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Book part
Publication date: 30 November 2011

Massimo Guidolin

I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to…

Abstract

I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to fit financial time series and at the same time provide powerful tools to test hypotheses formulated in the light of financial theories, and to generate positive economic value, as measured by risk-adjusted performances, in dynamic asset allocation applications. The chapter also reviews the role of Markov switching dynamics in modern asset pricing models in which the no-arbitrage principle is used to characterize the properties of the fundamental pricing measure in the presence of regimes.

Details

Missing Data Methods: Time-Series Methods and Applications
Type: Book
ISBN: 978-1-78052-526-6

Keywords

Article
Publication date: 9 October 2023

Shallu Batra, Mahender Yadav, Ishu Jindal, Mohit Saini and Pankaj Kumar

This study aims to examine the impact of institutional investors and their classes on the stock return volatility of an emerging market. The paper also determines the moderating…

Abstract

Purpose

This study aims to examine the impact of institutional investors and their classes on the stock return volatility of an emerging market. The paper also determines the moderating role of firm size, crisis and turnover on such relationships.

Design/methodology/approach

The study covers nonfinancial companies of the Bombay Stock Exchange-100 index that are listed during the study period. The study uses fixed effects and systematic generalized method of moments estimators to look over the association between institutional investors and firms’ stock return volatility.

Findings

The study provides evidence that institutional investors destabilize the Indian stock market. It indicates that institutional investors do not engage in management activities; they earn short-term gains depending on information efficiency. Pressure-insensitive institutional investors have a significant positive relation with stock return volatility, while pressure-sensitive institutional investors do not. The study also reflects that pressure-sensitive institutional investors are underweighted in India, which jointly represents an insignificant nonlinear association between institutional ownership and stocksvolatility. Furthermore, outcomes reveal that the intersection effect of the crisis, firm size and turnover is positively and significantly related to such relationships.

Research limitations/implications

The outcomes encourage initiatives that keep track of institutional investors in the Indian stock market. To control the destabilizing effect of pressure-insensitive institutional investors, regulators should follow strict regulations on their trading patterns. Moreover, it guides the potential researchers that they should also take into account the impact of other classes of ownership structure or what type of ownership can help in stabilizing or destabilizing the Indian stock market.

Originality/value

Abundant literature studies the relationship between institutional ownership and firm performance in the Indian context. From the standpoint of making management decisions, the return and volatility of stock returns are both different aspects. However, this study examines the effect of institutional ownership and its groups on the volatility of stock return using the panel data estimator, which was previously not discussed in the literature.

Details

Multinational Business Review, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1525-383X

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Article
Publication date: 1 September 2021

Rodrigue Majoie Abo

Studies on transfers to a more regulated section show an increase in information disclosure and stocks’ liquidity levels. Classical theories suggest that volatility should also be…

Abstract

Purpose

Studies on transfers to a more regulated section show an increase in information disclosure and stocks’ liquidity levels. Classical theories suggest that volatility should also be reduced. This study aims to analyse the long-term effects of a section transfer to a more regulated section (TSE 1/TSE 2) on stock return volatility.

Design/methodology/approach

This study uses an empirical framework relying on two-sample t-tests and panel regressions. These use robust standard errors and control for fixed effects, day effects and macroeconomic factors. The return variance of comparable stocks’ benchmark sample, instead of market variance, is used as a control variable. Comparable stocks operate within the same industry and do not transfer during the sample period. The authors test our results’ robustness using generalized autoregressive conditional heteroskedasticity estimates.

Findings

The study’s main findings show that pre-transferred stocks are more volatile than the stocks’ benchmark sample. The transfer to a more regulated section leads to a gradual decrease in the total daily stock return volatility, intraday return volatility and overnight return volatility.

Originality/value

To the best of my knowledge, this study is the first to empirically address the volatility change caused by the stocks’ transfer to a more regulated section. This study highlights the benefits of choosing section transfers to reduce volatility.

