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Article
Publication date: 17 July 2019

Thomas C. Chiang

The purpose of this paper is to investigate the risk and economic policy uncertainty (EPU) shocks on China’s equity markets while controlling for changes in sentiments and…

Abstract

Purpose

The purpose of this paper is to investigate the risk and economic policy uncertainty (EPU) shocks on China’s equity markets while controlling for changes in sentiments and liquidity.

Design/methodology/approach

The GED-TARCH(1,1)-M procedure is used in estimations to deal with the heteroscedasticity problem.

Findings

Evidence shows that stock returns are positively correlated with predictable volatility and lagged downside risk. This study indicates that the stock returns are negatively correlated with both local and global uncertainty innovations. The test results are robust across different measures of stock returns and model specifications. The global EPU innovations have more profound impact on stock returns than that of Chinese EPU.

Research limitations/implications

The findings are based on the data in the China’s stock market, other global markets may be considered in the future research.

Practical implications

Evidence indicates that a rise in EPU produces a negative effect on stock returns at the time news hits a market; however, investors will be rewarded by a premium as prices rebound in the subsequent period for compensating the investment decision made at a high uncertainty period.

Originality/value

The excess stock returns are negatively related to the EPU innovations, regardless of whether EPU originates from a domestic source or external sources.

Details

China Finance Review International, vol. 9 no. 4
Type: Research Article
ISSN: 2044-1398

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Book part
Publication date: 21 August 2019

Thomas C. Chiang

This chapter tests the market risk and economic policy uncertainty (EPU) of five Asian stock market returns and finds positive and significant intertemporal relations…

Abstract

This chapter tests the market risk and economic policy uncertainty (EPU) of five Asian stock market returns and finds positive and significant intertemporal relations between excess stock returns and conditional volatility/downside risk. The results support positive risk-return relations across five Asian markets after controlling for the lagged dividend yield and the change in EPU ( Δ EPU). The evidence strongly indicates that excess stock returns are negatively correlated with the Δ EPUs. This finding holds true not only for the domestic market but also for external sources. The negative effect of Δ EPU is more profound from the US and global markets as compared with those from the Europe, Japanese, and domestic markets and suggests that a pathway to forming an optimal strategy for portfolio risk management depends on developing an effective hedging strategy against the impact of Δ EPUs from US/global markets.

Details

Advances in Pacific Basin Business, Economics and Finance
Type: Book
ISBN: 978-1-78973-285-6

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Article
Publication date: 10 December 2020

Thomas C. Chiang

Recent empirical studies by Antonakakis, Chatziantoniou and Filis (2013), Brogaard and Detzel (2015) and Christou et al. (2017) present evidence, which supports the notion…

Abstract

Purpose

Recent empirical studies by Antonakakis, Chatziantoniou and Filis (2013), Brogaard and Detzel (2015) and Christou et al. (2017) present evidence, which supports the notion that a rise in economic policy uncertainty (EPU) will lead to a decline in stock prices. The purpose of this paper is to examine US categorical policy uncertainty on stock returns while controlling for implied volatility and downside risk. In addition to the domestic impacts of policy uncertainty, this paper also presents evidence that changes in US policy uncertainty promptly propagates to the global stock markets.

Design/methodology/approach

This study uses a GED-GARCH (1, 1) model to estimate changes of uncertainties in US monetary, fiscal and trade policies on stock returns for the sample period of January 1990–December 2018. Robustness test is conducted by using different set of data and modeling techniques.

Findings

This paper contributes to the literature in several aspects. First, testing of US aggregate data while controlling for downside risk and implied volatility, consistently, shows that responses of stock prices to US policy uncertainty changes, not only display a negative effect in the current period but also have at least a one-month time-lag. The evidence supports the uncertainty premium hypothesis. Second, extending the test to global data reveals that US policy uncertainty changes have a negative impact on markets in Europe, China and Japan. Third, testing the data in sectoral stock markets mainly displays statistically significant results with a negative sign. Fourth, the evidence consistently shows that changes in policy uncertainty present an inverse relation to the stock returns, regardless of whether uncertainty is moving upward or downward.

