Sector Equity Research Articles

Variance risk premia for agricultural commodities

PurposeThe purpose of this paper is to study the variance risk premium in corn and soybean markets, where the variance risk premium is defined as the difference between the historical realized variance and the corresponding risk-neutral expected variance.Design/methodology/approachThe authors compute variance risk premiums using historical derivatives data. The authors use regression analysis and time series econometrics methods, including EGARCH and the Kalman filter, to analyze variance risk premiums.FindingsThere are moderate commonalities in variance within the agricultural sector, but fairly weak commonalities between the agricultural and the equity sectors. Corn and soybean variance risk premia in dollar terms are time-varying and correlated with the risk-neutral expected variance. In contrast, agricultural commodity variance risk premia in log return terms are more likely to be constant and less correlated with the log risk-neutral expected variance. Variance and price (return) risk premia in agricultural markets are weakly correlated, and the correlation depends on the sign of the returns in the underlying commodity.Practical implicationsCommodity variance (i.e. volatility) risk cannot be hedged using futures markets. The results have practical implications for US crop insurance programs because the implied volatilities from the relevant options markets are used to estimate the price volatility factors used to generate premia for revenue insurance products such as “Revenue Protection” and “Revenue Protection with Harvest Price Exclusion.” The variance risk premia found implies that revenue insurance premia are overpriced.Originality/valueThe empirical results suggest that the implied volatilities in corn and soybean futures market overestimate true expected volatility by approximately 15 percent. This has implications for derivative products, such as revenue insurance, that use these implied volatilities to calculate fair premia.

Volatility spillovers between crude oil and Chinese sectoral equity markets: Evidence from a frequency dynamics perspective

We examine the frequency dynamics of volatility spillovers between crude oil and China's stock markets in a spectral representation framework of generalized forecast error variance decomposition using sectoral stock indices data. We find evidence of total volatility spillover driven mainly by short-term spillovers. The net spillovers of the oil market are almost all positive and dominated by short-ter.m components, although the spillover during China's 2015 financial crisis is negative and attributable to long-term components. In addition, there exists heterogeneity in net pairwise (frequency) spillovers between the oil and sectoral stock markets. Moreover, structural breaks in volatilities appear to be a significant feature of volatility spillovers. Finally, frequency spillovers in our system can predict future stock market volatility. These results have economic implications for investors and policymakers.

Uncertainty and energy-sector equity returns in Iran: a Bayesian and quasi-Monte Carlo time-varying analysis

This study investigates whether the implied crude oil volatility and the historical OPEC price volatility can impact the return to and volatility of the energy-sector equity indices in Iran. The analysis specifically considers the refining, drilling, and petrochemical equity sectors of the Tehran Stock Exchange. The parameter estimation uses the quasi-Monte Carlo and Bayesian optimization methods in the framework of a generalized autoregressive conditional heteroskedasticity model, and a complementary Bayesian network analysis is also conducted. The analysis takes into account geopolitical risk and economic policy uncertainty data as other proxies for uncertainty. This study also aims to detect different price regimes for each equity index in a novel way using homogeneous/non-homogeneous Markov switching autoregressive models. Although these methods provide improvements by restricting the analysis to a specific price-regime period, they produce conflicting results, rendering it impossible to draw general conclusions regarding the contagion effect on returns or the volatility transmission between markets. Nevertheless, the results indicate that the OPEC (historical) price volatility has a stronger effect on the energy sectors than the implied volatility has. These types of oil price shocks are found to have no effect on the drilling sector price pattern, whereas the refining and petrochemical equity sectors do seem to undergo changes in their price patterns nearly concurrently with future demand shocks and oil supply shocks, respectively, gaining dominance in the oil market.

An application of sparse-group lasso regularization to equity portfolio optimization and sector selection

In this paper, we propose a modified mean-variance portfolio selection model that incorporates the sparse-group lasso (abbreviated as SGLasso) regularization in machine learning. This new model essentially has three merits: first, it allows investors to incorporate their preference over equity sectors when constructing portfolios; second, it helps investors select sectors based on assets’ past performances as it encourages sparsity among sectors; third, it has stabilizing and sparsifying effect on the entire portfolio. We connect our model to a robust portfolio selection problem, and investigate effects of the SGLasso regularization on the optimal strategy both theoretically and empirically. We develop an efficient algorithm to find the optimal portfolio and prove its global convergence. We demonstrate the efficiency of the algorithm through simulated experiments under large datasets and evaluate the out-of-sample performance of our model via empirical tests across different datasets.