Details

Studies in Economics and Finance, vol. 39 no. 1
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 6 August 2020

Mao He, Juncheng Huang and Hongquan Zhu

The purpose of our study is to explore the “idiosyncratic volatility puzzle” in Chinese stock market from the perspective of investors' heterogeneous beliefs. To delve into the…

Abstract

Purpose

The purpose of our study is to explore the “idiosyncratic volatility puzzle” in Chinese stock market from the perspective of investors' heterogeneous beliefs. To delve into the relationship between idiosyncratic volatility and investors' heterogeneous beliefs, and uncover the ability of heterogeneous beliefs, as well as to explain the “idiosyncratic volatility puzzle”, we construct our study as follows.

Design/methodology/approach

Our study adopts the unexpected trading volume as proxies of heterogeneity, the residual of Fama–French three-factor model as proxies of idiosyncratic volatility. Portfolio strategies and Fama–MacBeth regression are used to investigate the relationship between the two proxies and stock returns in Chinese A-share market.

Findings

Investors' heterogeneous beliefs, as an intermediary variable, are positively correlated with idiosyncratic volatility. Meanwhile, it could better demonstrate the negative correlation between the idiosyncratic volatility and future stock returns. It is one of the economic mechanisms linking idiosyncratic volatility to subsequent stock returns, which can account for 11.28% of the puzzle.

Originality/value

The findings indicate that idiosyncratic volatility is significantly and positively correlated with heterogeneous beliefs and that heterogeneous beliefs are effective intervening variables to explain the “idiosyncratic volatility puzzle”.

Details

China Finance Review International, vol. 11 no. 1
Type: Research Article
ISSN: 2044-1398

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Article
Publication date: 2 May 2019

Mouna Aloui, Bassem Salhi and Anis Jarboui

The purpose of this paper is to study the impact of some corporate governance mechanisms on the market risk (stock price return and volatility, exchange rate) and on the exchange…

Abstract

Purpose

The purpose of this paper is to study the impact of some corporate governance mechanisms on the market risk (stock price return and volatility, exchange rate) and on the exchange rate and Treasury Bill during the financial crisis. In order to better clarify the firms’ resistance to financial crises, the effect of exchange rate, Treasury Bill and the market risk are also considered.

Design/methodology/approach

The study uses a sample data of the SBF 120 on a panel of 99 French firms over the period between 2006 and 2015 divided into three sub-periods: the first sub-period, which covers the period between December 31, 2006 and December 31, 2009, was characterized by the outbreak of the subprime crisis. The second sub-period considers the sovereign debt crisis in Europe between December 31, 2010 and December 31, 2012. The last sub-period includes the post-crisis period (December 31, 2013 to December 31, 2015). The GARCH and BEKK models are used to capture the effect of volatility and conditional heteroskedasticity of both corporate governance and market risk.

Findings

The paper found that during the financial crisis (first sub-period, the sovereign crisis period), the high shareholders’ protection had a positive and significant impact on the stock market returns. Furthermore, the shareholders’ protection, the Treasury Bill, the institutional investors, the board’s size, had a negative and significant effect on the stock returns volatility. During the post-crisis period, the high protection and the board’s size had a negative and significant effect on the volatility of the stock returns.

Research limitations/implications

This result implies that during the financial crisis, the high shareholders’ protection played a role in increases the stock market return and minimized the stock return volatility.

Practical implications

This study helps in improving the legal protection of investors and helps managers, shareholders and investors to evaluate their investments. This study also provides implications for policymakers and legal environment in order to evaluate the importance of the current corporate governance frameworks in place.

Originality/value

This result implies that the institutional investors, as the results suggest, should follow the shareholders’ protection in all the countries to make decisions about their investments since the high shareholders’ protection increases the firm’s stock returns and decreases the stock return volatility.

Details

International Journal of Managerial Finance, vol. 15 no. 5
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 20 July 2015

Mustafa Sayim and Hamid Rahman

The purpose of this paper is to examine the impact of Turkish individual investor sentiment on the Istanbul Stock Exchange (ISE) and to investigate whether investor sentiment…

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Abstract

Purpose

The purpose of this paper is to examine the impact of Turkish individual investor sentiment on the Istanbul Stock Exchange (ISE) and to investigate whether investor sentiment, stock return and volatility in Turkey are related.

