Canadian Stock Market Research Articles

Oil Price Shocks and the Canadian Stock Market

In this paper, we use monthly data from 1992 to 2022 and a structural VAR model to investigate the effects of oil supply shocks, aggregate demand shocks, and oil-specific demand shocks in the global crude oil market on the Canadian stock market. Our analysis reveals that these shocks affect the S&P/TSX Composite Index and various sector-specific indices in different ways. Specifically, the response of the Canadian market to oil-specific demand shocks diverges notably from the U.S. market, highlighting Canada’s unique position as an oil-exporting country. In the long run, oil price shocks account for over 10% of the variation in the composite index and as much as 35% in the Energy sector index.

Tug of war with noise traders? Evidence from the G7 stock markets

Tug of war with noise traders? Evidence from the G7 stock markets

Can the Sell in May effect be enhanced by a size tilt?

PurposeThe authors evaluate the Sell in May effect in the Canadian context to comprehensively explore the Sell in May effect as well as its interactions with the size effect and risk and with multiple indices.Design/methodology/approachThe authors use ordinary least squares (OLS) regressions to examine the Sell in May effect and Huber M-estimation to handle potential outliers. They also use the generalized autoregressive conditional heteroskedasticity (GARCH) models to explore the role of risk in the Sell in May effect.FindingsThe results demonstrate that the Sell in May effect is present in all three main Canadian stock market indices. More telling, the anomaly is strongest in small cap indices and in indices that give equal weighting to small and large cap stocks. They do not find that the effect is driven by risk.Originality/valueWhile several papers have explored the Sell in May phenomenon in several countries, little scholarly attention has been paid to this effect in Canada and to its interaction with the size effect. The authors contribute to the literature by examining of the interactions between Sell in May and the size effect in Canada. They examine the Sell in May effect using CFMRC value-weighted and equally weighted indices of all Canadian companies. They also incorporate in their analysis the role of risk.

Issues and Countermeasures in the Canadian Stock Market: A Theoretical Analysis

Issues and Countermeasures in the Canadian Stock Market: A Theoretical Analysis

Oil and US stock market shocks: Implications for Canadian equities

AbstractOil and US stock market shocks are relevant to Canadian equities because Canada is an oil exporter exposed to market developments in the wider continent. We evaluate how the relationship between Canadian stock market indices and such external shocks change under extraordinary events. To do this, we subject statistically identified oil and S&P 500 market shocks to a surprise filter, which detects shocks with the greatest magnitude occurring over a given lookback period, and an outlier filter, which detects extrema shocks that exceed a normal range. Then, we examine how the dependence structure between shocks and Canadian equities change under the extreme surprise and outlier episodes through various co‐moment spillover tests. Our results show co‐moments beyond correlation are important in reflecting the changes occurring in the relationships between external shocks and Canadian equities in extreme events. Additionally, the differences in findings under extreme positive and negative shocks provide evidence for asymmetric spillover effects from the oil and US stock markets to Canadian equities. Moreover, the observed heterogeneity in the relationships between disaggregated Canadian equities and shocks in the crude oil and S&P 500 markets are useful to policy‐makers for revealing sector‐specific vulnerabilities and provide portfolio diversification opportunities for investors to exploit.

GENERALIZED FISHER HYPOTHESIS VALIDITY FOR CANADA, UK, AND SUISSE STOCK MARKETS: EVIDENCE FROM PANEL ARDL MODELS

In this paper we propose a decision support tool for the investor in terms of asset allocation. The key question is to know whether equities are perfect hedge against inflation if either we invest in only one market or if we go to all the considered markets. We chose three democratic countries having common monetary policy based on the Inflation rate stabilization targeting (including Canada, UK, and Suisse) over the period 1999M01-2018M04. We see how the stock return evolution is related to inflation rate Pre, during, and Post 2008 Global financial crisis (GFC). Then, some dynamic version of the Generalized Fisher hypothesis (GFH) models are explored by some univariate and panel autoregressive dynamic linear (ARDL) frameworks. We conclude that during crisis period, being on either Suisse or Canadian stock market, investors can have important abnormal gains. Then including the UK in a portfolio allows investors to limit losses caused by inflation in the UK stock market alone.

