Normal Return Research Articles

Martingale Pricing and Single Index Models: Unified Approach with Esscher and Minimal Relative Entropy Measures

In this paper, we explore the connection between a single index model under the real-world probability measure and martingale pricing via minimal relative entropy or Esscher transform, within the context of a one-period market model, possibly incomplete, with multiple risky assets and a single risk-free asset. The minimal relative entropy martingale measure and the Esscher martingale measure coincide in such a market, provided they both exist. From their Radon–Nikodym derivative, we derive a portfolio of risky assets in a natural way, termed portfolio G. Our analysis shows that pricing using the Esscher or minimal relative entropy martingale measure is equivalent to a single index model (SIM) incorporating portfolio G. In the special case of elliptical returns, portfolio G coincides with the classical tangency portfolio. Furthermore, in the case of jointly normal returns, Esscher or minimal relative entropy martingale measure pricing is equivalent to CAPM pricing.

Sectoral performance of Indian stock market during 1st and 2nd wave of COVID-19 pandemic: an event study analysis

PurposeCapital markets are the backbone of an economy. COVID-19 has created an unacceptable and unpredictable economic environment worldwide, resulting in a significant setback for securities exchanges. India also experienced two waves of this pandemic, which led to a significant downturn in the capital market.Design/Methodology/ApproachResearchers have endeavored to study the impact of the first and second waves of COVID-19 on the performance of various sectoral stocks in India. The performance of selected sectoral indices of the Bombay Stock Exchange was compared with the market performance of the S&P BSE 100. An event study was conducted to analyze the normal return, abnormal return (A.R.), and t-statistics of A.R. for various sectoral stocks. In addition, the abnormal returns of sectoral stocks between the first and second waves of COVID-19 in India were comparedFindingsThe results of the tests showed heterogeneous A.R. between different sectors in both the first and second waves of COVID-19 in India. Positive investor outlook and government financial support programs for various sectors helped them recover from the second wave of COVID-19.Research limitations/implicationsThe study analyzed the impact of the peak of the first and second waves of COVID-19 on selected sectoral indices. There may be several reasons for the performance of this particular stock index. However, we have tried to analyze the best possible reasons for this turbulence in the performance of stocks of selected sectoral indices. The study can be further analyzed to examine the long-term impact of such a pandemic on other sectors.Originality/valueThe study is based on the panic behavior of investors during such a pandemic. No one was prepared for this and expected this pandemic to last this long. This pandemic has taught so many lessons to everyone involved. Investors need to be prepared and cautious for such unforeseen disasters before making any investment decision. They need to analyze which industry can survive under such circumstances, and then they should invest there. Industries and enterprises must adapt and improve by honestly looking at their weaknesses and trying to meet investors' expectations.

Optimal taxation of normal and excess returns to risky assets

AbstractWe examine optimal linear taxes on normal and excess capital income with heterogeneous rates of return, alongside an optimal nonlinear earnings tax. Households optimize a portfolio containing three types of assets: risk‐free, diversifiable risky, and private investment with idiosyncratic risk and heterogeneous expected returns. We define normal capital income as the risk‐free rate times the size of the portfolio, and excess returns as any deviations from it. In this setting, taxing excess returns is ineffective for redistribution due to a Domar–Musgrave effect and only generates revenue, to be balanced against the cost of revenue uncertainty. Taxing normal returns does serve redistribution, as they reveal information about the investors' types beyond what the earnings tax base reveals.

Investigating extreme linkage topology in the aerospace and defence industry

This paper analyses return and volatility spillovers among 21 global aerospace and defence (A&D) companies from six countries and three continents using quantile-based models and daily data from August 23, 2010, to July 1, 2022. The results show that both return and volatility spillovers vary over time, and those estimated at normal market conditions, intensify during COVID-19 and Russia–Ukraine war periods. Spillovers of returns estimated at lower and upper quantiles exceed those estimated at the middle quantile. Volatility spillover is extremely high at the upper quantile and exhibits low variability. Chinese defence stocks are segmented from the rest under normal return conditions and a moderate volatility state. In contrast, they are somewhat integrated under extreme return conditions and volatility states. Hence, Chinese defence stocks entail more diversification benefits under normal conditions than in bear or bull markets. Further analysis shows that geopolitical risk consistently plays a significant role in driving both returns and volatility spillovers, especially during the pandemic and war periods, without ignoring the role of macroeconomic and financial variables. These results have implications for investors concerned with stock portfolio management under various return and volatility conditions and for policymakers preoccupied with policy design under unstable periods

