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1 – 10 of 10Athanasios Fassas, Stephanos Papadamou and Dionisis Philippas
The purpose of this paper is to examine the spillover effects in international financial markets related to investors’ risk aversion as proxied by the variance premium, and how…
Abstract
Purpose
The purpose of this paper is to examine the spillover effects in international financial markets related to investors’ risk aversion as proxied by the variance premium, and how these relationships were affected by the quantitative easing (QE) announcements by the Federal Reserve.
Design/methodology/approach
The empirical analysis employs a multivariate exponential generalized autoregressive conditionally heteroskedastic (VAR-EGARCH) specification, which includes the USA, the UK, Germany, France and Switzerland.
Findings
Two main findings are raised from the empirical analysis. First, the VAR-EGARCH model identifies statistically significant spillover effects identifying the USA as the leading source driving investors’ risk aversion. Second, unconventional monetary easing announcement by the Fed has had significant effects on investors’ risk perspectives.
Practical implications
Accounting for the dynamic volatility of variance premium inter-dependencies, the authors show that the correlations among variance premia increase during the QE announcements by the Federal Reserve, suggesting a herding behavior that may potentially lead to stock price bubbles and undermine financial stability.
Originality/value
This is an empirical attempt that investigates the unexplored effects of unconventional monetary policy decisions in relation with investors’ attitudes toward risk.
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Over a short interval of time (i.e. 2011-2014), Egypt has experienced tectonic political shifts, including the toppling of a long-entrenched dictator, two presidential elections…
Abstract
Purpose
Over a short interval of time (i.e. 2011-2014), Egypt has experienced tectonic political shifts, including the toppling of a long-entrenched dictator, two presidential elections, and a military coup. The purpose of this paper is to provide an analysis of the impact of such events on the country’s equity market behaviour, both in terms of returns and volatility.
Design/methodology/approach
The data set is composed of daily stock index closing prices for the overall market and top eight most actively traded sectors. To assess the impact of the considered events on the market and sector returns, an event study approach is applied. On the other hand, a univariate VAR-EGARCH model is employed to explore whether, and to what extent, volatilities at the market and sector levels respond to such events.
Findings
The results suggest that political uncertainty has a profound impact on the risk-return profiles of almost all market sectors, with different degrees of intensity. By and large, the price and volatility effects are most pronounced in banks, financial services excluding banks and chemicals sectors, whilst food and beverages as well as construction and materials sectors are found to be the least responsive to these events. The 2013 military coup turns out to be the most pervasive event impinging on the market and sector-specific indices.
Practical implications
The results have a number of practical implications that could be of interest to many parties involved. More specifically, with political dysfunction overshadowing business and investment activities in Egypt, genuine democratic reforms, which entail proper regard for human rights and the rule of law, must have the highest priority of policymakers, in order to secure a positive investment climate and to foster investor confidence. Furthermore, in tandem with considering other relevant factors, multinational companies need to have a thorough assessment of Egypt’s future political course and to develop more robust contingency plans to effectively combat potential threats generated by political vicissitudes.
Originality/value
To the author’s best knowledge, this study is the first attempt to empirically examine the price and volatility effects of the recent presidential events in Egypt, thereby contributing to the relevant literature in this area.
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Melih Kutlu and Aykut Karakaya
This study aimed to investigate return and volatility spillover between the Borsa Istanbul (BIST) and the Moscow Stock Exchange (RTS).
Abstract
Purpose
This study aimed to investigate return and volatility spillover between the Borsa Istanbul (BIST) and the Moscow Stock Exchange (RTS).
Design/methodology/approach
This study used generalized autoregressive conditionally heteroscedasticity (GARCH) model for volatility and the Aggregate Shock (AS) model for return and volatility spillover. The data are divided into six sub-periods. Period events take place between Turkey and Russia.
Findings
BIST investors considered the return and volatility of the RTS, it is observed that Moscow Stock Exchange investors considered only the return of BIST at the full sample. It is only a return spillover from BIST to RTS and neither the return nor the volatility of the RTS is spillover to BIST in the pre-crisis period. No evidence of return and volatility spillover between the BIST and the RTS in the post-crisis period. The returns and volatility spillovers between Russia and Turkey are mutual feedback in the jet crisis period.
