Equity Prices Research Articles

The Impact Automated Market Makers on Stock Prices and Returns

Examining the impact Automated market makers have on stock prices and returns is the focus of this study. Automated market makers are state-of-the-art financial instruments that facilitate the bilateral trade of digital assets in the DeFi industry. Market participants trade against pools of liquidity rather than individual buyers and sellers. Market returns, price changes, and liquidity levels will be analyzed both before and after the introduction of automated market makers. Well take a look at how automated market makers affect transaction costs, liquidity, and trading volume. Major stock markets that employ automated market makers will be surveyed for data collection and analysis. The effect of liquidity ratios on market performance will be studied statistically. Understanding the impact Automated market makers have on market returns and pricing is critical for traders, regulators, and researchers. Improved investment returns and the development of decentralized financial ecosystems may result from incorporating the results into market structure and liquidity. The implementation of automated market makers on centralized stock exchanges has been aimed at enhancing market efficiency. This research investigates the impact of automated market makers on stock prices and returns. Using monthly market returns from the closing index and equity price data, the study examines the effects before and after the implementation of automation. The study utilizes a longitudinal research design, analyzing listed firms with data spanning the study period. The findings contribute to the understanding of the influence of automated market makers on stock prices and returns, particularly in regions with limited literature on the subject.

The effect of housing price inequality on mental health

This study investigates whether and how changes in local housing price inequality affect individuals’ mental health. We construct a local-level housing price inequality index using data on all housing transactions in South Korea and link it with individual-level medical utilization records. We find that rising local housing price inequality increases the likelihood of medical visits and expenditures related to mental health conditions. Subgroup analysis shows that the estimated effect of housing price inequality is highly heterogeneous, as the estimates vary noticeably by gender, age, and income levels.

Bank-specific factors, market conditions and the riskiness of Islamic and conventional banks: evidence from recent quantile approaches

PurposeThe purpose of this paper is to investigate how bank-specific factors affect the riskiness of conventional and Islamic banks in response to shocks in major financial indices as market conditions change.Design/methodology/approachThe authors use a multivariate quantile model using daily equity returns data to analyze financial risk spillovers in the values at risk that may occur between major financial indices and the equity prices of conventional and Islamic banks worldwide. Then, using both quantile and quantile-on-quantile models, the authors examine the effects of bank-specific variables such as leverage ratio, bank size, return on equity and capital adequacy ratio on the initial impact of shocks in major global financial indices on bank equity price returns at different quantiles of shocks and bank-specific variables.FindingsThe findings reveal that major financial indices can predict bank stock returns. Moreover, the authors find that the effect of bank-specific factors on the riskiness of banks is heterogeneous in that it depends on the bank type (Islamic vs conventional), the level of banking variable (high vs low) and, more importantly, market conditions.Originality/valueTo the best of the authors’ knowledge, this is the first study that compares the dual banking system with stock market performance while considering bank-specific variables as market conditions change. The results of this study reveal that the effect of bank-specific variables on bank performance varies according to different quantiles of shocks and bank-specific variables. Islamic banks may echo or differ from conventional banks depending on the specific factor under investigation.

Fund Flows, Stock Markets, and Economic Policy Uncertainty: From the Perspective a CIVET Nation

ABSTRACT We investigate the relationships among economic policy uncertainty (EPU), equity fund flows (EFF), and the Colombian stock market. Results show adverse impacts of domestic, global, and regional EPUs on Colombia’s stock returns and EFF. Global and regional EPUs transmit to Colombian EPU which makes the market vulnerable to uncertainty shocks. A global EPU shock reduces returns by 2.2% the following month, raises Colombian EPU by 12%, and reduces EFF by 0.24%. Furthermore, heightened EPU increases liquidity and reduces stock returns. Our results suggest a feedback loop where uncertainty shocks increase trading, fuel domestic uncertainty, and reduce equity prices.

Systemic Risk and Stock Market Return: A Vector Error Correction Estimate from Nigeria

This study examined the effect of systemic risk on the stock market return in Nigeria. Time series data were sourced from Central Bank of Nigeria statistical Bulletin from 1990-2021. Stock market return was modeled as the function of exchange rate risk, commodity price risk, equity price risk and interest rate risk. Multiple regressions were formulated to examine the effect of systemic risk on stock market return. Ordinary least square methods were adopted as data analysis methods. R-square, adjusted R-square, T-statistic, regression coefficient, f-statistic and Durbin Watson were used to examine the effect of systemic risk on stock return. The study found that systemic risk explained 62.8 percent variation in stock market return over the time covered in this study. The study found that exchange rate risk has negative and no significant effect, commodity price risk have positive and significant effect, interest rate have positive and no significant effect while equity price risk have positive and significant effect on stock market return. From the regression summary, the study concludes that systemic risk has significant effect on stock market return in Nigeria. The study recommends that systemic risk management should be considered as part of strategic plans which need to be reviewed on a more frequent basis and macroeconomics policies should directed towards stabilizing Nigerian exchange rate to avoid depreciating naira exchange rate against key currencies that exposes the firms to exchange rate risk.