The reaction of the Egyptian stock market to recurring devaluations: an event study approach

PurposeThis paper examines the reaction of the Egyptian stock market to two substantial devaluations of the Egyptian pound (EGP) in 2022 and tests the informational efficiency of the Egyptian market.Design/methodology/approachThe paper uses the event study framework to analyze the significance and direction of abnormal returns of the leading index of the Egyptian stock market (EGX30) on and around the devaluation days. It employs both the constant mean model and the market model to estimate the normal returns of the EGX30. Additionally, the paper uses data on two equity indices, one global and one for emerging markets, as benchmarks for normal returns.FindingsThe paper finds that the Egyptian stock market experienced significant positive abnormal returns on the devaluation days of the EGP in March and October of 2022, indicating a positive market reaction to the devaluation. Furthermore, evidence suggests that the Egyptian market may not be informationally efficient as significant positive abnormal returns were observed two weeks before and two weeks after the devaluation day, suggesting news leaks and delayed reactions, respectively.Originality/valueThis study is the first to examine the impact of the recent two devaluations of the EGP in 2022 on the Egyptian stock market. It complements existing literature by analyzing the immediate market reaction to two consecutive devaluations in an African country. Furthermore, the paper evaluates the efficiency of the Egyptian market in processing information related to exchange rates.

The Covid-19 Pandemic and the Consumer Staples Sector: A Test of Market Efficiency

On Wednesday March 11, 2020, the World Health Organization (WHO) declared the covid 19 outbreak a global pandemic (Cucinotta, 2020). How efficient is the consumer staples market reaction to the announcement of a global pandemic? The purpose of this study is to examine the risk adjusted returns on and around the pandemic announcement to test the semi-strong form market efficiency hypothesis using the standard event study methodology in the finance literature. Will returns in the consumer staples industry show larger than expected gains on and surrounding the WHO’s COVID-19 pandemic announcement? The finance literature offers little evidence supporting the link between pandemics and the stock market. The announcement of a pandemic by the WHO should significantly and quickly affect the market. According to Eugene Fama (1970), if the market is semi-strong form efficient, all public information is immediately factored into the market and no investor can use this information to achieve an above normal return when adjusted for risk. To study this relationship, data for the S&P 500 and 10 consumer staples sector firms were collected for the event period surrounding the announcement of the COVID-19 pandemic. This study tests the global pandemic announcement for semi-strong form market efficiency (Bacon &Howell 2021). Evidence here supports the expected positive signal associated with the sample of consumer staples sector firms in reaction to the announcement of the pandemic. Likewise, the study results support the semi-strong form efficient market hypothesis and suggest the possibility of trading on this information up to 15 days prior to the announcement consistent with the behavioral finance literature (Bacon & Howell 2021).

Examining the efficiency of stock markets using multifractal detrended fluctuation analysis. Empirical evidence from OIC (Organization of Islamic Cooperation) countries during the GFC and COVID-19 pandemic