Practical implications
Economic developments between Turkey and Russia is growing rapidly in recent years. The return and volatility analysis between the stock exchanges of these two countries is important for investment decisions.
Originality/value
There are many studies in the literature about emerging markets. There are also Turkish and Russian stock exchanges in these studies. However, this study only examined return and volatility spillover analysis between the Turkish and Russian stock exchanges and prevents the results from being overlooked among other countries.
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This study aims to link the financial cooperation in the Nordic region and the interdependence between the stock markets in this area. The main emphasis is placed on the evolution…
Abstract
Purpose
This study aims to link the financial cooperation in the Nordic region and the interdependence between the stock markets in this area. The main emphasis is placed on the evolution of this interdependence as the financial integration was proceeding.
Design/methodology/approach
Johansen’s cointegration technique and the exponential generalized autoregressive conditionally heteroskedastic model are applied to test the long-run and short-run interdependences, respectively, among Nordic stock markets. In particular, the recursive estimation approach is used to reveal the evolution of the interdependence between those markets.
Findings
The existence of two cointegrations over the sample period indicates that the markets depend on each other to some extent. The recursive estimation of Johansen’s model further reveals that the interdependence had been greatly improving until late 2008. The interdependence between those markets is also confirmed convincingly by the short-term dynamics, noting that the spillover effects between most pairs of stock volatilities are witnessed in the empirical results.
Practical implications
The findings show the dynamics of the long-run correlations between the Nordic stock markets, which imply the intrinsic response to the process of financial market reforms, the 2008 global financial crisis and the period after the crisis. The evidenced information about determinants of the interdependence between Nordic stock markets is sending strong signals to investors to enhance their investment strategies.
Originality/value
Most of the existing studies have been restricted to the static long-run and/or short-run interdependence among those markets. However, this study contributes to the literature by investigating the dynamics of interdependence among the Nordic stock markets over time; moreover, the evolution of the market interdependence is sketched closely to the process of the regional financial market reforms.
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Dilip Kumar and Srinivasan Maheswaran
This paper aims to propose a framework based on the unbiased extreme value volatility estimator (namely, the AddRS estimator) to compute and predict the long position and the…
Abstract
Purpose
This paper aims to propose a framework based on the unbiased extreme value volatility estimator (namely, the AddRS estimator) to compute and predict the long position and the short position value-at-risk (VaR) and stressed expected shortfall (ES). The precise prediction of VaR and ES measures has important implications toward financial institutions, fund managers, portfolio managers, regulators and business practitioners.
Design/methodology/approach
The proposed framework is based on the Giot and Laurent (2004) approach and incorporates characteristics like long memory, fat tails and skewness. The authors evaluate its VaR and ES forecasting performance using various backtesting approaches for both long and short positions on four global indices (S&P 500, CAC 40, Indice BOVESPA [IBOVESPA] and S&P CNX Nifty) and compare the results with that of various alternative models.
Findings
The findings indicate that the proposed framework outperforms the alternative models in predicting the long and the short position VaR and stressed ES. The findings also indicate that the VaR forecasts based on the proposed framework provide the least total loss for various long and short position VaR, and this supports the superior properties of the proposed framework in forecasting VaR more accurately.
Originality/value
The study contributes by providing a framework to predict more accurate VaR and stressed ES measures based on the unbiased extreme value volatility estimator.
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Abstract
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The purpose of this paper is to examine the macroeconomic determinants of stock market development in South Africa during the period 1975–2015. Specifically, it examines the…
Abstract
Purpose
The purpose of this paper is to examine the macroeconomic determinants of stock market development in South Africa during the period 1975–2015. Specifically, it examines the impact of banking sector development, economic growth, inflation rate, real interest rate and trade openness on the development of the South African stock market.
Design/methodology/approach
The author employs autoregressive distributed lag bounds testing procedure that allows the author to empirically investigate both the short- and long-run relationships between the stock market development and its determinants in the context of South Africa. In addition, the author also conducts a sensitivity analysis by accounting for the presence of structural breaks in the underlying series to check for the robustness of the estimation.