Beta hedging: performance measures, momentum weighting and rebalancing effects

We discuss the various performance measures of beta hedging and offer a new synthetic criterion that accounts for both risk-adjusted returns and losses of trading strategy. We consider two long portfolios hedged by the SPDR S&P 500 exchange-traded fund (ETF), which mimics the Standard & Poor’s 500 (S&P 500) index. The first portfolio consists of nine major US equity sector SPDR ETFs, while the second portfolio contains five high-growth technology stocks. For these portfolios, beta hedging always outperforms market-neutral hedging. We found that momentum-based weighting of long assets may be preferable for portfolios with high-growth stocks and short rebalancing periods. In most cases, though, beta hedging with equal weighting of long assets performs better.

Active vs. Passive, The Case of Sector Equity Funds

Active vs. Passive, The Case of Sector Equity Funds

Impact of changes in the level, slope and curvature of interest rates on U.S. sector returns: an asymmetric nonlinear cointegration approach

This article examines the sensitivity of U.S. sector equity indices to changes in nominal interest rates and in the corresponding principal components (level, slope and curvature of the U.S. yield curve) over the period 1990–2013 using factor models and a nonlinear autoregressive distributed lag (N.A.R.D.L.) approach. Furthermore, for robustness, this research analyses whether the sensitivity of sector stock returns is different depending on the stage of the economy, splitting the whole sample period into two sub-periods: pre-crisis and subprime crisis. In general, the empirical results confirm a substantial exposure to interest rate risk that depends on the model used and the period analysed. In addition, considering the three principal components of the U.S. yield curve, the sensitivity to changes in these components tends to be stronger during the subprime crisis sub-period. Finally, in the N.A.R.D.L. context, about 50% of sectors show long-run relations between sector stock returns and the explanatory factors, mainly during the whole sample and the pre-crisis sub-period. Nevertheless, short-run responses may be mostly shown in the subprime crisis sub-period. Therefore, our results evidence that nominal interest rates and its three components would have asymmetric effects on the U.S. stock returns at sector level, depending on the stage of the economy.

Infrastructure as an Investment: A Study of Listed Infrastructure Firms in India

The important task of infrastructure provision and enhancement faces ever rising financing requirement in the face of little fiscal space and this points to the pertinence of market based finance. This calls for a pressing need to gauge the sectoral performance of infrastructure and this study takes up this task. The study assesses the risk-return and volatility profile of Nifty Infra, the National Stock Exchange (NSE) sectoral index for infrastructure vis-à-vis the broader Nifty 50 for the time period 2010-2019. The standard financial economic analysis finds the sectoral equity performance of infrastructure to be marginally below that of a broadly diversified index. Further, the study analyses the cashflow and leverage characteristics which are imperative factors in medium term risk return profile of infrastructure stocks. The disaggregated firm level analysis reveals that rent-like return do exist for the biggest players in the sector due to past installed capacities, while the subcontracting mechanism percolates to meagre cashflows for smaller players, partly bearing the greenfield risks.

Momentum Strategies for the ETF-Based Portfolios

We compared performance of past ‘winners’ and past ‘losers’ over the look-ahead period of one month for various portfolios that consist of the US ETFs and the holdings of the US equity Select Sector SPDRs in 2007 – 2017 and 2011 - 2017. Namely, we verified the conventional pattern described in the literature according to which there is mean reversion (i.e. past losers outperform past winners in near future) for short past periods and persistent momentum (i.e. past winners outperform past losers in near future) for longer past periods. We also compared performance of the momentum-based strategies with that of the equal-weight benchmark portfolios (EWBPs). We found that performance of the momentum strategies depends on portfolio holdings and whether the bear market of 2008 is included in the data sample. The conventional momentum pattern was statistically significant only for a multi-asset ETF portfolio in both 2007-2017 and 2011 -2017, and for the proxies of the SPDR S&P500 ETF and the Industrials Select Sector SPDR ETF in 2011 – 2017. However, we found other, sector-specific momentum patterns that may be explored for arbitraging past winners and past losers of the equity sector ETF holdings between themselves and/or with their EWBPs.

