Country Equity Indices Research Articles

Cross-Country Differences in Return and Volatility Metrics of World Equity Indices

Abstract This research seeks to determine whether the cross-country differences in return and volatility metrics in various country equity indices can be explained by differences in economic development. We base the study on the MSCI IMI net income indices on two samples: a 51-country sample from the period 31 May 2002 to 28 February 2022, and a 75-country sample from the period 30 November 2010 to 28 February 2022. In this study, countries are grouped into four categories: frontier, emerging, early-developed, and developed, based on gross domestic product (GDP) per capita. The Kruskal–Wallis rank sum test is used to find cross-group differences, and the results are further analyzed with the pairwise Wilcoxon rank sum test with the Holm–Bonferroni p value adjustment method. The results are relatively unintuitive and show that there is no significant cross-group difference in daily and monthly returns. There is evidence of a considerable difference in volatility metrics, especially in the case of the emerging market group, which is significantly different from the three other groups. The results are slightly sensitive to time period change and very sensitive to changes in income categories of some countries.

On the systemic nature of global inflation, its association with equity markets and financial portfolio implications

This paper uses new and recently introduced mathematical techniques to undertake a data-driven study on the systemic nature of global inflation. We start by investigating country CPI inflation over the past 70 years. There, we highlight the systemic nature of global inflation with a judicious application of eigenvalue analysis and determine which countries exhibit most “centrality” with an inner-product based optimization method. We then turn to inflationary impacts on financial market securities, where we explore country equity indices’ equity robustness and the varied performance of equity sectors during periods of significant inflationary pressure. Finally, we implement a time-varying portfolio optimization to determine which asset classes were most beneficial in increasing portfolio Sharpe ratio when an investor must hold a core (and constant) allocation to equities.

Statutory corporate tax change and the stock market returns: the global experience

ABSTRACT This study offers a global perspective on the relationship between statutory corporate tax changes and country equity index returns for 54 countries for 2002–2017. Using fixed-effect models for country-effect to account for possible omitted country characteristics, we report higher world-adjusted buy and hold abnormal returns (BHARs) for the country-years with higher corporate tax cuts. Noticeably, we document this outcome for not only the year before the actual tax change but also the year afterwards, indicating that investors might not fully or quickly integrate tax change information. The results hold after excluding the 2008 global financial crisis. Dividing the sample based on market development, we report similar results for emerging and frontier markets, but the tax cut effect becomes insignificant for the one-year window after the tax change in developed markets, indicating a lesser degree of market underreaction.

Global risk factors in the returns of listed private equity

PurposeThe purpose of this paper is, to study macroeconomic risk factors driving the expected stock returns of listed private equity (LPE). The authors use LPE indices divided into different styles and regions from January 2004 to December 2016 and a set of country stock indices to estimate the macroeconomic risk profiles and corresponding risk premiums. Using a seemingly unrelated regressions (SUR) model to estimate factor sensitivities, the authors document that LPE indices exhibit stock market βs that are greater than 1. A one-factor asset pricing model using world stock market returns as the only possible risk factor is rejected on the basis of generalized method of moments (GMM) orthogonality conditions. In contrast, using the change in a currency basket, the G-7 industrial production, the G-7 term spread, the G-7 inflation rate and a recently proposed indicator of economic policy uncertainty as additional risk factors, this multifactor model is able to price a cross-section of expected LPE returns. The risk-return profile of LPE differs from country equity indices. Consequently, LPE should be treated as a separate asset class.Design/methodology/approachFollowing Ferson and Harvey (1994), the authors use an unconditional asset pricing model to capture the structure of returns across LPE. The authors use 11 LPE indices divided into different styles and regions from January 2004 to December 2016, and a set of country stock indices as spanning assets to estimate the macroeconomic risk profiles and corresponding risk premiums.FindingsUsing a seemingly unrelated regressions (SUR) model to estimate factor sensitivities, the authors document that LPE indices exhibit stock market ßs that are greater than 1. The authors estimate a one-factor asset pricing model using world stock market returns as the only possible risk factor by GMM. This model is rejected on the basis of the GMM orthogonality conditions. By contrast, a multifactor model built on the change in a currency basket, the G-7 industrial production, the G-7 term spread, the G-7 inflation rate and a recently proposed indicator of global economic policy uncertainty as additional risk factors is able to price a cross-section of expected LPE returns.Research limitations/implicationsGiven data availability, the authors’ sample is strongly influenced by the financial crisis and its aftermath.Practical implicationsInformation about the risk profile of LPE is important for asset allocation decisions. In particular, it may help to optimally react to contemporaneous changes in economy-wide risk factors.Originality/valueTo the best of authors’ knowledge, this is the first LPE study which investigates whether a set of macroeconomic factors is actually priced and, therefore, associated with a non-zero risk premium in the cross-section of returns.

