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Article
Publication date: 14 May 2018

Abdelmonem Oueslati and Yacine Hammami

This paper aims to investigate the performance of various return forecasting variables and methods in Saudi Arabia and Malaysia. The authors document that market excess returns in…

Abstract

Purpose

This paper aims to investigate the performance of various return forecasting variables and methods in Saudi Arabia and Malaysia. The authors document that market excess returns in Saudi Arabia are predicted by changes in oil prices, the dividend yield and inflation, whereas the equity premium in Malaysia is predicted only by the US market excess returns. In both countries, the authors find that the diffusion index is the best forecasting method and stock return predictability is stronger in expansions than in recessions. To interpret the findings, the authors perform two tests. The empirical results suggest irrational pricing in Malaysia and rationally time-varying expected returns in Saudi Arabia.

Design/methodology/approach

The authors apply the state-of-the-art in-sample and out-of-sample forecasting techniques to predict stock returns in Saudi Arabia and Malaysia.

Findings

The Saudi equity premium is predicted by oil prices, dividend yield and inflation. The Malaysian equity premium is predicted by the US market excess returns. In both countries, the authors find that the diffusion index is the best forecasting method. In both countries, predictability is stronger in expansions than in recessions. The tests suggest irrational pricing in Malaysia and rationality in Saudi Arabia.

Practical implications

The empirical results have some practical implications. The fact that stock returns are predictable in Saudi Arabia makes it possible for policymakers to better evaluate future business conditions, and thus to take appropriate decisions regarding economic and monetary policy. In Malaysia, the results of this study have interesting implications for portfolio management. The fact that the Malaysian market seems to be inefficient suggests the presence of strong opportunities for sophisticated investors, such as hedge and mutual funds.

Originality/value

First, there are no papers that have studied the return predictability in Saudi Arabia in spite of its importance as an emerging market. Second, the methods that combine all predictive variables such as the diffusion index or the kitchen sink methods have not been implemented in emerging markets. Third, this paper is the first study to deal with time-varying short-horizon predictability in emerging countries.

Details

Review of Accounting and Finance, vol. 17 no. 2
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 16 January 2020

Muhammad Naeem Shahid, Malik Jehanzeb, Aamir Abbas, Ahsan Zubair and Mahmood A. Hussain Akbar

The purpose of this paper is to boost the existing literature on adaptive market hypothesis (AMH) as it first time links predictability of gold, silver and metal returns with AMH…

Abstract

Purpose

The purpose of this paper is to boost the existing literature on adaptive market hypothesis (AMH) as it first time links predictability of gold, silver and metal returns with AMH which permits the predictability of returns to vary over time.

Design/methodology/approach

To know whether commodity (gold, silver and metal) market is efficient or not, the commodity returns are observed by using appropriate linear time series tests (variance ratio test, runs test and auto-correlation test). To capture the varying efficiency of three commodities, the study employs subsamples of five years and all sub-samples are exposed to linear econometric tests to reveal how market efficiency (independency of returns) has behaved over time.

Findings

It is found that the commodity market (gold, silver and metal) is adaptive because fluctuation is observed in the market efficiency. Returns of all three commodities go under the periods of efficiency and inefficiency. Thus, AMH is the better description of behavior of commodity markets than traditional efficient market hypothesis.

Research limitations/implications

Choice of sub-sample in the study is the first limitation as the authors employ a sub-sample comprising five years. Second, commission, fee and taxes (transection cost) are ignored in the study. Finally, the results are reported on the basis of linear econometric tests. In future, longer time period sub-sample analysis is suggested by the study to explore the varying nature of the commodities. Moreover, rolling window analysis may be a more appropriate method to elucidate the idea of AMH in further research. It is further suggested that the method used in the study could be helpful and adapted to examine other commodities (metal and agriculture), bonds and equity markets around the world.

Practical implications

The study will provide a better investment model which can enable the investors to seek more returns in future. Moreover, this research can be extended to explore multiple issues like adaptive behavior of returns from crypto currencies, bonds, stocks and real estate investment trusts.

Social implications

As all the linear tests reveal that almost all the commodities show inefficient behavior in full sample period, it is clear that past prices widely would be helpful to predict the future prices at NYSE; furthermore, investors can use the time-varying information to reduce the risk of investment at NYSE. The study is helpful for individual investors as well as portfolio managers and brokers to forecast the prices on the bases of findings.

Originality/value

The paper identifies the need to study why behavior of commodity returns varies over time.

Details

International Journal of Emerging Markets, vol. 15 no. 5
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 26 June 2020

Abhinava Tripathi, Vipul Vipul and Alok Dixit

The purpose of this study is to investigate the adaptive market hypothesis (AMH) for 21 major global market indices for the period 1998–2018. These market indices cover the 16…

Abstract

Purpose

The purpose of this study is to investigate the adaptive market hypothesis (AMH) for 21 major global market indices for the period 1998–2018. These market indices cover the 16 largest global financial markets.

Design/methodology/approach

Quantile-regression methodology is employed to examine the market efficiency of a large number of financial markets from America, Europe and the Asia–Pacific region.

