European Equity Research Articles

The Greek equity market in European equity portfolios

The present paper emphasizes on the importance of the Greek equity market to European equity portfolios. The portfolio performance is higher for portfolios for which the Greek equity market is included. This result is consistent across a variety of variance–covariance matrix estimators, portfolio types, and evaluation measures as well. Results are also robust to the 2008 financial crisis. In terms of the variance–covariance matrix estimation, the realized volatility estimators result in higher portfolio performance than the daily squared returns estimator does. The realized volatility estimator which is optimally sampled and bias corrected is the most accurate variance–covariance matrix estimator. The Capital Market Line portfolio type is the portfolio type with the best portfolio performance. Overall, the inclusion of the Greek equity market to the European equity portfolios results in higher European equity portfolio performance.

Examining the sentiment-return relationship in European real estate stock markets

Purpose– Recent studies in the field of behavioral finance have highlighted the importance of investor sentiment in the return-generating process for general equities. By employing an asset pricing framework, this paper aims to evaluate the performance of European real estate equities, based on their degree of sentiment sensitivity.Design/methodology/approach– Using a pan-European data set, we classify all real estate equities according to their sentiment sensitivity, which is measured relative to the Economic Sentiment Indicator (ESI) of the European Commission. Based on their individual sentiment responsiveness, we form both a high- and low-sensitivity portfolio, whose returns are included in the difference test of the liquidity-augmented asset pricing model. In this context, we analyze the performance of sentiment-sensitive and sentiment-insensitive real estate equities with a risk-adjusted perspective over the period July 1995 to June 2012.Findings– While high-sensitivity real estate equities yield significantly higher raw returns than those with low-sensitivity, we find no evidence of risk-adjusted outperformance. This indicates that allegedly sentiment-driven return behavior is in fact merely compensation for taking higher fundamental risks. In this context, we find that sentiment-sensitive real estate equities are exposed to significantly higher market risks than sentiment-insensitive ones. Based on these findings, we conclude that a sentiment-based investment strategy, consisting of a long-position in the high-sensitivity portfolio and a short-position in the low-sensitivity one, does not generate a risk-adjusted profit.Research limitations/implications– Although this study sheds some light on investor sentiment in European real estate stock markets, further research could usefully concentrate on alternative sentiment proxies.Originality/value– This is the first study to disentangle the relationship between investor sentiment and European real estate stock returns.

CAPE: Predicting Stock Market Returns

Equity investments are subject to high volatility in the short to medium term and a crucial factor for the strategic return potential is the timing of new investments. The objective of this examination has been to answer the extent to which the timing of new exposures can be successfully chosen using the cyclical adjusted Shiller CAPE, and whether the indicator allows statements to be made on long-term equity market returns. The examination reaches the conclusion that it is possible to forecast relatively reliably the long-term equity market returns of 15 equity markets using a cyclical adjusted CAPE. The concept has demonstrated impressive results in the US market over the past 130 years and in 14 other equity markets in the period 1979-2013. It is fair to assume that this connection can also be found in other markets even if we are unable to empirically verify this theory for lack of available data. Based on the insight thus gained, long-term equity market forecasts can be made for various markets for the next 15 years. The overall conclusion that we reach is that investors who, unlike the majority of investors, do not position themselves close to the benchmark with a high US weighting can expect annual capital growth of some 6% above and beyond the inflation rate over a long term horizon. A number of European equity markets in particular, but also selected emerging markets, currently display significant undervaluations and offer strategic investors interesting opportunities for exposure.