PurposeThis study aimed to examine the efficient market hypothesis (EMH) for the stock markets of 12 member countries of the Organization of Islamic Cooperation (OIC), such as Egypt, Indonesia, Jordan, Kuwait, Malaysia, Morocco, Pakistan, Saudi Arabia, Tunisia, Turkey and the United Arab Emirates (UAE), during the global financial crisis (GFC) and the COVID-19 (CV-19) epidemic. The objective was to classify the effects on individual indices.Design/methodology/approachThe study employed the multifractal detrended fluctuation analysis (MF-DFA) on daily returns. After calculation and analysis, the data were then divided into two significant events: the GFC and the CV-19 pandemic. Additionally, the market deficiency measure (MDM) was utilized to assess and rank market efficiency.FindingsThe findings indicate that the average returns series exhibited persistent and non-persistent patterns during the GFC and the CV-19 pandemic, respectively. The study employed MF-DFA to analyze the sequence of normal returns. The results suggest that the average returns series displayed persistent and non-persistent patterns during the GFC and the CV-19 pandemic, respectively. Furthermore, all markets demonstrated efficiency during the two crisis periods, with Turkey and Tunisia exhibiting the highest and deepest levels of efficiency, respectively. The multifractal properties were influenced by long-range correlations and fat-tailed distributions, with the latter being the primary contributor. Moreover, the impact of the fat-tailed distribution on multifractality was found to be more pronounced for indices with lower market efficiency. In conclusion, this study categorizes indices with low market efficiency during both crisis periods, which subsequently affect the distribution of assets among shareholders in the stock markets of OIC member countries.Practical implicationsMultifractal patterns, especially the long memory property observed in stock markets, can assist investors in formulating profitable investment strategies. Additionally, this study will contribute to a better understanding of market trends during similar events should they occur in the future.Originality/valueThis research marks the initial effort to assess the impact of the GFC and the CV19 pandemic on the efficiency of stock markets in OIC countries. This undertaking is of paramount importance due to the potential destabilizing and harmful effects of these events on global financial markets and societal well-being. Furthermore, to the best of the authors’ knowledge, this study represents the first investigation utilizing the MFDFA method to analyze the primary stock markets of OIC countries, encompassing both the GFC and CV19 crises.

Estimating and testing skewness in a stochastic volatility model

In this paper we propose a novel approach to estimating and testing skewness in a stochastic volatility (SV) model. Our key idea is to replace a normal return error in the standard SV model with a split normal error. We show that this simple variation in the model brings about two large computational advantages. First, the stochastic volatility process can be simulated fast and efficiently using a one-block Gibbs sampling technique. Second, more importantly, this is the first to provide a marginal likelihood calculation method to formally test the coexistence of stochastic volatility and skewness in return errors within a Bayesian framework. We demonstrate the efficiency and reliability of our posterior sampling and model comparison methods through a simulation study. The simulation results show that neglecting skewness leads to inaccurate estimates on both the volatility process and conditional expected returns. Our empirical applications to daily stock return data provide a strong evidence of negative skewness.

Event Studies for Publicly Traded Insurers: An Investigation of the Bad-Model Problem

The potential that abnormal returns are due to a misspecified expected (normal) return model is well known in the event study literature. Prior research shows that this “bad-model problem” is serious in long-run studies, and can also be problematic in short-run studies for firms grouped by certain characteristics. We investigate the bad-model problem for a large sample of insurance firms over an 18-year period, based on nine different expected return models and short- and long-run event windows. Using 1000 samples of randomly selected firms and dates, we find that the different normal return models make little difference in the statistical or economic significance of abnormal returns for short event windows (up to 3 days). However, for longer event windows, such as 1 month and 13 months, statistically and economically significant abnormal returns are more common. Further, we find that characteristic-based benchmark models generally perform better than models that require an estimation period. We also examine a sample of insurers that experienced a financial strength rating downgrade, and find significant differences between characteristic-based benchmark models and other normal return models for the 13-month event window. We recommend that abnormal returns from actual events be evaluated for their qualitative significance in relation to random samples with random event dates. Our results support the need to exercise caution in interpreting the findings of event studies.

THE EFFECTS OF THE COVID-19 PANDEMIC ON STOCK MARKET PERFORMANCE IN AFRICA

The aim of this research is to examine how the daily growth in COVID-19 confirmed cases and deaths in 15 African nations affects stock market returns, employing both time series and panel methods. This study uses robust ordinary least squares (ROLS) and dynamic ordinary least squares (DOLS) for time series. It uses Pooled OLS, Fixed Effects, Feasible Generalized Least Squares, Two-Stage Least Squares (2SLS), and panel vector autoregressive (PVAR) with respect to panel data. These methodologies help in addressing some econometric issues regarding the relationship between COVID-19 confirmed cases, deaths and stock returns in the panel of 15 African nations, which enhances our research and findings. The effects of confirmed COVID-19 cases and deaths on stock returns are not uniform among countries, according to the results of a time series analysis. Precisely, the rise of COVID-19 confirmed cases has had a detrimental impact on stock returns in nations including Botswana, Cote d’Ivoire, Morocco, Uganda, and Zambia. Similarly, COVID-19 confirmed deaths have a detrimental impact on the stock returns of nations like Botswana, Morocco, and Zambia. Even though COVID-19 confirmed cases have a negative impact on stock returns in the 15 African countries that make up the panel study, this effect is not statistically significant except when FGLS is applied. In a similar vein, stock returns in African nations are not significantly impacted by COVID-19 confirmed deaths. The results of FEVD support these findings. According to IRF findings, stock returns respond unfavorably to the shock of COVID-19 confirmed cases. The negative, nevertheless, quickly subsided as stock returns bounced back to positive returns until eventually reaching equilibrium. The stock returns, on the other hand, initially respond favorably to the shock of the COVID-19 confirmed deaths, then take a negative turn before returning to normal returns. Our study emphasizes the significance of examining each country’s socioeconomic response to the COVID-19 epidemic rather than grouping countries together.

