International Equity Markets Research Articles

Modeling Skewness in Portfolio Choice

Despite half a century of research, we still do not know the best way to model skewness of financial returns. We address this question by comparing the predictive ability and associated portfolio performance of several prominent skewness models in a sample of ten international equity market indices. Models that employ information from the option markets provide the best outcomes overall. We develop an option-based model that accounts for the skewness risk premium. The new model produces the most informative forecasts of future skewness, the lowest prediction errors and the best portfolio performance in most of our tests.

Analysis of the performance of volatility-based trading strategies on scheduled news announcement days: An international equity market perspective

This study explores the performance of volatility-based trading strategies on scheduled news announcement days. The design of the investment strategies is based on the fall of the VIX, VSTOXX, VDAX-NEW and VFTSE volatility indices on days with important macroeconomic releases, which we document over the period 2008–2018. Our trading strategies involve variance swaps, VIX futures, and VSTOXX mini futures contracts. The empirical evidence indicates that our trading strategies yield significantly positive mean returns on major announcement days. This finding suggests that variance swap and volatility futures markets are not efficient with respect to the release of macroeconomic information.

Do Stop-loss Rules Add Value in International Equity Market Allocation?

We consider the performance of stop-loss rules in international equity market allocation. Our results indicate that stop-loss rules, which involve closing positions that decline by a pre-specified percentage, are important determinants in the parametric portfolio policy. They generate portfolios that have superior mean and risk-adjusted returns for investors. This result holds in general but is economically stronger in declining markets. The out-performance is robust to the inclusion of transaction costs.

Time-Varying Risk Premia in Large International Equity Markets

We propose an estimation methodology tailored for large unbalanced panels of individual stock returns to study the factor structure and expected returns in international stock markets. We show that the local market is necessary to capture the factor structure in both developed and emerging markets. Neither the presence of multiple world risk factors, regional risk factors, systematic currency risk factors, nor a country-specific currency subsumes the importance of the local market factor. All factors, including the local market, carry significant risk premia across a large proportion of countries. The contribution of pricing errors to total expected returns is large and time-varying.

Quantile coherency networks of international stock markets

This paper uses the novel quantile coherency approach to examine the tail dependence network of 49 international stock markets in the frequency domain. We find that geographical proximity and state of market development are important factors in stock markets networks. Both the short- and long-run connectedness significantly increased after the global financial crisis and spillover is higher during bearish market states, highlighting the possibility of contagion effect mainly among developed markets. Frontier and emerging markets are relatively less connected. These findings have implications for international equity market diversification and risk management.

Market Efficiency and News Dynamics: Evidence from International Equity Markets

This paper examines the efficient market hypothesis by applying monthly data for 15 international equity markets. With the exceptions of Canada and the U.S., the null for the absence of autocorrelations of stock returns is rejected for 13 out of 15 markets. The evidence also rejects the independence of market volatility correlations. The null for testing the absence of correlations between stock returns and lagged news measured by lagged economic policy uncertainty (EPU) is rejected for all markets under investigation. The evidence indicates that a change of lagged EPUs positively predicts conditional variance.

Gravity in International Equity Markets

Gravity in International Equity Markets

The Correlation Risk Premium: International Evidence

In this paper we carry out the first cross-country analysis of the correlation risk premium. We examine the statistical properties of the implied and realized correlation in European equity markets and relate the resulting premium to US equity market correlation risk and a global correlation risk premium. We find evidence of strong co-movement of correlation risk premiums in European and US equity markets. Our results support the existence of a strong empirical relationship between the global correlation risk premium and international equity market option returns. We document the dependence of the correlation risk premium on macroeconomic policy uncertainty and related variables.

