Search results
1 – 10 of 19Rob Beaumont, Marco van Daele, Bart Frijns, Thorsten Lehnert and Aline Muller
The purpose of this paper is to investigate the impact of individual investor sentiment on the return process and conditional volatility of three main US market indices (Dow Jones…
Abstract
Purpose
The purpose of this paper is to investigate the impact of individual investor sentiment on the return process and conditional volatility of three main US market indices (Dow Jones Industrial Average, S&P500 and Nasdaq100). Individual investor sentiment is measured by aggregate money flows in and out of domestically oriented US mutual funds.
Design/methodology/approach
A generalised autoregressive conditional heteroscedasticity (GARCH)‐in‐mean specification is used, where our measure for individual sentiment enters the mean and conditional volatility equation.
Findings
For a sample period of six years (February 1998 until December 2004), we find that sentiment has a significant and asymmetric impact on volatility, increasing it more when sentiment is bearish. Using terminology of De Long et al., we find evidence for the “hold more” effect, which states that when noise traders hold more of the asset, they also see their returns increase, and the “create space” effect, which states that noise traders are rewarded for the additional risk they generate themselves.
Originality/value
In contrast to existing studies using explicit measures of market sentiment on low sampling frequencies, the use of daily mutual flow data offers a unique picture on investors' portfolio rebalancing and trading behavior. We propose an integrated framework that jointly tests for the effects of mutual fund flows on stock return and conditional volatility.
Details
Keywords
The purpose of this paper is to investigate herding behavior around the crude oil market and the stock market and the possible cross-herding behavior between the two markets. The…
Abstract
Purpose
The purpose of this paper is to investigate herding behavior around the crude oil market and the stock market and the possible cross-herding behavior between the two markets. The analysis examines also the herding behavior during financial turmoil and includes the investor sentiment and market volatility.
Design/methodology/approach
The authors use a modified version of the cross-sectional standard deviation and the cross-sectional absolute deviation to include investor sentiment, financial crisis and market volatility.
Findings
The authors find that the volatility of the stock market reduces the herding behavior around the oil market and boosts that around the stock market. However, the investors’ sentiment reduces the herding around the stock market and boosts that around the crude oil market. Consequently, the authors can conclude that the herding behavior around the two markets moves inversely and the herding in each market is enhanced by the lack of information in the other market.
Research limitations/implications
This paper is limited to the herding of stocks around the crude oil market and ignores the possible herding of commodities around the oil market.
Originality/value
The originality of the paper rests on the study of the possible cross-herding behavior between the oil market and the stock market especially during financial turmoil.
Details
Keywords
Tarek Eldomiaty, Ola Attia, Wael Mostafa and Mina Kamal
The internal factors that influence the decision to change dividend growth rates include two competing models: the earnings and free cash flow models. As far as each of the…
Abstract
The internal factors that influence the decision to change dividend growth rates include two competing models: the earnings and free cash flow models. As far as each of the components of each model is considered, the informative and efficient dividend payout decisions require that managers have to focus on the significant component(s) only. This study examines the cointegration, significance, and explanatory power of those components empirically. The expected outcomes serve two objectives. First, on an academic level, it is interesting to examine the extent to which payout practices meet the premises of the earnings and free cash flow models. The latter considers dividends and financing decisions as two faces of the same coin. Second, on a professional level, the outcomes help focus the management’s efforts on the activities that can be performed when considering a change in dividend growth rates.
This study uses data for the firms listed in two indexes: Dow Jones Industrial Average (DJIA30) and NASDAQ100. The data cover quarterly periods from 30 June 1989 to 31 March 2011. The methodology includes (a) cointegration analysis in order to test for model specification and (b) classical regression in order to examine the explanatory power of the components of earnings and free cash flow models.
The results conclude that: (a) Dividends growth rates are cointegrated with the two models significantly; (b) Dividend growth rates are significantly and positively associated with growth in sales and cost of goods sold only. Accordingly, these are the two activities that firms’ management need to focus on when considering a decision to change dividend growth rates, (c) The components of the earnings and free cash flow models explain very little of the variations in dividends growth rates. The results are to be considered a call for further research on the external (market-level) determinants that explain the variations in dividends growth rates. Forthcoming research must separate the effects of firm-level and market-level in order to reach clear judgments on the determinants of dividends growth rates.
This study contributes to the related literature in terms of offering updated robust empirical evidence that the decision to change dividend growth rate is discretionary to a large extent. That is, dividend decisions do not match the propositions of the earnings and free cash flow models entirely. In addition, the results offer solid evidence that financing trends in the period 1989–2011 showed heavy dependence on debt financing compared to other related studies that showed heavy dependence on equity financing during the previous period 1974–1984.
