European Market Indices Research Articles

The Effects of Direct Democracy on Stock Market Risk and Returns: An Event Study from Switzerland

The aim of this study was to determine whether referendums affect stock price risks and returns, using an event study approach. Daily end period data for the Swiss stock market index, the STOXX European market index, and the Swiss/US exchange rate running from the beginning of 2004 to June 2021, along with the EGARCH model, were applied to determine the effects on both the market’s return and volatility. The results suggest that the day after the referendum, there was little evidence of a positive effect on stock returns. However, using a longer window of three days before and after the referendum, there was evidence of a positive effect from the referendum on the market’s returns and a negative effect on its volatility. Analysing the effects of referendums on both asset returns and risks allows for a more comprehensive assessment of how they impact on the economy, with these results supporting previous studies that found a positive effect on economic returns, and also showing they can reduce risks.

Diversification Benefits of European REIT, Equities and Bonds

This study aims to demonstrate the benefits related to the inclusion of European REIT in a portfolio of stocks and bonds traded on European markets. Major studies of the portfolio’s diversification those considered REIT was carried out on the American real estate market. Therefore, this research project aims to extend the work to the European scale by forming a mixed pan‐European REIT portfolio. The database is composed of monthly dividend‐adjusted closing prices, over the past 11 years, from different stock indexes collected during eleven years of different European market indexes. Four hypothetic portfolios were constructed to test our hypothesis. Descriptive statistics and correlations were presented. Therefore, the results have shown that European REIT has reduced the risk of a mixed portfolio even if the risk reduction is very limited. The same is true for the portfolio’s return, which was slightly improved. The study showed that European REIT remains a factor of diversification that should not be overlooked in building an asset portfolio. These findings contribute to the existing portfolio theory arguing that using REITs in portfolio diversification helps investors dilute their risk and improve their returns. Our results also have practical implications. They can be useful to investors and financial analysts in their investment decisions by shedding light on this type of asset.

Googling investor's sentiment, financial stress and dynamics of European market indexes: a Markov chain analysis

This study investigates the relationship between financial stress, googling investor's sentiment and indexes returns dynamics in five European markets. By using a Markov model, we find that the effect of the googling investor's sentiment on the stock market return highlights the persistence of the three regimes: bullish state for Germany and Spain; bearish state for Italy and the UK and stable state for France. For the effect of the stress index on the return, we note that France and Italy are in the bullish regime, the UK is in stable state and the persistence of the bearish regime for Germany and Spain. The smoothed and filtered probabilities suggest that the effect of googling investor's sentiment on market index return is subject to switching regime for all countries. For the stress index, results reveal the limited predictive power of financial stress on the change of regime of the financial markets.

Googling investor's sentiment, financial stress and dynamics of European market indexes: a Markov chain analysis

This study investigates the relationship between financial stress, googling investor's sentiment and indexes returns dynamics in five European markets. By using a Markov model, we find that the effect of the googling investor's sentiment on the stock market return highlights the persistence of the three regimes: bullish state for Germany and Spain; bearish state for Italy and the UK and stable state for France. For the effect of the stress index on the return, we note that France and Italy are in the bullish regime, the UK is in stable state and the persistence of the bearish regime for Germany and Spain. The smoothed and filtered probabilities suggest that the effect of googling investor's sentiment on market index return is subject to switching regime for all countries. For the stress index, results reveal the limited predictive power of financial stress on the change of regime of the financial markets.

Asymmetric volatility in equity markets around the world

The observation that price declines usually lead to volatility increases is known as the asymmetric volatility effect and has become a stylized fact about the financial markets. We study asymmetric volatility effect in 19 equity indices from North America, Latin America, Europe, Asia and Australia, utilizing not only daily data and four GARCH class models, but also realized volatility calculated from high-frequency data within HAR class models. We first confirm the stylized fact that stock market indices around the world exhibit the asymmetric volatility effect. This effect is stronger for US and European market indices. Second, we find that the asymmetric volatility effect is strong enough to significantly improve out-of-sample forecasts of an accurate HAR volatility model. Third, we show that forecast improvements of the asymmetric volatility models are largest during periods of higher market volatility, when accurate volatility forecasts matter the most.