Generalized Fisher Hypothesis Validity for Canada, UK, and Suisse Stock Markets: Evidence from ARDL Models

In this paper we propose a decision support tool for the investor in terms of asset allocation. The key question is to know whether equities are perfect hedge against inflation. We chose three democratic countries having common monetary policy based on the Inflation rate stabilisation targeting (including Canada, UK, and Suisse) over the period 1999M01-2018M04. We see how the stock return evolution is related to inflation rate Pre, during, and Post 2008 Global financial crisis (GFC). Then, some dynamic version of the Generalized Fisher hypothesis (GFH) models is explored by some univariate autoregressive dynamic linear (ARDL) frameworks. We conclude that during crisis period, being on either Suisse or Canadian stock market, investors can have important abnormal gains. © 2022 The Author(s). Published by RITHA Publishing. This article is distributed under the terms of the license CC-BY 4.0., which permits any further distribution in any medium, provided the original work is properly cited.

COVID-19 pandemic, stock returns, and volatility: the role of the vaccination program in Canada

ABSTRACT This paper examines how stock returns and volatility in the Canadian stock market have been affected by both the COVID-19 pandemic and the associated vaccination program. The empirical analysis is based on the generalized autoregressive conditionally heteroskedastic model which explicitly allows the inclusion of information on the COVID-19 pandemic and the vaccination program. The analysis uses daily Canadian equity returns and volatility, spanning the period 27 January 2020, to 31 August 2021. The findings provide evidence that the COVID-19 pandemic exerts a significant negative impact on the mean of Canadian stock returns and a positive impact on their volatility. In contrast, the findings provide novel evidence that the vaccination program in Canada has reversed these detrimental effects.

The climate change and stock market: catastrophes of the Canadian weather.

In the last few decades, the frequency and intensity of extreme weather events have increased in many parts of the world, including Canada, as a result of global warming. Climate warming in Canada is about double the magnitude of global warming; therefore, the effects of weather catastrophes are expected to be higher in Canada compared to other economies. This study explores the impact of weather catastrophes on the Canadian stock market over the period 1988-2016. A mix of accounting ratios and statistical tests is used to estimate the effects of the extreme weather events on the Toronto Stock Exchange (TSX) composite and its subsector indices. A significant negative effect of the weather catastrophes on stock market returns and volatility is noticed a day after the extreme weather events. This effect is widespread in all sub-sectors of the market; IT and financial services sectors are the most impacted, while the consumer staples sector is the least. It is concluded that the impact of climate warming in Canada is higher and more widespread compared to other economies.

Detection of structural regimes and analyzing the impact of crude oil market on Canadian stock market: Markov regime-switching approach

PurposeThis study aims to analyze the impact of the crude oil market on the Toronto Stock Exchange Index (TSX).Design/methodology/approachThe focus is on detecting nonlinear relationship based on monthly data from 1970 to 2021 using Markov-switching vector auto regression (VAR) model.FindingsThe results indicate that TSX return contains two regimes: positive return (Regime 1), when growth rate of stock index is positive; and negative return (Regime 2), when growth rate of stock index is negative. Moreover, Regime 1 is more volatile than Regime 2. The findings also show the crude oil market has a negative effect on the stock market in Regime 1, while it has a positive effect on the stock market in Regime 2. In addition, the authors can see this effect in Regime 1 more significantly in comparison to Regime 2. Furthermore, two-period lag of oil price decreases stock return in Regime 1, while it increases stock return in Regime 2.Originality/valueThis study aims to address the effect of oil market fluctuation on TSX index using Markov-switching approach and capture the nonlinearities between them. To the best of the author’s knowledge, this is the first study to assess the effect of the oil market on TSX in different regimes using Markov-switching VAR model. Because Canada is the sixth-largest producer and exporter of oil in the world as well as the TSX as the Canada’s main stock exchange is the tenth-largest stock exchange in the world by market capitalization, this paper’s framework to analyze a nonlinear relationship between oil market and the stock market of Canada helps stock market players like policymakers, institutional investors and private investors to get a better understanding of the real world.

China’s geopolitical risk and international financial markets: evidence from Canada

ABSTRACT Given the high level of economic and financial globalization, geopolitical tensions can disrupt international trade and negatively influence financial markets. China, a global economic power, has been at the center stage of recent geopolitical tensions with widespread economic implications. We empirically investigate the effect of China’s geopolitical risk on Canada’s equity markets. The results show a persistent impact on market returns and volatility, most prominently on the resources and energy sectors. Even though China plays a smaller role than the US as a trading partner, China’s geopolitical risk significantly affects the Canadian stock market and its component sectors. Our results, therefore, support the need for a constructive approach toward alleviating global geopolitical tensions and for the development of geopolitical risk hedging strategies such as insurance and investment in commodities at the country and investor levels.

