Aggregate volatility risk and the cross-section of stock returns: Australian evidence

This study examines the relation between aggregate volatility risk and the cross-section of stock returns in Australia. We use a stock's sensitivity to innovations in the ASX200 implied volatility (VIX) as a proxy for aggregate volatility risk. Consistent with theoretical predictions, aggregate volatility risk is negatively related to the cross-section of stock returns only when market volatility is rising. The asymmetric volatility effect is persistent throughout the sample period and is robust after controlling for size, book-to-market, momentum, and liquidity issues. There is some evidence that aggregate volatility risk is a priced factor, especially in months with increasing market volatility.

Does financial news predict stock returns? New evidence from Islamic and Non-Islamic stocks

The paper extends the time-series financial news data set constructed by Garcia (2013) and uses it to examine whether financial news predicts returns of Islamic stocks differently compared to non-Islamic (conventional) stocks. We find that they do. First, while both positive and negative worded news predict most Islamic and conventional stock returns, positive words have a larger impact on both types of stock returns. Second, shock to returns from financial news reverses only in part for some stocks. Third, for a mean-variance investor, investing in Islamic stocks is relatively more profitable than investing in the corresponding conventional stocks. Fourth, we show that profits are robust to a range of time-series risk factors, namely, market risk, size-based risk, and momentum-induced risk.

Financial constraints and stock returns — evidence from Australia

Using multiple discriminant analysis, we construct an index thatmeasures firms' external financial constraints in an Australian setting.We form portfolios of firms based on our financial constraints index andfind that financially constrained firms earn lower return than theirunconstrained counterparts. Moreover, stock returns of financiallyconstrained firms are found to move together, indicating the potentialexistence of a financial constraints factor. Neither the variation nor themean return of the constraints factor are well explained by existing assetpricing models, suggesting an independent role for our financialconstraints factor in affecting stock returns.

Are Islamic stock returns predictable? : a global perspective

Using the sharia-compliant measures, we compile a data set that spans January 1981 to December 2014 and contains 2577 Islamic stocks. Using as many as 12 financial and macroeconomic predictors, we discover strong evidence of both in-sample and out-of-sample return predictability. There is robust evidence of predictability only when U.S. stock returns are used as a predictor. We find that investing in regional (industry) portfolios offers on average, across the 12 predictors, meaningful profits of 6.16% (6.03%) per annum. Investing in a portfolio of Islamic stocks belonging to emerging markets (9.89% per annum) and a portfolio of Islamic stocks belonging to the consumer goods sector (6.37% per annum) offers the most returns amongst regions and industries, respectively.

Volatility spillover between New Zealand stock market returns and exchange rate changes before and after the 1997 Asian financial crisis

Researchers in the last decade have been investigating the interdependence of stock returns and exchange rate changes within the same economy. Kanas (2000) and Yang and Doong (2004) find that for the G-7 countries, in general, the volatility of the stock market spills over to the exchange rate market but that volatility spillovers from the exchange rate market to the stock market are insignificant. Chen, Naylor, and Lu (2004) find that NZ individual firm returns are significantly exposed to exchange rate changes. This study complements their work by investigating the volatility spillover between the stock market and the foreign exchange market within the NZ economy.

Mean reversion in stock prices: new evidence from panel unit root tests

Purpose – There are several studies that investigate evidence for mean reversion in stock prices. However, there is no consensus as to whether stock prices are mean reverting or random walk (unit root) processes. The goal of this paper is to re-examine mean reversion in stock prices.
Design/methodology/approach – The authors use five different panel unit root tests, namely the Im, Pesaran and Shin t-bar test statistic, the Levin and Lin test, the Im, Lee, and Tieslau Lagrangian multiplier test statistic, the seemingly unrelated regression test, and the multivariate augmented Dickey Fuller test advocated by Taylor and Sarno.
Findings – The main finding is that there is no mean reversion of stock prices, consistent with the efficient market hypothesis.
Research limitations/implications – One issue not considered by this study is the role of structural breaks. It may be the case that the efficient market hypothesis is contingent on structural breaks in stock prices. Future studies should model structural breaks.
Practical implications – The findings have implications for econometric modelling, in particular forecasting.
Originality/value – This paper adds to the scarce literature on the mean reverting property of stock prices based on panel data; thus, it should be useful for researchers.

Trading activities and cross-sectional variation in stock expected return : evidence from Kuala Lumpur stock exchange

Trading activity has been considered as one of the possible factor that explains the cross-sectional variation in stock returns. In this study I use trading volume as a possible measure to proxy for liquidity as part of the trading activity. Monthly observations were used over a period 1995 to 2005 to examine the liquidity effect on stock expected returns. Based on findings it is appeared that level of liquidity does matter in explaining the expected stock returns in Malaysian capital market. While Fama-french factors also provide important explanation for stock returns. But none of the second moment variables proxying liquidity appeared to be statistically significant. However, momentum effect apprearently explain ing the cross-sectional variation in stock returns. 

