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1 – 10 of over 7000Sruthi Rajan and Shijin Santhakumar
The innovations in fundamentals coupled with noise traders induce co-movement in diverse markets. This co-movement in equity markets which is evidenced higher during the turmoil…
Abstract
Purpose
The innovations in fundamentals coupled with noise traders induce co-movement in diverse markets. This co-movement in equity markets which is evidenced higher during the turmoil period influences economic fundamentals of a country dissimilar in nature. The purpose of this paper is to examine whether economic fundamentals or investors’ behavior attributable to disturbances across the world are the rationale behind the crisis transmission, and thereby distinguish fundamental-based contagion from investor-induced contagion.
Design/methodology/approach
Initially, the study investigates the role of macroeconomic fundamentals and stock returns on crisis occurrence using panel probit estimates. Additionally, ordinary least squares estimates controlling the influence of fundamentals on domestic return capture the discrete country effect measuring the influence of domestic as well as foreign economic fundamentals along with foreign returns on the domestic stock index.
Findings
The empirical results reveal that foreign country stock index returns are having a significant influence on domestic returns besides a prominent role in crisis occurrence. The binary probit model confirmed the influence of both macroeconomic factors and foreign returns in crisis occurrence. The OLS estimates found evidence for investor-induced contagion in the crisis period where the effects of economic fundamentals are small in comparison to foreign market returns that are mainly dominant in pre- and post-crisis period.
Research limitations/implications
The propagation of crisis from one market to other would enable the policy makers to make clear regulations at right time to control for the crisis in future. The results can help the policy makers as well as investors in reducing the impact of the crisis in future by clearly monitoring the behavior of the factors under study.
Originality/value
The current study addresses the role of macro fundamentals and investors influence in crisis propagation. Adopting subprime crisis of 2008-2009 as a reference point and separating the sample period into pre-crisis, crisis and post-crisis period, the study explains how badly the other 30 markets impacted the crisis that emerged in the USA.
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Anastasios G. Malliaris and Ramaprasad Bhar
The equity premium of the S&P 500 index is explained in this paper by several variables that can be grouped into fundamental, behavioral, and macroeconomic factors. We hypothesize…
Abstract
The equity premium of the S&P 500 index is explained in this paper by several variables that can be grouped into fundamental, behavioral, and macroeconomic factors. We hypothesize that the statistical significance of these variables changes across economic regimes. The three regimes we consider are the low‐volatility, medium‐volatility, and high‐volatility regimes in contrast to previous studies that do not differentiate across economic regimes. By using the three‐state Markov switching regime econometric methodology, we confirm that the statistical significance of the independent variables representing fundamentals, macroeconomic conditions, and a behavioral variable changes across economic regimes. Our findings offer an improved understanding of what moves the equity premium across economic regimes than what we can learn from single‐equation estimation. Our results also confirm the significance of momentum as a behavioral variable across all economic regimes
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Gonzalo Gomez-Bengoechea and Alfredo Arahuetes
This paper aims to provide an empirical analysis of the macroeconomic determinants of sovereign bond yield spreads in the Eurozone from 2000 until August 2012, when the Outright…
Abstract
Purpose
This paper aims to provide an empirical analysis of the macroeconomic determinants of sovereign bond yield spreads in the Eurozone from 2000 until August 2012, when the Outright Monetary Transactions programme was launched.
Design/methodology/approach
The authors constructed an unbalanced panel with quarterly data from 2000 Q1 to 2012 Q2 for the 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Luxembourg, Italy, The Netherlands, Portugal and Spain. The authors propose a model that explains spreads through the main categories of variables observed in the literature. The relationship between variables is analysed using ordinary least squares and quantile regressions. As discussed by the authors, quantile regressions provide a more precise estimation, given the huge heterogeneity across counties that can be observed in the Eurozone.
Findings
Results show that the relationship between sovereign risk and macroeconomic fundamentals is affected by a strong country sentiment effect. The impact of country sentiment on sovereign risk is larger for those countries that were already experiencing higher spreads. Regardless the impact that European Central Bank’s (ECB) intervention had on sovereign risk from 2012, quantile regression results suggest that policy recommendations and goals should be adapted to each country’s market perception.
Originality/value
The results obtained improve on previous findings on this topic (De Grauwe and Ji, 2012) in two ways. First, they show that even introducing every category of determinants found in the literature in the main specification, fundamentals can only partially explain the evolution of sovereign risk in the Eurozone. Second, they find there is a country-sentiment effect that affects the relationship between macroeconomic indicators and sovereign risk. Furthermore, the paper finds that the country-sentiment effect is larger for countries facing high spreads.
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Md Abdullah Al-Masum and Chyi Lin Lee
Housing prices in Sydney have increased rapidly in the past three decades. This leads to a debate of whether Sydney housing prices have departed from macroeconomic fundamentals…
Abstract
Purpose
Housing prices in Sydney have increased rapidly in the past three decades. This leads to a debate of whether Sydney housing prices have departed from macroeconomic fundamentals. However, little research has been devoted to this area. Therefore, this study aims to fill this gap by examining the long-run association between housing prices and market fundamentals. Further, it also examines the long-run determinants of housing prices in Greater Sydney.
