Progress Towards to Equity Market Integration in Eastern Europe

The advent of the European Union has decreased the diversification benefits available from country based equity market indices in the region. This paper measures the increase in stock integration between the three largest new EU members (Hungary, the Czech Republic and Poland who joined in May 2004) and the Euro-zone. A potentially gradual transition in correlations is accommodated in a single VAR model by embedding smooth transition conditional correlation models with fat tails, spillovers, volatility clustering, and asymmetric volatility effects. At the country market index level all three Eastern European markets show a considerable increase in correlations in 2006. At the industry level the dates and transition periods for the correlations differ, and the correlations are lower although also increasing. The results show that sectoral indices in Eastern European markets may provide larger diversification opportunities than the aggregate market. JEL classifications: C32; C51; F36; G15 Keywords: Multivariate GARCH; Smooth Transition Conditional Correlation; Stock Return Comovement; Sectoral correlations; New EU Members

Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis

This study examines the impact of macro-liquidity shocks on the returns of UK stock portfolios sorted on the basis of a series of micro-liquidity measures. The macro-liquidity shocks are extracted on the meeting days of the Bank of England Monetary Policy Committee relative to market expectations embedded in futures contracts on the 3-month LIBOR during the period June 1999- December 2009. We report definitive evidence that these shocks are transmitted to the cross-section of liquidity-sorted portfolios, with most liquid stocks playing a very active role. Our results emphatically document that the shocks-returns relationship has reversed its sign during the recent financial crisis; the standard inverse relationship between interest rate surprises and portfolios’ returns before the crisis has turned into positive during the crisis. This finding confirms the inability of interest rate cuts to boost returns in the shortrun during the crisis, because these were perceived by market participants as a signal of a deteriorating economic outlook.

Which firms want PhDs? The effect of the university-industry relationship on the PhD labour market

PhD graduates hold the highest education degree, are trained to conduct research and can be considered a key element in the creation, commercialization and diffusion of innovations. The impact of PhDs on innovation and economic development takes place through several channels such as the accumulation of scientific capital stock, the enhancement of technology transfers and the promotion of cooperation relationships in innovation processes. Although the placement of PhDs in industry provides a very important mechanism for transmitting knowledge from universities to firms, information about the characteristics of the firms that employ PhDs is very scarce. The goal of this paper is to improve understanding of the determinants of the demand for PhDs in the private sector. Three main potential determinants of the demand for PhDs are considered: cooperation between firms and universities, R&D activities of firms and several characteristics of firms, size, sector, productivity and age. The results from the econometric analysis show that cooperation between firms and universities encourages firms to recruit PhDs and point to the existence of accumulative effects in the hiring of PhD graduates.

Quantiles of the Realized Stock-Bond Correlation

Abstract: We scrutinize the realized stock-bond correlation based upon high frequency returns. We use quantile regressions to pin down the systematic variation of the extreme tails over their economic determinants. The correlation dependence behaves differently when the correlation is large negative and large positive. The important explanatory variables at the extreme low quantile are the short rate, the yield spread, and the volatility index. At the extreme high quantile the bond market liquidity is also important. The empirical fi…ndings are only partially robust to using less precise measures of the stock-bond correlation. The results are not caused by the recent …financial crisis. Keywords: Extreme returns; Financial crisis; Realized stock-bond correlation; Quantile regressions; VIX. JEL Classifi…cations: C22; G01; G11; G12

U.S. subprime financial crisis contagion on BRIC and European Union stock markets

ABSTRACTThe Copula Theory was used to analyze contagion among the BRIC (Brazil, Russia, India and China) and European Union stock markets with the U.S. Equity Market. The market indexes used for the period between January 01, 2005 and February 27, 2010 are: MXBRIC (BRIC), MXEU (European Union) and MXUS (United States). This article evaluated the adequacy of the main copulas found in the financial literature using log-likelihood, Akaike information and Bayesian information criteria. This article provides a groundbreaking study in the area of contagion due to the use of conditional copulas, allowing to calculate the correlation increase between indexes with non-parametric approach. The conditional Symmetrized Joe-Clayton copula was the one that fitted better to the considered pairs of returns. Results indicate evidence of contagion effect in both markets, European Union and BRIC members, with a 5% significance level. Furthermore, there is also evidence that the contagion of U.S. financial crisis was more pronounced in the European Union than in the BRIC markets, with a 5% significance level. Therefore, stock portfolios formed by equities from the BRIC countries were able to offer greater protection during the subprime crisis. The results are aligned with recent papers that present an increase in correlation between stock markets, especially in bear markets.