Details
Keywords
Tarek Ibrahim Eldomiaty, Islam Azzam, Mohamed Bahaa El Din, Wael Mostafa and Zahraa Mohamed
The main objective of this study is to examine whether firms follow the financing hierarchy as suggested by the Pecking Order Theory (POT). The External Funds Needed (EFN) model…
Abstract
The main objective of this study is to examine whether firms follow the financing hierarchy as suggested by the Pecking Order Theory (POT). The External Funds Needed (EFN) model offers a financing hierarchy that can be used for examining the POT. As far as the EFN considers growth of sales as a driver for changing capital structure, it follows that shall firms plan for a sustainable growth of sales, a sustainable financing can be reached and maintained. This study uses data about the firms listed in two indexes: Dow Jones Industrial Average (DJIA30) and NASDAQ100. The data cover quarterly periods from June 30, 1999, to March 31, 2012. The methodology includes (a) cointegration analysis in order to test for model specification and (b) causality analysis in order to show the generic and mutual associations between the components of EFN. The results conclude that (a) in the majority of the cases, firms plan for an increase in growth sales but not necessarily to approach sustainable rate; (b) in cases of observed and sustainable growth of sales, firms reduce debt financing persistently; (c) firms use equity financing to finance sustainable growth of sales in the long run only, while in the short run, firms use internal financing, that is, retained earnings as a flexible source of financing; and (d) the EFN model is quite useful for examining the hierarchy of financing. This study contributes to the related literature in terms of utilizing the properties of the EFN model in order to examine the practical aspects of the POT. These practical considerations are extended to examine the use of the POT in cases of observed and sustainable growth rates. The findings contribute to the current literature that there is a need to offer an adjustment to the financing order suggested by the POT. Equity financing is the first source of financing current and sustainable growth of sales, followed by retained earnings, and debt financing is the last resort.
Details
Keywords
Tarek Eldomiaty, Yasmeen Saeed, Rasha Hammam and Salma AboulSoud
This paper aims to examine the effect of both inflation rate and interest rate on stock prices using quarterly data on non-financial firms listed in DJIA30 and NASDAQ100 for the…
Abstract
Purpose
This paper aims to examine the effect of both inflation rate and interest rate on stock prices using quarterly data on non-financial firms listed in DJIA30 and NASDAQ100 for the period 1999-2016. The stock duration model is used to measure the sensitivity in variations in inflation rates and interest rates on stock prices.
Design/methodology/approach
The authors use standard statistical tools that include Johansen cointegration test, linearity, normality tests, cointegration regression, Granger causality and vector error correction model.
Findings
The results of panel Johansen cointegration analysis show that cointegration exists between the stock prices, the changes in stock prices due to inflation rates and the changes in stock prices due to real interest rates. The results of cointegration regression show that inflation rates are negatively associated with stock prices, the real interest rates and stock prices are positively associated, changes in real interest rates and inflation rates Granger cause significant changes in stock prices, significant speed of adjustment to long run equilibrium between observed stock prices and real interest rates and significant speed of adjustment to long run equilibrium between changes in stock prices due to real interest rates and changes in inflation rates.
Originality/value
This paper contributes to the empirical literature in three ways. The paper examines the effects of inflation and interest rates on stock prices differently from other related studies by separating inflation from real interest rates. The paper examines the causality between stock prices, interest and inflation rates. This paper offers significant updated validity to extended literature that a negative association exists between stock prices and inflation rates. This validity can be considered as an existence a theory of stock prices, inflation rates and interest rates.
Details
Keywords
Tarek Eldomiaty, Marwa Anwar and Ahmed Ayman
The purpose of this paper is to explore the potential benefits of an optimal vs observed working capital; the latter being measured by cash conversion cycle (CCC). Optimal CCC is…
Abstract
Purpose
The purpose of this paper is to explore the potential benefits of an optimal vs observed working capital; the latter being measured by cash conversion cycle (CCC). Optimal CCC is defined and measured as the CCC that maximizes sales in the last four quarters. The initial exploratory results show that optimal CCC has been shorter than the observed. In addition, shorter CCC is accompanied by higher return on investment.
Design/methodology/approach
The authors use various statistical tools to analyze the differences between determinants of observed and optimal CCC. These statistical tools include Johansen cointegration test, linearity, normality tests, cointegration regression and Granger causality. The authors also use the benefits of discriminant analysis in order to reach a Z-score model that can be used for monitoring the move from an observed to optimal working capital.
Findings
The results show that: significant association exists between volatility of sales and CCC; sales volatility and lagged growth of sales carry relatively the highest weights when a firm moves from observed to optimal CCC; shorter CCC is associated significantly with higher profitability; the observed CCC adjusts to an optimal level; as inflation rises causing potential rise in cost of goods sold, firms prefer staying away from optimal levels of working capital; as economic growth slows down, firms stay at the current level of observed working capital; the results are subject to industry and size effects; and the DJIA and NASDAQ listed firms adjust observed CCC to optimal level slowly.
