Market Proxy Research Articles

A cointegration analysis of wine stock indexes

This paper analyzes price patterns and long-run relationships for both fine wine and non-fine wine, with the aim to highlight price dynamics and co-movements between series, and to exploit potential diversification benefits. Data are from Liv-Ex 100 Fine Wine for fine wine, the Mediobanca Global Wine Industry Share Price for normal wine, and the MSCI World Index as a proxy of the overall stock market. Engle-Granger and Johansen tests were used to detect whether and to what extent the series co-move in the long run and which one of the variables contributes proactively to such an equilibrium by reacting to disequilibria from the long-run path. The estimates highlight that i) the two wine indexes have a higher Sharpe ratio compared to the general stock market index, revealing wine stocks as a profitable investment per se, and ii) the absence of cointegration among the three series and the existence of possible diversification benefits. In fact, in the long-run price do not move together and, therefore, investors may be better off by including wine stocks into investment portfolios and take advantage of diversification.

Beta dispersion and portfolio returns

As any well-versed investor should know, there are many ways in which beta can be calculated based on factors such as the choice of time interval and market proxy used in the estimation process. Of course, this can lead to wide variation in beta estimates reported through publication sources. In this paper, we create portfolios based on the dispersion in the estimate of 27 different beta calculations. Defining stocks with higher variation in their beta estimates as higher risk, and consistent with risk-return theory, we find that portfolios of stocks with high dispersion across beta estimates outperform portfolios of stocks with low dispersion regardless of their level of systematic risk.

Forecasting performance of smooth transition autoregressive (STAR) model on travel and leisure stock index

Travel and leisure recorded a consecutive robust growth and become among the fastest economic sectors in the world. Various forecasting models are proposed by researchers that serve as an early recommendation for investors and policy makers. Numerous studies proposed distinct forecasting models to predict the dynamics of this sector and provide early recommendation for investors and policy makers. In this paper, we compare the performance of smooth transition autoregressive (STAR) and linear autoregressive (AR) models using monthly returns of Turkey and FTSE travel and leisure index from April 1997 to August 2016. MSCI world index used as a proxy of the overall market. The result shows that nonlinear LSTAR model cannot improve the out-of-sample forecast of linear AR model. This finding demonstrates little to be gained from using LSTAR model in the prediction of travel and leisure stock index.

The Capital Asset Pricing Model And Fama-French Three Factor Model In An Emerging Market Environment

This paper tests the validity and accuracy of the Capital Asset Pricing Model and the Fama-French Three-Factor Model, by predicting the variation in excess portfolio returns on the Johannesburg Stock Exchange. Portfolios of stocks were constructed based on an adapted Fama-French (1993) approach, using a annual sorting procedure, based on Size and Book-to-Market metrics respectively. The sample period spans six years, 2010 to 2015, and includes 46 companies listed on the JSE. The results indicate that both models perform relatively poorly because of inadequate market proxy measures, market liquidity restrictions, unpriced risk factors and volatility inherent in an emerging market environment. The Value Premium is found to explain a larger proportion of variation in excess returns than the Size Premium, and is more pronounced in portfolios with relatively higher book-to-market portfolios.

Consistent Risk Modeling of Liquid and Illiquid Asset Returns

The authors link liquid assets like exchange-traded real estate investment trusts and public equity, which have relatively high volatilities and low autocorrelations, to illiquid assets like real estate and private equity, which have relatively low volatilities and high autocorrelations. A suitable weighted moving-average or smoothing function applied to public market proxies can yield risk estimates similar to their private market equivalents. Going in the opposite direction, the inverted lag polynomial, or desmoothing function, can transform illiquid alternative asset returns to have risk characteristics similar to those of public market proxies. Using the transform function to express liquid and illiquid views enables more consistent modeling of risk attribution and risk management for portfolios with illiquid assets.