A JOINT EXPERIMENTAL ANALYSIS OF INVESTOR BEHAVIOR IN IPO PRICING METHODS

This article jointly examines the differences of laboratory versions of the Dutch clock open auction, a sealed-bid auction to represent book building, and a two-stage sealed bid auction to proxy for the “competitive IPO”, a recent innovation used in a few European equity initial public offerings. We investigate pricing, seller allocation, and buyer welfare allocation efficiency and conclude that the book building emulation seems to be as price efficient as the Dutch auction, even after investor learning, whereas the competitive IPO is not price efficient, regardless of learning. The competitive IPO is the most seller allocative efficient method because it maximizes offer proceeds. The Dutch auction emerges as the most buyer welfare allocative efficient method. Underwriters are probably seeking pricing efficiency rather than seller or buyer welfare allocative efficiency and their discretionary pricing and allocation must be important since book building is prominent worldwide.

Divestment of Private Equity in Europe in the Years 2007–2013

Using the data from the website of EVCA, the European Private Equity and Venture Capital Association, we provide an analysis of the divestment transactions made by Private Equity and Venture Capital in Europe in the period from 2007 to 2013. The purpose of the research is to verify whether the amount of divestments and the selection of exit strategies are influenced by the GDP growth rate of European Union and the performance of equity markets of European Union Member States. We also highlight the importance of divestment phase, because it is only through its success that venture capital and private equity firms can realize capital gains. The analysis has demonstrated a positive correlation between divestments realized in the period considered and the GDP growth rate of European Union, as well as between the amount of disposals made during the period analyzed and the development of the Eurostoxx50 index.

Implications of manager replacement: evidence from the Spanish mutual fund industry

We analyse the financial consequences of manager replacement in a sample that includes all domestic and European equity funds in Spain. Specifically, we examine a total of 104 funds of the sample that experience manager turnover over the period 1999–2009. We find that underperforming funds in the pre-replacement period experience a significant improvement in the excess returns and performance after the manager change, an improvement that lasts over time for domestic equity funds. The analysis of the risk profile indicates that funds experiencing a manager change do not show significantly different levels of risk before the replacement dates although they tend to show an increase in the level of total risk after the change. Finally, the pool-regression analysis of the investment flows confirms that manager changes tend to impact negatively on subsequent flows of those funds with manager turnover.

Information Arrival, Jumps and Cojumps in European Financial Markets: Evidence Using Tick by Tick Data

This paper investigates jumps and cojumps in European financial markets around the major U.S macroeconomic news announcements employing more than six years of high frequency data on stock indices, currency and interest rate futures. The findings show that while the U.S macroeconomic announcements cause significant jumps on all asset classes, European equity markets are found to be more responsive. Moreover, there is a strong correlation between the type of news and direction of the jumps. Significant cojumps caused by the U.S macroeconomic surprises across European stock indices futures are also reported. The time series analyses show that the European financial markets experienced more frequent and sizeable jumps during the recent global financial crisis. Similarly, more frequent cojumps are also reported across European equity markets during the same period. (JEL: G13, G14)

On the impact of market mergers over herding: evidence from EURONEXT

Purpose– The purpose of this paper is to present and empirically test for the first time the hypothesis that herding in a market increases following the market's merger in an exchange group.Design/methodology/approach– The hypothesis is tested empirically in EURONEXT's four European equity markets (Belgium, France, the Netherlands and Portugal) on the premise of the Hwang and Salmon (2004) measure which allows us insight into the significance, structure and evolution of market herding. Tests are conducted for each market for the period prior to and after its merger into EURONEXT, controlling for a series of variables (market conditions, common risk factors, size) to gauge the robustness of the findings.Findings– Results indicate that, with the exception of Portugal, herding grows in significance, yet declines in momentum post-merger. The authors ascribe the findings to EURONEXT's enhanced transparency (which makes it easier for investors to observe their peers’ trades, thus allowing them to infer and free-ride on their information) and its fast-moving informational dynamics that render herding movements shorter-lived. These results are robust when controlling for various market states and common risk factors, with deviations being observed when controlling for size and market volatility.Originality/value– The study presents results for the first time on the impact of exchange mergers on herd behavior. The authors believe these to constitute useful stimulus for further research on the issue and bear important implications for regulators/policymakers in view of the ongoing proliferation of exchange mergers that has been underway since the 1990s.

