Sector Equity Research Articles

The US equity sectors, implied volatilities, and COVID-19: What does the spillover analysis reveal?

This study examines the spillover role of the implied volatilities of oil, gold, and the stock market with US equity sectors. Using time and frequency-based spillover methods, we find that the market’s expectation of oil price volatility (OVX) spillovers less strongly on the US sectoral returns than the market’s expectation of US stock market volatility (VIX), which exhibits the dominant spillover role. The market’s expectation of gold price volatility (GVZ) has a zero range spillover effect on the sectoral returns and is the most weakly affected by them, suggesting that gold can be used to hedge downside risk in all 10 US equity sectors considered. We also find that the US equity sectors’ spillovers on the VIX and OVX strengthen because of the coronavirus (COVID-19) outbreak.

Do the electricity price shocks influence the Sectoral Production and KSE100 Index in Pakistan? An ARDL structural breaks approach

This research investigates the long-term cointegration of electricity price with sectoral production and equity market in Pakistan. Fourteen major industrial sectors and the KSE100 index is taken into consideration to determine the relationship. Literature in this regard is available but this research is distinct from previous literature for it tests the sectoral production and equity market relationship with electricity price change in Pakistan. Monthly data from 1st Jan 2011 till 31st Dec 2019 is taken for fourteen sectors from the sources of Quantum Index Pakistan Bureau of Statistics (PBS) and for KSE100 index from (www.investing.com). An Auto Regressive Distributed Lag (ARDL) model and bound test for multiple structural breaks has been applied. It is found that almost the production of all industrial sectors and KSE100 index stock prices are adversely affected by the electricity price shocks both in long-term and short-term. The study suggests that management should implement a moderate monitory policy that is neither more expansionary nor contractionary. The government should provide incentives to those who successfully control energy wastage. A mixed kind of energy policy is recommended with higher weightage to the development of renewable energies to reduce foreign exchange outflow with imported furnace oil. This study is limited to the sectoral production and equity market of Pakistan. A cross-sectional research is encouraged to compare the connection between major energy costs and macroeconomic variables in different countries.

Spillovers to sectoral equity returns: do liquidity and financial positions matter?

ABSTRACT In this paper, we investigate spillovers from regional and global equity markets to sectoral equity indices for several different regions/countries. First, we investigate the connectedness of sectoral equity return spillovers and explore the different patterns and magnitudes of spillovers. Next, we look for the determinants of sectoral equity return spillovers. We find the regional and global markets spillovers on sector equity indices are highly dispersed across different markets. Novel to the literature, we examine the liquidity and financial positions of the sectors and find that sector positions are highly influential in explaining the extent of the spillovers. Particularly, our exploration evidence that regional and global spillovers to specific sector equity markets jump significantly when a sector has higher debt and lower interest expense coverage. Similarly, higher profit margins of the sector make it less vulnerable to global and regional shocks. We also find market capitalization of the sectors inversely affects the extent of the spillovers originating from global and regional markets.

Impact of the COVID-19 outbreak on the US equity sectors: Evidence from quantile return spillovers

The aim of this study is to examine the extreme return spillovers among the US stock market sectors in the light of the COVID-19 outbreak. To this end, we extend the now-traditional Diebold-Yilmaz spillover index to the quantiles domain by building networks of generalized forecast error variance decomposition of a quantile vector autoregressive model specifically for extreme returns. Notably, we control for common movements by using the overall stock market index as a common factor for all sectors and uncover the effect of the COVID-19 outbreak on the dynamics of the network. The results show that the network structure and spillovers differ considerably with respect to the market state. During stable times, the network shows a nice sectoral clustering structure which, however, changes dramatically for both adverse and beneficial market conditions constituting a highly connected network structure. The pandemic period itself shows an interesting restructuring of the network as the dominant clusters become more tightly connected while the rest of the network remains well separated. The sectoral topology thus has not collapsed into a unified market during the pandemic.

DO INTERNATIONAL GOLD PRICES AND NSE NIFTY 50 MOVE TOGETHER?

With gold’s persistence performance over erratic periods since the catastrophic event of global financial crisis in 2008, attention is focussed on gold to substitute stock market investments in the times of crisis. Exploring such causal nexus between NSE NIFTY 50 index and Gold prices in Indiapost 2008 crisis is the main focus of the present research. The daily data of International Bloom berg Gold prices and NSE NIFTY 50 Index series has been used over the time period of November 13, 2008 to January 24, 2020. By applying unit root and Toda-Yamamoto granger causality test, study primarily shows stationarity of the variables at different order. The study evidenced the significant bidirectional short-run causal relationship in between NSE NIFTY 50 prices and International Gold prices. Hence, International Gold prices hold significant information which can be used to predict NSE NIFTY 50 returns and vice-versa. The results of present study can be used by Indian stock market policymakers to implement new structural restructuring to augment efficiency of Indian equity sector. Present study is limited in scope to account for gold’s nexus with only stock market index which in future can be furthered by establishing association with other commodity markets, mutual funds, exchange rate, derivative, etc.