Asymmetric Volatility in Equity Markets Around the World

The observation that price declines usually lead to volatility increases is known as the asymmetric volatility effect and has become a stylized fact about the financial markets. We study asymmetric volatility effect in 19 equity indices from North America, Latin America, Europe, Asia and Australia, utilizing not only daily data and four GARCH class models, but also realized volatility calculated from high-frequency data within HAR class models. We first confirm the stylized fact that stock market indices around the world exhibit the asymmetric volatility effect. This effect is stronger for US and European market indices. Second, we find that the asymmetric volatility effect is strong enough to significantly improve out-of-sample forecasts of an accurate HAR volatility model. Third, we show that forecast improvements of the asymmetric volatility models are largest during periods of higher market volatility, when accurate volatility forecasts matter the most.

IMPACT OF UNCERTAINTY ON EUROPEAN MARKET INDICES QUANTILE REGRESSION APPROACH

Contemporary Europe needs to make important collective economic and foreign-policy decisions. Many authors argue that uncertainty has influence on the markets’ behavior. Therefore, we have decided to analyze the impact of the uncertainty on the returns and the volatility of two major European market indices Germany (DAX) and the U.K. (FTSE 100) across selected quantiles. We present results for the time-period from January 3, 2000 to December 30, 2016. As influential factors, we consider the Economic policy uncertainty (EPU) indices for Europe, the United Kingdom, Brexit and low prices of the crude oil. In our paper, we have found an asymmetric dependence of the analyzed market indices on the selected factors. EPU Brexit had no or weak impact on the analyzed data. Our conclusion shows to investors how sensitive German and English markets are to the uncertainty in Europe.

DCC-Garch Models Using Islamic Market and European Market Indices

The last financial crisis (2007-2008) raises the question of how European stock shocks are distributed and transmitted from developed stock markets to Islamic stock markets. More precisely, the problem related to Islamic finance or any other alternative finance is, whether the shocks to the volatilities in the asset returns constitute substitute or complement in terms of risks strategies. A good understanding of volatilities of asset returns is necessary to analyze and forecast domestic and international investors’ portfolios. The cornerstone of the current paper is the analysis of the dynamic correlations between the European conventional financial indices (as a proxy for globalbenchmark) and Islamic indices. We have chosen European markets since most of the works on this topic have focused on the US market. We have used the Dynamic Conditional Correlations approach to detect any shifts in correlations between the different indices over a recent period (from 07/31/2007 to 08/25/2017). The period includes the most severe financial turbulences (2007-2011) in Europe. Two types of distribution have been tested namely Gaussian distributions versus t-distributions. The paper finds that European and Islamic indices are highly correlated. This point may be useful for the policymakers because of the contagion risk. The results are robust acrossdifferent distributions and the model associated with t-distribution is more relevant.

The Effect of World Markets on Indian Policy Rates

The study investigates the relationship between Indian Policy rates and Market indexes of the largest economies of the world, including the U.S., the U.K., Germany, France, and Canada, for the 10 years from January 2002 to September 2012. The results indicate that the short-term lending to banks by the Reserve Bank of India (RBI) varied more rapidly with the market indexes of America compared to European market indexes, but long-term lending to banks by RBI varied more rapidly with the market indexes of Europe than American market indexes in the past 10 years. It was also found that long-term lending by RBI was more dependent on the world’s largest market indexes than was short-term lending by RBI.

Time Varying Herding and Anti-Herding Behavior and Dynamic Conditional Correlations in European Market Indices

We examine the existence of herding and anti-herding (positive herding) behavior in major European benchmarking stock market indices. Following the recent events that unfolded in the Eurozone sovereign debt crisis our analysis is further expanded on two subsamples namely north and south European countries. In order to identify any time-dependent properties reflected in time-varying parameters, we employ an overlapping rolling window regression of varying window sizes. The empirical evidence confirms a herding behavior during the global financial crisis for the South countries, and anti-herding behavior for both North and South subsets before and after the shock, independent of the window size. The herding and anti-herding behavior, are explained with the use of dynamic conditional correlation via DCC-GARCH family multivariate modeling. The results indicate that the correlations have recorded a significant decrease before and after the crisis for both North and South subsamples, accounting for the anti-herding behavior, whereas correlations for the South countries during the crisis have increased, thus justifying the herding behavior. Our results entail significant implications for international portfolio diversification strategies.