New DCC analyses of return transmission, volatility spillovers, and optimal hedging among oil futures and oil equities in oil-producing countries

This paper examines the return transmission, volatility spillovers, dynamic correlations, and financial risks among oil futures and oil and gas sector equity returns of the US, Canada, Australia, and Russia by applying our new vector autoregressive (VAR) dynamic conditional correlation (DCC) multivariate exponential generalized autoregressive conditional heteroscedasticity (MEGARCH) model incorporating asymmetric spillovers and skew-t errors. We employ bivariate models for oil futures and oil and gas sector equity returns and a four-variate model for oil and gas sector equity returns. Our results reveal mostly unidirectional return transmission between oil futures and oil equities, unidirectional and bidirectional volatility spillovers between oil futures and oil equities, and mostly bidirectional volatility spillovers among oil equities. Interpreting our results from an informational efficiency perspective suggests that US and Canadian oil equities are more informationally efficient than Australian or Russian oil equities, and that oil futures are not always the most informationally efficient. Our results also indicate that downside risk is important in considering volatility spillovers because they are always associated with the well-known leverage effect. Using the conditional variances and covariances from our new model, we further compute more precise time-varying optimal hedge ratios and portfolio weights, and these suggest that hedging equities with oil is more effective than vice versa. This indicates the importance of the hedging function of oil on the back of globalizing and financializing energy markets.

Sectoral exposure of financial markets to oil risk factors in BRICS countries

In this paper, we examine the exposure of sectoral equity returns to changes in oil risk factors among BRICS markets. The paper combines VAR model together with the Random Forest technique to provide a novel framework which overcome some weaknesses in VAR modelling and help in the selection of oil-risk factors considered. Our results in general show that the response of sectoral stocks to changes in oil-risk factors is not homogenous and their sensitivities are not uniform across BRICS markets. Stock returns of Basic Materials, Financials and Industrials sectors show consistently negative sensitivity to crude oil volatility (OVX) and oil price shocks for major oil importers, whereas sectoral stocks among major oil exporters seems to demonstrate systematic pattern. To explain sectoral stock variations, the results reveal OVX and oil to be the most significant risk transmitting factors in BRICS, irrespective of whether the market is a major oil importer or exporter. However, our results also confirm the presence of asymmetric effects in sectoral stocks for Brazil and Russia while no such evidence is found for India, China and South Africa. Overall, the findings suggest that the manner in which sectors respond to fluctuations in oil-risk factors varies between different sectors and it depends on the oil characteristics of the markets, nature of sectors and the type of oil-risk factors considered.

Return transmission and asymmetric volatility spillovers between oil futures and oil equities: New DCC-MEGARCH analyses

Applying our newly extended vector autoregressive (VAR) dynamic conditional correlation (DCC) asymmetric spillover (AS) multivariate exponential generalized autoregressive conditional heteroscedasticity (MEGARCH) model with skew-t errors, this paper investigates return transmission and volatility spillovers between oil futures and international oil and gas sector equity returns. Employing a global perspective, and using six international oil and gas sector equity index returns for North America, Latin America, Developed Europe, Emerging Europe, the Far East, and BRIC alongside the WTI oil futures return, we obtain the following findings. First, we reveal unidirectional return transmission from oil futures to oil equities for Developed Europe, Emerging Europe, the Far East, and BRIC. Second, we find unidirectional return transmission from North American oil equities to oil futures, and mostly bidirectional return transmission between oil futures and Latin American oil equities. Moreover, we reveal unidirectional asymmetric volatility spillover effects from all the six oil equities to oil futures except for the Far East, where we observe mostly bidirectional asymmetric volatility spillovers. Furthermore, using the conditional variances and covariances from our new model, we also compute more precise time-varying optimal hedge ratios and optimal portfolio weights, and clarify that in international markets, hedging oil equities with oil is cheaper than vice versa.

Lessons from the global financial crisis – the case of Mainland China and Hong Kong

The analysis of the intertwined reactions of Hong Kong and Mainland China to the 2008 Global Financial Crisis is considered in this study through the lenses of their stock markets. The GARCH-based analysis of stock market performance over the period December 2011–December 2014 shows that trade and equity sectors were the sectors most affected by the global recession; volatility was prevalent on the Shanghai stock market, whereas volatility persistence characterised the Hong Kong stock market. The results also show that the two stock markets recovered quite quickly. Tight controls applied by the financial authorities helped ensure some stability during the crisis.

Talking Numbers: Technical versus fundamental investment recommendations

Abstract Market efficiency is often evaluated through the ability of fundamental analysis or technical trading rules to exploit predictable patterns in asset prices. The evidence following decades of empirical research is mixed. This paper reexamines the evidence using a novel database from the TV show “Talking Numbers.” We assess the performance of 1,599 investment recommendations, where each recommendation features a fundamental and a technical forecast. We show that technicians are able to predict individual stock returns to economically significant degrees up to a one-year horizon. Beyond that, the null hypothesis of market efficiency is not rejected for market-wide indices, equity sectors, bonds, or commodities.