Paper profits or real money? Trading costs and stock market anomalies in country ETFs

Are the quantitative equity strategies for country selection robust to implementation costs? To answer this question, we conduct a comprehensive examination of the country-level strategies so far. We review, classify, and replicate 120 equity anomalies within a sample of 42 country equity indices for the years 1996–2017. Next, using ETF price and spread data, we test the effect of real-life conditions and trading costs on the anomaly performance. We also examine three cost-mitigation strategies: infrequent rebalancing, capitalization-based weighting, and focus on low-cost securities. We find that 46% of the long-only monthly rebalanced anomaly portfolios display significant alphas, concentrated strongly among strategies based on value, momentum, and liquidity. The effect of transaction costs proves largely lethal to returns, leaving only a handful of anomalies profitable. Less frequent rebalancing (annually) helps to regain the effectiveness of the strategies, increasing the monthly alphas on the long-only anomaly portfolios to 0.44% on average.

Paper Profits or Real Money? Trading Costs and Stock Market Anomalies in Country Equity Indices

Are the quantitative equity strategies for country selection robust to implementation costs? To answer this question, we conduct a comprehensive examination of the country-level strategies so far. We review, classify, and replicate 120 equity anomalies within a sample of 42 country equity indices for the years 1996–2017. Next, using ETF price and spread data, we test the effect of real-life conditions and trading costs on the anomaly performance. We also examine three cost-mitigation strategies: infrequent rebalancing, capitalization-based weighting, and focus on low-cost securities. We find that 46% of the long-only monthly rebalanced anomaly portfolios display significant alphas, concentrated strongly among strategies based on value, momentum, and liquidity. The effect of transaction costs proves largely lethal to returns, leaving only a handful of anomalies profitable. Less frequent rebalancing (annually) helps to regain the effectiveness of the strategies, increasing the monthly alphas on the long-only anomaly portfolios to 0.44% on average.

Oil and G7 Equity Index Return Predictability: The Importance of Disentangling the Shocks Embedded in Oil Price Changes

Using data until 2015, we document that oil price changes no longer predict G7 country equity index returns, as has been documented based on earlier sample periods. We use a structural VAR approach to obtain an oil price change decomposition into an oil supply shock, a global demand shock, and an oil-specific demand shock and argue that these three shocks should have different effects on equity markets. The conjecture that oil supply shocks and oil-specific demand shocks (global demand shocks) predict equity returns with a negative (positive) slope is supported by the empirical evidence over the 1986-2015 period. The results are statistically and economically significant and do not appear to be consistent with time-varying risk premia.

Has the Long-Term Reversal Reversed? Evidence from Country Equity Indices

This study reexamines the long-term reversal anomaly across international stock market indices. We investigate a comprehensive and up-to-date sample of 74 countries for years 1995-2015. By controlling for country-level value, size and momentum effects, we provide convincing evidence that the long-run reversal effect has reversed in recent years, so that past winners outperform losers. The outcomes are robust to impact of country-specific tax rates on dividends, different portfolio weighting schemes or alternative sorting periods. The “reverse reversal anomaly” is strongest for large markets, nonetheless it is observable in a broad range of subsets, independently of market liquidity, level of development, country financial openness, pricing or short term past performance.