Analysing Cross-Currency Basis Spreads

This paper investigates the drivers of cross-currency basis spreads, which were historically close to zero but have widened significantly since the start of the financial crisis. Credit and liquidity risk, as well as supply and demand have often been cited as general factors driving cross-currency basis spreads, however, these spreads may widen beyond what is normally explained by such variables. We suggest market proxies for EUR/USD basis swap spread drivers and build a multiple regression and cointegration model to explain their significance during three different historical periods of basis widening. The most important drivers of the cross-currency basis spreads appear to be short- and medium-term EU financial sector credit risk indicators, and to a slightly lesser extent, short- and medium-term US financial sector credit risk indicators. Another important driver is market volatility for the short-end basis spread, and the EUR/USD exchange rate for the medium term basis spread, and to a lesser extent, the Fed/ECB balance sheet ratio.

Modelling Stock Returns in India: Fama and French Revisited

Since reforms, Indian security market has gone through significant changes and as result the efficiency of many models developed earlier might have been affected. The same may be true with three factors CAPM. This study aims to test the validity of three factors CAPM model proposed by Fama and French (1993) in changed Indian context. For the study, assessment period is 1999-2013 and BSE-500 has been taken as proxy for market. Results show that in Indian market, no size effect and a weak value effect exists but size or value of stocks cannot discriminate stocks robustly. Beta is significant and none of the three factors alone can explain the variations in the expected return but two or three factors together can explain to some degree. The ability of three factors CAPM in explaining the expected return increases during low GDP growth period and falls during high GDP growth period.

The One: A Simulation of CAPM Market Returns

This study presents a new method for calculating beta through a back-solving process, which assumes the capital asset pricing model (CAPM) to be absolute. This process has improved asset pricing abilities and allows for the discovery of the “one true” market returns. The market portfolio returns required for CAPM to be accurate are then calculated and compared with eight popular financial distributions and five market proxies. The overall best distribution to use for CAPM market returns is the Student t-distribution. This study also contributes to the literature that the market proxies used are inefficient and adversely affect the results used in other studies to discredit the CAPM.

The disappearing abnormal returns to a fundamental signal strategy

PurposeThe purpose of this paper is to examine whether abnormal returns to a fundamental signal (FS) strategy disappear after the publication of Abarbanell and Bushee (1998).Design/methodology/approachUsing data on NYSE/AMEX firms from 1974 to 2012, this research estimates annual Fama and MacBeth (1973) cross-sectional regression of risk-adjusted buy-and-hold returns on the FSs after controlling for contemporaneous earnings changes and a proxy for market risk.FindingsThis paper finds that predictable hedge returns to the FSs substantially decrease and become statistically insignificant after the Abarbanell and Bushee’s publication date. This research also finds that the FSs have not lost their importance to equity valuation process; value relevance of the FSs has not diminished, and the FSs have retained their predictive ability over time. The evidence on changing information and trading environments appears to contribute to the disappearing abnormal returns to a FS strategy.Originality/valueThis paper adds to the growing body of literature on the persistence of pricing anomalies.

The Lost Capital Asset Pricing Model

A flat Securities Market Line is not evidence against the CAPM. In a rational-expectations economy in which markets are not informationally efficient, the CAPM holds but is rejected empirically (Type I Error). There exists an information gap between the empiricist and the average investor who clears the market. The CAPM holds unconditionally for the investor, but appears flat to the empiricist who uses the correct unconditional market proxy. This distortion is empirically substantial and offers a new interpretation of why “Betting Against Beta” works: BAB really bets on true beta. The empiricist retrieves a stronger CAPM on macroeconomic announcement days.

Nexus between Stock Market Returns and Economic Variables: Evidence

The paper examines the impact of selected macroeconomic variables on the Indian stock market. The macroeconomic variables used in the study are interest rate, exchange rate, index of industrial production (IIP) and gold price. BSE Sensex is used as proxy for Indian stock market. We have used the monthly data for all the variables from January 2001 to December 2016. Regression analysis and Granger Causality test is used to establish the relationship between the stock market and macroeconomic variables. The results show significant impact of only exchange rate on stock returns. All the other variables have shown insignificant impact on the stock market returns. The results of Granger causality test show unidirectional relationship between exchange rate and stock prices and bi-directional relation between IIP and SENSEX.