Impact of oil price risk on sectoral equity markets: Implications on portfolio management

Structure and degree of oil price impact on sectoral indices are examined using Quantile Regression Analysis (QRA). Nine sectors are found to provide diversification opportunities during a bull market (i.e. 90th quantile of the return distribution) and three sectors during a bear market (10th quantile) to hedge oil price risk. Further, the contagion effect and interdependency between oil price and sectoral equity are assessed through frequency domain causality. The causality from oil price in the long run determined that there is interdependence between three sectors and oil price changes. The direction of causality from oil price is mixed in both the short run (high frequency) and long run (low frequency) for nine sectors. Overall, the carbon sector is the only sector that is immune to oil price risk, thereby providing investment and hedging opportunities for portfolio managers.

THE REAL SECTOR OF UKRAINIAN ECONOMY CAPITALIZATION: TRENDS AND CONSEQUENCES

Introduction. The main trends in the corporate finance of Ukraine hardly could be explained with the traditional corporate finance frameworks which the trading-off or pecking order approaches included. In the beginning of 2017, the whole corporate sector indebtedness (calculated as total unconsolidated debt to book value based equity ratio) was substantially higher than a proper level for emerging markets countries. The restoring of the real sector equity capital sufficiency is crucial for the whole financial system stabilization and investments fostering. Purpose. The investigation of the book value decapitalization in real sector of Ukrainian economy scale and its potential impact on the financial system stability and economic growth assessment. Methods. International comparisons of the total book value capital to GDP ratios, the real book value capital (denominated by GDP deflator) trends and structural changes investigation. Results. The volume and the dynamics of the book value capitalization in Ukrainian economy’s real sector are investigated. The overall level of capital losses is determined (18% decline with 5 years) and significant structural imbalances are revealed. The trends of real sector book value equity changes analyzed comparing with the nominal GDP changes trends in Ukraine and foreign countries. A comparative analysis trends of real sector capital return in Ukraine and some European countries is conducted. The total book value capital to GDP ratio in Ukraine does not differ significantly from other countries. We explain these results capital by the low level of GDP in Ukraine and not by the book value capital sufficiency. The low level of legal productivity the real sector aggregate equity capital in Ukraine is determined. The share of accumulated capital in real sector book value equity in Ukraine was closed to 0 and fall negative in 2017. We explain this by the low level of legal productivity of equity capital in Ukraine. Conclusion. The capital accumulation in the real sector of Ukrainian economy is structurally deteriorated and generates significant risks for the stability of ountry financial system. The lack of capital in real sector hardly can be compensated by the financial sector and government investments. Thus, we can conclude that deficiency of equity in real sector is a strong barrier for the economic growth.

Systemic Risk Contribution in Islamic Equity Markets: CoVaR Based Model

The main challenge by the study of systemic risk is the measurement of contagion that enables the impact of external movement in one market on other markets. One of the main tools that has been proposed for this purpose is the risk measure ∆CoVaR of Adrian and Brunnermeier (2011). This study explore the systemic risk profile of Islamic equity Markets based on CoVaR, ∆CoVaR and quantile regressions. We empirically investigate the systemic risk contributions of 10 Islamic Dow Jones sector equity indexes covering 15 years of daily data in the U.S stock Market. Evidences show that Industrial and Technology sectors contributing the most to systemic risk in the US. Furthermore, we confirm that the Oil & Gas and Technology sectors were the most exposed to systemic risk and hence a larger risk spillover in distressed period.

DCCs among Sector Indexes and Dynamic Causality between Foreign Exchange and Equity Sector Volatility: Evidence from Egypt

The objective of the current paper is to explore the co-movements between domestic equity sectors in the Egyptian Exchange (EGX), using the dynamic conditional correlation (DCC) model, and to examine the time-varying causal links between the exchange rate volatility (EXVOL) and sector volatility (SVOL) using the bootstrap Granger non-causality tests in a bivariate VAR, where conditional volatility series are extracted from GARCH(1,1) model. We employ weekly data. Results show that all estimated DCCs are positive with a clear heterogeneity between the sector pairs. They do not exhibit stable correlation pattern for a prolong time, implying that DCC estimates change in response to price increment shocks to each sector in the pair. Hence, the assumption of static inter-sectoral correlations between domestic sector indexes is invalid when forming and periodically re-balancing portfolios. The global financial crash and the political instability in early 2011 have significantly increased the level of DCCs for four and ten out of fifteen pairs, respectively. Thus, the recent political turmoil in Egypt has widely affect diversification opportunities in the EGX whereas the global financial crash has not. The volatility transmission between SVOL and EXVOL is subject to structural breaks. The bootstrap rolling window estimations show that the casual relationship between SVOL and EXVOL varies across time. These findings would be of great importance to market participants in their hedging and investment decisions since investors and firms are more concerned with industrial sector exposure estimates.

