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1 – 10 of 266Yener Altunbas¸s, Antonis Karagiannis, Ming‐Hua Liu and Alireza Tourani‐Rad
The purpose of this paper is to investigate the profitability of European Union (EU) firms with the aim of confirming the mean‐reverting pattern documented by earlier research in…
Abstract
Purpose
The purpose of this paper is to investigate the profitability of European Union (EU) firms with the aim of confirming the mean‐reverting pattern documented by earlier research in the USA. In addition, the paper classifies firms by industry sectors across countries to investigate potential differences.
Design/methodology/approach
The paper follows closely a model where the forecasting of profitability is done through year‐by‐year regressions. This approach allows the use of large samples and the year‐by‐year variation in the slopes. Both a linear and a nonlinear partial adjustment models are used for forecasting profitability.
Findings
Findings show that the profitability does follow a mean‐reverting process and that profitability forecasting can be improved substantially by exploiting the mean‐reverting feature. Further analysis shows that mean reversion does not play an important role in EU countries as in the USA and there is no evidence of nonlinearity in mean reversion. It was also found that mean‐reverting speed differ across industries, with utilities, financial and manufacturing among the lowest.
Research limitations/implications
The sample companies are not originated from a single economy, but from 15 different countries with different macro‐economic conditions that might influence their profitability.
Originality/value
Studying the European market, where the institutional and financial structure of firms are different from the USA allows us to observe whether the US results are sample specific or can be generalized and applied elsewhere. The difference observed in these sample results is probably due to the fact that the US economy is more competitive than that of EU.
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– This paper investigates whether mean reversion holds for a panel of 16 OECD stock price indices for the period 1970 to 2011.
Abstract
Purpose
This paper investigates whether mean reversion holds for a panel of 16 OECD stock price indices for the period 1970 to 2011.
Design/methodology/approach
We employ seemingly unrelated regression (SUR)-based linear and non-linear unit root tests which are not only able to exploit the power of panel data analysis but also account for cross sectional dependencies as well as identify which panel members are stationary.
Findings
In contrast to a literature that offers mixed findings on stationarity, it was found that most of our sample is characterized as mean- or trend-reverting with approximated half-lives in the region of three to five years.
Originality/value
In contrast to other panel unit root tests of stock prices, the authors identify which individual panel members are stationary and non-stationary using a SURADF test. A further novelty of our approach is that we also develop a SUR-based panel KSS test that allows us to explore the possibility that stock prices exhibit non-linear stationarity.
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Fredj Jawadi and Mondher Bellalah
While price studies such as Jawadi et al. generally focus on the relationships between oil and stock markets through the study of oil price on stock markets, this paper takes a…
Abstract
Purpose
While price studies such as Jawadi et al. generally focus on the relationships between oil and stock markets through the study of oil price on stock markets, this paper takes a different perspective to the linkages between oil and stock markets. This study sets out to investigate the efficiency hypothesis for oil markets while testing for whether oil price dynamics depend on stock market fluctuations or not.
Design/methodology/approach
Using nonlinear econometric modeling, this paper investigates the oil market adjustment dynamics for four developed and emerging countries: France, the USA, Mexico and the Philippines. Our findings show strong evidence of significant linkages between oil and stock markets for all the countries under consideration.
Findings
As in Jawadi et al. who focus on stock price dynamics regarding oil price, the findings of this present paper, which focuses more on the oil industry, also point to an asymmetrical mean‐reversion between oil and stock markets that occurs in a nonlinear manner. They reject the informational efficiency hypothesis for oil markets. Indeed, while the previous literature often highlights the stock markets' dependence on the oil industry, this study contributes to the literature by concluding in favor of significant feedback from stock to oil markets, which is not compatible with the efficiency principle according to Fama.
Research limitations/implications
This paper develops a new nonlinear framework that should improve the investigation of oil‐stock market linkages. Future research could check the forecasting properties of this model to forecast the future dynamics of oil prices.
Originality/value
This paper adds to the literature by suggesting that it is not only oil shocks that affect stock markets, but that the latter also have a strong nonlinear impact on oil markets, reducing the diversification benefits of oil‐stock portfolios.