Эффекты перетекания волатильности и заражения на фондовых рынках: определение глобальных и локальных лидеров (часть 1)

The study focuses on the identification of stable relations between the stock markets of three geographic regions, including pre- and post-crisis periods. The paper demonstrates the applicability of the ARMA-DCC-GARCH model, allowing to provide a detailed examination of the dynamic correlation between 26 stock markets in the three regions (America, Europe and Asia) over the period of 1995-2012. We examine the volatility spillover effects and conditional correlations among the international equity markets. The country stock index is considered as an indicator of market dynamics. The results show that the US market (S&P500 index) is the main volatility transmitter worldwide, whereas the UK, German and French markets are the sources of volatility for the European developed and emerging European equity markets. However, the German DAX index, contrary to some studies, cannot be considered as a dominant one in the European region, in spite of the leadership of the German economy. The study shows that the role of “exporting volatility” or volatility transmitter belongs to the UK stock market. We also found that the US, the UK, Germany and France have a greater influence on emerging markets rather than on developed ones. Between the two markets in the North and East European region (Russia and Poland) the dominant transmitter role belongs to Russia.

Fragmentation and Price Discovery: A Comparison of Reg NMS and MiFID1

We study NYSE, NASDAQ, and ARCA prices for DJIA stocks and LSE, Xetra, and Chi-X prices for five leading British equities. MiFID1 hastened fragmentation but accomplished the intended cointegration of European equity markets that had previously been segmented. Initially, price discovery in London was largely unaffected; permanent quote innovations remained more than 90% attributable to the LSE. However, clearing and settlement fee reductions by Chi-X five months later did result in a substantial reduction in the information impounding and price discovery efficiency of London Stock Exchange trades. The contemporaneous situation in the United States with the implementation of Reg NMS was quite different. During its staggered rollout in 2007, NYSE’s price discovery declined steadily from 74% to 41%, with much of that role migrating to ARCA. In this case, the price discovery efficiency of NASDAQ substantially improved.

Financial crises and volatility spillovers among emerging European equity markets

Financial crisis not only have statistically but also economically significant impact on global equity market returns. This study analyzes whether current financial crisis affect the equity market returns of Balkan transition economies and what is the extent of such impact by employing Generalized Autoregressive Conditional Heteroscedasticity model is employed on daily data spans from 2006 to 2012 for three transition economies which are Bosnia-Herzegovina, Croatia and Serbia. Empirical result indicates that volatility of Serbian stock price is influenced by the volatility of Bosnian and Croatian stock prices. There is one way volatility transmission from Bosnian and Croatian stock markets to Serbian stock market. High degree of volatility is observed in the stock markets during latest financial crises.

Where Should Active Asian Equity Strategies Focus: Stock Selection or Asset Allocation

The majority of active Asian equity strategies claim to derive their value addition by focussing their skill on security selection. We investigate if empirically this is the most appropriate area for an active Asian manager to focus on, in comparison to focussing on asset allocation as the mainstay of the investment process. Unlike US and European equity markets, Asia has two dimensions of allocation (both country and sector) and shallower liquidity for stocks. After accounting for differences in the opportunity set in terms of breadth and asset dispersion, we find that if a manager’s skill in asset allocation and stock selection were the same, then two-thirds of the portfolio’s return would come from asset allocation. This is in sharp contrast to a US equity portfolio, where this would be only 18%. In Asia, a manager's skill in security selection, would need to be almost double that in asset allocation for the return contribution from security selection to be equal or more than that from asset allocation. We therefore believe that for Asian equity portfolios, a much greater emphasis is required on the allocation process; a facet which seems to have been missed by asset managers thus far.