Effect of investments on fundamentals and market reaction on pre-operational and operational Brazilian companies for the period 2006-2012

ABSTRACT This paper provides evidence on the market reaction to corporate investment decisions whose shareholder value is largely attributed to growth options. The exploratory research raised pre-operational companies and their operational pairs on the same economy segments. It had the purpose of investigating the existence of statistical differentiation from financial indicators that reflect the installed assets and growth assets, and then study the market reaction to changes in fixed assets as a signaling element about investment decisions. The formation process of operational assets and shareholder value almost exclusively dependent on asset growth stands out in the pre-operational companies. As a result, differentiation tests confirmed that the pre-operational companies had their value especially derived on growth options. The market reaction was particularly bigger in pre-operational companies with abnormal negative stock returns, while the operational companies had positive returns, which may indicate that the quality of the investment is judged based on the financial disclosure. Additionally, operational companies' investors await the disclosure to adjust their prices. We conclude that the results are consistent with the empirical evidence and the participants in financial markets to long-term capital formation investments should give that special attention.

Determining underlying macroeconomic fundamentals during emerging market crises: Are conditions as bad as they seem?

Emerging market crises are characterized by large swings in both macroeconomic fundamentalsand asset prices. The economic significance of observed movements in macroeconomicvariables is obscured by the brief and extreme nature of crises. In this paper we propose to study the macroeconomic consequences of crises by studying the behavior of effective fundamentals, constructed by studying the relative movements of stock prices during crises. We find that these effective fundamentals provide a different picture than that implied by observed fundamentals. First, asset prices often reflect expectations of improvement in fundamentals after the initial devaluations; specifically, effective depreciations are positive but not as large as the observed ones. Second, crises vary in their effect on credit market conditions, with investors expecting tightening of credit in some cases (Mexico 1994, Philippines 1997), but loosening of credit in others (Sweden 1992, Korea 1997, Brazil 1999).

Improved estimation of the covariance matrix of stock returns with an application to portofolio selection

This paper proposes to estimate the covariance matrix of stock returnsby an optimally weighted average of two existing estimators: the samplecovariance matrix and single-index covariance matrix. This method isgenerally known as shrinkage, and it is standard in decision theory andin empirical Bayesian statistics. Our shrinkage estimator can be seenas a way to account for extra-market covariance without having to specifyan arbitrary multi-factor structure. For NYSE and AMEX stock returns from1972 to 1995, it can be used to select portfolios with significantly lowerout-of-sample variance than a set of existing estimators, includingmulti-factor models.

Market Index Biases and Minimum Risk Indices

Markets, in the real world, are not efficient zero-sum games where hypotheses of the CAPM are fulfilled. Then, it is easy to conclude the market portfolio is not located on Markowitz"s efficient frontier, and passive investments (and indexing) are not optimal but biased. In this paper, we define and analyze biases suffered by passive investors: the sample, construction, efficiency and active biases and tracking error are presented. We propose Minimum Risk Indices (MRI) as an alternative to deal with to market index biases, and to provide investors with portfolios closer to the efficient frontier, that is, more optimal investment possibilities. MRI (using a Parametric Value-at-Risk Minimization approach) are calculated for three stock markets achieving interesting results. Our indices are less risky and more profitable than current Market Indices in the Argentinean and Spanish markets, facing that way the Efficient Market Hypothesis. Two innovations must be outlined: an error dimension has been included in the backtesting and the Sharpe"s Ratio has been used to select the"best" MRI

IFRS and Asymmetrical Information: Empirical Evidence from the Finnish Stock Markets