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Christina Anderl and Guglielmo Maria Caporale
This paper aims to explain real exchange rate fluctuations by means of a model including both standard fundamentals and two alternative measures of inflation expectations for five…
Abstract
Purpose
This paper aims to explain real exchange rate fluctuations by means of a model including both standard fundamentals and two alternative measures of inflation expectations for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) over the period January 1993–July 2019.
Design/methodology/approach
Both a benchmark linear autoregressive distributed lag (ARDL) model and a nonlinear autoregressive distributed lag (NARDL) specification are considered.
Findings
The results suggest that the nonlinear framework is more appropriate to capture the behaviour of real exchange rates given the presence of asymmetries both in the long and short run. In particular, the speed of adjustment towards the purchasing power parity (PPP) implied long-run equilibrium is three times faster in a nonlinear framework, which provides much stronger evidence in support of PPP. Moreover, inflation expectations play an important role, with survey-based ones having a more sizable effect than market-based ones.
Originality/value
The focus on linearities and the estimation of a NARDL model, which is shown to outperform the linear ARDL model both within sample and out of sample, is an important contribution to the existing literature which has rarely applied this type of framework; the choice of an appropriate econometric method also makes the policy implications of the analysis more reliable; in particular, monetary authorities should aim to achieve a high degree of credibility to manage them and thus currency fluctuations effectively; the inflation targeting framework might be especially appropriate for this purpose.
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This work presents evidence that cross‐isted stocks (ADRs) are traded in markets that are not completely integrated, and it is the presence of high frequency arbitrage activity…
Abstract
This work presents evidence that cross‐isted stocks (ADRs) are traded in markets that are not completely integrated, and it is the presence of high frequency arbitrage activity that forces these stock pairs to be most commonly in relative equilibrium. A Threshold Autoregressive (TAR) model tests the hypothesis that the reversion to equilibrium of the price discrepancy series is a nonlinear function that has nontrivial thresholds, and that large price discrepancies are relatively short‐lived. The TAR specification models the neutralization of arbitrage forces with thresholds that separate outer regions where large discrepancies have a strong reversion to equilibrium from a central region where transaction costs significantly mitigate this reversion.
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Wasim Khalil Al-Shattarat, Basiem Khalil Al-Shattarat and Ruba Hamed
This study aims to examine the signalling hypothesis of dividends by testing empirically the market reaction to dividends announcements. Furthermore, this study aims to examine…
Abstract
Purpose
This study aims to examine the signalling hypothesis of dividends by testing empirically the market reaction to dividends announcements. Furthermore, this study aims to examine the information content of dividends announcements with respect to future earnings changes for a sample of Jordanian industrial firms over the period 2009 to 2015.
Design/methodology/approach
The authors mainly used the event study methodology to examine the market reaction to dividend release announcements. The market model is used to generate the expected returns. Also, the t-test is used to examine the significance of the mean and cumulative abnormal return. Furthermore, a simultaneous-equation model developed by Nissim and Ziv (2001) and Grullon et al. (2005), applying the two-stage least squares (2SLS), is used to examine the relationship between dividends changes and future earnings changes.
Findings
The results reveal consistency with the limited extant empirical evidence for developing markets and provide some new insights for Jordanian listed firms that support the signalling hypothesis. In applying the event study methodology, the information content of dividends shows that there is a significant positive market reaction to dividends announcements. The study’s findings also present a strong relationship between dividends announcements and profitability in the year of announcements and the subsequent year, whereas this relationship does not exist in the second year. The findings show that there is value-relevance for dividends, suggest that investors recognize the signalling purpose and discern that dividends announcements are useful in predicting favourable and unfavourable future earnings in the short run (the same year and subsequent year) and also show that managers may use dividends to signal earnings prospects in anticipation of expected future market benefits.
Research limitations/implications
The findings of this study could have significant policy implications. The support of a signalling effect implies an existence of information symmetry, at least theoretically, between management and investors. On the other side, this study could not reflect the levels of inside ownership or the existence of signalling substitutes even though these findings could have implications for Jordan’s existing corporate governance practices and firms’ disclosure environment. The results are specific to Jordan, but they do shed light on the generality of the rival models of dividend policy. Many of the structural characteristics of the capital market in Jordan are, however, also present in other emerging markets. The results from this study may, therefore, help provide the basis for comparative research both in the region and in other emerging markets.
