Global 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)

Global Equity Markets: An Empirical Study of Return Prediction and Diversification Benefits

My research delves into the equity market trends of China, Japan, and the UK in the post-2000 era. I analyze a dataset of macroeconomic variables from 2000 to 2022 to assess their ability to predict equity market returns. My study reveals that all three nations have seen an upward trajectory in their equity markets, with China's market experiencing the most substantial growth. In addition, I explore how macroeconomic variables affect stock prices and identify the variables that have the most significant impact on equity market returns. Finally, I conclude that a diversified investment strategy in multiple countries stock markets produces higher Sharpe ratios than any single-country investment.

An Investigation into How Fluctuations in Global Crude Oil Prices Impact Tadawul All-Shares Index (TASI) (January 1995-December 2017)

This paper investigates the effect of fluctuations in the global oil market on the movement of the TADAWUL All Shares Index, TASI, by using monthly data for the period between January 1995 and December 2017. To capture the impact of the global oil market, this paper uses the two main benchmarks in the global oil market, West Texas Intermediate (WTI), and Brent Crude oil. As the stock market is known to be stochastic, a set of secondary explanatory variables is added to this research. It consists of the following: inflation rates, short-term interest rates, gold spot prices, level of imports, level of funds invested in private securities by the private sector, and proxy for global equity markets, FTSE 100. The FTSE 100 has a significant impact on the TASI index, the coefficient is close to 1. The significant impact of the FTSE 100 on the TASI index could signal the existence of many dual investors in both indices. The results show that all variables have an impact on the TASI index at a statistically significant level. Despite the positive impact of spot prices on both benchmarks, the futures strip curve for both benchmarks are inversely related to the predicted variable. Also, the TAIS index is more exposed to changes in the WTI than changes in Brent Crude. It is clearly shown in the coefficient values, .359 and .302, for WTI and Brent Crude respectively. Moreover, over the sample period there is an increase in the level of the explained variation in the TASI index by the explanatory variable. This would indicate that TASI has become a less speculative and more sophisticated market. Finally, as this paper provides evidence for the impact of the global equity market on TASI, it would open a window for future research to examine the impact of other international equity markets on TASI.

Commodity futures markets under stress and stress-free periods: Further insights from a quantile connectedness approach

Most of the academic literature on connectedness focuses on stock markets and commodity spot markets. However, there is still much to say about the connectedness among commodity futures markets at different expiration dates, as this part of the literature is as yet small and inconclusive. This paper builds on the existing literature by focusing on connectedness among a set of ten commodity futures markets (including energy, agriculture, and metal sectors) at different maturities, the global equity market and three different sources of uncertainty (financial, economic, and geopolitical) over the period 2000–2022. In doing so, we estimate a combination of complementary connectedness metrics based on the work of Diebold and Yilmaz (2012), which enables measuring average, and the works of Chatziantoniou et al. (2021) and Ando et al. (2022) which enable measuring connectedness under different market circumstances (i.e., low, median and high quantiles). The analysis provides evidence of the variable aspect of connectedness across commodities and uncertainty measures assessed across different quantiles. The average directional connectedness network suggests that commodity futures markets within the same category are significantly sensitive to each-other. However, interdependencies between commodities belonging to different categories are relatively lower. The average total connectedness across quantiles provides evidence of (i) a clear symmetric pattern at the extreme lower and upper quantiles, and (ii) an increase in connectedness with the magnitude of extreme negative and positive shocks. The time-varying analysis indicates that connectedness increases at all quantiles during periods of high market stress, but with relatively higher intensity at the lower quantiles. Additionally, the structure and magnitude of connectedness at the extremes – upper and lower quantiles – differs from the pattern of connectedness at the median quantiles.

Forecast combination puzzle in the HAR model

AbstractThe heterogeneous autoregressive (HAR) model has become the benchmark model for predicting realized volatility, given its simplicity and consistent empirical performance. Many modifications and extensions to the original model have been proposed that often only provide incremental forecast improvements. In this paper, we take a step back and view the HAR model as a forecast combination that combines three predictors: previous day realization (or random walk forecast), previous week average, and previous month average. When applying the ordinary least squares (OLS) to combine the predictors, the HAR model uses optimal weights that are known to be problematic in the forecast combination literature. In fact, an average of simpler HAR‐style models, and a simple average forecast often outperforms the optimal combination in many empirical applications. We investigate the performance of these simple combination forecasts for the realized volatility of the Dow Jones Industrial Average equity index, and a sample of individual constituent stocks, as well as across a range of other assets, commodities, exchange rates, and a range of global equity market indices. In all cases, we find dramatic improvements in forecast accuracy across all horizons and different time periods. The combinations also perform well relative to the logarithmic form of the HAR model and when using a volatility timing strategy in portfolio allocation. Thisis the first time the forecast combination puzzle is identified in this context.