Findings
This paper confirms the findings by other studies that banking sector development and economic growth promote stock market development, while inflation rate and real interest rate inhibit stock market development. In addition, this paper finds an interesting result in the fact that trade openness has a negative impact on stock market development, which is different from the findings of many other studies.
Originality/value
Currently, while the theoretical and empirical literature presents diverse views on the relationship between each determinant and stock market development, no study has focussed on the South African stock market. Given the significant role that the South African stock market plays in Africa as measured by its market capitalisation and market capitalisation ratio, there is a need for a better understanding of the macroeconomic factors influencing its development.
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Refers to previous research on the yields of default‐free securities and uses the Nelson‐Siegel model for estimating yield curve as a basis for developing a model which decomposes…
Abstract
Refers to previous research on the yields of default‐free securities and uses the Nelson‐Siegel model for estimating yield curve as a basis for developing a model which decomposes the risk premium into long‐term risk, two factors influencing the rate of decay (curvature) and a feed back factor. Applies this to 1984‐1993 data for treasury bills to test for predictive validity and shows that the feedback factor (prediction error of the most recent period) improves this by around 10 per cent. Goes on to apply a multivariate exponential GARCH process to the components to produce a prediction model for the term structure of interest rates. Promises further research to refine this estimation and compare it with the expectations hypothesis as a basis for strategy.
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Bakri Abdul Karim, Mohamad Jais and Samsul Ariffin Abdul Karim
The purpose of this paper is to examine the effects of the current global crisis on the integration and co‐movements of selected stock index futures markets.
Abstract
Purpose
The purpose of this paper is to examine the effects of the current global crisis on the integration and co‐movements of selected stock index futures markets.
Design/methodology/approach
Time series techniques of cointegration and weekly data covering the period from January 2001 to December 2009 were used in this study. The period of analysis was divided into two periods, namely the pre‐crisis period (January 2001‐July 2007) and during crisis period (August 2007‐December 2009).
Findings
No evidence was found of cointegration among the stock index futures markets in both periods. Accordingly, the 2007 subprime crisis does not seem to affect the long‐run co‐movements among the stock index futures markets.
Practical implications
The stock index futures markets provide opportunity for the potential benefits from international portfolio diversification and hedging strategies even after the subprime crisis. The stock index futures significantly extended the variety of investment and risk management strategies available to investors.
Originality/value
Examining the effects of the US subprime crisis on the stock index futures markets integration, to the best of the authors' knowledge, goes clearly beyond the existing literature on the subject matter.
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Pat Obi and Shomir Sil
This study aims to evaluate the market risk exposure of three international equity portfolios using value‐at‐risk (VaR). This risk metric calculates the worst case loss for a…
Abstract
Purpose
This study aims to evaluate the market risk exposure of three international equity portfolios using value‐at‐risk (VaR). This risk metric calculates the worst case loss for a business in the course of its daily transactions. To ensure that the calculated VaR reflects emerging risk characteristics, this paper introduces an approach that incorporates time‐varying volatility.
Design/methodology/approach
This study uses the GARCH technique to calculate the volatility metric with which VaR estimates are obtained. The out‐of‐sample performance of the VaRs is then assessed by comparing them to the actual market risk losses in that period.
Findings
Empirical results show that regardless of market conditions, the VaR calculated with this (GARCH) approach is more robust and more reliable than the traditional methods. Pursuant to the banking regulation on market risk capital stipulated by the Basel Committee on Banking Supervision, the out‐of‐sample VaRs are at least equal to actual daily market risk losses at the 99 percent confidence level.
Practical implications
The key goal of banking regulation is to ensure that financial firms have sufficient capital for the types of risks they take. Determining the right amount of capital requires these firms to first estimate their worst case loss, which is the value‐at‐risk. The approach to the calculation of VaR introduced in this paper enhances the accuracy in the measurement of market risk capital for financial institutions.
Originality/value
This paper recognizes that for VaR to fully account for market risk losses, the risk metric must be correctly measured. The unparalleled approach in this paper of incorporating time‐varying volatility in VaR calculations offers banking institutions a more reliable means of determining their capital adequacy.
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