Findings

The results show that the returns in higher quantiles are negatively autocorrelated, and those in lower quantiles are positively autocorrelated. This evidence is stronger for the tails of return distribution. The positive autocorrelation (momentum effect) suggests market underreaction, and the negative autocorrelation (reversal effect) suggests overreaction. Overall, market efficiency appears to be time-varying and conditioned to the state of the market.

Originality/value

This study offers considerable evidence in favor of the AMH, for a large number of financial markets. These markets are substantially different from each other in terms of geography, nature of operation and size of the economy. The results from this study would be helpful to the academics, regulators and practitioners interested in financial markets.

Details

Managerial Finance, vol. 46 no. 11
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 15 August 2016

Raj S. Dhankar and Devesh Shankar

The purpose of this paper is to discuss the relevance and evolution of adaptive markets hypothesis (AMH) that has gained traction in the recent years, as it provides a dynamic…

Abstract

Purpose

The purpose of this paper is to discuss the relevance and evolution of adaptive markets hypothesis (AMH) that has gained traction in the recent years, as it provides a dynamic perspective to the concept of informational efficiency.

Design/methodology/approach

This paper discusses several issues related to the concept of informationally efficient markets that have indicated efficient market hypothesis to be an incomplete portrayal of stock market behavior.

Findings

The authors find that a strict and perpetual adherence to informational efficiency is highly unlikely, and AMH provides a much more plausible description of the behavior of stock markets.

Originality/value

The authors provide a description of studies that examine the testable implications of AMH.

Article
Publication date: 17 February 2012

Richard J. Buttimer, Jun Chen and I‐Hsuan Ethan Chiang

The purpose of this paper is to study performance and market timing ability of equity real estate investment trusts (REITs).

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Abstract

Purpose

The purpose of this paper is to study performance and market timing ability of equity real estate investment trusts (REITs).

Design/methodology/approach

The authors use classical regression‐based framework and their multi‐index, multifactor, and conditional extensions to jointly detect asset selectivity and market timing ability of equity REITs and their subcategories. These results are then validated by a nonparametric test.

Findings

It is found that equity REITs in aggregate have some housing market timing ability. Various equity REIT subcategories perform differently: office REITs can discover underpriced properties, while retail, industrial, and office REITs have poor timing ability. Nonparametric tests confirm that equity REITs do not have ability to predict real estate market movements.

Originality/value

Research in REIT performance evaluation is still limited to the asset selectivity aspect. This paper intends to fill this gap by providing empirical evidence of market timing ability of equity REITs using an array of parametric and nonparametric methods.

Details

Managerial Finance, vol. 38 no. 3
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 13 September 2021

Mahtab Athari, Atsuyuki Naka and Abdullah Noman

This paper aims to achieve two main objectives. The first is to introduce a suitable adjustment to the conventional dividend-price ratio, which would address econometric concerns…

Abstract

Purpose

This paper aims to achieve two main objectives. The first is to introduce a suitable adjustment to the conventional dividend-price ratio, which would address econometric concerns and improve the predictability of the equity premium. The second is to compare the predictive performance of the newly introduced adjusted dividend-price ratio with the conventional dividend-price ratio.

Design/methodology/approach

The authors hypothesize that the adjusted dividend-price ratio will have better predictive power and forecasting quality for equity premium compared to the conventional dividend-price ratio. To test the hypothesis, the authors predict equity premium with both variables on a sample of 11 developed and emerging market indexes over a period spanning June 1995 to March 2017. To accommodate time variation in parameter values or structural breaks in the data, the authors conducted a fixed window rolling regressions using both variables. A variety of forecast techniques including magnitude and sign accuracy measures are applied to compare the performance of forecasts.

Findings

The adjusted dividend-price ratio is shown to be stationary and has both lower persistence and variability compared with the conventional dividend-price ratio. The authors find that the adjusted dividend-price ratio provides superior out-of-sample (OOS) performance compared to the conventional dividend-price ratio, for both size and sign accuracy, in forecasting equity premium for the majority of the countries in the sample.

Research limitations/implications

This paper introduces an easy-to-follow modification in the conventional dividend-price ratio that can be replicated by researchers and practitioners alike. However, the study has a limitation in that it does not capture the impact of dividend-paying firms within each index on the predictive ability of the adjusted dividend-price ratio.

Practical implications

The knowledge of equity premium predictability is important in implementing market-timing strategies and could be beneficial for portfolio and risk management. The newly introduced variable is easy to construct using widely available data without the need for complex econometric estimation. Investors can use this variable to predict equity premiums in international markets, both developed and emerging. The findings of this paper will be relevant to financial analysts, portfolio managers, investors and researchers in international finance. For example, by using the adjusted dividend-price ratio, investors would see up to 0.5% improvement in their OOS monthly forecasts of the equity premium.

Originality/value

To the best of the authors’ knowledge, this is the first paper that proposes adjustment in the conventional dividend-price ratio based on the past observations of the most recent quarter. In this way, the paper offers fresh insight that dividend-price ratio is still useful to predict equity premium albeit, after some adjustments and modifications. The findings of the paper would result in renewed interest in using the dividend-price ratio as a predictor of the equity premium.

