Foreign Equity Market Research Articles

Shorting the Dollar When Global Stock Markets Roar: The Equity Hedging Channel of Exchange Rate Determination

Abstract This paper investigates the influence of global equity market value shocks on institutional investors’ (IIs’) hedging behavior and the resultant effects on exchange rates. Employing unique granular daily data on Israeli IIs’ foreign exchange (FX) forward flows and prices and a granular instrumental variable estimation approach, we find that foreign equity market value shocks generate significant selling of U.S. dollar forwards by IIs, as a hedge against heightened FX exposure, along with significant exchange rate appreciation. A value-shock-induced one-standard-deviation increase in IIs’ supply of forward flows appreciates IIs’ forward rate by 0.53%. (JEL E44, F3, F31, G15, G23)

Do stocks outperform treasury bills in international markets?

More than half the common stocks in the majority (55 of 57) of international equity markets generate total returns less than Treasury bill returns. However, there is a sizable variation in the extent of this underperformance. A greater proportion of stocks underperform in countries with weaker governance, less individualistic investors, less openness to trade and foreign equity market investment, less financial market development, and weaker economies.

Венчурне фінансування суб’єктів агробізнесу

The article is devoted to the analysis of problems and prospects of development of Ukrainian venture industry in agriculture, taking into account the comprehensive methodological approach to ensuring the profitability of financial assets of subjects in the distribution of investment resources of venture funds. The axiom of value and the universal method of discrete venture financing in agriculture were singled out. The basis of the favorable institutional infrastructure of venture funds for regulation of financial support of high-tech projects of subjects at the macro level was determined. To achieve the purpose of the study, the authors used the synchronization of flexible methods for the gradual financing of in-vestment projects, as well as methods of analysis of the dynamics of the innovation process of venture financing in Ukraine and countries of the world. The binomial model of estimating the value of the basic financial assets of venture funds at a risk-free rate was constructed by transforming the tree of the financial flows of the latter into the tree value of sources of venture financing of agrarian enterprises. It was proved that the attraction of long-term (due to Euro-bonds) and non-maturity (at the expense of placement of shares) of venture financing in the amount of 1 EUR., in the foreign equity market of venture capital allows ensuring an increase in agricultural GDP in Ukraine by an average of 6.8 EUR. Under the ideal conditions of the financial environment and achieving the risk-free margin of the financial flow margin for all the same type of agro holdings that form the volume of gross agricultural output, must have the same access to investment resources and equal rates of yield of financial assets in the investment portfolios of foreign venture funds.

Examining the uncovered equity parity in the emerging financial markets

Uncovered Equity Parity condition states that the foreign equity market outperformance relative to the home equity market associates with foreign exchange rate depreciation. This study examines this condition in the emerging financial markets context using bounds testing approach to the level relations. Our rigorous analysis shows an evidence opposite to the UEP prediction such that an outperformance of foreign equity market links with a foreign exchange rate appreciation. Moreover, a nonlinear model shows an asymmetry in the equity market effect on the exchange rate, both in the short run and long run.

Global equity market volatility spillovers: A broader role for the United States

Rapach et al. (2013) recently showed that U.S. equity market returns contain valuable information for improving return forecasts in global equity markets. In this study, we extend the work of Rapach et al. (2013) and examine whether U.S.-based equity market information can be used to improve realized volatility forecasts in a large cross-section of international equity markets. We use volatility data for the U.S. and 17 foreign equity markets from the Oxford Man Institute’s realized library, and augment our benchmark HAR model with U.S. equity market volatility information for each foreign equity market. We show that U.S. equity market volatility information improves the out-of-sample forecasts of realized volatility substantially in all 17 foreign equity markets that we consider. Not only are these forecast gains highly significant, they also produce out-of-sample R2 values of between 4.56% and 14.48%, with 9 being greater than 10%. The improvements in out-of-sample forecasts remain statistically significant for horizons up to one month ahead. A substantial part of these predictive gains is driven by forward-looking volatility, as captured by the VIX.

Global Equity Market Volatility Spillovers: A Broader Role for the United States

Rapach et al. (2013) have recently shown that U.S. equity market returns carry valuable information to improve return forecasts in global equity markets. In this study, we extend the work of Rapach et al. (2013) and examine if U.S. based equity market information can be used to improve realized volatility forecasts in a large cross-section of international equity markets. We use volatility data for the U.S. and 17 foreign equity markets from the Oxford Man Institute’s realized library and augment for each foreign equity market our benchmark HAR model with U.S. equity market volatility information. We show that U.S. equity market volatility information substantially improves out-of-sample forecasts of realized volatility in all 17 foreign equity markets that we consider. Forecast gains are not only highly significant, but produce out-of-sample R 2 values between 4.56% and 14.48%, with 12 of these being greater than 10%. The improvements in out-of-sample forecasts remain statistically significant for horizons up to 1 month ahead. A substantial part of the predictive gains are driven by forward looking volatility as captured by the VIX.

China’s Growing Influence in Southeast Asia – Monetary Policy and Equity Markets

AbstractThis study analyses the potential transmission of China’s monetary policy shocks to equity markets in Southeast Asia. Impulse response functions indicate that the impact of a monetary expansion in China is significant and positive for four of the five Southeast Asian equity markets. One explanation for this result is that monetary policy shocks in China lead to an increase in demand for goods and services in both China and abroad, which then shows up in the foreign equity market. The results in this paper provide evidence of China’s influence in Southeast Asia and its financial markets. The transmission effect is small and very short lived, but can be expected to increase if the current trends of a deepening economic integration between China and Southeast Asia and a maturing Chinese central bank continue.