Tutkimuksen tavoitteena on selvittää kansainvälisiin tilinpäätösstandardeihin siirtymisen vaikutuksia epäsymmetriseen informaatioon Suomen osake-markkinoilla. Suomalaisten tilinpäätöskäytäntöjen ja kansainvälisten standardien eroja on selvitetty ensin laadullisin menetelmin,jonka jälkeen on tehty asymmetrisen informaation markkinapohjaisiin mittareihinperustuva kvantitatiivinen tutkimus. Yleisiin eroavaisuuksiin liittyvän selvityksen lisäksi on tutkittu erikseen erityisesti standardimuutoksen vaikutusta älylliseen pääomaan liittyvään informaation asymmetriaan. Empiirisessä osiossa älyllisen pääoman epäsuoraksi mitaksi on valittu kehitys- ja tutkimusmenojen suhde taseen loppusummaan. Kuten oletus oli, sekä laadullisen että empiirisen osion tulokset viittaavat siihen, että IFRS:n myötä informaatioympäristö on parantunut. Uudet standardit vaativat laajempaa ja tarkempaa informaation julkaisua liittyen älylliseen pääomaan, mikä ei ole kuitenkaan havaittavissa valituissa mittareissa

Market Index Biases and Minimum Risk Indices

Markets, in the real world, are not efficient zero-sum games where hypotheses of the CAPM are fulfilled. Then, it is easy to conclude the market portfolio is not located on Markowitz"s efficient frontier, and passive investments (and indexing) are not optimal but biased. In this paper, we define and analyze biases suffered by passive investors: the sample, construction, efficiency and active biases and tracking error are presented. We propose Minimum Risk Indices (MRI) as an alternative to deal with to market index biases, and to provide investors with portfolios closer to the efficient frontier, that is, more optimal investment possibilities. MRI (using a Parametric Value-at-Risk Minimization approach) are calculated for three stock markets achieving interesting results. Our indices are less risky and more profitable than current Market Indices in the Argentinean and Spanish markets, facing that way the Efficient Market Hypothesis. Two innovations must be outlined: an error dimension has been included in the backtesting and the Sharpe"s Ratio has been used to select the"best" MRI

Tests of International Asset Pricing Models in Scandinavian Stock Markets

This thesis examines whether global, local and exchange risks are priced in Scandinavian countries’ equity markets by using conditional international asset pricing models. The employed international asset pricing models are the world capital asset pricing model, the international asset pricing model augmented with the currency risk, and the partially segmented model augmented with the currency risk. Moreover, this research traces estimated equity risk premiums for the Scandinavian countries. The empirical part of the study is performed using generalized method of moments approach. Monthly observations from February 1994 to June 2007 are used. Investors’ conditional expectations are modeled using several instrumental variables. In order to keep system parsimonious the prices of risk are assumed to be constant whereas expected returns and conditional covariances vary over time. The empirical findings of this thesis suggest that the prices of global and local market risk are priced in the Scandinavian countries. This indicates that the Scandinavian countries are mildly segmented from the global markets. Furthermore, the results show that the exchange risk is priced in the Danish and Swedish stock markets when the partially segmented model is augmented with the currency risk factor.

The governmental organization's role in railway freight market's liberalization -building knowledge through Swedish and Polish operators' experiences

Globalization has increased transport aggregates’ demand. Whilst transport volumes increase, ecological values’im portance has sharpened: carbon footprint has become a measure known world widely. European Union together with other communities emphasizes friendliness to the environment: same trend has extended to transports. As a potential substitute for road transport is noted railway transport, which decreases the congestions and lowers the emission levels. Railway freight market was liberalized in the European Union 2007, which enabled new operators to enter the markets. This research had two main objectives. Firstly, it examined the main market entry strategies utilized and the barriers to entry confronted by the operators who entered the markets after the liberalization. Secondly, the aim was to find ways the governmental organization could enhance its service towards potential railway freight operators. Research is a qualitative case study, utilizing descriptive analytical research method with a normative shade. Empirical data was gathered by interviewing Swedish and Polish railway freight operators by using a semi-structured theme-interview. This research provided novel information by using first-hand data; topic has been researched previously by utilizing second-hand data and literature analyses. Based on this research, rolling stock acquisition, needed investments and bureaucracy generate the main barriers to entry. The research results show that the mostly utilized market entry strategies are start-up and vertical integration. The governmental organization could enhance the market entry process by organizing courses, paying extra attention on flexibility, internal know-how and educating the staff.