Practical implications
The support of the signalling effect implies the existence of information symmetries, at least theoretically, between management and investors. These findings could have implications for Jordan’s existing corporate governance practices and firms’ disclosure environment.
Originality/value
This paper contributes to the literature by providing a workable test for the dividend signalling hypothesis, applying a simultaneous-equation model that incorporates the market reaction to dividends announcements and future earnings changes. Moreover, this paper uses a recent data set of dividends announcements in Jordan. This study provides additional insight to support the signalling hypothesis in emerging markets. Overall, current and previous studies have focused typically on investigating dividend policy in developed markets, especially the US and European markets, although there has been limited analysis of dividends changes on earnings changes for developing markets.
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Augustine Chuck Arize, Ebere Ume Kalu, Chinwe Okoyeuzu and John Malindretos
This study aims to make a comparative study of the applicability of the purchasing power parity (PPP) in selected less developing countries (LDCs) on one hand and European…
Abstract
Purpose
This study aims to make a comparative study of the applicability of the purchasing power parity (PPP) in selected less developing countries (LDCs) on one hand and European countries on the other hand.
Design/methodology/approach
The research design is empirical and ex post facto. This study uses an assortment of co-integration tests and error correction representation. The chosen approach allows for the consideration of long-run elasticities and the dynamics of the short-run adjustment of exchange rates to changes in domestic and foreign prices. Monthly data are used for the period 1980:1 through 2015:12 (i.e. 432 observations).
Findings
Results from long-run co-integration analysis, short-run error correction models and persistence profile analysis overwhelmingly confirm the validity of PPP in these two sets of countries regardless the disparity in their relative exchange rate and price characteristics.
Research limitations/implications
Curiously, several of these empirical studies and still many more, have focused their attention on the experiences of industrialized countries, with a few investigations devoted to LDCs. The evidence is even scarcer in Africa. Clearly, the acceptance of any hypothesis as a credible explanation of economic reality hinges on the robustness of the hypothesis across countries with different economic and institutional frameworks.
Practical implications
Knowledge of the extent to which exchange rate and relative prices can be linked in the long run is important for the design and management of inflation and the implementation of monetary policy. For instance, policy actions aimed at stabilizing the domestic economy can obtain results that are, at best, uncertain in the absence of correct characterization of the PPP dynamics. Moreover, structural and macroeconomic adjustment programs implemented in these countries to achieve economic growth and external competitiveness could be unsuccessful if flawed estimates of PPP exchange rates are retained.
Originality/value
Several empirical studies have been done to prove the validity or otherwise of the PPP. Unlike prior authors, this study makes a comparative study of the applicability of the PPP in selected LDC on one hand and European countries.
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Mohamed El Hedi Arouri and Fredj Jawadi
Purpose – This chapter aims to investigate the stock market comovements between Mexico and the world capital market using nonlinear modeling tools.Methodology/approach – We apply…
Abstract
Purpose – This chapter aims to investigate the stock market comovements between Mexico and the world capital market using nonlinear modeling tools.
Methodology/approach – We apply recent nonlinear cointegration and nonlinear error correction models (NECMs) to investigate the comovements between stock prices over the recent period.
Findings – While the previous literature only highlights some evidence of time-varying comovements, our chapter aims to specify the mechanism characterizing the comovement process through the comparison of two nonlinear error correction models (NECMs). It shows a nonlinear relationship between stock prices that are activated per regime.
Originality – Studying the integration hypothesis between stock markets over the recent financial crisis, our findings highlight strong evidence of significant comovements that explain the global collapse of stock markets in 2008–2009.
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Kirstin Hubrich and Timo Teräsvirta
This survey focuses on two families of nonlinear vector time series models, the family of vector threshold regression (VTR) models and that of vector smooth transition regression…
Abstract
This survey focuses on two families of nonlinear vector time series models, the family of vector threshold regression (VTR) models and that of vector smooth transition regression (VSTR) models. These two model classes contain incomplete models in the sense that strongly exogeneous variables are allowed in the equations. The emphasis is on stationary models, but the considerations also include nonstationary VTR and VSTR models with cointegrated variables. Model specification, estimation and evaluation is considered, and the use of the models illustrated by macroeconomic examples from the literature.
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