Impact of Multi Brand Foreign Direct Investment in Retail Sector in India

India has been placed at first position in the category of countries with the best opportunity for investment in the Retail Sector by a survey of A.T. Kearney’s 2005 on Global Retail Development. The increasing disposable incomes among the Indian middle class and increasing young population have been cited as the main reasons for such attractive optimism. This positive opinion of the experts has also encouraged the intense lobbying by certain sections for opening Foreign Direct Investment in this sector. Foreign investors are also very enthusiastic to invest in India’s Retail Sector.At present India does not allow FDI in multi-brand retail but permits up to 51 percent in single brand retail and 100 percent in cash and carry wholesale trading. There is a ban on FDI in big multi-brand retail stores but there is no restriction on companies accessing the foreign equity market through the American and Global Depository Receipts. The Government of India opened up FDI in ‘Single Brand Retailing’ in the year 2006. This was done with a primary motive of giving a boost to organized retailing in India.However, there’s another equally strong lobby that has been opposing this idea tooth and nail. They claim that it will mop away the corner shops in every locality and chuck inhabitants out of the jobs and bring unthinkable melancholy. The Government cap over FDI in retail, like in many other sectors, has been essentially a personification of the dilemma that confronts policy makers about whether opening up FDI in retail would be a boon or bane for the sector and for the stakeholders involved in it.This Research Paper makes a modest attempt of developing an insight as to what are the trends in the Indian Retail Industry and to the benefits and drawbacks of FDI in this sector. It has also focused on whether this policy will be beneficial for the Indian Economy as a whole or not.

International order flows: Explaining equity and exchange rate returns

Macroeconomic models of equity and exchange rate returns perform poorly at high frequencies. The proportion of daily returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, we model equity price and exchange rate behavior based on a concept from microstructure–order flow. The international order flows are derived from belief changes of different investor groups in a two-country setting. We obtain a structural relationship between equity returns, exchange rate returns and their relationship to home and foreign equity market order flow. To test the model we construct daily aggregate order flow data from 800 million equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and aggregate order flows in both markets. As predicted by the model, daily exchange rate returns and order flow into the French market have significant incremental explanatory power for the daily S&P returns. The model implications are also validated for intraday returns.

Exchange Rates, Equity Prices, and Capital Flows

We develop an equilibrium model in which exchange rates, stock prices and capital flows are jointly determined under incomplete forex risk trading. Incomplete hedging of forex risk, documented for US global mutual funds, has three important implications: 1) exchange rates are almost as volatile as equity prices when the forex liquidity supply is not infinitely price elastic; 2) higher returns in the home equity market relative to the foreign equity market are associated with a home currency depreciation; 3) net equity flows into the foreign market are positively correlated with a foreign currency appreciation. The model predictions are strongly supported at daily, monthly and quarterly frequencies for 17 OECD countries vis-a-vis the US. Moreover, correlations are strongest after 1990 and for countries with higher market capitalization relative to GDP, suggesting that the observed exchange rate dynamics are indeed related to equity market development.

Modeling jumps in returns of financial assets as M4 processes: Measured exchange rate exposure of Asian equity portfolio

Previous work on the exposure of equity markets to exchange rate risk, surprisingly, found stock returns were not significantly affected by exchange rate fluctuations. In this paper, we examine the relation between China, Japan and USA MSCI (Morgan & Stanley Capital International) daily equity index returns and SAFE (State Administration of Foreign Exchange) exchange rate returns of Chinese RMB and Japanese Yen in US dollar. We find a significant relation between Asian foreign equity stock returns and Chinese RMB and Japanese Yen exchange rate returns. This article incorporates foreign exchange values as partial determinants of Asian foreign equity market returns and suggests that currency risk is of hedging concern to investors with implications for portfolio management. We implement our result in portfolio’s CaR determination under VaR constraints.

Effects of exchange-rate and interest-rate risk on ADR pricing behavior

This study examines various risk factors that the value of American Depository Receipts (ADRs) might be exposed to. We found that over the 1990–2000 period: (1) ADR portfolio returns were sensitive to the movements in the US stock market, in the underlying foreign equity market, and in the corresponding foreign exchange market. (2) To the fluctuations in corresponding money market, Australian and European ADRs exhibited more significant exposure compared with Asian, Latin American, and South African ADRs. (3) Following the outbreak of international financial crises, there were significant structural shifts in various risk factors for ADRs originating in the affected area.

Pricing of American Depositary Receipts under Market Segmentation

This article examines the pricing of American Depositary Receipts (ADRs) in a three-factor pricing model. A seemingly unrelated regression model is utilized to test the nonlinear parameter restriction implied by the model. It is found that, although ADRs are traded in the U.S. securities market, their returns are significantly affected by their respective home market factors rather than by U.S. market movements. While U.S. investors are exposed to incremental risk from foreign equity market, they do not command a risk premium. The findings suggest that (1) markets are segmented and ADR listing does not integrate world capital market and (2) ADRs behave more like a foreign security and ADR is an effective tool of global risk diversification for U.S. investors.

The Interrelationships Between U.S. and Foreign Equity Market Yields: Tests of Granger Causality

This study examines the interrelationships between yields on the U.S. and several foreign market portfolios over the 1980–89 period. Tests of Granger causality are used to investigate the effects of uni-directional causality, bi-directional causality, and contemporaneous adjustment in the determination of market rates of return. The results indicate that international equity market returns are largely contemporaneously determined, and the significance of contemporaneous effects varied over time. Uni-directional and bi-directional causality were found to be relatively weak.