U.S. stock market uncertainty and cross-market European stock returns

We investigate the cross-market differential relations of U.S. stock market uncertainty (VIX) with U.S. and European stock market returns before and during the European equity market crisis. Also, we examine whether VIX has predictive ability with respect to short-run European stock market returns. We find a strong negative contemporaneous relation between VIX changes and European stock returns that was twice as large during the equity market crisis period than before it. Changes in VIX have significant predictive ability for daily returns in the major European equity markets during the European equity market crisis period but not before it. The VIX fears persist longer in European markets than in the U.S. market, suggesting market frictions and limitations in information-processing capabilities of investors.

European Equity Market Contagion: An Empirical Application to Ireland's Sovereign Debt Crisis

This paper examines the time-varying conditional correlations of daily European equity market returns during the Irish sovereign debt crisis. A dynamic conditional correlation (DCC) multivariate GARCH model is used to estimate to what extent the collapse of Irish equity markets and subsequent Troika intervention in Ireland spilled over upon European equity markets during this crisis. During the Irish financial crisis from 2007 to 2010, strong contagion effects are uncovered between Irish equity markets and the eleven investigated European equity markets. The contagion effects are found to ease dramatically in the period after Troika intervention in Irish finances. This result supports bailouts and external financial intervention as a mechanism to mitigate and absorb contagion associated with state-specific financial crises and if possible, should be considered as a primary response function in future cases.

Evidence for the seasonality of European equity fund performance

The literature provides broad evidence for the seasonality of stock market returns, but is very scarce regarding the potential seasonality of investment funds performance. Using a sample of 5349 Equity Europe or Equity Eurozone investment funds, this article contributes to fill this gap by providing evidence that investment funds globally exhibit higher performances in the first than in the second 6 months of the year, and that they exhibit negative abnormal performances in the first compared to the intermediate and final months of each quarter. Finally, the article reports a summer holiday effect, such that investment funds outperform negatively in August compared to the other intermediate months of the quarter.

Idiosyncratic risk and the cross-section of European real estate equity returns

Purpose– This study is the first to examine the role of idiosyncratic risk in the pricing of European real estate equities. The capital asset pricing model predicts that in equilibrium, investors should hold the market portfolio. As a result, investors should only be rewarded for carrying undiversifiable systematic risk and not for diversifiable idiosyncratic risk. The study is adding to the growing body of countering studies by first examining time trends of idiosyncratic risk and subsequently the pricing of idiosyncratic risk in European real estate equities. The paper aims to discuss these issues.Design/methodology/approach– The study analyses 293 real estate equities from 16 European capital markets over the 1991-2011 period. The framework of Fama and MacBeth is employed. Regressions of the cross-section of expected equity excess returns on idiosyncratic risk and other firm characteristics such as beta, size, book-to-market equity (BE/ME), momentum, liquidity and co-skewness are performed. Due to recent evidence on the conditional pricing of European real estate equities, the pricing is also investigated using the conditional framework of Pettengillet al.Either realised or expected idiosyncratic volatility forecasted using a set of exponential generalized autoregressive conditional heteroskedasticity models are employed.Findings– The initial analysis of time trends in idiosyncratic risk reveals that while the early 1990s are characterised by both high total and idiosyncratic volatility, a strong downward trend emerged in 1992 which was only interrupted by the burst of the dotcom bubble and the 9/11 attacks along with the global financial and economic crisis. The largest part of total volatility is idiosyncratic and therefore firm-specific in nature. Simple cross-correlations indicate that high beta, small size, high BE/ME, low momentum, low liquidity and high co-skewness equities have higher idiosyncratic risk. While size and BE/ME are priced unconditionally from 1991 to 2011, both measures of idiosyncratic risk fail to achieve significance at reasonable levels. However, once conditioned on the general equity market or real estate equity market, a strong positive relationship between idiosyncratic risk and expected returns emerges in up-markets, while the opposite relationship exists in down-markets. The relationship is robust to firm-specific factors and a series of robustness checks.Research limitations/implications– The results show that ignoring the conditional relationship between idiosyncratic risk and returns might result in the false realisation that idiosyncratic risk does not matter in the pricing of risky (real estate) assets.Originality/value– This study is the first to examine the role of idiosyncratic risk in the pricing of European real estate equities. The study reveals differences in the pricing of European real estate equities and US REITs. The study highlights that ignoring the conditional relationship between idiosyncratic risk and returns might result in the false realisation that idiosyncratic risk does not matter in the pricing of risky assets.