Management Culture as Part of Organizational Culture in the Context of Corporate Social Responsibility Implementation

IntroductionRelevance of the research. It is significant that the management culture in the organization not only guarantees the functionality of the processes, but also enables cultural innovation. Overall management culture improves the organization, simplifies and reduces the cost of management processes, determines the accuracy and consistency of work, increases labour discipline. Management culture is a key factor in the overall culture of the organization, acting directly on the organization's performance (Voronkova, 2006). In addition, management culture, as the way of realization of the main vital forces of the human, in the management activities determines the striving for managerial staff aims, encourages creativity, the expansion and deepening of existing knowledge, acquisition of new knowledge during communication, search for new ways and methods in management activities. Management culture stimulates activity, initiative and managerial staff responsibility for their actions and their consequences. This enables the achievement of the foreseen aims in a shorter period of time by planned or better economic effectiveness (Skibickaja, 2009). In addition, as stated by Melnikas (2008), in order to get to know better the processes of ongoing management and change of management culture in the modern world, it is appropriate to evaluate the circumstances affecting modern management, which reflect the effects of historical lifestyles and stereotypes occurring in management activities.Social responsibility is inevitably mentioned when analysing organizational culture profile and behaviour with subjects of external environment. As Vveinhardt and Andriukaitiene (2014a) state, a lack of integrity in the development of social responsibility of organizations, public authorities and the public pose such threats as: focusing of organizations only on marketing dimension of the corporate social responsibility and the rising disappointment with the idea of the corporate social responsibility with no immediate financial effect received; declarativity, when the values of the corporate social responsibility do not become part of organizational culture; ineffective use of both private and public resources (financial and human) to promote and implement corporate social responsibility ideas; excluding or removing employees (their representatives) as stakeholders from the process; disappointment of the public in the corporate social responsibility and insufficient rise of moral standards for the private and public sector organizations. The development of corporate social responsibility in the private equity sector is directly related to the development of corporate social responsibility values and standards in the public sector. It is, therefore, a particularly important period for the organizations preparing to become socially responsible and purposeful self-evaluation of their managerial activities.Research problem is presented through the questions: What is management culture, as part of formal organizational culture, expression order to implement corporate social responsibility? How, aiming to implement corporate social responsibility, is management culture to be assessed from the managers' point of view?Problem investigation level. Management culture is not very abundant of scientific works, or simply it is generally referred to as organizational culture. All the more the authors of different countries, publishing their research in the native language, use the term of management culture rather differently. Even the definitions in scientific publications are rather controversial. Lithuanian scholar Zakarevicius (2004) in his analysis of organizational culture and organizational culture concepts states that if the concept 'organizational culture' is replaced by the term 'management culture', the duplication and confusion of the terms cease to exist (p. 203). However, the author, having made such a proposal, raises the question, how to describe management culture? …

Shock and Volatility Spillovers Among Equity Sectors of the National Stock Exchange in India

The basic thrust of this article is to examine how shocks and volatility are transmitted across sector indices. This article employs the autoregressive asymmetric BEKK-GARCH model. The study is based on daily data from the National Stock Exchange (NSE) of India from January 2004 to January 2014. Volatility spillover was found to be bidirectional among the two pro-cyclical sectors: Finance and IT. But, there was a unidirectional shock and volatility spillover from the non-cyclical FMCG sector to both the pro-cyclical sectors. The FMCG sector has remained almost unaffected by the spillover from the other sectors. Moreover, the evidence of asymmetric spillover has been found to be present in most of the case. Second, correlations between the sectors were found to be higher during the period of global financial crisis. But no such evidence was found in the context of the Euro zone debt crisis. Understanding the dynamics of shocks and volatility transmission is necessary for risk management in general and for optimal portfolio allocation and hedging strategy in particular. To the best of our knowledge, this is the first study on Indian stock market which has analysed the dynamics of shock and volatility transmission across sector indices.