Design/methodology/approach
The analysis of this study involves two stages. The first stage is to estimate the presence of long-run relationship between housing prices and market fundamentals with the Johansen and Juselius Cointegration test. Thereafter, the determinants of housing prices in Greater Sydney is assessed by using a vector error correction model.
Findings
The empirical results show that Sydney housing prices are cointegrated with market fundamentals in the long run. In addition, there is evidence to suggest that market fundamentals such as gross disposable income, housing supply, unemployment rate and gross domestic product are the key long-run determinants of Sydney housing prices, reflecting that Sydney housing prices, in general, can be explained by market fundamentals in the long run.
Research limitations/implications
The findings enable more informed and practical policy and investment decision-making regarding the relation between housing prices and market fundamentals.
Originality/value
This paper is the first study to offer empirical evidence of the degree to which the behaviour of housing prices can be explained by market fundamentals, from a capital city instead of at a national level, using a relatively disaggregated dataset of housing price series for Greater Sydney.
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Chiedza Ndlovu and Paul Alagidede
The purpose of this paper is to examine the impact of industry structure and macroeconomic indicators on return on equity (ROE) of listed financial services firms.
Abstract
Purpose
The purpose of this paper is to examine the impact of industry structure and macroeconomic indicators on return on equity (ROE) of listed financial services firms.
Design/methodology/approach
Herfindahl–Hirschman Index concentration scales were used to categorise industries into competitive, moderate and concentrated segments, while Arbitrage Pricing Model principles were used to capture the effect of macroeconomic fundamentals on ROE. Generalised method of moments estimator was used to model random effects which were supported by the Hausman test.
Findings
Findings suggest that the influence of macroeconomic fundamentals on ROE deteriorates as one moves from competitive to concentrated industries. ROE is volatile in concentrated markets and less volatile in competitive markets. Concentrated markets generally enjoy monopoly profits. Gross domestic product and interest rates have a positive impact on ROE, while inflation, unemployment and exchange rates have a negative effect.
Originality/value
This study highlights the need to apply appropriate business strategies and policies depending on the structure of the industry. Competitive advantage strategies may assist in sustaining profits of firms in competitive markets. Regulators need to be proactive and stress test the impact of a policy on industry performance before implementation because competitive and concentrated markets react differently to external shocks. Risk tolerant investors may invest in volatile markets such as Russia and South Africa, while risk-averse investors may prefer to invest in less volatile markets such as India and China.
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Daniel Lo, Michael McCord, Peadar T. Davis, John McCord and Martin Edward Haran
House price-to-rent (P-t-R) ratios are among the most widely used measures of housing market conditions. Given the theoretical and apparent bidirectional, causal relationships and…
Abstract
Purpose
House price-to-rent (P-t-R) ratios are among the most widely used measures of housing market conditions. Given the theoretical and apparent bidirectional, causal relationships and imbalances between the housing market, broader economy and financial market determinants, it is important to understand the relationship between macro- and micro-economic characteristics in relation to the P-t-R ratio to enhance the understanding of housing market dynamics. This paper studies the joint dynamics and persistence of house prices and rents and examines the temporal interactions of the P-t-R ratio and economic and financial determinants.
Design/methodology/approach
The authors examine the lead–lag relationships between the P-t-R ratios and a spectrum of macroeconomic variables using cointegration and causality methods, initially at the aggregate position and also across housing types within the Northern Ireland housing market to establish whether there are subtle differences in how various housing segments react to changes in economic activity and market fundamentals.
Findings
The findings reveal price switching dynamics and some very distinct long- and short-run relationships between macroeconomic and financial indicators and the P-t-R ratios across the various housing segments. The results exhibit monetary supply, foreign exchange markets and the stock market to be important drivers of the P-t-R ratio, with P-t-R movements seemingly tied, or are in tandem, with the overall economy, particularly with the construction sector.
Practical implications
The study shows that the P-t-R ratio can be used as an early measure for establishing the effects of macroprudential policy changes and how these may manifest across housing tiers and quality, which can further act as a signal for preventing or at least mitigating future irrational price cyclicity. These insights serve to inform housing and economic policy and macroprudential policy design, principally within lending policy and the effect of regulatory interventions and further enhance the understanding of the P-t-R ratio on housing market structure and dynamics.
Originality/value
This study is the first in the housing literature that examines the causal relationships between the P-t-R ratio and macroeconomic activity at the sub-market level. It investigates whether and how money supply, inflation, foreign exchange markets, general economic productivity and other important macroeconomic factors interact with the pricing of different property types over time.
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This paper aims to examine asymmetries in the house price cycle and to understand the dynamic of housing prices, incorporating macroeconomic variables at regional and country…
Abstract
Purpose
This paper aims to examine asymmetries in the house price cycle and to understand the dynamic of housing prices, incorporating macroeconomic variables at regional and country level, namely, housing affordability, the unemployment rate, mortgage rate and inflation rate.