Determinants of the performance of investment funds managed in Hungary

We investigate the performance and time varying risk behaviour of Hungarian equity mutual funds by applying modified versions of the four-factor model applying different market proxies. We classify the funds according to their target markets (Hungary, Central and Eastern Europe [CEE], developed markets) and separate bullish and bearish periods. We find no significant excess returns for any circumstances; however, market betas are significantly different for bullish and bearish periods as well as the explanatory power of book-to-market ratio and market capitalisation. After taking into account the daily percentage changes in the number of shares outstanding we find investors’ relation to risk to be different in bearish and bullish periods.

How are discretionary accruals priced? Evidence from the Canadian stock market

This paper examines the pricing of discretionary accruals of a sample of 159 Canadian listed firms. According to previous literature, firms' accounting manipulations are explained by the opportunism of managers. As a result, discretionary accruals are negatively priced by an efficient capital market. However, another stream of literature argues that discretionary accruals are positively priced by financial markets as they reduce information asymmetry and capture information not reflected by non-discretionary earnings. As a consequence, discretionary accruals enhance the capacity of reported earnings to reflect firm real performance. The evidence of our study is consistent with the latter scenario. Our findings are robust to alternative models of discretionary accruals, to income increasing vs. income decreasing manipulations, to the level of financial performance and finally to financial market proxies.

Stress Indicator for Clearing Houses

As a regulatory answer to the crisis, financial instruments are increasingly forced to be cleared centrally even in the OTC markets; therefore, risk management of central clearinghouses has become a central issue. A key term of the regulation is a stress event; however, it is not specified in the legislation what should be meant under stress in the case of a clearinghouse. To find an objective stress indicator, we built up a micro-simulation model of a hypothetical clearinghouse operating on the US equity market between 2007 and 2015. Based on this, we developed a logit regression model to specify an appropriate stress indicator and we showed that our tailor-made stress index calibrated to the position of the clearinghouse performs significantly better than the usual market proxies for financial stress.

Performance evaluation of actively managed mutual funds

Motivated by the growing attraction of the mutual fund industry worldwide, this research seeks to explore the economic benefits contributed by the South African equity unit trust managers over the period from 6 January 2002 to 2 September 2012. The performance statistics of selected equity unit trusts are examined for the overall examination period and two sub-periods: 6 January 2002 to 6 May 2007 and 7 May 2007 to 2 September 2012. The first sub-period captures the bullish performance of the unit trusts before the 2008 global financial crisis. The second sub-period captures the global financial crisis and the European debt crisis before the European Central Bank (ECB) subsequently implemented the outright monetary transactions (OMT) to curb the yields in Eurozone. The risk-adjusted performance measures employed by this study include the Sharpe ratio, M-squared, Treynor measure and Jensen’s alpha. Regardless of the different applications of risk-return parameters employed to evaluate fund performance, the results reveal that, on average, most of the equity unit trust managers in South Africa do not outperform the market proxy on a consistent basis. The majority of the unit trust managers show good performance before the crisis, with subsequent inferiority in performance in turbulent times. Keywords: unit trusts, active portfolio management, passive portfolio management, performance evaluation, efficient market hypothesis (EMH). JEL Classification: G11, G12, G14, G15

Sharī'Ah and SRI Portfolio Performance in the UK : Effect of Oil Price Decline

In accordance with decline in oil price and portfolio performance, this study attempts to examine the effect of oil price on Sharī‘ah portfolio performance, which Socially Responsible Investment (SRI) portfolio is also constructed as a comparison. This study is different from other empirical studies which use stock index as proxy for stock market returns since this study constructs its own Sharī‘ah and SRI portfolio investment in the UK taking the companies included in FTSE 100 from 2008 up to 2015. This study shows that the decline in oil price has higher impact on Sharī‘ah portfolio compared to SRI portfolio, which is shown by lower value of Sharpe’s ratio and Treynor ratio. On the other hand, Sharī‘ah portfolio has higher beta and Jensen’s alpha compared to SRI portfolio. It provides insight to the regulatory body and scholars to reconsider the Sharī‘ah screening criteria in order for Sharī‘ah portfolio to be able to have better performance and more sustainable in the long run in order to be able to overcome different type of crisis.