Design/methodology/approach

This study used the monthly Turkish Consumer Confidence Index, published by the Turkish Statistical Institute, as a proxy for individual investor sentiments. First, Turkish market fundamentals were regressed on investor sentiments in order to capture the effects of macroeconomic risk factors on investor sentiments. Then, it used the impulse response functions (IRFs) generated from the vector autoregression (VAR) model to examine the effect of unanticipated movements in Turkish investor sentiment to both stock returns and volatility of the ISE.

Findings

The generalized IRFs from VAR shows that unexpected changes in rational and irrational investor sentiment have a significant positive impact on ISE returns. This suggests that a positive investor sentiment tends to increase ISE returns. The study also documents that unanticipated increase in the rational component of Turkish investor sentiment has a negative significant effect on ISE volatility. This might indicate that investors have optimistic expectations of the economy overall with respect to market fundamentals in Turkey. This optimism can result in creating positive expectations, reducing uncertainty, and reducing the volatility of stock market returns.

Research limitations/implications

The study was applied only for the period 2004-2010 on the ISE stock returns and volatility.

Practical implications

Regardless, investors should know the impact of irrational investor sentiments while establishing investment strategies. The results of this study may also help policy makers stabilize investor sentiments to reduce stock market volatility and uncertainty.

Originality/value

This paper adds to the limited understanding of investor sentiment impact on stock return and volatility in an emerging market context.

Details

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

Keywords

Article
Publication date: 31 May 2022

Seyed Reza Tabatabaei Poudeh and Chengbo Fu

The purpose of this paper is to contribute to the existing stock return predictability and idiosyncratic risk literature by examining the relationship between stock returns and…

Abstract

Purpose

The purpose of this paper is to contribute to the existing stock return predictability and idiosyncratic risk literature by examining the relationship between stock returns and components derived from the decomposition of stock returns variance at the portfolio and firm levels.

Design/methodology/approach

A theoretical model is used to decompose the variance of stock returns into two volatility and two covariance terms by using a conditional Fama-French three-factor model. This study adopts portfolio analysis and Fama-MacBeth cross-sectional regression to examine the relationship between components of idiosyncratic risk and expected stock returns.

Findings

The portfolio analysis results show that volatility terms are negatively related to expected stock returns, and alpha risk has the most significant relationship with stock returns. On the contrary, covariance terms have positive relationships with expected stock returns at the portfolio level. Furthermore, the results of the Fama-MacBeth cross-sectional regression show that only alpha risk can explain variations in stock returns at the firm level. Another finding is that when volatility and covariance terms are excluded from idiosyncratic volatility, the relation between idiosyncratic volatility and stock returns becomes weak at the portfolio level and disappears at the firm level.

Originality/value

This is the first study that examines the relations between all the components of idiosyncratic risk and expected stock returns in equal-weighted and value-weighted portfolios. This research also suggests covariance terms of idiosyncratic volatility as new predictors of stock returns at the portfolio level. Moreover, this paper contributes to the idiosyncratic risk literature by examining whether all the four additional components explain all the systematic patterns included in the unconditional idiosyncratic risk.

Details

The Journal of Risk Finance, vol. 23 no. 4
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 4 April 2019

Mouna Aloui and Anis Jarboui

The purpose of this study is to examine the impact of domestic ownership on the stock return volatility. The authors use a detailed panel data set of 89 French companies listed on…

Abstract

Purpose

The purpose of this study is to examine the impact of domestic ownership on the stock return volatility. The authors use a detailed panel data set of 89 French companies listed on the SBF 120 over the period 2006-2013. The empirical results show that the domestic institutional investors have low stock price volatility in the French stock market. This result implies the stabilizing factor of domestic investors in France stock markets, which can be considered as one of the potential favor of growing the exhibition of domestic stock markets to institutional investors. This study employs a variety of econometric models, including feedbacks, to test the robustness of our empirical results.

Design/methodology/approach

To explain the relation between stock return volatility and domestic institutional investors (DIIs), the authors used two complementary methods: two-step generalized method of moments analysis as well as panel vector autoregressive framework and two-stage least squares (2SLS) method.