Investment in Microfinance Equity: Risk, Return, and Diversification Benefits

This paper takes full advantage of daily quoted prices of microfinance stocks from their issuance, and draws a global picture of worldwide microfinance equity from the viewpoint of a profit-oriented investor. We construct microfinance country equity indices and an international global microfinance index. We analyse the changes in these indices, which we assess in reference to comparable indices for the financial sector and also to national indices. Our findings show that microfinance has resumed its close correlation with the financial sector since 2001. In terms of risk exposure, estimations of the Capital Asset Pricing Model demonstrate that microfinance shares exhibit higher market beta than conventional financial institutions, and have equivalent currency exposure. We also examine whether adding microfinance to international asset portfolios improves the investor's risk-return performance. While the inclusion of microfinance equity has indeed been a major source of diversification in the 1990s, its impact has diminished in recent years. Still, optimal portfolios invested in countries where microfinance equity is available may contain up to 20% of stocks from MFIs.

Investment in Microfinance Equity: Risk, Return, and Diversification Benefits

This paper takes full advantage of daily quoted prices of microfinance stocks from their issuance, and draws a global picture of worldwide microfinance equity from the viewpoint of a profit-oriented investor. We construct microfinance country equity indices and an international global microfinance index. We analyse the changes in these indices, which we assess in reference to comparable indices for the financial sector and also to national indices. Our findings show that microfinance has resumed its close correlation with the financial sector since 2001. In terms of risk exposure, estimations of the Capital Asset Pricing Model demonstrate that microfinance shares exhibit higher market beta than conventional financial institutions, and have equivalent currency exposure. We also examine whether adding microfinance to international asset portfolios improves the investor's risk-return performance. While the inclusion of microfinance equity has indeed been a major source of diversification in the 1990s, its impact has diminished in recent years. Still, optimal portfolios invested in countries where microfinance equity is available may contain up to 20% of stocks from MFIs.

Currency depreciation effects on ADR returns: evidence from Latin America

We use seemingly unrelated regressions (SUR) and multivariate regression models (MVRM) in a panel sample of 74 American depository receipts (ADR) programs from Argentina, Brazil, Chile, and Mexico during the period May 1994 to May 2009 to analyze the behavior of ADR returns during the 300-day period surrounding the currency crises breakdown in the originator’s country. Controlling for the underlying stock and local and host country equity indices, we find that ADRs generate significant negative abnormal returns during currency crises, due to translation exposure. Abnormal returns remain statistically significant even in crises triggered by currency depreciations as small as 3.6%. The results persist after including exchange rate returns as a control variable and after an orthogonalization procedure of exchange rate against local country indices. In agreement with ADR literature, our results show that ADR prices are determined primarily by the underlying stock, exchange rates, and host country index, in that order. Moreover, we observe how market integration has become evident in more recent times as the coefficients for the U.S. stock market have increased its contribution to ADR price discovery.

The role of exchange rates in intertemporal risk–return relations

This paper investigates the significance of an intertemporal relation between expected returns on countries’ stock market portfolios and their risk exposures to the world market portfolio. We find that the intertemporal risk–return relation differs significantly under different currency denominations. The slope coefficient is the largest at around seven when the returns are denominated in Japanese yen, moderate at about five when the returns are denominated in the Canadian or US dollars, and the smallest at around three when the returns are denominated in pound or euro and its predecessors. The ranking of the risk–return coefficients across different currency denominations remains the same when we replace country equity indices with global industry portfolios in estimating the intertemporal relations, when we change the return frequency from monthly to daily, and when we consider different specifications for the conditional covariance process.

Momentum Effects in Country Equity Indices

This paper examines the 70 country indices which comprise the MSCI world index as a representative set of global equity investment opportunities, and examines momentum and mean-reversion effects in these. We show that persistent and significant effects do exist, particularly with regard to short-term momentum. A strategy of holding for one month, a portfolio of the four best performing MSCI country indices over the previous 11 months, was found to persistently out-perform an equal weighted benchmark by around 10% per annum over the 39 year period from 1970 to 2009.

The Role of Exchange Rates in Intertemporal Risk-Return Relations

In this paper, we investigate the role of currency denomination in intertemporal risk-return relations in international economies. We find that the intertemporal risk-return relation differs significantly under different currency denominations. The slope coefficient is the largest at around seven when the returns are denominated in Japanese yen, moderate at about five when the returns are denominated in the Canadian or US dollars, and the smallest at around three when the returns are denominated in pound or euro and its predecessors. The ranking of the risk-return coefficients across different currency denominations remains the same when we replace country equity indices with global industry portfolios in estimating the intertemporal relations, when we change the return frequency from monthly to daily, and when we consider different specifications for the conditional covariance process. Our study shows that consumption risk sharing is incomplete and that exchange rate dynamics are informative about the pricing differences across different economies.