Pillar 2: tax competition in low‐income countries and substance‐based income exclusion

AbstractPillar 2 of the OECD's global tax reform proposal will have significant direct and indirect impacts for low‐income developing countries (LICs). Most interesting and problematic is the question as to how the global anti‐base erosion (GloBE) rules for a proposed global minimum effective tax will affect tax competition behaviour in LICs, and how LICs should respond when a critical mass of higher‐income economies adopt the new structure. Most LICs are source‐only countries, and they are very much in competition to attract foreign direct investment. Do LICs want to continue to compete using the tax system to the extent possible, to step back from that competition, or to take some intermediate course? Pillar 2 does not itself change a country's desired position on the competition spectrum – it merely affects how, and to what extent, that position can still be obtained. This paper posits that LICs should adopt qualified domestic minimum top‐up taxes, and that this will not itself have a negative impact on their competitiveness. The primary focus of the paper, however, is on the design of the substance‐based income exclusion (carve‐out), examining the following three questions. Should the GloBE have been designed without a carve‐out? Would there have been a better way of designing it? How will LICs be affected? The paper concludes that, as little real advantage is likely to accrue to LICs from intangible assets, minimising tax competition for those assets will have relatively little impact on them; and that, from an economic efficiency standpoint, shifting the tax burden away from a normal return and toward economic rents – albeit imperfectly – is a reasonable solution.

Improvement, Validation, and Analysis of Colles Fracture Treated with an Integrated Retainer Pad Splint

To observe the effectiveness and safety of the Colles fracture treated with the integrated retainer pad splint and to compare the clinical and radiological outcomes of the integrated retainer pad splint and the traditional bamboo curtain splint in the treatment of the Colles fracture. A total of 100 patients with Colles fractures were randomly divided into two groups: the treatment group was fixed with the integrated retainer pad splint (IS), and the control group was fixed with the traditional bamboo curtain splint (TS).The range of wrist motion was measured at follow-up examinations, and volar inclination, ulnar deviation, and radial height were measured on radiographs. Regular follow-up wrist imaging examinations and functional examinations were performed before reduction, after reduction, and at the 1st, 3rd, 5th, and 8th weeks. The two groups were compared in terms of convenience, fracture healing time, X-ray data of volar inclination, ulnar deviation, radial height, and wrist joint function. The relevant data were analyzed with SPSS 25.0 statistical software. There were no notable differences in gender, age, and injured side between IS and TS groups. In terms of operation time, IS was better than the TS group (P < 0.05), and the operation time in the IS group was shorter. On the basis of X-ray data of volar inclination, ulnar deviation, and radial height measured on radiographs, the difference between the IS and TS groups was statistically significant (P < 0.05), which showed that the IS group was more stable in fracture fixation and had less reduction loss during the treatment process. At the 8th week of treatment, the wrist Gartland-Werley score of the two groups showed that the two fixation methods are equivalent in restoring wrist joint function (P > 0.05); however, in terms of the excellent and good rate of wrist joint function, the IS group scored 96% was higher than the TS group (80%). Compared with the traditional bamboo curtain splint, the integrated retainer pad splint is more convenient and stable, and it has less reduction loss during the treatment. Repair of the Colles fracture using the integrated retainer pad splint with external fixation results in nearly normal return of function, which is significantly better than using the traditional bamboo curtain splint.