Findings

The authors’ empirical results show that the proportion of DIIs with advanced local degrees stabilizes the stock price volatility. However, firm’s size and the turnover have a positive effect on the volatility of the stock returns. This result is consistent with the hypothesis that the firm’s size and the turnover will increase price volatility during a financial crisis as a result of the deterioration of the monitoring mechanism and the reduction of the investors’ confidence in firms.

Originality/value

This result also indicates that the variables (the firm’s size, total sales and debt ratio) are poor corporate governance and have a role in the increased the stock return volatility.

Details

International Journal of Law and Management, vol. 61 no. 2
Type: Research Article
ISSN: 1754-243X

Keywords

Article
Publication date: 12 March 2018

Mouna Aloui and Anis Jarboui

The purpose of this study is to investigate the relationship between the stock return volatility, the outside and the independent directors.

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Abstract

Purpose

The purpose of this study is to investigate the relationship between the stock return volatility, the outside and the independent directors.

Design/methodology/approach

The volatility, as the dependent variable in the model, is measured by the standard deviation of annual stock returns. Concerning the independent variable is as follows: The chief executive officer (CEO) is a dummy variable denoting whether or not the chairman of the board holds the position of CEO. The INDD, which represents the independent directors, is measured according to whether the firm appoints independent directors, or by the ratio of independent directors. The FD, which represents the outside directors, is measured according to whether the firm appoints outside directors, or by the ratio of outside directors. In addition, the authors also add the following five control variables to the regression model: the certified public accountant refers to the auditor-related variables including the audit opinion and whether the firm has previously switched accounting firms. The performance (PER) represents the firm performance in terms of the relative return on assets (ROA). The turnover (TURN) is measured by the natural log of the total liabilities. The SIZE is measured by the natural log of the market value of equity, and the leverage ratio (LEV) is the firm’s debt ratio measured by the ratio of total. The TURN is measured by the natural log of the total liabilities. The SIZE is measured by the natural log of the market value of equity and the LEV is the firm’s debt ratio measured by the ratio of total debt to total assets. The sample comprises 89 firms listed on the SBF 120 index over 2006-2012.

Findings

Results reveal that the outside directors have a positive and significant effect on the stock return volatility. Moreover, the firm’s size and ROA have a negative effect on the stock return volatility, which is clearly evidenced in all the regressions. On the other hand, the CEO, audit size and debt ratio have statically significant and positive effects on the stock return volatility.

Originality/value

This study indicates the importance of corporate governance and helps investors and financial economists understand the behavior of the stock prices during a financial crisis. Although the existing studies refer to the influence of corporate governance on the stock prices during a crisis, none of these has ever discussed whether better corporate governance can help reduce the stock price volatility in such a situation.

Details

International Journal of Law and Management, vol. 60 no. 2
Type: Research Article
ISSN: 1754-243X

Keywords

Book part
Publication date: 21 November 2014

Chi Wan and Zhijie Xiao

This paper analyzes the roles of idiosyncratic risk and firm-level conditional skewness in determining cross-sectional returns. It is shown that the traditional EGARCH estimates…

Abstract

This paper analyzes the roles of idiosyncratic risk and firm-level conditional skewness in determining cross-sectional returns. It is shown that the traditional EGARCH estimates of conditional idiosyncratic volatility may bring significant finite sample estimation bias in the presence of non-Gaussianity. We propose a new estimator that has more robust sampling performance than the EGARCH MLE in the presence of heavy-tail or skewed innovations. Our cross-sectional portfolio analysis demonstrates that the idiosyncratic volatility puzzle documented by Ang, Hodrick, Xiang, and Zhang (2006) exists intertemporally. We conduct further analysis to solve the puzzle. We show that two factors idiosyncratic variance and individual conditional skewness play important roles in determining cross-sectional returns. A new concept, the “expected windfall,” is introduced as an alternate measure of conditional return skewness. After controlling for these two additional factors, we solve the major piece of this puzzle: Our cross-sectional regression tests identify a positive relationship between conditional idiosyncratic volatility and expected returns for over 99% of the total market capitalization of the NYSE, NASDAQ, and AMEX stock exchanges.

Details

Essays in Honor of Peter C. B. Phillips
Type: Book
ISBN: 978-1-78441-183-1

Keywords

1 – 10 of over 11000