Estimating contagion mechanism in global equity market with time‐zone effect

AbstractThis paper proposes a time‐zone vector autoregressive (VAR) model to investigate comovements in the global financial market. Analyzing daily data from 36 national equity markets, we explore the subprime and European debt crises using static analysis and the COVID‐19 crisis through a rolling window method. Our study of comovements using VAR coefficients reveals a resonance effect in the global system. Findings on densities and assortativities suggest the existence of the transmission mechanism in all periods and abnormal structural changes during the crises. Strength analysis uncovers the information transmission mechanism across continents over normal and turmoil periods and emphasizes specific stock markets' unique roles. We examine dynamic continent strengths to demonstrate the contagion mechanism in the global equity market over an extended period. Incorporating the time‐zone effect significantly enhances the VAR model's interpretability. Signed networks provide more information on global equity markets and better identify critical contagion patterns than unsigned networks.

Combination forecast based on financial stress categories for global equity market volatility: the evidence during the COVID-19 and the global financial crisis periods

ABSTRACT The 2008 global financial crisis and the COVID-19 pandemic both decrease economic growth and lead to high uncertainty in global stock markets, and financial stress information is closely linked to financial crises. To improve the predictability of the realized volatility of the global equity indices during crises, we examine the predictive role of the Global Financial Stress Index (GFSI) and its categories. We find that the combination predictions based on GFSI’s five incorporated categories and three region-based categories outperform the predictions based on the raw GFSI for most indices. Specifically, the DMSPE combination model with a low discount factor has accurate forecasts for 5- and 22-day-ahead realized volatility, and it also performs better than the equal-weighted and the trimmed mean combination methods. In this study, we present a comprehensive analysis of the predictive role of financial stress information in stock market volatility during crises, and the empirical evidence provides a positive case against the ‘forecast combination puzzle’. Our findings are very instructive for policymakers and investors to make their own short-term and long-term plans in crisis.

Research on the Corporate Bond Risk Factors

The global bond market is greater than the global equity market meanwhile it grows gradually in recent years. Issuing corporate bonds is an ideal channel for enterprises to raise funds in the course of COVID-19 and also provides resilience in the market. Moody's, Standard & Poor's and Fitch are well-known global credit rating agencies and suggest investors purchasing investment-grade bonds for reasonable risks and returns. But local credit rating agencies have limited capacities to appraise local bonds. In the COVID-19 crisis, widen yield spreads represent likelihood of default which can be a measure of credit risk. Besides, government interventions (i.e., Quantitative Easing Program) can effectively eliminate credit risks and Confucian culture is a factor in assessing credit risks of corporate bonds. As for liquidity risk, Chinese bond market is less liquid than the US bond market and financial bonds are the most liquid in the Chinese market. The liquidity risk is caused by inaccurate information and market risk tolerance whereas market risk tolerance integrates credit and liquidity, the main measurement of liquidity risk is transaction cost which means that higher transaction cost can impede liquidity in the bond market. Finally, market risk comprises of COVID-19 pandemic, market design and biodiversity risk. The epidemic tightens the financial condition of developing countries and depreciates the currency of the bond market which raises term structure of interest rate up. A well-designed financial market system can help stabilize fluctuations during financial crisis. Besides, biodiversity risk is relevant to the operation apartment of companies.

Dynamic dependencies and return connectedness among stock, gold and Bitcoin markets: Evidence from South Asia and China