“Do Mutual Funds Deliver Alpha”; An assessment of Mutual the Funds Industry in the United Kingdom (UK)

The main purpose of this paper is to assess if “Mutual fund can deliver Alpha”. Alpha being the measure of performance in excess to market performance (Alpha = mutual funds return – market return). In assessing the performance of mutual funds in UK, the study employed descriptive research whereby qualitative and quantitative research approaches were used. The study assessed the performance of 50 mutual funds for the period of 19 years from January 2001 to December 2019 using data from Financial Times (FT) all share market index. The result shows mutual funds significantly performed below the market performance. Study recommends investors to use mutual funds as investment vehicles to earn normal return rather than expecting abnormal return and other evaluation metrics measures free from assumption limitations to be used to assess the performance of mutual funds.

Impactos de la pandemia de coronavirus en el bienestar animal

In 2020, the World Health Organization decreed a state of pandemic caused by the “new coronavirus”, Covid-19, leading to a scenario of social isolation worldwide, drastically changing the routine of human beings and, consequently, of their companion animals. In this context, the following literature review aims to carry out a compilation of research results promoted worldwide, bringing together data from several studies on the impacts caused by the coronavirus pandemic on animal well-being and behavior. In this way, it was possible to conclude that the biggest complication caused during this period was the hyper attachment and excessive dependence of the companion animals with their tutors, triggering several behavioral disorders, such as the Separation Anxiety Syndrome, especially after the normal return of the activities of the human daily life. In addition, some negative repercussions of the closeness of the human-animal relationship during this period was the significant increase in dog aggression attacks, especially against children, related to the reduction of walks and moments of rest and disconnection of the animals. Studies have also made it possible to identify risk factors related to confinement, such as less socialization and difficult access to veterinary services. Thus, it can be concluded that the mental health status of tutors has clear effects on the behavior and well-being of companion animals.

The Leverage Factor: Credit Cycles and Asset Returns

Research has found strong links between past credit booms and adverse outcomes for macroeconomic aggregates like output and investment. However, are price impacts also seen more widely in broad asset classes such as equity and fixed-income markets? We document such a robust and significant connection using a large sample of historical data for many advanced countries since 1870. Credit boom periods with a high “leverage factor” tend to be predictably followed by unusually low returns to risky equities, in absolute terms and relative to a safe fixed-income portfolio. Fixed income is a safe haven at these times and has slightly higher than normal returns. We show these properties hold in-sample and out-of-sample. Return predictability because of the leverage factor is distinct from that because of momentum (lagged return) and value (cashflow relative to price). Trading strategies built on the leverage factor accrue meaningful excess profits out-of-sample. This paper was accepted by Victoria Ivashina, finance.

Respon Jangka Pendek Pasar Saham Indonesia terhadap Wabah Pandemi Covid-19

The Indonesian stock market's response to the pandemic Covid-19 outbreak uses the event study method with abnormal return technical tools. This study aims to determine the stock market response to Covid-19, namely responding significantly negative and not because many stocks in other countries were affected by Covid-19. This event study method had carried out observations from 12 days before the announcement to 30 days after the announcement of Covid-19. The results of the data show that the data has no significant effect before and after the announcement by t-statistical analysis. In the significance test with daily observation data, the average abnormal return has no significant effect before the announcement. Then, after the announcement, the average normal return on the 5th, 8th, 15th, 17th and 26th day responded significantly negative, although not entirely. The results of this study indicate that the response of the Indonesian stock market is significantly negative due to the Covid-19 outbreakDOI: https://doi.org/10.26905/afr.v5i2.7601

The impact of qualified audit opinion on stock returns: an empirical study at Amman stock exchange