Investor Myopia and the Momentum Premium across International Equity Markets

Myopic investors focus on short-run price changes rather than long-term fundamental value, resulting in an overweighting of public information and a slow diffusion of fundamental news. Such processing of information can produce price drifts similar to those seen in behavioral models of momentum. We explore the impact of myopia over an international sample, finding that momentum is stronger in more myopic countries, and this relationship is magnified where the proportion of funds under delegated management is high. We therefore argue that investor myopia, which arises due to agency issues in delegated funds management, is an important determinant of momentum.

Building Entrepreneurial Orientation from Learning through Internationalization

Multi-National Enterprises (MNEs) expand overseas to sell their offerings outside the home country (internationalization), seek capital in international equity market (capital-seeking international...

International Equity Markets Interdependence: Bigger Shocks or Contagion in the 21st Century?

Abstract This paper investigates the nature of shocks across international equity markets and evaluates the shifts in their comovements at a business-cycle frequency. Using an “identification through heteroskedasticity” methodology, we compute the impact coefficients on the common and country-specific shocks to stock returns. We then establish three key results regarding the recent comovement amongst returns. First, across all indices, persistent high-volatility spells always coincide with macroeconomic slowdowns. This confirms that market volatility increases as a result of shifts in the perception of macroeconomic risk. Second, there is a rise in the observed responses of international stock returns to common shocks during turbulent periods; such increase is largely attributable to bigger shocks (heteroskedasticity of fundamentals) rather than to breaks in the transmission mechanism or increased structural interdependence between markets. This holds for the Great Financial Crisis too. Third, since around the turn of the new millennium, returns have been hit more often by high-volatility common shocks, likely because of larger and more persistent macroeconomic disturbances.

Does Policy Instability Matter for International Equity Markets?

AbstractWe test whether policy risk is systematically priced in equity returns across 49 countries from 1995 to 2013. We construct two global policy risk factors based on the ratings from international country risk guide. They capture the policy risk from government instability (GOVLMH) and the quality of bureaucracy (BURLMH). Both factors are significantly and positively related to equity returns and the BURLMH factor carries a monthly risk premium of 65 basis points. A country with weaker economic and institutional conditions has more risk exposure to the BURLMH factor whereas a country with high democracy has more risk exposure to the GOVLMH factor. Overall, our study reveals the importance and complexity of policy risk in international equity markets.

Time-Varying Risk Premia in Large International Equity Markets

We use an estimation methodology tailored for large unbalanced panels of individual stock returns to address key economic questions about the factor structure, pricing performance of factor models, and time-variations in factor risk premia in international equity markets. We estimate factor models with time-varying factor exposures and risk premia at the individual stock level using 62,320 stocks in 46 countries over the 1985-2018 period. We consider market, size, value, momentum, profitability, and investment factors aggregated at the country, regional, and world level. We find that adding an excess country market factor to world or regional factors is sufficient to capture the factor structure for both developed and emerging markets. We do not reject asset pricing restriction tests for multifactor models in 74% to 91% of countries. Value and momentum premia show more variability over time and across countries than profitability and investment premia. The excess country market premium is statistically significant in many developed and emerging markets but economically larger in emerging markets.

Is there Momentum in Factor Premia? Evidence from International Equity Markets

This study examines the momentum effect in the returns of factor premia representing a broad set of stock market strategies. Using cross-sectional and time-series tests, we investigate the performance persistence of market, value, size, momentum, low-risk, and quality premia within a sample of 24 international equity markets for the years 1990–2016. We provide strong evidence that the top performing factors continue to outperform the worst performing factors both in individual equity markets and in the cross-country framework. The momentum in factor premia is largely explained by the classic stock-level momentum effect.