Originality/value
This paper offers three advances in the literature. The first advance is that the paper determines an optimal level of working capital empirically. To the best of the authors’ knowledge up to the date of submission, other related studies did not include an empirical solution to determine optimal working capital. The second advance is that the paper develops an empirical discriminant model that can be used for monitoring firms’ move from an observed to optimal working capital. The third advance is that optimal working capital shows the empirical integration between short-term and long-term investments that results in an improvement to firm’s liquidity and profitability.
Details
Keywords
Although some research has been carried out on feedback trading in different asset classes, there have been few empirical investigations that consider both major and emerging…
Abstract
Purpose
Although some research has been carried out on feedback trading in different asset classes, there have been few empirical investigations that consider both major and emerging stock markets (Koutmos, 1997; Antoniou et al., 2005; Kim, 2009) stock index futures (Salm and Schuppli, 2010). In this study, the author examines positive/negative feedback trading in both developed-emerging-frontier-standalone (51) stock markets for 2010–2020 and sub-periods including COVID-19 period.
Design/methodology/approach
The hypothesis “feedback trading behaviour led the price boom/bust in the stock markets during the first quarter of COVID-19 pandemic” is tested by employing the Sentana and Wadhwani (1992) framework and using asymmetrical GARCH models (GJRGARCH, EGARCH) in accordance with the empirical literature.
Findings
The following conclusions can be drawn from the present study; (1) There is no evidence to support a significant distinction between developed, emerging, frontier or standalone markets or high/upper middle, lower middle income economies in the case of feedback trading. It is more likely to be a general phenomenon reflecting the outcomes of general human psychology (2) in the long term (2010–2020) based on the feedback trading results Asian stock markets appear to be far from efficiency.
Research limitations/implications
Stock markets are selected based on data availability.
Practical implications
Several inferences can be drawn about overall results. First, investors and portfolio managers should beware of their investment decisions during bearish market conditions where volatility is on the rise and also when there is a strong reaction to bad news/negative shocks in the market. Moreover, investing in Asia stock markets may require more attention since those markets are reputed to be more “idiosyncratic”, less reliant on economic and corporate fundamentals in their pricing. Moreover, the impact of foreign investors on stock market volatility and returns and weaker implementation of regulations also affect the efficiency of the markets (Lipinsky and Ong, 2014).
Originality/value
To the best of the author’s knowledge, most studies in the field of feedback trading in stock markets have only focused on a small sample of countries and second, the effect of COVID-19 uncertainty on the stock markets have not been addressed in the literature with respect to feedback trading. This paper fills these literature gaps. This study is expected to provide useful insights for understanding the instabilities in stock markets particularly under conditions of high uncertainty and to fill the gap in the literature by comparing the results for a large sample of countries both in the long term and in the pandemic.
Highlights for review
This study has shown that feedback trading is more prevalent in Asian stock markets in the long run in Europe, America or Middle East for the period 2010–2020.
Positive feedback traders generally dominated most of the stock markets during the early period of COVID-19 pandemic.
Another major finding was that the stock markets in Malaysia, Japan, the Philippines, Estonia, Portugal and Ukraine are dominated by negative feedback traders which may be interpreted as “disposition effect” meaning that they sell the “past winners”.
In Indonesia, New Zealand, China, Austria, Greece, UK, Finland, Spain, Iceland, Norway, Switzerland, Poland, Turkey, Chile and Argentina neither positive nor negative feedback trading exists even under uncertain conditions.
This study has shown that feedback trading is more prevalent in Asian stock markets in the long run in Europe, America or Middle East for the period 2010–2020.
Positive feedback traders generally dominated most of the stock markets during the early period of COVID-19 pandemic.
Another major finding was that the stock markets in Malaysia, Japan, the Philippines, Estonia, Portugal and Ukraine are dominated by negative feedback traders which may be interpreted as “disposition effect” meaning that they sell the “past winners”.
In Indonesia, New Zealand, China, Austria, Greece, UK, Finland, Spain, Iceland, Norway, Switzerland, Poland, Turkey, Chile and Argentina neither positive nor negative feedback trading exists even under uncertain conditions.
Details
Keywords
John E. Cresson, R. Mike Cudd and Tom J. Lipscomb
Notes the popularity of index funds with US investors, refers to research on fund performance compared with indexes and presents a study comparing daily returns of S&P 500 index…
Abstract
Notes the popularity of index funds with US investors, refers to research on fund performance compared with indexes and presents a study comparing daily returns of S&P 500 index funds with the index itself. Explains the methodology and presents the results, which show that the funds “fall well short” of tracking the index efficiently; although larger funds and/or those with longer term managers have a better tracking performance. Considers consistency with other research and the implications of the findings.
Details