Research limitations/implications

The current research is limited to the markets in the USA, eurozone, China and Japan. This study can be extended to additional countries, such as emerging markets.

Practical implications

This paper provides a model that uses categorical policy uncertainty approach to explain stock price changes. The parametric estimates provide insightful information in advising investors for making portfolio decision.

Social implications

The estimated coefficients of changes in monetary policy uncertainty, fiscal policy uncertainty and trade policy uncertainty are informative in assisting policymakers to formulate effective financial policies.

Originality/value

This study extends the existing risk premium model in several directions. First, it separates the financial risk factors from the EPU innovations; second, instead of using EPU, this study investigates the effects from monetary policy, fiscal policy and trade policy uncertainties; third, in additional to an examination of the effects of US categorical policy uncertainties on its own markets, this study also investigates the spillover effects to global major markets; fourth, besides the aggregate stock markets, this study estimates the effects of US policy uncertainty innovations on the sectoral stock returns.

Details

The Journal of Risk Finance, vol. 21 no. 5
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 17 March 2021

Thomas C. Chiang

This paper investigates the impact of a change in economic policy uncertainty

Abstract

Purpose

This paper investigates the impact of a change in economic policy uncertainty (ΔEPUt) and the absolute value of a change in geopolitical risk (|ΔGPRt|) on the returns of stocks, bonds and gold in the Chinese market.

Design/methodology/approach

The paper uses Engle's (2009) dynamic conditional correlation (DCC) model and Chiang's (1988) rolling correlation model to generate correlations of asset returns over time and analyzes their responses to (ΔEPUt) and  |ΔGPRt|.

Findings

Evidence shows that stock-bond return correlations are negatively correlated to ΔEPUt, whereas stock-gold return correlations are positively related to the |ΔGPRt|, but negatively correlated with ΔEPUt. This study finds evidence that stock returns are adversely related to the risk/uncertainty measured by downside risk,  ΔEPUt and  |ΔGPRt|, whereas the bond return is positively related to a rise in ΔEPUt; the gold return is positively correlated with a heightened |ΔGPRt|.

Research limitations/implications

The findings are based entirely on the data for China's asset markets; further research may expand this analysis to other emerging markets, depending on the availability of GPR indices.

Practical implications

Evidence suggests that the performance of the Chinese market differs from advanced markets. This study shows that gold is a safe haven and can be viewed as an asset to hedge against policy uncertainty and geopolitical risk in Chinese financial markets.

Social implications

This study identify the special role for the gold prices in response to the economic policy uncertainty and the geopolitical risk. Evidence shows that stock and bond return correlation is negatively related to the ΔEPU and support the flight-to-quality hypothesis. However, the stock-gold return correlation is positively related to |ΔGPR|, resulting from the income or wealth effect.

Originality/value

The presence of a dynamic correlations between stock-bond and stock-gold relations in response to  ΔEPUt and  |ΔGPRt| has not previously been tested in the literature. Moreover, this study finds evidence that bond-gold correlations are negatively correlated to both ΔEPUt and  |ΔGPRt|.

Details

China Finance Review International, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2044-1398

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Book part
Publication date: 28 September 2020

Thomas C. Chiang

This chapter examines changes in US monetary policy uncertainty (ΔMPU) and fiscal policy uncertainty (ΔFPU) on stock returns while controlling for downside risk, lagged…

Abstract

This chapter examines changes in US monetary policy uncertainty (ΔMPU) and fiscal policy uncertainty (ΔFPU) on stock returns while controlling for downside risk, lagged dividend yield, and time series patterns. Testing G7 markets consistently shows that both ΔMPU and ΔFPU have significant negative impacts on stock returns. Evidence shows that any downside risk, ΔMPU or ΔFPU in US market will soon be transmitted to G6 industrial markets and the impacts are extended to two months. These risk and uncertainty premiums should be priced in the stocks of the major industrial markets.