Design/methodology/approach
To highlight significant differences in the asymmetric patterns of house prices between regions, the STAR model is adopted.
Findings
The authors highlight significant differences in the asymmetric patterns of house prices between regions, in which some areas showed asymmetric response over the housing cycle; here the LSTAR model outperforms other models. In contrast, some regions (the South West and the North West) showed symmetric properties in the tails of the cycle; therefore, the ESTAR model was adopted in their case.
Practical implications
Being limited to a few fundamentals, this study opens an avenue for further research to investigate this dynamic using in addition such demand-supply factors as land supply, construction cost and loans made for housing. These findings can also be used to examine whether other models such as ARIMA, exponential smoothing or artificial neural networks can more accurately forecast housing prices.
Originality/value
The present paper aims to highlight housing affordability as a cause of asymmetric behaviour in house prices. Put differently, the authors seek to understand the dynamics of housing prices with other fundamentals incorporating macroeconomic variables in regions and country level data as a means of achieving a more concise result.
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The purpose of this paper is to use the Barberis et al. (1998)’s valuation model to calculate the fundamental value of a stock and examine whether the differences between…
Abstract
Purpose
The purpose of this paper is to use the Barberis et al. (1998)’s valuation model to calculate the fundamental value of a stock and examine whether the differences between predicted and realized stock prices are explained both by psychological factors (that affect investor reaction to information) and by key macroeconomic variables.
Design/methodology/approach
This paper adopts a time-series analysis, as well as a panel data approach, to examine whether the price deviations from fundamental values are because of macroeconomic and psychological factors, using data from the London Stock Exchange.
Findings
The results indicate that these differences are explained by important macroeconomic variables, as well as by the sentiment of investors (that is used as a proxy of the psychological factors).
Originality/value
Based on the above results, this paper suggests that the price deviations from fundamental values are not treated as model estimation errors as proposed by Penman and Sougiannis (1998) but rather as deviations that are because of psychological factors, as well as to macroeconomic conditions.
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Eduardo Saucedo and Jorge González
Fama–French model (FFM) has been successful in helping to predict the financial markets, but investors have been interested in creating more sophisticated models to better predict…
Abstract
Purpose
Fama–French model (FFM) has been successful in helping to predict the financial markets, but investors have been interested in creating more sophisticated models to better predict the performance of the stock market. The objective of the extended version is to create a more robust econometric model to better predict the performance of the Mexican Stock Market.
Design/methodology/approach
The study divides the Mexican Stock Market into six different portfolios. The criteria to build those portfolios are the same one used in Fama–French (1992). The study comprises 78 stocks listed in the Mexican Stock Market that are analyzed monthly during 1997–2018. The study analyzes the period before and after the 2008–2009 financial crisis to identify whether there are important changes. The estimation applies the traditional and an extended version of the FFM that include macroeconomic variables such as country risk, economic activity, inflation rate, and exchange rate and some financial variables recommended in the literature.
Findings
Results indicate that classic FFM variables are statistically significant in most cases, but relevant macroeconomic variables such as the interest rate, exchange rate and country risk stand out for being weakly relevant in most of the portfolios. However, it is noticed that some of these macroeconomic variables became relevant for different portfolios only after the 2008–2009 crisis, especially in portfolios which include small market capitalization firms.
Research limitations/implications
The study includes the stocks listed in the Mexican Stock Market. One limitation is the small number of stocks available, which reduces the possibility of creating well diversified portfolios. This study includes 78 stocks. The stocks removed from the sample are from firms that were not listed during six consecutive months or whose market capitalization did not change in the same period. Outlier data were removed from the sample to capture in better way the general performance of the stock market.
Practical implications
The objective of the extended version is to create a more robust econometric model than the traditional model. It is expected that such estimations can be helpful to investors to make better decisions when they try to predict performance in the stock market.
Social implications
An extended version of the FFM can be helpful to investors to make better decisions when they try to predict performance in the stock market.
Originality/value
To the best of our knowledge there are no more studies in the literature of the Mexican financial market that apply the same methodology.
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Jorge Guadalupe-Lanas, Jorge Cruz-Cárdenas, Patricio Arévalo-Chávez and Andrés Palacio-Fierro
This study aims to analyze the influence of political regime on economic growth.
Abstract
Purpose
This study aims to analyze the influence of political regime on economic growth.
Design/methodology/approach
The methodology was based on an inter-period comparison of the evolution of macroeconomic fundamentals in three different political regimes in Ecuador, a South American country.
Findings
The results showed that what determines the evolution of macroeconomic fundamentals is not the political regime that oversees it, but the size of a positive exogenous shock on the price of raw materials, which, by providing higher incomes, considerably increases the level of investment and net exports. However, the political regime does affect the distribution of income in sectors such as health and education.
Originality/value
As far as the authors know, this may be the first paper to explore the importance of a positive exogenous shock on a political regime for the case of primary-exporting Latin American economies, which are price takers subject to exogenous shocks.
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