evidence on the relationship between ΔGP and international stock markets. The study draws on behavioral finance theory, specifically the myopic loss aversion, the herd effect and the limited attention theory, to explain the predictability of stock returns in international stock markets.

Details

International Journal of Managerial Finance, vol. 19 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 7 August 2007

Apostolos Serletis and Periklis Gogas

To test the Feldstein‐Horioka hypothesis that the investment‐to‐output ratio moves one‐for‐one with the saving‐to‐output ratio, suggesting international capital mobility.

Abstract

Purpose

To test the Feldstein‐Horioka hypothesis that the investment‐to‐output ratio moves one‐for‐one with the saving‐to‐output ratio, suggesting international capital mobility.

Design/methodology/approach

The paper uses the econometric framework developed by Fisher and Seater, interpreting the Feldstein‐Horioka hypothesis as a long‐run phenomenon, and paying particular attention to the integration properties of the data, since meaningful tests critically depend on these properties. The paper also investigates the power of the long‐horizon regression tests, using the inverse power function of Andrews.

Findings

The paper tests the Feldstein‐Horioka hypothesis for 15 European countries, as well as for the USA and Japan, using annual data for the period from 1960 to 2002. Evidence is found against the Feldstein and Horioka hypothesis of low international capital mobility.

Originality/value

Although the findings are in contrast to those of Feldstein and Horioka, they are consistent with neoclassical growth theory according to which there is no reason to expect a relation between saving and investment if there are no barriers to capital movements.

Details

Journal of Economic Studies, vol. 34 no. 3
Type: Research Article
ISSN: 0144-3585

Keywords

Open Access
Article
Publication date: 11 February 2021

Asif M. Ruman

Considering the relationship between the central bank balance sheet and unconventional monetary policy after the 2008 financial crisis, it is crucial to see how the unconventional…

3415

Abstract

Purpose

Considering the relationship between the central bank balance sheet and unconventional monetary policy after the 2008 financial crisis, it is crucial to see how the unconventional monetary policy, given near-zero interest rates, affects future stock market performance. This paper analyzes the impact of the Fed's balance sheet size on stock market performance.

Design/methodology/approach

To analyze the Fed's balance sheet size's long-term stock market implications, this paper uses the asset pricing framework of market return predictability such as Ordinary least squares (OLS) and Generalized method of moments (GMM) analysis.

Findings

Findings in this paper suggest that the Fed's balance sheet size, deflated by asset market wealth, presents evidence of return predictability during 1926–2015 that is robust against standard controls. These results can be explained through the redistribution of risk and the wealth channels of monetary policy transmission. The changing balance sheet size of a central bank (1) affects systemic risk, yields and expectations and (2) signals the future direction of monetary policy and thus economic outlook.

Research limitations/implications

The main implication of these findings is that policymakers should avoid a severe imbalance between a central bank's balance sheet size and assets market wealth.

Originality/value

The empirical evidence in this paper documents a century-old relation between the Fed's balance sheet size and US stock market return using the Fed's balance sheet data for the last 100 years and stock market returns from the Center for research in security prices (CRSP) database.

Article
Publication date: 21 April 2011

Alan Gregory

In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the…

1026

Abstract

In this paper, it is argued that previous estimates of the expected cost of equity and the expected arithmetic risk premium in the UK show a degree of upward bias. Given the importance of the risk premium in regulatory cost of capital in the UK, this has important policy implications. There are three reasons why previous estimates could be upward biased. The first two arise from the comparison of estimates of the realised returns on government bond (‘gilt’) with those of the realised and expected returns on equities. These estimates are frequently used to infer a risk premium relative to either the current yield on index‐linked gilts or an ‘adjusted’ current yield measure. This is incorrect on two counts; first, inconsistent estimates of the risk‐free rate are implied on the right hand side of the capital asset pricing model; second, they compare the realised returns from a bond that carried inflation risk with the realised and expected returns from equities that may be expected to have at least some protection from inflation risk. The third, and most important, source of bias arises from uplifts to expected returns. If markets exhibit ‘excess volatility’, or f part of the historical return arises because of revisions to expected future cash flows, then estimates of variance derived from the historical returns or the price growth must be used with great care when uplifting average expected returns to derive simple discount rates. Adjusting expected returns for the effect of such biases leads to lower expected cost of equity and risk premia than those that are typically quoted.