On the relationship between stock prices and exchange rates for India

In this paper, we apply several variants of the EGARCH model to examine the role of depreciation of the Indian rupee on India's stock market returns using daily data. Our findings suggest that volatility persistence has been high; depreciation of the rupee has increased volatility; and asymmetric volatility confirms that negative shocks generate more volatility than positive shocks. We also find that an appreciation of the Indian rupee over the 2002 to 2006 has generated more returns and less volatility.

Are the Australian and New Zealand stock prices nonlinear with a unit root?

Whether or not stock prices are characterized by a unit root has important implications for policy. For instance, by applying unit root tests one can deduce whether stock returns can be predicted from previous changes in prices. A finding of a unit root implies that stock returns cannot be predicted. This paper investigates whether or not stock prices for Australia and New Zealand can be characterized by a unit root process. An unrestricted two-regime threshold autoregressive model is used with an autoregressive unit root. Among the main results, it is found that the stock prices of both countries are nonlinear processes that are characterized by a unit root process, consistent with the efficient market hypothesis.

Market liquidity risk factor and financial market anomalies : evidence from the Chinese stock market

The Chinese stock market is an order-driven market and hence its characteristics are structurally different from quote-driven markets. There are no studies that consider the role of the market liquidity risk factor in determining cross-sectional stock returns in a model including financial market anomalies for order-driven markets. Our aim is to test whether financial market anomalies such as firm size, the book-to-market ratio, the turnover rate, and momentum both with and without the inclusion of the market liquidity risk factor in the case of the Chinese stock market can explain cross-sectional stock returns. The empirical framework is based on the model proposed by Avramov and Chordia (AC, 2006). Our main finding is that the AC model can capture financial market anomalies except momentum when we include the market liquidity risk factor on the Chinese stock market.

The relationship between exchange rates, interest rates and Australian bank returns

Although there has been significant research on US financial intermediaries' stock returns and sensitivity to interest yields, there has only been limited research on Australian bank stock returns and key macro variables, such as interest rates and exchange rates. The aim of this article is to examine this relationship for four major Australian banks, namely the Australia New Zealand bank (ANZ), the Commonwealth Bank of Australia (CBA), the National Australia Bank (NAB) and the Westpac Banking Corporation (WBC). We use the EGARCH model and examine the relationship using monthly data covering the period 1992 to 2007. The results suggest that for all four banks: (1) there is a similar and statistically significant negative relationship between interest rates and stock returns; and (2) there is evidence of an increase in returns during the period of appreciation of the Australian dollar.

Does the choice of estimator matter when forecasting returns?

While the literature concerned with the predictability of stock returns is huge, surprisingly little is known when it comes to role of the choice of estimator of the predictive regression. Ideally, the choice of estimator should be rooted in the salient features of the data. In case of predictive regressions of returns there are at least three such features; (i) returns are heteroskedastic, (ii) predictors are persistent, and (iii) regression errors are correlated with predictor innovations. In this paper we examine if the accounting of these features in the estimation process has any bearing on our ability to forecast future returns. The results suggest that it does.

Rating downgrade and the price impact of CDS spread on stock return

We investigate the time-varying informativeness of credit default swap (CDS) trading on stock returns for 302 US firms from July 2004 to August 2010. Using the Acharya and Johnson (2007) measure, we find that CDS trading becomes informative for an increasing number of firms as we approach the global financial crisis (GFC). Firm numbers gradually decline post-GFC, but remain high compared to the pre-GFC period. furthermore, CDS trading imposes the largest conditional price impact on firms that are recently downgraded, regardless of rating levels. Interestingly, this holds during and after the GFC, but not before. We offer two implications. First, despite post-GFC outcry against the CDS market, our results suggest it exhibits enhanced price discovery during the GFC. Second, our findings support criticism that, in the lead-up to the GFC, rating agencies are slow in downgrading firms. However, if downgrade decisions made during and after the GFC induce informed trading in the CDS market, this necessarily implies that during the midst of the GFC, rating agencies have got their act together.

Does cash flow predict returns?

In this paper, we propose the hypothesis that cash flow and cash flow volatility predict returns. We categorize firms listed on the New York Stock Exchange into sectors, and apply tests for both in-sample and out-of-sample predictability. While we find strong evidence that cash flow volatility predicts returns for all sectors, the evidence obtained when using cash flow as a predictor is relatively weak. Estimated profits and utility gains also suggest that it is cash flow volatility that is more relevant as a source of information than cash flow.

Stock return predictability and determinants of predictability and profits

We examine stock return predictability for India and find strong evidence of sectoral return predictability over market return predictability. We show that mean-variance investors make statistically significant and economically meaningful profits by tracking financial ratios. For the first time in this literature, we examine the determinants of time-varying predictability and mean-variance profits. We show that both expected and unexpected shocks emanating from most financial ratios explain sectoral return predictability and profits. These are fresh contributions to the understanding of asset pricing.