The performance effects of composition changes on sector specific stock indices: The case of European listed real estate

This paper examines the impact of changes in the composition of real estate stock indices, considering companies both joining and leaving the indices. Stocks that are newly included not only see a short-term increase in their share price, but trading volumes increase in a permanent fashion following the event. This highlights the importance of indices in not only a benchmarking context but also in enhancing investor awareness and aiding liquidity. By contrast, as anticipated, the share prices of firms removed from indices fall around the time of the index change. The fact that the changes in share prices, either upwards for index inclusions or downwards for deletions, are generally not reversed, would indicate that the movements are not purely due to price pressure, but rather are more consistent with the information content hypothesis. There is no evidence, however, that index changes significantly affect the volatility of price changes or their operating performances as measured by their earnings per share.

The level of compliance with the International Code of marketing of breast-milk substitutes: does it matter to stock markets?

The present paper explores, theoretically, and empirically, whether compliance with the International Code of marketing of breast-milk substitutes impacts on financial performance measured by stock markets. The empirical analysis, which considers a 20-year period, shows that stock markets are indifferent to the level of compliance by manufacturers with the International Code. Two important issues emerge from this result. Based on our finding that financial performance as measured by stock markets cannot explain the level of compliance, the first issue refers to what alternative types of mechanisms drive manufacturers who comply the least with voluntary codes such as the International Code. Conversely, from our finding that stock markets do not reward the most compliant, the second issue raised is an inherent weakness of stock markets to fully incorporate social and environmental values.

Lock, stock, and barrel: a comprehensive assessment of the determinants of terror

We assess the robustness of previous findings on the determinants of terrorism. Using extreme bound analysis, the three most comprehensive terrorism datasets, and focusing on the three most commonly analyzed aspects of terrorist activity, i.e., location, victim, and perpetrator, we re-assess the effect of 65 proposed correlates. Evaluating around 13.4 million regressions, we find 18 variables to be robustly associated with the number of incidents occurring in a given country-year, 15 variables with attacks against citizens from a particular country in a given year, and six variables with attacks perpetrated by citizens of a particular country in a given year.

A comparison of tests of non-linear cointegration with an application to the predictability of US interest rates using the term structure

We test whether there are nonlinearities in the response of short- and long-term interest rates to the spread in interest rates, and assess the out-of-sample predictability of interest rates using linear and nonlinear models. We find strong evidence of nonlinearities in the response of interest rates to the spread. Nonlinearities are shown to result in more accurate short-horizon forecasts, especially of the spread.

Inflammatory modulation of exercise salience: using hormesis to return to a healthy lifestyle

Most of the human population in the western world has access to unlimited calories and leads an increasingly sedentary lifestyle. The propensity to undertake voluntary exercise or indulge in spontaneous physical exercise, which might be termed "exercise salience", is drawing increased scientific attention. Despite its genetic aspects, this complex behaviour is clearly modulated by the environment and influenced by physiological states. Inflammation is often overlooked as one of these conditions even though it is known to induce a state of reduced mobility. Chronic subclinical inflammation is associated with the metabolic syndrome; a largely lifestyle-induced disease which can lead to decreased exercise salience. The result is a vicious cycle that increases oxidative stress and reduces metabolic flexibility and perpetuates the disease state. In contrast, hormetic stimuli can induce an anti-inflammatory phenotype, thereby enhancing exercise salience, leading to greater biological fitness and improved functional longevity. One general consequence of hormesis is upregulation of mitochondrial function and resistance to oxidative stress. Examples of hormetic factors include calorie restriction, extreme environmental temperatures, physical activity and polyphenols. The hormetic modulation of inflammation, and thus, exercise salience, may help to explain the highly heterogeneous expression of voluntary exercise behaviour and therefore body composition phenotypes of humans living in similar obesogenic environments.

Predictability of large interannual Arctic sea-ice anomalies

In projections of twenty-first century climate, Arctic sea ice declines and at the same time exhibits strong interannual anomalies. Here, we investigate the potential to predict these strong sea-ice anomalies under a perfect-model assumption, using the Max-Planck-Institute Earth System Model in the same setup as in the Coupled Model Intercomparison Project Phase 5 (CMIP5). We study two cases of strong negative sea-ice anomalies: a 5-year-long anomaly for present-day conditions, and a 10-year-long anomaly for conditions projected for the middle of the twenty-first century. We treat these anomalies in the CMIP5 projections as the truth, and use exactly the same model configuration for predictions of this synthetic truth. We start ensemble predictions at different times during the anomalies, considering lagged-perfect and sea-ice-assimilated initial conditions. We find that the onset and amplitude of the interannual anomalies are not predictable. However, the further deepening of the anomaly can be predicted for typically 1 year lead time if predictions start after the onset but before the maximal amplitude of the anomaly. The magnitude of an extremely low summer sea-ice minimum is hard to predict: the skill of the prediction ensemble is not better than a damped-persistence forecast for lead times of more than a few months, and is not better than a climatology forecast for lead times of two or more years. Predictions of the present-day anomaly are more skillful than predictions of the mid-century anomaly. Predictions using sea-ice-assimilated initial conditions are competitive with those using lagged-perfect initial conditions for lead times of a year or less, but yield degraded skill for longer lead times. The results presented here suggest that there is limited prospect of predicting the large interannual sea-ice anomalies expected to occur throughout the twenty-first century.