The Stochastic Volatility Model, Regime Switching and Value-at-Risk (VaR) in International Equity Markets

In this paper, we estimate two stochastic volatility models applied to international equity markets. The two models are the log-normal stochastic volatility (SV) model and the two-regime switching model. Then based on the one-day-ahead forecasted volatility from each model, we calculate the Value-at-Risk (VaR) in each market. The estimated VaR measures from the SV are higher than those obtained from the regime-switching model for all markets and over all horizons. The exception is the Japanese market, where the stochastic volatility model generates low VaR estimates. Comparing those estimates with the unconditional return distribution, the two models generate smaller VaR measures; an evidence of the two models capturing volatility changes in international equity markets. Finally, we backtest each model and find that the performance of both models is the worst for the Canadian stock market, while the regime switching model does poorly for Germany. The results have significant implications for risk management, trading and hedging activities as well as in the pricing of equity derivatives.

US Implied Volatility as A predictor of International Returns

This study provides evidence of the US implied volatility’s e ect on international equitymarkets’ returns. This evidence has two main implications: i) investors may find that foreign equityreturns adjusting to US implied volatility may not provide true diversification benefits, and ii) foreignequity returns may be predicted using US implied volatility. Our sample includes US volatility index(VIX) and major equity indexes in twenty countries for the period between January, 2000 throughJuly, 2017. VIX leads eighteen of the international markets and Granger causes seventeen of themarkets after controlling for the S&P-500 index returns and the 2007/2008 US financial crisis. USinvestors looking to diversify US risk may find that international equities may not provide intendeddiversification benefits. Our evidence provides support for predictability of international equity returnsbased on US volatility.

Differences of Opinion and International Equity Markets

We develop an international financial market model in which domestic and foreign residents differ in their beliefs about the information content in public signals. We determine how informational advantages of domestic investors in the interpretation of home public signals affect equity markets. We evaluate the ability of our model to generate four international-finance anomalies: (i) the co-movement of returns and capital flows, (ii) home-equity preference, (iii) the dependence of firm returns on home and foreign factors, and (iv) abnormal returns around foreign firm cross-listing in the home market. Their relationships with empirical differences-of-opinion proxies are consistent with the model.Received January 15, 2011; editorial decision May 16, 2016 by Editor Geert Bekaert.

The Role of Jumps and Leverage in Forecasting Volatility in International Equity Markets

The Role of Jumps and Leverage in Forecasting Volatility in International Equity Markets

Merger Imbalance and Returns in International Equity Markets

At the global level, the mispricing theory of mergers by Shleifer and Vishny (2003) may imply that a large number of targets acquired in a given country is a sign of market-wide undervaluation whereas intense acquisition activity indicates overvaluation. The present study has developed a measure for merger imbalance that compares the quantity of targets and acquirers in a local market and tests significance of this variable for country-level asset pricing. The results prove that countries with a high merger imbalance significantly outperform countries with a low merger imbalance. The research was based on data from 46 countries for the years 1999–2015. The outcomes are robust to many considerations, and the findings support the theory of stock market-driven acquisitions.

Testing Calendar Effects of International Equity and Real Estate Markets

There are a lot of previous studies on calendar effects. However, most of them use traditional methods like regression. Hui et al. Habitat International 48, 38–45, (2015b) incorporated Shiryaev-Zhou index with logistic regression to study the Halloween and January effects of eight securitized real estate markets, but they fixed the moving-window size to be 130 days. How the change in moving-window size affects the calendar effects cannot be seen. In this study, we also apply the Shiryaev-Zhou index, but we allow the moving-window size to vary. Furthermore, we incorporated Shiryaev-Zhou index with analysis of mean (ANOM) and logistic regression to examine calendar effects of general equity and securitized real estate indices of Hong Kong, Japan, US, UK, France and Germany during the period 1996 – 2014. The results show that our new methods can detect additional channels of significant calendar effects of which normal methods fail to show. Furthermore, the general equity indices show significant Halloween and January effects. However, for the securitized real estate indices, the Halloween and January effects are less significant or even go into reverse in some cases. This study has two main implications. Firstly, investors can formulate a better trading strategy to earn more profits. Secondly, trends and phenomena found in equity markets may not be applicable to real estate markets, so investment rules on equity markets may not work on real estate markets.