Details

Emerging Market Finance: New Challenges and Opportunities
Type: Book
ISBN: 978-1-83982-058-8

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Book part
Publication date: 28 September 2020

Dazhi Zheng, Thomas C. Chiang and Edward Nelling

This chapter examines a multifactor model for stock returns in nine Asian markets (Japan, China, South Korea, Hong Kong, Taiwan, Singapore, Indonesia, Malaysia, and…

Abstract

This chapter examines a multifactor model for stock returns in nine Asian markets (Japan, China, South Korea, Hong Kong, Taiwan, Singapore, Indonesia, Malaysia, and Thailand). The authors develop a model using the market risk premium, size, book-to-market, profitability, investment, momentum, price-to-earnings ratio, and dividend yield factors for each market. The empirical results suggest that this eight-factor model can better explain the variations of stock returns than the original Fama–French three-factor model. Factor-based models using local data outperform those using data from US markets. In addition, the evidence suggests that the eight-factor model can better explain stock returns when the market is under stress.

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Book part
Publication date: 15 September 2017

Thomas C. Chiang and Xiaoyu Chen

This study presents evidence on the relations of stock market performance and industrial production growth for a group of 20 industrial markets. Evidence supports the…

Abstract

This study presents evidence on the relations of stock market performance and industrial production growth for a group of 20 industrial markets. Evidence supports the notion that an increase in stock returns or a rise in the market value of stocks contributes positively to industrial production growth. Evidence suggests that stock market risk has a significantly negative effect on production growth for advanced markets. The Granger test finds a unidirectional causality running from stock returns or stock volatility to industrial growth. However, the United States shows a bilateral causality between stock volatility and industrial production growth.

Details

Advances in Pacific Basin Business Economics and Finance
Type: Book
ISBN: 978-1-78743-409-7

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Book part
Publication date: 15 September 2017

Abstract

Details

Advances in Pacific Basin Business Economics and Finance
Type: Book
ISBN: 978-1-78743-409-7

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Book part
Publication date: 28 September 2020

Abstract

Details

Emerging Market Finance: New Challenges and Opportunities
Type: Book
ISBN: 978-1-83982-058-8

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Article
Publication date: 13 April 2012

Jian Shi, Thomas C. Chiang and Xiaoli Liang

The purpose of this paper is to examine positive‐feedback (PF) behavior and its relationship to momentum profitability and information uncertainty.

Abstract

Purpose

The purpose of this paper is to examine positive‐feedback (PF) behavior and its relationship to momentum profitability and information uncertainty.

Design/methodology/approach

Using the behavioral function of rational traders and feedback traders, the authors jointly estimate the mean and conditional variance equations of the GARCH model to derive the positive‐ and non‐positive‐feedback coefficients, respectively. In each six‐month period, the number of PF stocks were then calculated as a fraction of the total number of stocks in that period. The authors then investigate whether day‐to‐day PF trading activities vary across different momentum portfolios by calculating the percentage of PF stocks in each decile portfolio.

Findings

This study finds that about 9.4 per cent of stocks exhibit PF trading activities and that these activities have a more profound effect on stocks with a higher level of information uncertainty. The finding shows that the percentage of stocks with PF trading is higher in the portfolios of extreme losers than in the portfolios of extreme winners. The evidence suggests that stocks exhibiting PF trading activities subsequently experience significantly higher momentum returns.

Originality/value

This paper presents evidence to test whether a relationship exists between short‐term PF trading and future momentum profitability. Since PF traders tend to chase price movements, PF trading is more likely to cause stock prices to further diverge from the firm's fundamentals and, therefore, give rise to stock return momentum. This phenomenon appears to be more profound in this study when there is a higher level of information uncertainty.

Details

Managerial Finance, vol. 38 no. 5
Type: Research Article
ISSN: 0307-4358

Keywords

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