Details

Review of Accounting and Finance, vol. 20 no. 3/4
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 19 March 2020

Venkata Narasimha Chary Mushinada

The main aim of this paper is to empirically test at market level, the investors' differential reaction to information, contribution of their confidence level and adaptive…

Abstract

Purpose

The main aim of this paper is to empirically test at market level, the investors' differential reaction to information, contribution of their confidence level and adaptive behaviour to excessive market volatility in Indian stock market.

Design/methodology/approach

The Bivariate Vector Autoregression and Impulse Response Analysis are used to study whether investors over/under-react to private and public information. EGARCH models are used to study the contribution of investors' over/under-confidence and adaptive behaviour to excessive market volatility.

Findings

The investors over-react to private information and under-react to public information during pre-crash period, become overconfident and contribute to excessive volatility. They under-react to both private and public information during after-crash period, become under-confident and also conform to adaptive market hypothesis (AMH).

Research limitations/implications

The empirical results of the study can help investors to minimize the negative impact of over/under-confidence on their expected utility.

Practical implications

The investors shall perform a post-analysis of investment, become aware of their past behavioural mistakes and start adapting to changing market conditions. This shall move the markets towards a new equilibrium in long run thus conforming AMH. However, the investors sometimes display an apparently irrational behaviour during this process.

Originality/value

To the best of the author's knowledge, this is the first study at market level data examining investors' over/under-reaction, over/under-confidence and adaptive behaviour in the context of stock market crash.

Details

International Journal of Emerging Markets, vol. 15 no. 6
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 22 October 2019

Julien Chevallier and Dinh-Tri Vo

In asset management, what if clients want to purchase protection from risk factors, under the form of variance risk premia. This paper aims to address this topic by developing a…

Abstract

Purpose

In asset management, what if clients want to purchase protection from risk factors, under the form of variance risk premia. This paper aims to address this topic by developing a portfolio optimization framework based on the criterion of the minimum variance risk premium (VRP) for any investor selecting stocks with an expected target return while minimizing the risk aversion associated to the portfolio according to “good” and “bad” times.

Design/methodology/approach

To accomplish this portfolio selection problem, the authors compute variance risk-premium as the difference from high-frequencies' realized volatility and options' implied volatility stemming from 19 stock markets, estimate a 2-state Markov-switching model on the variance risk-premia and optimize variance risk-premia portfolios across non-overlapping regions. The period goes from March 16, 2011, to March 28, 2018.

Findings

The authors find that optimized portfolios based on variance-covariance matrices stemming from VRP do not consistently outperform the benchmark based on daily returns. Several robustness checks are investigated by minimizing historical, realized or implicit variances, with/without regime switching. In a boundary case, accounting for the realized variance risk factor in portfolio decisions can be seen as a promising alternative from a portfolio performance perspective.

Practical implications

As a new management “style”, the realized volatility approach can, therefore, bring incremental value to construct the conditional covariance matrix estimates.

Originality/value

The authors assess the portfolio performance determined by the variance-covariance matrices that are derived by four models: “naive” (Markowitz returns benchmark), non-switching VRP, maximum likelihood regime-switching VRP and Bayesian regime switching VRP. The authors examine the best return-risk combination through the calculation of the Sharpe ratio. They also assess another different portfolio strategy: the risk parity approach.

Details

The Journal of Risk Finance, vol. 20 no. 5
Type: Research Article
ISSN: 1526-5943

Keywords

Open Access
Article
Publication date: 15 August 2022

Ismail Olaleke Fasanya

In this paper, the author examines the role of uncertainty due to pandemic on the predictability of sectoral stock returns in South Africa. This is motivated by the ongoing global…

Abstract

Purpose

In this paper, the author examines the role of uncertainty due to pandemic on the predictability of sectoral stock returns in South Africa. This is motivated by the ongoing global pandemic, COVID-19, in predicting sector stock returns.

Design/methodology/approach

The study considers estimation of dynamic panel data with dynamic common correlated effects estimator and two pair-wise forecast measures, namely Campbell and Thompson (2008) and Clark and West (2007) tests in dealing with the nested predictive models.

Findings

The results show that pandemic uncertainty has a negative and statistically significant effect on the different sector returns, implying that sector stock returns decline as the pandemic outbreak becomes more pronounced. While the single predictor model consistently outperforms the historical average model both for in-sample and out-of-sample, controlling for other macroeconomic variables effect improves the forecast accuracy of infectious diseases uncertainty. These results are consistently robust to both the in-sample and out-of-sample forecast periods, outliers and heterogeneity. These results have implications for portfolio diversification strategies, which we set aside for future research.

Originality/value

The empirical literature is satiated with studies on how news can predict economic and financial variables, however, the role of uncertainty due to infectious diseases in the stock return predictability especially at the sectoral level is less understudied, this is the main contribution of the study.

Details

African Journal of Economic and Management Studies, vol. 14 no. 1
Type: Research Article
ISSN: 2040-0705

Keywords

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

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