Details

Review of Behavioural Finance, vol. 3 no. 1
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 29 May 2018

Daniel Liston-Perez, Patricio Torres-Palacio and Sidika Gulfem Bayram

The purpose of this paper is to test whether investor sentiment is a significant predictor of future Mexican stock market returns. It also estimates the dynamic correlation…

Abstract

Purpose

The purpose of this paper is to test whether investor sentiment is a significant predictor of future Mexican stock market returns. It also estimates the dynamic correlation between investor sentiment and equity returns. Finally, it examines if investor sentiment innovations impact unexpected returns for a variety of portfolios.

Design/methodology/approach

This study utilizes predictive regressions to determine if sentiment can predict Mexican equity returns. Multivariate GARCH models are estimated to examine the time-varying correlations between investor sentiment and equity returns.

Findings

The results show that Mexican investor sentiment is a significant predictor of Mexican equity returns for up to 24 months ahead. The findings show that high levels of sentiment today are associated with lower equity returns over the near term. Furthermore, multivariate GARCH estimations indicate that the correlation between investor sentiment and equity returns is not static and varies considerably over time. Finally, the findings indicate that sentiment innovations are significantly correlated with unexpected returns, reinforcing the notion that unexplained sentiment fluctuations lead to unexplained changes in stock market returns. Overall, these results suggest that investor sentiment is a significant source of risk for the Mexican stock market.

Originality/value

This study seeks to further our understanding of how behavioral factors influence and predict Mexican equity returns.

Details

International Journal of Managerial Finance, vol. 14 no. 4
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 9 March 2010

Le Ma and Chunlu Liu

This paper develops a new decomposition method of the housing market variations to analyse the housing dynamics of the Australian eight capital cities.

Abstract

Purpose

This paper develops a new decomposition method of the housing market variations to analyse the housing dynamics of the Australian eight capital cities.

Design/methodology/approach

This study reviews the prior research on analysing the housing market variations and classifies the previous methods into four main models. Based on this, the study develops a new decomposition of the variations, which is made up of regional information, home‐market information and time information. The panel data regression method, unit root test and F test are adopted to construct the model and interpret the housing market variations of the Australian capital cities.

Findings

This paper suggests that the Australian home‐market information has the same elasticity to the housing market variations across cities and time. In contrast, the elasticities of the regional information are distinguished. However, similarities exit in the west and north of Australia or the south and east of Australia. The time information contributes differently along the observing period, although the similarities are found in certain periods.

Originality/value

This paper introduces the housing market variation decomposition into the research of housing market variations and develops a model based on the new method of the housing market variation decomposition.

Details

International Journal of Housing Markets and Analysis, vol. 3 no. 1
Type: Research Article
ISSN: 1753-8270

Keywords

Article
Publication date: 7 October 2021

Maria Elisabete Neves, Mário Abreu Pinto, Carla Manuela de Assunção Fernandes and Elisabete Fátima Simões Vieira

This study aims to analyze the returns obtained from companies with strong growth potential (growth stocks) and the returns from companies with quite low stock prices, but with…

Abstract

Purpose

This study aims to analyze the returns obtained from companies with strong growth potential (growth stocks) and the returns from companies with quite low stock prices, but with high value (value stocks).

Design/methodology/approach

The sample comprises monthly data, from January 2002 to December 2016, from seven countries, Germany, France, Switzerland, the UK, Portugal, the USA and Japan. The authors have used linear regression models for three different periods, the pre-crisis, subprime crisis and post-crisis period.

Findings

The results point out that the performance of value and growth stocks differs from different periods surrounding the global financial crisis. In fact, for six countries, value stocks outperformed growth stocks in the period that precedes the subprime crisis and during the crisis, this tendency remained only for France, Portugal and Japan. This trend changed in the period following the crisis. The results also show that investor sentiment has a robust significance in value and growth stock returns, mostly in the period before the crisis, highlighting that the investor sentiment is more significant in the moments that the value stocks outperformed.

Originality/value

As far as the authors know, this is the first work that, taking into account the future research lines of Capaul et al. (1993), investigates whether the results obtained by those authors remain current, meeting the authors’ challenge and covering the gap of recent studies on the performance of value and growth stocks. Besides, the authors have introduced a new country, heavily punished by both the global financial crisis and the sovereign debt crisis to understand whether there are significant differences in investment styles and whether this is related to the different economies. Also, in this context, the authors were pioneers in adding investor sentiment as an exogenous variable in the influence of stock returns.