The Climate Change and Stock Market: Catastrophes of the Canadian Weather

In the last few decades, the frequency and intensity of extreme weather events have increased in many parts of the world, including Canada, as a result of global warming. Climate warming in Canada is about double the magnitude of global warming; therefore, the effects of weather catastrophes are expected to be higher in Canada compared to other economies. This study explores the impact of weather catastrophes on the Canadian stock market over the period 1988–2016. A mix of accounting ratios and statistical tests is used to estimate the effects of the extreme weather events on the Toronto Stock Exchange (TSX) composite and subsector indices. A significant negative effect of the weather catastrophes on stock market returns and volatility is noticed a day after the extreme weather events. This effect is widespread in all sub-sectors of the market; IT and financial services sectors are the most impacted, while the consumer staples sector is the least. It is concluded that the impact of climate warming in Canada is higher and more widespread compared to other economies.

Canadian stock market volatility under COVID-19

This paper focuses on investigating the impacts of the novel coronavirus (COVID-19) on the Canadian stock market volatility from a time-varying parameter volatility model point of view.

Economic policy uncertainty and stock market returns: Evidence from Canada

We contribute to the literature on economic policy uncertainty (EPU) and asset prices by studying the impact that EPU has on the behavior of the stock market in Canada over the period 1985–2015. Even though a previous study has assessed the impact of policy uncertainties on stock returns in Canada, no research has explained its country-specific associated implications about policy and market behavior in short-run and long-run. Our results indicate that the EPU exhibits significant negative impacts on Canadian stock market returns in both OLS and ARDL estimations. When we look at the possibilities of asymmetric effects of EPU shocks through nonlinear adjustment of the policy uncertainty measure, we find both short-run and long-run impacts are asymmetric. In the long-run, increased policy uncertainty persuades investors to take a ‘risk-off’ approach to gravitate toward lower-risk investments, which tends to decrease asset prices, whereas, decreased uncertainty prompts investors to take on portfolio risk for the chance of higher returns. Over the long-run, higher inflation can have a dampening effect on investment returns and real savings. The Bank of Canada should always demonstrate its accountability through forward looking monetary policy actions to maintain the value of assets in the long-run. Our main conclusions are based on various robustness checks.

Realized Volatility, Jump and Beta: evidence from Canadian Stock Market

ABSTRACT Inclusion of jump component in the price process has been a long debate in finance literature. In this paper, we identify and characterize jump risks in the Canadian stock market using high-frequency data from the Toronto Stock Exchange. Our results provide a strong evidence of jump clustering – about 30% of jumps occur within first 30 minutes of trading hours, and about 25% of jumps are due to the overnight returns. While average intraday jump is negative, jumps induced by overnight returns bring a cancellation effect yielding average size of the jumps to zero. We show that the economic significance of jump component in volatility forecasting is significant but nominal. Our results further demonstrate that market jumps and overnight returns bring significant changes in systematic risk of stocks. From a cross-sectional perspective, while the average effect of market jumps on the beta is not significantly different from zero, the average effect of overnight returns is statistically significant. Overall, our results suggest that systematic risk induced by the market jumps could be hedged by combining value stocks and growth stocks in a portfolio whereas the systematic risk induced by overnight returns can not be hedged even with a well diversified portfolio.

Volatility Contagion between Crude Oil and G7 Stock Markets in the Light of Trade Wars and COVID-19: An Application Based on the TVP-VAR Extended Joint Connectedness Approach

We investigate volatility contagion across G7 stock markets and the market for crude oil for the period between 2007 and 2021. Following the work of Balcilar et al. (2021), we utilise the TVP-VAR extended joint connectedness method and compare results to the standard TVP-VAR method that predicates upon the normalisation approach by Diebold and Yilmaz (2009, 2012, 2014). Both methods provide qualitatively similar results. Overall, findings suggest that connectedness in this network is highly responsive to events that greatly affect international financial markets and assumes large values across the sample period. Prominent among our results is that the crude oil market is an important net transmitter of volatility shocks across the network during the 2014 oil collapse period. In addition, the period from the beginning of 2018 and until mid-2019 is a rather turbulent period for stock markets a fact which is reflected upon the net receiving character of the market for crude oil. Finally, we show that the Canadian stock market is a persistent net transmitter of volatility in recent years, following developments in international trade and the outbreak of the COVID-19 crisis.