Liquidity and real estate asset pricing: a pan-European study

Purpose– Understanding the pricing of real estate equities is a central objective of real estate research. This paper aims to investigate the impact of liquidity on European real estate equity returns, after accounting for well-documented systematic risk factors.Design/methodology/approach– Based on risk factors derived from general equity data, the authors extend the Fama-French time-series regression approach by a liquidity factor, using a pan-European sample of 272 real estate equities.Findings– The empirical results indicate that liquidity is a significant pricing factor in real estate stock returns, even after controlling for market, size and book-to-market factors. In addition, the authors detect that real estate stock returns load predominantly positively on the liquidity risk factor, suggesting that real estate equities tend to behave like illiquid common equities. These findings are underpinned by a series of robustness checks. Running a comparative analysis with alternative factor models, the authors further demonstrate that the liquidity-augmented asset-pricing model is most appropriate for explaining European real estate stock returns.Research limitations/implications– The inclusion of sentiment and downside risk factors could provide further insights into real estate asset pricing in European capital markets.Originality/value– This is the first study to examine the role of liquidity as a systematic risk factor in a pan-European setting.

Accounting Accruals and Stock Returns: Evidence from European Equity Markets

In this paper, I show a generalisation of the negative relation of traditional accruals and percent accruals with future returns in 11 of 16 European countries. Positive abnormal returns from hedge portfolios on both accrual measures summarise the economic significance of this generalisation. The magnitude of returns obtained from traditional accruals is higher than that obtained from percent accruals, contrary to existing evidence from the U.S. capital market. The magnitude of the accrual effect on stock returns based on both accrual measures is stronger in countries with higher individualism, lower uncertainty avoidance, higher equity-market development, higher equity-market liquidity, lower transaction costs, higher analyst coverage, lower analyst optimism, and lower ownership concentration. In markets where minorities have legal protection against expropriation by corporate insiders and where accrual accounting is permitted, the accrual effect based only on percent accruals is positive. Earnings opacity does not appear to exhibit a significant influence. Overall, the evidence suggests that cross-country differences in culture, equity-market setting, analysts' research output, investor protection, and ownership structure play an important role in explaining variation on the magnitude of the accrual anomaly in Europe.

Effect of social screening on funds’ performance: empirical evidence of European equity funds

The aim of this study is to evaluate the financial performance of European socially responsible investment (SRI) funds for the period 1993–2012 to contrast whether there is a relationship between the application of social screening on investment decisions and funds’ financial performance measured by Carhart’s alpha. Regression analysis has been used to test the hypotheses of this research with a sample free of survivorship bias of 184 SRI equity funds from 14 European countries and the population of conventional funds from the same country and investment objective. The main conclusion of this study is that the application of social criteria in investment decisions carries a cost to the investor in terms of lower financial performance caused by differences in screening intensity.

Dynamic market opportunities and the behaviour of active managers

ABSTRACTThis paper examines the behaviour of active managers during periods of changing market opportunities, defined in terms of a market's cross-correlation and cross-sectional volatility structure. Examining active managers of UK, European and US equities over twenty years, the paper finds that both of these aspects of active management are at least partly determined by the available opportunity set. Overall, top quartile managers do much better, and bottom quartile managers much worse, when the opportunities are higher, and vice-versa when they are lower. Tracking errors are less responsive to opportunities than are active returns, leading to improvements in the information ratios as the opportunity set expands.