Details

International Journal of Accounting & Information Management, vol. 29 no. 5
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 1 November 2003

Kausik Chaudhuri and Yangru Wu

This paper investigates whether stock‐price indexes of emerging markets can be characterized as random walk (unit root) or mean reversion processes. We implement a panelbased test…

1067

Abstract

This paper investigates whether stock‐price indexes of emerging markets can be characterized as random walk (unit root) or mean reversion processes. We implement a panelbased test that exploits cross‐sectional information from seventeen emerging equity markets during the period January 1985 to April 2002. The gain in power allows us to reject the null hypothesis of random walk in favor of mean reversion at the 5 percent significance level. We find a positive speed of reversion with a half‐life of about 30 months. These results are similar to those documented for developed markets. Our findings provide an interesting comparison to existing studies on more matured markets and reduce the likelihood of earlier mean reversion findings as attributable to data mining.

Details

Managerial Finance, vol. 29 no. 10
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 1 June 2015

Kirsten Thompson, Renee Van Eyden and Rangan Gupta

The purpose of this study is to construct a financial conditions index (FCI) for the South African economy to enable the gauging of financial conditions and to better understand…

Abstract

Purpose

The purpose of this study is to construct a financial conditions index (FCI) for the South African economy to enable the gauging of financial conditions and to better understand the macro-financial linkages in the country. The global financial crisis that began in 2007-2008 demonstrated how severe the impact of financial markets’ stress on real economic activity can be. In the wake of the financial crisis, policy-makers and decision-makers across the world identified the critical need for a better understanding of financial conditions, and more importantly, their impact on the real economy.

Design/methodology/approach

The FCI is constructed using monthly data over the period 1966 to 2011, and is based on a set of 16 financial variables, which include variables that define the state of international financial markets, asset prices, interest rate spreads, stock market yields and volatility, bond market volatility and monetary aggregates. The authors explore different methodologies for constructing the FCI, including full sample and rolling-window principal components analysis. Furthermore, the authors investigate whether it is beneficial to purge the FCI of the real effects of inflation, economic growth and interest rates, and evaluate the performance of our constructed FCIs by comparing their ability to pick up turning points in the South African business cycle, and by running in-sample causality (forecast) tests.

Findings

The authors find that the estimated FCIs are good predictors of economic activity; with the rolling-window FCI being the “best” performing index. Causality tests indicate that this FCI is a good in-sample predictor of industrial production growth and the Treasury Bill rate, but a weak predictor of inflation.

Practical implications

The authors find that the resulting FCI can act as an “early warning system”. This, in turn, may serve to indicate that monetary policy should take broader financial conditions into account.

Originality/value

This study offers three main contributions to the existing literature on financial conditions in South Africa: the authors construct an FCI over a sample period that is three decades longer than existing indices, the FCI of this paper comprises a wider coverage of financial variables than others and the authors make use of rolling-window estimation techniques that allow them to account for parameter instability and to capture the real-time constraints faced by a policymaker.

Details

Studies in Economics and Finance, vol. 32 no. 2
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 26 January 2010

Yevheniya Hyrina and Apostolos Serletis

The purpose of this paper is to revisit the evidence for purchasing power parity (PPP) using long, low‐frequency data (over 100 years) for 23 organization for economic…

3426

Abstract

Purpose

The purpose of this paper is to revisit the evidence for purchasing power parity (PPP) using long, low‐frequency data (over 100 years) for 23 organization for economic co‐operation and development (OECD) countries against each of four different base currencies – the Deutsch mark, the Japanese yen, the British pound, and the US dollar.

Design/methodology/approach

The paper uses standard unit root tests and level and trend stationarity tests, and also investigates the robustness of the results to alternative testing methodologies from statistical physics, such as Lo's modified rescaled range statistic and the Hurst exponent.

Findings

The results indicate that the theory of PPP does not hold.

Originality/value

Motivated by the mixed results from previous research on the validity of the theory of PPP, the robustness of standard unit root and stationarity tests to alternative testing methodologies are investigated. In particular, the paper uses two tests from statistical physics – Lo's modified R/S statistic and the Hurst exponent.

Details

Journal of Economic Studies, vol. 37 no. 1
Type: Research Article
ISSN: 0144-3585

Keywords

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