Research background: In order to examine market uncertainty, the paper depicts broad patterns of risk and systematic exposure to global equity market shocks for the major South Asian and Chinese equity markets, as well as for specific assets (gold and Bitcoin). Purpose of the article: The purpose of this paper is to investigate the dynamic correlation among the major South Asian equity markets (India and Pakistan), the Chinese equity markets, the MSCI developed markets, Bitcoin, and gold markets. Methods: While applying the GARCH-Vine-Copula model and the TVP-VAR Connectedness approach, major patterns of dependency and interconnectedness between these markets are investigated. Findings & value added: We find that risk shocks from developed equity markets are critical in these dynamic links. A net return spillover from Bitcoin to the Chinese and Pakistani stock markets throughout the sample period is reported. Interestingly, gold can be applied to hedge and diversify positions in China and major South Asian markets, particularly following the COVID-19 outbreak. Our paper presents three main original add valued: (1) This paper adds global factors to the targeted study of risk transmission among South Asian and Chinese stock markets for the first time. (2)The assets of Bitcoin and gold were added to the study of risk transmission among South Asian and Chinese stock markets for the first time, enabling the research in this paper to observe the non-linear link among the South Asian and Chinese stock markets with them. (3) Our research adds to these lines of inquiry by giving empirical evidence on how COVID-19 altered the dependent structure and return spillover dynamics of Bitcoin, gold and South Asian and Chinese stock markets for the first time. Our results have critical implications for investors and policymakers to effectively understand the nature of market forces and develop risk-averse strategies.

Another history of global financial markets: Local stock market integration since 1913 from a network perspective

AbstractWe examine local and global equity market integration since 1900 using network methods. The analysis uncovers a new stylised fact about equity market integration over the past 120 years. Local equity market integration generally increases over the entire sample period. This finding is at odds with much of the existing literature that describes long‐run market integration as following a U‐shape pattern. Global stock market integration peaks in 1913 followed by disintegration during the Great Depression and Bretton Woods periods. Then it rebounds and achieves the highest level of integration during the recent period of globalisation that began in the early 1970s. We argue that this U‐shape pattern is the by‐product of the interaction of the network effects of the monotonic decrease in local distances (decrease in information costs, accelerated in the past decades) and network connectivity (which varies inversely with the control over international financial transactions).

To what extent do sovereign rating actions affect global equity market sectors?

This paper investigates the reaction of global equity market sectors to sovereign rating news issued by the three largest credit rating agencies (CRAs), S&P, Moody's, and Fitch, during the period 10th August 1994 until 31st December 2019. Results show significant reactions by equity market sectors to sovereign rating news. This reaction is asymmetric as negative news affects market sectors more than positive news. Results also show considerable variations in the sectors' responses to sovereign credit news in developed and developing countries. In terms of three CRAs, S&P's actions induce the strongest market reaction in most sectors, while Moody's negative actions are relatively more informative in developing countries. Fitch's rating actions are the least influential. Solo upgrade (negative outlook/watch) signals are influential amongst positive (negative) event types. These results provide valuable insights to policymakers by identifying the most vulnerable sectors of the economy during different sovereign rating events.

How does private firm disclosure affect demand for public firm equity? Evidence from the global equity market

We investigate the relationship between private firms' disclosures and the demand for the equity of their publicly traded peers. Using data on the global movement of portfolio investments in public equity, we find that a 10% increase in private firm disclosure transparency – proxied by the number of disclosed private firms' financial statement line items – reduces global investors’ demand for public equity by 4.3% or $358 million per investee country-industry. These findings are consistent with private firm disclosures generating negative pecuniary externalities – global investors reallocate their capital away from public firms to more transparent private firms – and less consistent with these disclosures creating positive information externalities that would benefit public firms. Consistent with this interpretation, we find that the reduction in demand for public equity is offset by a comparable increase in capital allocation to more transparent private firms. Using a simulated instruments approach and the staggered implementations of electronic business registers in investee countries in Europe as plausibly exogenous shocks to private firm transparency, we conclude that the negative relationship between private firm disclosures and public equity demand is likely causal.

Oil Price Uncertainty Shocks and Global Equity Markets: Evidence from a GVAR Model

This paper examines the propagation of oil price uncertainty shocks to real equity prices using a large-scale Global Vector Autoregressive (GVAR) model of 26 advanced and emerging stock markets. The GVAR framework allows us to capture the transmission of local and global shocks, while simultaneously accounting for individual-country peculiarities. Utilising a recently developed model-free, robust estimate of oil price uncertainty, we document a statistically significant and negative effect of uncertainty shocks emanating from oil prices on the large majority of global stock markets, with the adverse effect of oil price uncertainty shocks found to be stronger for emerging economies as well as net oil-exporting nations. Interestingly, however, global stock markets exhibit a great deal of heterogeneity in their recovery following oil uncertainty shocks as some experience rapid corrections in stock valuations while others suffer from extended slumps. While the results are sensitive to the oil uncertainty measure utilised, they suggest that country diversification in the face of rising oil market uncertainty can still be beneficial for global investors as global stock markets exhibit a rather heterogeneous pattern in their recovery rates against oil market shocks.