The term effect of financial cycle variables on GDP growth

We study how current financial cycle variables (house prices, credit-to-GDP, and share prices) influence the entire distribution of future GDP growth. Changes in financial cycle variables affect borrowers’ and lenders’ balance sheets, resulting in the lower quantile of GDP growth to be more sensitive to the financial accelerator, while the upper quantiles are relatively stable over horizons. We also find the combination of the rapid growth in asset prices and higher leverage amplifies the effect of asset prices on the downside of GDP growth. Moreover, we rely upon financial cycles constructed using two popular methods to investigate the impact on the distribution of GDP growth. The findings are consistent with the impact of financial cycle variables. In addition, we execute a series of robustness tests and find that the results survive. Our results suggest that policymakers should consider the risk-return tradeoff between economic growth and financial stability in the term structure emanating from macro-financial linkages. Specifically, policies regarding credit expansion and contraction combined with the regulation of house and equity prices should be calibrated to the state of GDP growth.

An inquiry concerning Japanese yen swap yields

This paper econometrically models Japanese yen (JPY)–denominated interest rate swap yields. It examines whether the short-term interest rate exerts an influence on the long-term JPY swap yield after controlling for several key macroeconomic variables, such as core inflation, the growth of industrial production, the percentage change in the equity price index, and the percentage change in the exchange rate. It also tests whether there are structural breaks in the dynamics of Japanese swap yields and related variables. The estimated econometric models show that the short-term interest rate exerts an important influence on the long-term swap yield in some periods but not in other periods in which core inflation exerts a marked influence on the swap yield. The findings from the econometric models reveal that a discernible relationship between the call rate and the swap yield of different maturity tenors clearly held prior to April 2014 but did not in the subsequent period. These findings highlight the limits and scope of John Maynard Keynes’s contention that the central bank’s policy rate commands a decisive influence over the long-term market rate through the short-term interest rate. The policy implications of the estimated models’ results are discussed.

The Effect of U.S. Climate Policy on Financial Markets: An Event Study of the Inflation Reduction Act

The Inflation Reduction Act of 2022 (IRA) represents the largest climate policy action ever undertaken in the United States. Its legislative path was marked by two abrupt shifts as the likelihood of climate policy action fell to near zero and then rose to near certainty. We investigate equity price reactions to these two events, which represent major realizations of climate policy transition risk. Our results highlight the heterogeneous nature of climate policy risk exposure. We find sizable reactions that differ by industry as well as across firm-level measures of greenness such as environmental scores and emission intensities. While the financial market response to the IRA was economically significant, it did not lead to instability financial stress, suggesting that transition risks posed by climate policies even as ambitious as the IRA may be manageable.

The effects of the BoJ's ETF purchases on equities and corporate investment

The Bank of Japan acquired ETFs and stocks to stimulate Japan's stagnating economy and improve financial conditions. Studies found that this program raised equity prices, although its effectiveness in stimulating corporate investment remained unclear. This paper contributes to the literature by identifying the program's channels affecting equities and corporate investment by utilizing data from firms listed on the Nikkei-225 from 2012 to 2019 and estimating a panel GMM. The results show the program raised stock returns and reduced volatility by creating price pressures and inducing investors to rebalance their portfolios; however, it diminished market liquidity by reducing the supply of shares and adjusting market expectations. The program raised investment for firms with high-growth prospects or domestic-oriented revenue by increasing household wealth and reducing equity risk premia to create favorable financial conditions. Overall, this study illustrates the program stimulated investment while having trade-offs regarding market liquidity and cash hoarding.

An IMEX-based approach for the pricing of equity warrants under fractional Brownian motion models

In this paper, the pricing of equity warrants under a class of fractional Brownian motion models is investigated numerically. By establishing a new nonlinear partial differential equation (PDE) system governing the price in terms of the observable stock price, we solve the pricing system effectively by a robust implicit-explicit numerical method. This is fundamentally different from the documented methods, which first solve the price with respect to the firm value analytically, by assuming that the volatility of the firm is constant, and then compute the price with respect to the stock price and estimate the firm volatility numerically. It is shown that the proposed method is stable in the maximum-norm sense. Furthermore, a sharp theoretical error estimate for the current method is provided, which is also verified numerically. Numerical examples suggest that the current method is efficient and can produce results that are, overall, closer to real market prices than other existing approaches. A great advantage of the current method is that it can be extended easily to price equity warrants under other complicated models. doi: 10.1017/S1446181123000159