Impact of News on Indian Stock Market: A Periodic Study with Asymmetric Conditional Volatility Models

The article analyzes the leverage effect for Indian stock market. The effect of good and bad news on volatility during the period of growth, recession and the post-recession period is investigated taking American recession of 2008–2009 as the benchmark. Bombay Stock Exchange (BSE) 30 index was used as the proxy for Indian stock market. Using suitable asymmetric generalized autoregressive conditional heteroscedasticity (GARCH) models based on information criterions to study the asymmetry for the period and sub-periods, it was found that Indian stock market reacts differently to positive and negative news confirming leverage effect in all periods considered. However, the leverage effect was seen prominent during the period of gloom than other periods shown by the news impact curve.

The cyclical behaviour of commodities

Commodities are known to exhibit cyclical behaviour. This paper studies the dynamics of commodities regimes and their implications for portfolio diversification. Using an extension of the regime-switching model, we find that the 12 commodities studied can be clustered into four groups with different regime dynamics, demonstrating that the asset class behaviour of commodities is far from homogeneous. The existence of two regimes is transversal to the assets studied. One regime is marked by high volatility and the other by low volatility. In both regimes, most of the commodities exhibit returns that are not statistically significantly different from those of the stock market regime. The exceptions are oil and natural gas during the low-volatility regime. The analysis of regime synchronization shows that our stock market proxy has low synchronization with commodities, which suggests potential diversification value from adding commodities to an equity portfolio. Based on portfolio optimization, we find that commodities are included in the optimal portfolios in the bull and bear regime of the Standard & Poor’s 500 index. The benefits of diversifying into commodities are particularly strong in the bear stock market regime.

Dependence structure between sukuk (Islamic bonds) and stock market conditions: An empirical analysis with Archimedean copulas

We investigate the dependence structure between major local sukuk (Islamic bonds) yields in three Muslim countries and various stock market conditions as represented by national, regional and global stock market returns and conditional volatility. We consider the three largest country sukuk markets in the world which are for Malaysia, United Arab Emirates and Saudi Arabia, as well as their stock markets, the global Islamic stock index as the global representative of faith-based investing, the S&P index for Asia as the proxy for the regional stock market and the S&P 500 index as the global stock factor. We use the Archimedean copula models: Gumbel, Clayton, Frank and AMH which have different tail dependence structures. The results show that the three largest country sukuk indices exhibit significant dependence but only with the volatility of the considered stock markets. Moreover, the dependence structure between the local sukuk yields and the various stock markets’ volatility is asymmetric and oriented toward the upper side for Malaysia and United Arab Emirates, while it has a symmetric dependence for the Saudi Arabian market. We also find that the country sukuk yields are more sensitive to the global conventional stock market rather than to the global Islamic, regional and local stock markets.

Are Stock Markets Efficient? (Price-Earnings Ratio Approach): Korean Stock Market Proxy

This study investigates the relationship between Price-Earnings ratio and return on stocks. The result is used to appraise the efficiency of the Korean stock market. Findings statistically opposed S. Basu (1977) results. He realized Price-Earnings ratio effect but I found no statistical evidence supporting Price-Earnings ratio. Using Fama and Macbeth (1973) methodology of portfolio formation, I found no statistical Price-Earnings ratio nor size effect. If a test of financial market efficiency depends on Price-Earnings ratio and size effect only, then Korean stock market is efficient. However, within this context, it was difficult to determine the extent to which the market is efficient. The bid-ask spread (measure of information asymmetry) Will be study next to figure out the degree of market efficiency.