A Comparative Analysis on Asymmetric Effect of News on Stock Return Volatility

본 연구는 최근의 글로벌 주식시장에서 주식수익률의 변동성이 뉴스의 호·악재 여부에 따라 비대칭적으로 반응하는지를 분석하였다. 분석대상으로 북미 주식시장 및 유럽의 대표적인 주식시장을 연구대상으로 하였다. 미국과 캐나다의 북미 주식시장 및 프랑스, 영국, 독일의 유럽의 대표적 주식시장 모두가 주식시장에 긍정적인 뉴스가 도착할 경우 예상치 못한 양의 수익률의 제곱이 주식수익률 변동성에 미치는 영향에 비해, 예상치 못한 음의 수익률의 제곱이 변동성에 미치는 영향이 더 크다는 결과를 보여주었다. 이들 국가의 주식시장 주식수익률 변동성의 비대칭성의 상대적인 크기를 비교해보면, 미국의 주식시장이 비대칭성면에서 가장 크고, 상대적으로 캐나다의 주식시장은 악재의 비대칭성 정도가 작았다. 또한, 글로벌 금융위기 전과 후로 분리하여 각각 분석하였는데, 아는 전구간의 분석결과와 거의 유사하였다. 본 연구결과를 볼 때, 주식시장에서의 좋은 뉴스와 부정적인 뉴스의 구분은 주식수익률 변동성을 예측할 때 중요한 고려사항임을 알 수 있다.This study analyzed whether the volatility of stock returns in the recent global representative stock markets reacts asymmetrically according to the good and bad information. For the analysis, the North American stock markets and the representative stock markets in Europe were studied. According to the empirical results of this study, the unanticipated negative return has a more remarkable effect on stock return volatility than the unanticipated positive one does in all stock markets. Comparing the relative size of the asymmetry of the stock markets of these countries, the US stock market is the largest in terms of asymmetry, and the Canadian stock market has a relatively small degree of asymmetry of bad news. It can be seen that the analysis results before and after the global financial crisis are almost similar to the analysis results of all periods of time, and both have significant positive values in the asymmetric response of volatility in stock returns.

THE DAY OF THE WEEK EFFECT: UNCONDITIONAL AND CONDITIONAL MARKET RISK ANALYSIS

The objective of our investigation is to test empirically the existence of the day of the week effect on the Canadian stock market between September 2009 and August 2019. Our findings show that the day of the week effect is present. The highest and lowest mean daily returns of the S&P/TSX Composite index are detected on Tuesday and Monday, respectively. Moreover, we try to give an explanation of the day of the week effect by referring to the world market risk. Using unconditional and conditional models, our results reveal that only the significant Monday effect is still present after accounting for world market risk. Then, we can deduce that the Monday effect in returns of the S&P/TSX Composite index is not explained by the risk-return relationship and that it is an anomaly of the Canadian stock market.

Information flow and price discovery dynamics

Non-homogeneous and time-varying information flow that affects the price discovery processes within and across markets is a common occurrence in reality but is often neglected in the literature of price discovery. To analyze such information flow within and across markets, we propose a new strategy with a new dynamic price discovery measure. We use this strategy to test the efficient home market hypothesis and the sector effect hypothesis based on the intraday data of the 115 stocks cross-listed and traded in the Canadian and U.S. stock markets. We find that the Canadian stock market is more efficient in price discovery for the Canadian stocks cross-listed in the U.S. stock market. A higher trading volume in the Canadian market makes price discovery in that market more efficient. The Canadian stock market is more efficient in price discovery for stocks in the basic materials sector but not in the technology and financial sectors. The NYSE Alternext is more efficient for junior stocks while the NASDAQ is more efficient for technology stocks.

Empirical Evidence of Co-Movement between the Canadian CDS, Stock Market And TSX 60 Volatility Index

Purpose- The prime objective of this study was to find the co-movement between the Canadian credit default swaps market, the Stock market and volatility index (TSX 60 Index) Design/ Methodology- To achieve this purpose, daily data containing 2870 observations starting from the 1st of January 2009 to the 30th of December 2019 were analyzed. This study employed the wavelet approach to present results in short-term, medium-term, long-term, and very long time. Findings- The findings of this study showed a negative correlation between the CDS market, stock market, and the TSX 60 index in the short-term as well as in the long-term term, while in medium-term and very long-term period correlation is strongly positive. The wavelet co-movement results in the short-term and long-term were negative, while this relationship in the medium-term and very long-term period was strongly positive. Practical Implications- This research provides simultaneous valuable information for investment decisions in the short, medium, and long term time horizons, as well as for the policymakers in the Canadian credit default swaps market, stock market, and the volatility index (TSX 60 Index).