A vaccine for volatility? An empirical analysis of global stock markets and the impact of the COVID-19 vaccine

The oscillation of COVID-19 growth has had a sustaining impact on financial markets. This study investigates the asymmetric impact of COVID-19 growth and recovery on financial markets. Examining ten epicenters of the virus from 01/01/2021 to 31/12/2021, we utilize a stepwise regression methodology and a diverse set of control variables. Controlling for volatility, credit risk, liquidity risk, monetary policy, gold, and oil, our findings indicate a significant impact of COVID-19 on equity indices. Vaccination growth correlates with positive price movements in the USA, UK, China, Japan, France, and Spain. Simultaneously, negative price trends align with virus growth in the USA, UK, China, Japan, Spain, and World models. A nexus of causality between COVID-19, global oil markets, and equity prices is identified, while credit and liquidity risks emerged as significant risk factors in China. Our results highlight the pertinence of swift vaccine developments, lockdown interventions, and central bank responses, providing valuable insights to governments, regulators, and all financial market stakeholders.

Impact of Monetary Policy on Financial Risks in Nigerian Banking Industry

The study examines how monetary policy affects financial risks in the Nigerian banking sector. The study's goal is to demonstrate the monetary policy's major influence and significance on credit risk, market risk, and operational risk. The study was conducted as a result of the issue that monetary policy would just raise market volatility and undermine its own credibility. The market would not contribute in any way to the successful implementation of monetary policy or the pursuit of price stability. The outlook for the economy and cost extensive have drawbacks. Hence, the direction of financial stability and price stability actions normally go in the same direction and contention between both branches is rather questionable. The study adopted a quantitative method research design only since the variables can be measured and quantified. The population of the study consisted of 24 deposit money banks in Nigeria. Secondary data were obtained from annual reports and statements of accounts of six banks. The sampled banks were selected using judgemental sampling techniques. The financial statement was analysed through Ordinary Least Square (OLS) regression analysis facilitated by applying Econometric views (Eviews). The reports were made based on the results of the tables. The finding revealed that monetary policy significantly impacts non-performing loans, equity prices and the number of employees. The study recommends that further research should be carried out using other banking sectors, such as microfinance and companies.

Which Investors Matter for Equity Valuations and Expected Returns?

Abstract Based on an asset demand system, we develop a framework to quantify the impact of market trends and changes in regulation on asset prices, price informativeness, and the wealth distribution. Our leading applications are the transition from active to passive investment management and climate-induced shifts in asset demand. The transition from active to passive investment management had a large impact on equity prices but a small impact on price informativeness because capital did not flow from more to less informed investors on average. This finding is based on a new measure of investor-level informativeness that identifies which investors are more informed about future profitability. Climate-induced shifts in asset demand have a potentially large impact on equity prices and the wealth distribution, implying capital gains for passive investment advisors, pension funds, insurance companies, and private banking and capital losses for active investment advisors and hedge funds.

Portfolio benefits of taxonomy orientated and renewable European electric utilities

This paper investigates carbon and energy mix risk in the equity prices of EU-Taxonomy orientated and renewable European electric utility companies. We calculate carbon intensity and energy mix factors to measure possible carbon and energy mix premia while investigating the performance of portfolios of EU-Taxonomy orientated and renewable European electric utilities. We use a unique dataset to extend the three-factor model presented by Fama and French (1993) and find evidence of a positive renewable energy mix premium for portfolios of EU-Taxonomy orientated firms and firms with a high level of renewable energy in the energy mix. A positive low-carbon premium is also found for these same portfolios. Lastly, based on the three-factor model, an EU-Taxonomy orientated portfolio outperforms both a non-orientated portfolio and a non-reporting portfolio while a renewable energy portfolio outperforms a conventional energy portfolio. Our results are important for regulators, investors and European electric utilities in assessing the impact environmental regulations have on a firm’s cost of capital.

Chinese yuan interest rate swap yields.

This paper models the dynamics of Chinese yuan-denominated long-term interest rate swap yields. It shows that the short-term interest rate exerts a decisive influence on the long-term swap yield after controlling for various macrofinancial variables, such as core inflation, the growth of industrial production, the percent change in the equity price index, and the percentage change in the Chinese yuan exchange rate. The autoregressive distributed lag approach is applied to model the dynamics of the long-term swap yield. The findings reinforce and extend John Maynard Keynes's conjecture that in advanced countries, as well as emerging market economies such as China, the central bank's actions have a decisive role in setting the long-term interest rate on government bonds and over-the-counter financial instruments, such as swaps.