Dynamic Asymmetric Dependencies between Equities and Exchange Rate Markets

This paper investigates the dynamic relationship between exchange rate and equity return differentials, for ten developed countries relative to the US, by employing a time varying copula methodology. Most of the time, this relationship is empirically found to be positive with statistical significance: e.g., when a foreign country equity index has a higher return than S\&P500, it is accompanied with the appreciation of the foreign (local) currency relative to the US dollar. Evidence of structural breaks (dramatic drops) is found in the conditional copula during the 2008 global financial crisis but not in the 2002 bear market. Asymmetry is also tested for the estimated dynamic dependence by the symmetrized Joe-Clayton copula. For most of our samples, the upper tail dependence tends to be smaller than the lower tail dependence. This demonstrates that the exchange rate and equity return differentials against the US are less dependent when the local currency appreciates against USD and the local equities outperform the US equities, than vice versa.

Modeling Exchange Rate Movements with Cross-Markets and Macroeconomics Variables

This paper proposes to model exchange rate movements by integrating cross-markets explanatory variables, such as country equity indices and commodity prices (crude oil) with macroeconomics variables such as inflation and interest rates. The empirical analysis is carried out through the vector autoregression (VAR) methodology, as well as Granger causality, cointegration tests, impulse responses and variance decomposition. The testing period is from January 1989 to October 2008, i.e, includes the recent financial crisis episode. Our universe is limited to the most liquid developed markets. We find evidence that the financial markets variables, individually and jointly, outperform the macroeconomics variables in determining exchange rates. The oil price has been the strongest driver for the US dollar, with soaring oil prices leading to dollar depreciation against the major currencies: EUR, GBP, JPY and CAD.

The Impact of Macroeconomic and Financial Variables on Market Risk: Evidence from International Equity Returns

Using a GARCH approach, we estimate a time–varying two–factor international asset pricing model for the weekly equity index returns of 16 OECD countries. We find significant time–variation in the exposure (beta) of country equity index returns to the world market index and in the risk–adjusted excess returns (alpha). We then explain these world market betas and alphas using a number of country–specific macroeconomic and financial variables with a panel approach. We find that several variables including imports, exports, inflation, market capitalisation, dividend yields and price–to–book ratios significantly affect a country’s exposure to world market risk. Similar conclusions are obtained by using lagged explanatory variables, and thus these variables may be useful as predictors of world market risks. Several variables also significantly impact the risk–adjusted excess returns over this time period. Our results are robust to a number of alternative specifications. We further discuss some economic hypotheses that may explain these relationships.

Explaining exchange rate risk in world stock markets: A panel approach

Using a GARCH approach, we estimate a time-varying two-factor international asset pricing model for weekly equity index returns of 16 OECD countries. A trade-weighted basket of exchange rates and the MSCI world market index are used as risk factors. We find significant currency risk exposures in country equity index returns. We then explain these currency betas using several country-specific macroeconomic variables with a panel approach. We find that imports, exports, credit ratings, and tax revenues significantly affect currency risks in a way that is consistent with some economic hypotheses. Similar conclusions are obtained by using lagged explanatory variables, and thus these macroeconomic variables may be useful as predictors of currency risk exposures. Our results are robust to a number of alternative specifications.

The Impact of Macroeconomic and Financial Variables on Market Risk: Evidence from International Equity Returns

Using a GARCH approach, we estimate a time-varying two-factor international asset pricing model for the weekly equity index returns of 16 OECD countries. We find significant time-variation in the exposure (beta) of country equity index returns to the world market index and in the risk-adjusted excess returns (alpha). We then explain these world market betas and alphas using a number of country-specific macroeconomic and financial variables with a panel approach. We find that several variables including imports, exports, inflation, market capitalization, dividend yields and price-to-book ratios significantly affect a country's exposure to world market risk. Similar conclusions are obtained by using lagged explanatory variables, and thus these variables may be useful as predictors of world market risks. Several variables also significantly impact the risk-adjusted excess returns over this time period. Our results are robust to a number of alternative specifications. We further discuss some economic hypotheses that may explain these relationships.