Seasonal to interannual Arctic sea-ice predictability in current GCMs

We establish the first inter-model comparison of seasonal to interannual predictability of present-day Arctic climate by performing coordinated sets of idealized ensemble predictions with four state-of-the-art global climate models. For Arctic sea-ice extent and volume, there is potential predictive skill for lead times of up to three years, and potential prediction errors have similar growth rates and magnitudes across the models. Spatial patterns of potential prediction errors differ substantially between the models, but some features are robust. Sea-ice concentration errors are largest in the marginal ice zone, and in winter they are almost zero away from the ice edge. Sea-ice thickness errors are amplified along the coasts of the Arctic Ocean, an effect that is dominated by sea-ice advection. These results give an upper bound on the ability of current global climate models to predict important aspects of Arctic climate.

An alternative approach to investigating lead-lag relationships between stock and stock index futures markets

In the absence of market frictions, the cost-of-carry model of stock index futures pricing predicts that returns on the underlying stock index and the associated stock index futures contract will be perfectly contemporaneously correlated. Evidence suggests, however, that this prediction is violated with clear evidence that the stock index futures market leads the stock market. It is argued that traditional tests, which assume that the underlying data generating process is constant, might be prone to overstate the lead-lag relationship. Using a new test for lead-lag relationships based on cross correlations and cross bicorrelations it is found that, contrary to results from using the traditional methodology, periods where the futures market leads the cash market are few and far between and when any lead-lag relationship is detected, it does not last long. Overall, the results are consistent with the prediction of the standard cost-of-carry model and market efficiency.

Forecasting real estate returns using financial spreads

This paper examines the predictability of real estate asset returns using a number of time series techniques. A vector autoregressive model, which incorporates financial spreads, is able to improve upon the out of sample forecasting performance of univariate time series models at a short forecasting horizon. However, as the forecasting horizon increases, the explanatory power of such models is reduced, so that returns on real estate assets are best forecast using the long term mean of the series. In the case of indirect property returns, such short-term forecasts can be turned into a trading rule that can generate excess returns over a buy-and-hold strategy gross of transactions costs, although none of the trading rules developed could cover the associated transactions costs. It is therefore concluded that such forecastability is entirely consistent with stock market efficiency.

The cyclical relations between traded property stock prices and aggregate time-series

This paper examines the cyclical regularities of macroeconomic, financial and property market aggregates in relation to the property stock price cycle in the UK. The Hodrick Prescott filter is employed to fit a long-term trend to the raw data, and to derive the short-term cycles of each series. It is found that the cycles of consumer expenditure, total consumption per capita, the dividend yield and the long-term bond yield are moderately correlated, and mainly coincident, with the property price cycle. There is also evidence that the nominal and real Treasury Bill rates and the interest rate spread lead this cycle by one or two quarters, and therefore that these series can be considered leading indicators of property stock prices. This study recommends that macroeconomic and financial variables can provide useful information to explain and potentially to forecast movements of property-backed stock returns in the UK.

Does orthogonalization really purge equity based property valuations of their general stock market influences?

This paper uses a recently developed nonlinear Granger causality test to determine whether linear orthogonalization really does remove general stock market influences on real estate returns to leave pure industry effects in the latter. The results suggest that there is no nonlinear relationship between the US equity-based property index returns and returns on a general stock market index, although there is evidence of nonlinear causality for the corresponding UK series.

Linear and non-linear transmission of equity return volatility: evidence from the US, Japan and Australia

This paper models the transmission of shocks between the US, Japanese and Australian equity markets. Tests for the existence of linear and non-linear transmission of volatility across the markets are performed using parametric and non-parametric techniques. In particular the size and sign of return innovations are important factors in determining the degree of spillovers in volatility. It is found that a multivariate asymmetric GARCH formulation can explain almost all of the non-linear causality between markets. These results have important implications for the construction of models and forecasts of international equity returns.

Tests of non-linearity using LIFFE futures transactions price data

This paper presents and implements a number of tests for non-linear dependence and a test for chaos using transactions prices on three LIFFE futures contracts: the Short Sterling interest rate contract, the Long Gilt government bond contract, and the FTSE 100 stock index futures contract. While previous studies of high frequency futures market data use only those transactions which involve a price change, we use all of the transaction prices on these contracts whether they involve a price change or not. Our results indicate irrefutable evidence of non-linearity in two of the three contracts, although we find no evidence of a chaotic process in any of the series. We are also able to provide some indications of the effect of the duration of the trading day on the degree of non-linearity of the underlying contract. The trading day for the Long Gilt contract was extended in August 1994, and prior to this date there is no evidence of any structure in the return series. However, after the extension of the trading day we do find evidence of a non-linear return structure.

Hot and cold IPO markets : the case of the stock exchange of Mauritius

The aim of this study is to assess the characteristics of the hot and cold IPO markets on the Stock Exchange of Mauritius (SEM). The results show that the hot issues exhibit, on average, a greater degree of underpricing than the cold issues, although the hot issue phenomenon is not a significant driving force in explaining this short-run underpricing. The results are consistent with the predictions of the changing risk composition hypothesis in suggesting that firms going public during hot markets are on average relatively more risky. The findings also support the time adverse selection hypothesis in that the firms’ quality dispersion is statistically different between hot and cold markets. Finally, the study concludes that firms which go public during hot markets do not underperform those going public in cold markets over the longer term.