Asymmetric causality between Bitcoin and tech stocks in the US market using mixed frequency data

PurposeThis study is the first to investigate the causal relationship between Bitcoin and equity price returns by sectors. Previous studies have focused on aggregated indices such as S&P500, Nasdaq and Dow Jones, but this study uses mixed frequency and disaggregated data at the sectoral level. This allows the authors to examine the nature, direction and strength of causality between Bitcoin and equity prices in different sectors in more detail.Design/methodology/approachThis paper utilizes an Unrestricted Asymmetric Mixed Data Sampling (U-AMIDAS) model to investigate the effect of high-frequency Bitcoin returns on a low-frequency series equity returns. This study also examines causality running from equity to Bitcoin returns by sector. The sample period covers United States (US) data from 3 Jan 2011 to 14 April 2023 across nine sectors: materials, energy, financial, industrial, technology, consumer staples, utilities, health and consumer discretionary.FindingsThe study found that there is no causality running from Bitcoin to equity returns in any sector except for the technology sector. In the tech sector, lagged Bitcoin returns Granger cause changes in future equity prices asymmetrically. This means that falling Bitcoin prices significantly influence the tech sector during market pullbacks, but the opposite cannot be said during market rallies. The findings are consistent with those of other studies that have established that during market pullbacks, individual asset prices have a tendency to decline together, whereas during market rallies, they have a tendency to rise independently. In contrast, this study finds evidence of causality running from all sectors of the equity market to Bitcoin.Practical implicationsThe findings have significant implications for investors and fund managers, emphasizing the need to consider the asymmetric causality between Bitcoin and the tech sector. Investors should avoid excessive exposure to both Bitcoin and tech stocks in their portfolio, as this may lead to significant drawdowns during market corrections. Diversification across different asset classes and sectors may be a more prudent strategy to mitigate such risks.Originality/valueThe study's findings underscore the need for investors to pay close attention to the frequency and disaggregation of data by sector in order to fully understand the true extent of the relationship between Bitcoin and the equity market.

Environmental policy and equity prices.

The information quality hypothesis suggests that, theoretically, the relationship between expected returns and conditional volatility is ambiguous and depends on the precision of the information signal, hence, it is affected by investors' level of uncertainty. When investors' uncertainty increases, the relationship may become negative. Using environmental policy as an imprecise signal of future economic performance, I find that a newspaper-based environmental policy-related uncertainty indicator (EPN) has a low correlation with equity market volatility, but has a significant negative impact on expected returns. A managed equity market portfolio that takes less (more) risk when the past EPN-related uncertainty is high (low) produces significant equity-risk-adjusted alphas. In particular, I show that EPN-timing is profitable, because it foresees the attractiveness of the mean-variance trade-off. Overall, an EPN-managed equity portfolio generates an annualized equity-risk-adjusted alpha of 5-6%. Interestingly, I find that the uncertainty around environmental policy is on average lower and, therefore, the strategy performs better during periods when the Republicans control the senate.

Supervisory stringency, payout restrictions, and bank equity prices

I study investor responses to the 2020 bank stress tests that included restrictions on shareholder payouts. I find that banks subject to the stress tests and payout restrictions experienced both immediate and persistently lower excess stock price returns. In the cross-section, I find that excess stock returns declined with bank size but cannot otherwise be explained by pre-pandemic bank or payout characteristics, suggesting that investors penalized banks likely to experience greater regulatory scrutiny. However, the excess stock return penalties are smaller than those previously estimated in the literature examining voluntary payout reductions that signal bank distress. The results show that using supervisory discretion to take preventative actions in a crisis can be less costly than actions taken once banks are distressed.

Contingent capital conversion under dual asset and equity jump–diffusions

We model contingent capital with market trigger under dual jump–diffusion processes in asset values and equity prices. Under the dual jump–diffusions, we show that the conversion ratio is no longer deterministic under the jump–diffusion. The conversion ratio becomes a stochastic process related to the jump process of the underlying equity and the conditional expectation of the contingent capital at the conversion time. Thus, making the implementation of contingent capital impossible. The best we can hope to practically implement this conversion design, is to give the minimal conversion ratio (at least the portion required to convert) to conform with Basel III.

Security token offerings versus loan guarantees for risk-averse entrepreneurs under asymmetric information

We compare two competitive financing schemes, loan guarantees and security token offerings (STOs), for a risk-averse entrepreneur to start a project. We show that, if information is symmetric, STOs are better than loan guarantees. Under asymmetric information, we derive the highest equity price that makes low-type entrepreneurs’ imitation unprofitable. If the project risk is sufficiently high, loan guarantees (STOs) induce pooling (separating) equilibrium, and otherwise the opposite holds. Generally the higher the project risk, the less the share of equity retained by entrepreneurs and the less the project value. STOs might make project value increase with project risk. In the view of high-type entrepreneurs, if project risk is not very high or entrepreneurs do not dislike risk too much, loan guarantees are better than STOs, and otherwise the opposite holds true.