Global Equity Market Volatility during the Initial Stages of the COVID-19 Pandemic: Drivers and Policy Responses

The authors investigate the initial impact of the COVID-19 pandemic on global equity market volatility with particular interest on cross-country policy response differences in 86 countries across the globe. They find that reported cases, growth rate of cases, and the change in growth rate of cases significantly drove volatility during the first 100 days of the pandemic. Including policy variables obtained from Oxford COVID-19 Government Response Tracker that measure government responses in terms of containment, closure, health, and fiscal, the authors show that stricter policy responses significantly reduced the impact of the pandemic on stock market volatility in those early days, even after controlling for income levels of the countries in the sample. The authors also analyze the effect of managerial sentiment extracted from earnings call transcripts, and they find that, although managerial sentiment, both negative and uncertainty, partially subsumed the policy responses, their impact on volatility still persisted.

Measuring 25 years of global equity market co-movement using a time-varying spatial model

We analyse global equity market co-movement over the period of the last 25 years using a dynamic spatial model. Based on a generalized autoregressive score model, we analyse the co-movement among global, European, American, and Asian equity markets during various crises including the Asian, global financial, and European sovereign debt crises, as well as the economic turmoil arising due to the current COVID-19 pandemic. Our results show an increase in the co-movement prior to the onset of the global financial crisis in 2008; a generally higher co-movement among European countries as compared to American and Asian-Pacific countries; while the highest level of co-movement was reached during the current pandemic. When accounting for time-varying variances, however, we find evidence for global contagion only during the COVID-19 pandemic which induced an economic downturn in the first quarter of 2020.

Time-frequency analysis of the comovement between wheat and equity markets

PurposeThis study aims to investigate the time-frequency comovement between wheat futures traded on three US markets (Chicago Board of Trade (CBOT), Kansas City Board of Trade (KCBOT) and Minneapolis Grain Exchange (MGE)) at different maturities and a global equity index.Design/methodology/approachAs they allow to trace transitional shifts over time and across different frequency bands, this paper relies on continuous wavelet tools to investigate the time-frequency comovement among wheat and global stock markets.FindingsThe results show an increase in wheat futures prices at all maturities and a weak integration level within each wheat market during the subprime crisis. Moreover, the wavelet power spectra maps show high wheat and equity price volatility at different time scales and for various subperiods. Furthermore, the continuous wavelet coherence highlights time-frequency-varying comovements between the markets considered, which become particularly high during times of crisis.Practical implicationsThe results provide market participants with a better understanding of the nature as well as the magnitude of the relationship between the global financial market and different wheat markets at different maturities and during tranquil and crisis periods. Indeed, from investors' perspective it is important to understand how markets are segmented or integrated during tranquil and crisis periods in order to better assess risks, diversify portfolios and implement more effective hedging strategies. As for regulators, a better understanding of the level of integration of different markets would further help refine macroprudential policies, and thus strengthen financial stability and resilience.Originality/valueThis paper enriches the existing literature by investigating the time-frequency comovement between wheat and a global equity market. Indeed, the dynamics between stock and wheat markets across different nearest to maturities have not been widely explored by previous studies.

Global factors and stock market integration

We propose a novel approach for generating global factors to measure global equity market integration using a panel data model with cross-sectional dependence (CD). Based on the previous literature, our global factors are obtained by explicitly controlling the effects of local factors of different regions in one asset pricing model, which further provides an integration measure based on the adjusted-R2. We empirically investigate the dynamics of global integration from 1990–2017 and find that (1) the integration measure based on the considered developed markets shows a slightly upward trend during our sample period, (2) the main driving force behind volatility in global integration arose from the Asia-Pacific (excluding Japan) region, and (3) integration between North America, Europe and Japan showed a relatively flat and moderate trend.

Heterogeneous Impacts of Wars on Global Equity Markets: Evidence From the Invasion of Ukraine

Heterogeneous Impacts of Wars on Global Equity Markets: Evidence From the Invasion of Ukraine

Portfolio Optimization between Global Equity Markets

Portfolio Optimization between Global Equity Markets

The Cost of Russian Sanctions on the Global Equity Markets

The Cost of Russian Sanctions on the Global Equity Markets