PurposeThis paper aims to investigate the impact of qualified audit opinions on the returns of stocks listed at Amman Stock Exchange (ASE) after the introduction of the recent amendments by the International Auditing and Assurance Standard Board (IAASB) on audits reporting and conclusions. It further investigates if results differ between first time qualified and sequenced qualifications, and between plain qualified opinion and qualifications with going concern.Design/methodology/approachAudit opinions’ announcements and stock returns data are collected from companies’ annual reports for the fiscal years 2016 to 2019 while stock returns are computed from stock closing prices published at ASE website. The authors apply the event study approach and use the market model to calculate normal returns. Cumulative abnormal returns (CARs) and average abnormal returns (AARs) are computed for all qualified audit opinions’ announcements.FindingsThe empirical evidence suggests that investors at ASE do not react to qualified audit opinions announcements. That is, the authors find an insignificant impact of qualified audit opinion announcements on stock returns using both CAR and AAR estimates. The results are robust to first time and sequenced qualifications, and for qualifications with going concern. Results are also robust to the use of risk adjusted market model.Research limitations/implicationsThe insignificant impact of qualified audit opinions on stock returns have two potential conflicting research implications. First, the new amendments introduced to auditors’ report made them more informative and reduce the negative signals contained in the qualified opinions. That is, investors are now aware of the real causes of qualifications and not overreacting to the qualified opinion. Second, the documented insignificant impact confirms that ASE is not a semi-strong form efficient.Practical implicationsThe apparent excessive use of qualifications should ring the bell on whether auditors misuse their power or companies are really in trouble. Hence, the Jordanian regulatory bodies need to warn auditors against the excessive use of qualifications on the one hand, and to raise the awareness of investors on the implications of auditors’ opinions on the other hand.Originality/valueThis study is innovative in twofold. First, it explores the impact of qualified audit opinions on stock returns after the introduction of new amendments by IAASB at ASE. In addition, it uses event study approach and distinguishes between first time qualified and sequenced qualifications, and between plain qualified opinion and qualifications with going concern. The results are consistent with efficient market theory and behavioral finance explanations.

Impact of COVID-19 pandemic on stock markets: a case study of selected countries

As the outbreak of COVID-19 resulted in a wave of trade restrictions, it is worthwhile to study its impact on India and its trading partners. Accordingly, the study aims to examine the effect of the announcement of COVID-19 pandemic on the stock market returns of selected economies that are India's largest trading partners. By employing event study methodology the study finds that the stock markets displayed an immediate negative response to the announcement. Soon after, when the markets began to recover it was observed that within a month, the majority of the markets adjusted to the announcement and began to converge with normal returns. The results also revealed that different markets recovered at varying speeds contingent on the number of COVID cases. The study contributes to the existing literature on the response of stock markets to the outbreak of pandemic and disastrous events, besides the literature on market efficiency.

A broad analysis of short-term overreactions in the market for cryptocurrencies

PurposeThe purpose of this study is to analyze market inefficiencies in the market for cryptocurrencies by providing a comprehensive analysis of short-term (over)reactions that follow significant price changes of such currencies.Design/methodology/approachThis study identifies and analyzes overreactions and mispricing in markets for cryptocurrencies by applying a broad set of thresholds that depend on market-specific dynamics and volatilities. This study also analyzes the returns on days following abnormal returns and identifies significant differences from normal returns using the t-test and the Mann–Whitney U-test. The researchers further complement the literature by using end-of-the-day returns in addition to high-low returns. Additionally, this study considers a broad sample of 50 cryptocurrencies for an expanded time span (2015–2020) that includes the big currencies as well as smaller currencies.FindingsFindings detect the existence of overreactions and, thus, market inefficiencies in crypto markets. The findings for different methodological approaches are similar, which underpins the robustness of the findings. By considering a broad sample that includes small and big currencies, we can show the existence of a market size effect. By considering a broad set of thresholds, the authors further found evidence for a magnitude effect, which means that higher initial abnormal returns are related to higher inefficiencies.Practical implicationsThis paper has practical implications. Market inefficiencies were detected, which can be used in practical trading to obtain excess returns. In fact, methodological approach of this study and its results can be used to derive a strategy for trading in cryptocurrencies that can be easily implemented. Based on the study’s findings, the authors can expect positive access returns by applying this trading strategy.Originality/valueThe authors complement the literature on market inefficiencies and mispricing in crypto markets by analyzing price patterns after initial abnormal returns. Researchers contribute by applying different methodological approaches in addition to the approaches used so far, by considering a set of different thresholds and by applying a much broader data set that enables the study to analyze additional aspects.

An Empirical Analysis of the Annual Report Effect of High Market Capitalization Companies in China

In this paper, we study the abnormal stock price returns of the top 10 stocks in the Chinese stock market in terms of total market capitalization before and after the release of their annual reports in the past 10 years, using the event study method implemented by the Event Study package of the Alpha Library under Python, using a market model to estimate normal returns. The results find that and most of the events have insider phenomenon.