VaR BASED RISK MANAGEMENT

In this paper we discuss the Value–at–Risk concept and we analyse the market risk by using EWMA approach. EWMA (exponentially weighted moving average) forecasting technique is a popular measure of various risks in financial risk management. We will compare standard EWMA, robust EWMA and skewed EWMA forecast of VaR. JP Morgan standard EWMA is derived from Gaussian distribution. Robust EWMA is based on Laplace distribution and skewed EWMA is a new approach derived from an asymmetric Laplace distribution. Asymmetric Laplace distribution takes into account both skewness and heavy tails in return distribution and the time varying nature of them in practice. Skewed EWMA VaR is a generalization of the standard EWMA method. Using these approaches we will analyse selected financial series (three European market indexes and one exchange rate). We have found andconfirmed that skewed EWMA forecasting of VaR outperforms the standard EWMA method.

Cross-distributional robustness of conditional weekday effects: evidence from European equity-index returns

The paper re-examines the issue of the robustness of the weekday effect. Specifically, by utilizing a quantile regression approach, the homogeneity of observed day-of-the-week anomalies is monitored and tested over different parts of the conditional return distribution. The day-of-the-week effects are measured for conditional returns as well as for conditional volatilities. The model applied accounts for asymmetry in first-order autocorrelation in both moments. The weekday patterns in the returns on the European market index and 18 European country indexes are analyzed for the time period from January 2000 through December 2006. Generally, the sign of the estimated weekday effects in both the conditional mean and volatility seems to be very robust over the return distribution. However, about one half of the country-specific indexes exhibit significant variation or asymmetry in the day-of-the-week coefficients across the quantiles of the conditional return distribution. Only in a few cases, the significant day-of-the-week effect is clearly driven by extreme events.

Estimating Time-Varying Capital Market Integration In The EMU

This paper analyzes the effect of the European monetary unification and economic liberalization in a sample of three EMU (France, Germany, Netherlands) and two non-EMU (U.K. and Switzerland) countries, as well as the European market index and a currency index, using data from March 1984 to November 2002. We utilize a multivariate GARCH framework and estimate jointly all parameters in the model. The study reveals that financial markets in Europe followed a gradual integration process. We also find that the Euro countries generally display higher degrees of market integration compared to the non-Euro countries in our sample.

Common and local asymmetry and day-of-the-week effects among EU equity markets

In line with the integration of financial markets it is expected that anomalies and other characteristics of equity markets become more similar. This paper specifically examines how much of the asymmetry and the day-of-the-week effect is common to the European markets and how much is country specific. The day-of-the-week effects are measured for both unconditional and conditional expected returns and volatilities. Robustness of the results is analysed using two sub-periods. The conditional model accounts for asymmetry in first-order autocorrelation of both the common European market index and the country-specific indexes. The time period spans from January 2000 through December 2006. The results indicate that the asymmetry, especially in volatility, is a common characteristic carried by the European market index, whereas the conditional day-of-the-week effects are local, robust and country specific.

The relationship between risk and expected return in Europe

We employ MIDAS (mixed data sampling) to study the risk–expected return trade-off in several European stock indices. Using MIDAS, we report that in most indices there is a significant positive relationship between risk and expected return. This strongly contrasts with the result we obtain when we employ both symmetric and asymmetric GARCH models for conditional variance. We also find that asymmetric specifications of the variance process within the MIDAS framework improve the relationship between risk and expected return. As an additional application, we analyze the extent to which European stock markets are integrated, which is a particularly relevant issue, especially following the launch of the Euro in January 1999. Finally, we propose a bivariate MIDAS specification to test the pricing significance of the hedging component within an intertemporal risk–return trade-off with multiple European market indices.