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on Financial Markets |
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Issue of 2021‒01‒04
eight papers chosen by |
| By: | Fernando M. Duarte |
| Abstract: | “U.S. stocks are racing toward a second consecutive quarter of dramatic gains, continuing a historic stock-market recovery that few predicted in the depths of the March downturn,” said a September Wall Street Journal article. “The stock market is detached from economic reality. A reckoning is coming,” said the Washington Post. What is going on? In this post, I look not at what stocks have actually done or will do, but at what investors expected should have happened, and what they expect will happen going forward. It turns out that, at least by the particular measure of expectations I consider, investors expected stock returns to be high all along and continue to expect the same in the future. |
| Keywords: | stocks; equity premium; risk premium |
| JEL: | G1 |
| Date: | 2020–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:89219&r=all |
| By: | Peter Van Tassel |
| Abstract: | This paper documents law of one price violations in equity volatility markets. While tightly linked by no-arbitrage restrictions, the prices of VIX futures exhibit significant deviations relative to their option-implied upper bounds. Static arbitrage opportunities occur when the prices of VIX futures violate their bounds. The deviations widen during periods of market stress and predict the returns of VIX futures. A relative value trading strategy based on the deviation measure earns a large Sharpe ratio and economically significant alpha-to-margin. There is evidence that systematic risk and demand pressure contribute to the variation in the no-arbitrage deviations over time. |
| Keywords: | limits-to-arbitrage; VIX futures; variance swaps; volatility; return predictability |
| JEL: | G12 G13 C58 C59 |
| Date: | 2020–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:89214&r=all |
| By: | Lopes Moreira Da Veiga, María Helena; Mao, Xiuping; Casas Villalba, Maria Isabel |
| Abstract: | We revisit the stock market return predictability using the variance risk premium and conditional variance as predictors of classical predictive regressions and time-varying coefficient predictive regressions. Also, we propose three new models to forecast the conditional variance and estimate the variance risk premium. Our empirical results show, first, that the flexibility provided by time-varying coefficient regressions often improve the ability of the variance risk premium, the conditional variance, and other control variables to predict stock market returns. Second, the conditional variance and variance risk premium obtained from varying coefficient models perform consistently well at predicting stock market returns. Finally, the time-varying coefficient predictive regressions show that the variance risk premium is a predictor of stock market excess returns before the global financial crisis of 2007, but its predictability decreases in the post global financial crisis period at the 3-month horizon. At the 12-month horizon, both the variance risk premium and conditional variance are predictors of stock excess returns during most of 2000-2015. |
| Keywords: | Variance Risk Premium; Time-Varying Coefficient Predictive Regressions; Time-Varying Coefficient Har-Type Models; Realized Variance; Predictability; Nonparametric Methods |
| JEL: | G1 C53 C52 C51 C22 |
| Date: | 2020–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:31648&r=all |
| By: | Jie Cao; Sheridan Titman; Xintong Zhan; Weiming Zhang |
| Abstract: | Socially responsible (SR) institutions tend to focus more on the ESG performance and less on quantitative signals of value. Consistent with this difference in focus, we find that SR institutions react less to quantitative mispricing signals. Our evidence suggests that the increased focus on ESG may have influenced stock return patterns. Specifically, abnormal returns associated with these mispricing signals are greater for stocks held more by SR institutions. The link between SR ownership and the efficacy of mispricing signals only emerges in recent years with the rise of ESG investing, and is significant only when there are arbitrage-related funding constraints. |
| JEL: | G12 G4 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28156&r=all |
| By: | Giulio Girardi (Division of Economic and Risk Analysis, U.S. Securities and Exchange Commission, Washington); Kathleen W. Hanley (College of Business and Economics, Lehigh University); Stanislava Nikolova (College of Business, University of Nebraska-Lincoln); Loriana Pelizzon (SAFE-Goethe University Frankfurt); Mila Getmansky Sherman (Isenberg School of Management, University of Massachusetts) |
| Abstract: | We examine whether the concern of academics and regulators about the potential for insurers to sellsimilar assets due to the overlap in their holdings is justified. We measure this overlap using cosine similarity and find that insurers with more similar portfolios have larger subsequent common sales. We show that faced with a shock to their assets or liabilities, affected insurers with greater portfolio similarity have larger common sales that impact prices. Our measure can be used by regulators to predict the common selling of any institution that reports security or asset class holdings regardless of their public company status making it a useful ex-ante predictor of divestment behavior in times of market stress. |
| Keywords: | Interconnectedness, asset liquidation, similarity, financial stability, insurance companies, fire sales |
| JEL: | G11 G18 G2 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2020:13&r=all |
| By: | Guglielmo Maria Caporale; Alex Plastun |
| Abstract: | This paper investigates the impact of abnormal returns on stock prices by using daily and hourly data for some developed (US, UK, Japan) and emerging (China, India) markets over the period 01.01.2010-01.01.2020. Average analysis, t-tests, CAR and trading simulation methods are used to test the following hypotheses: H1) abnormal returns can be detected before the end of the day; H2) there are price effects on the day after abnormal returns occur; H3) these effects are different for developed vis-à-vis emerging markets; H4) they can be used to generate profits from intraday trading. The results suggest that there is a 2-hour window before close of business to exploit momentum effects on days with abnormal returns. On the following day momentum effects occur after positive abnormal returns, and contrarian (momentum) effects in the case of developed (emerging) stock markets after negative abnormal returns. Trading simulations show that some of these effects can be exploited to generate abnormal profits with an appropriate calibration of the timing parameters. |
| Keywords: | stock market, anomalies, momentum effect, contrarian effect, abnormal returns |
| JEL: | G12 G17 C63 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8783&r=all |
| By: | Ruqayya Aljifri (Department of Economics, University of Reading) |
| Abstract: | This study investigates the existence of long-run relationship/s among the Saudi stock price index (TASI) and domestic macroeconomic variable of money supply (M2), the international variable of S&P 500 and global variable of oil prices, using quarterly data from 1988 quarter 1 to 2018 quarter 1. We also used local and global events dummy variables to control for the impact of local (the 2004 and 2005 TASI bubble that followed by the 2006 crash) and global (the 2008 financial crisis) events, making this paper the first study that takes into account the impact of the local and global financial crisis events when examining the relationship between TASI and macroeconomic variables. We applied the vector error correction model with dummy variables and variance decomposition for long-run analysis. We also applied the Indicator Saturation method to detect outliers and structural breaks. Findings show that there exists a long-run relationship between all of the variables in the system. The equilibrium relation between TASI and S&P 500 and oil prices is positive. However, the relationship between TASI and money supply is negative. Moreover, TASI is substantially driven by innovations in oil prices, and to a lesser extent, by money supply and S&P 500, respectively. |
| Keywords: | TASI, macroeconomic variables, the TASI bubble and the crash, the global financial crisis, VECM, cointegration test,Indicator Saturation,variance decompositions |
| JEL: | C22 E44 |
| Date: | 2020–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2020-27&r=all |
| By: | Devansh Jain; Manthan Patel; Aman Narsaria; Siddharth Malik |
| Abstract: | The efficiency of the stock market has a significant impact on the potential return on investment. An efficient market eliminates the possibility of arbitrage and unexploited profit opportunities. This study analyzes the weak form efficiency of the Indian Stock market based on the two major Indian stock exchanges, viz., BSE and NSE. The daily closing values of Sensex and Nifty indices for the period from April 2010 to March 2019 are used to perform the Runs test, the Autocorrelation test, and the Autoregression test. The study confirms that the Indian Stock market is weak form inefficient and can thus be outperformed. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.01160&r=all |