Market anomalies and tactical asset allocation: Utilising market anomalies in multiple asset class portfolios with the Black−Litterman model

This thesis discusses the basic problem of the modern portfolio theory about how to optimise the perfect allocation for an investment portfolio. The theory provides a solution for an efficient portfolio, which minimises the risk of the portfolio with respect to the expected return. A central feature for all the portfolios on the efficient frontier is that the investor needs to provide the expected return for each asset. Market anomalies are persistent patterns seen in the financial markets, which cannot be explained with the current asset pricing theory. The goal of this thesis is to study whether these anomalies can be observed among different asset classes. Finally, if persistent patterns are found, it is investigated whether the anomalies hold valuable information for determining the expected returns used in the portfolio optimization Market anomalies and investment strategies based on them are studied with a rolling estimation window, where the return for the following period is always based on historical information. This is also crucial when rebalancing the portfolio. The anomalies investigated within this thesis are value, momentum, reversal, and idiosyncratic volatility. The research data includes price series of country level stock indices, government bonds, currencies, and commodities. The modern portfolio theory and the views given by the anomalies are combined by utilising the Black-Litterman model. This makes it possible to optimise the portfolio so that investor’s views are taken into account. When constructing the portfolios, the goal is to maximise the Sharpe ratio. Significance of the results is studied by assessing if the strategy yields excess returns in a relation to those explained by the threefactormodel. The most outstanding finding is that anomaly based factors include valuable information to enhance efficient portfolio diversification. When the highest Sharpe ratios for each asset class are picked from the test factors and applied to the Black−Litterman model, the final portfolio results in superior riskreturn combination. The highest Sharpe ratios are provided by momentum strategy for stocks and long-term reversal for the rest of the asset classes. Additionally, a strategy based on the value effect was highly appealing, and it basically performs as well as the previously mentioned Sharpe strategy. When studying the anomalies, it is found, that 12-month momentum is the strongest effect, especially for stock indices. In addition, a high idiosyncratic volatility seems to be positively correlated with country indices on stocks.

Return and Volatility spillovers among stock and Foreign Exchange Markets: Empirical Evidence from selected African Markets

Return and volatility dynamics in financial markets across the world have recently become important for the purpose of asset pricing, portfolio allocation and risk management. However, volatility, which come about as a result of the actions of market participants can help adapt to different situations and perform when it really matters. With recent development and liberalization among financial markets in emerging and frontier markets, the need for how the equity and foreign exchange markets interact and the extent to which return and volatility spillover are spread across countries is of importance to investors and policy makers at large. Financial markets in Africa have received attention leading to investors diversifying into them in times of crisis and contagion effects in developed countries. Regardless of the benefits these markets may offer, investors must be wary of issues such as thin trading, volatility that exists in the equity and currency markets and its related fluctuations. The study employs a VAR-GARCH BEKK model to study the return and volatility dynamics between the stock and foreign exchange sectors and among the equity markets of Egypt, Kenya, Nigeria, South Africa and Tunisia. The main findings suggest a higher dependence of own return in the stock markets and a one way return spillover from the currencies to the equity markets except for South Africa which has a weaker interrelation among the two markets. There is a relatively limited integration among the equity markets. Return and volatility spillover is mostly uni-directional except for a bi-directional relationship between the equity markets of Egypt and Tunisia. The study implication still proves a benefit for portfolio managers diversifying in these African equity markets, since they are independent of each other and may not be highly affected by the influx of negative news from elsewhere. However, there is the need to be wary of return and volatility spillover between the equity and currency markets, hence devising better hedging strategies to curb them.