Are green bonds a different asset class? Evidence from time-frequency connectedness analysis

This paper investigates the time-frequency connectedness across the global green bond market and several mainstream financial and energy markets in an attempt to figure out whether green bonds represent a different asset class. The connectedness methodology proposed by Baruník and Křehlík (2018) is employed for that purpose. This approach enables quantifying the dynamics of connectedness in terms of return and volatility over time and across time scales simultaneously. The empirical results indicate that connectedness between the global green bond market and the conventional financial and energy markets mainly occurs at shorter time horizons, suggesting that shocks are rapidly transmitted across markets with an effect lasting less than a week. A strong connectedness in return and volatility is found between green bonds and Treasury and investment-grade corporate bonds, principally because of the numerous characteristics they share. This finding implies that green fixed-income securities are not a different asset class, but they closely mirror the performance of government and high-quality corporate bonds. In contrast, there is a quite limited connectedness between the green bond market and the general stock market, the renewable energy equity sector and the crude oil market regardless of the time horizon considered. This evidence shows that green bonds appear as a valuable tool to fight against climate change without having to sacrifice part of the return generated by traditional assets, particularly ordinary bonds. Furthermore, it can have useful implications for investors and policy makers.

Impacts of COVID-19 outbreak on the spillovers between US and Chinese stock sectors

This paper examines the impacts of COVID-19 outbreak on the spillover between ten US and Chinese equity sectors. We use Copula and Conditional Value at Risk approaches. The results show evidence of asymmetric tail dependence during the COVID-19 outbreak with the exception of the Utilities sector, where a symmetric tail dependence is found. Moreover, we find time-varying bidirectional asymmetric risk spillovers from the US to China and vice versa. The risk spillover is higher from the US to China before COVID-19 and from China to the US during COVD-19 spread, which is significantly intensified between March 2020 and April 2020.

Explainable AI (XAI) Models Applied to Planning in Financial Markets

Regime changes planning in financial markets is well known to be hard to explain and interpret. Can an asset manager ex-plain clearly the intuition of his regime changes prediction on equity market ? To answer this question, we consider a gradi-ent boosting decision trees (GBDT) approach to plan regime changes on S&P 500 from a set of 150 technical, fundamen-tal and macroeconomic features. We report an improved ac-curacy of GBDT over other machine learning (ML) methods on the S&P 500 futures prices. We show that retaining fewer and carefully selected features provides improvements across all ML approaches. Shapley values have recently been intro-duced from game theory to the field of ML. This approach allows a robust identification of the most important variables planning stock market crises, and of a local explanation of the crisis probability at each date, through a consistent features attribution. We apply this methodology to analyse in detail the March 2020 financial meltdown, for which the model of-fered a timely out of sample prediction. This analysis unveils in particular the contrarian predictive role of the tech equity sector before and after the crash.

Explainable AI Models of Stock Crashes: A Machine-Learning Explanation of the Covid March 2020 Equity Meltdown

We consider a gradient boosting decision trees (GBDT) approach to predict large S&P 500 price drops from a set of 150 technical, fundamental and macroeconomic features. We report an improved accuracy of GBDT over other machine learning (ML) methods on the S&P 500 futures prices. We show that retaining fewer and carefully selected features provides improvements across all ML approaches. Shapley values have recently been introduced from game theory to the field of ML. They allow for a robust identification of the most important variables predicting stock market crises, and of a local explanation of the crisis probability at each date, through a consistent features attribution. We apply this methodology to analyze in detail the March 2020 financial meltdown, for which the model offered a timely out of sample prediction. This analysis unveils in particular the contrarian predictive role of the tech equity sector before and after the crash.

Static and dynamic connectedness between oil price shocks and Spanish equities: a sector analysis

This paper explores the static and dynamic connectedness between oil price shocks (risk, demand and supply shocks) and Spanish sector equity indices from January-2000 to July-2019. We document sizable system-wide connectedness between the variables under study. Among the oil shocks, demand and risk shocks are the main transmitter (receiver) of shocks to (from) the system and are overall net receiver of shocks from the system. Among the equity indices, Industrials, Financials, Utilities and Telecommunications as the major net transmitters whereas; Consumer Goods, Technology, Retail and Telecommunications are the main net receivers. The dynamic connectedness changes over time and between sectors. We document important differences over time and between sectors, mainly during the recent global financial crisis and the European sovereign debt crisis. Overall, Financials, Telecommunications, Industrials and Utilities as the most influential sectors.

The Low Volatility Anomaly in Equity Sectors – 10 Years Later!

Ten years after showing that the low volatility anomaly in the performance of stocks is a phenomenon that should be considered in each sector as opposed to on an absolute basis ignoring sectors, we present evidence that this observation has held up well, and that if anything, has become even more valid.

Geopolitical Risk and Tourism Stocks of Emerging Economies

A bulk of literature suggests that geopolitical events such as terrorist attacks dampen tourism demand. However, there is little research on whether this effect helps predict the return of the tourism equity sector. We provide country-level evidence on whether local and global geopolitical risk (GPR) predicts the first and second moments of tourism stocks in emerging economies. This objective was achieved by employing the non-parametric causality-in-quantiles (CiQ) model and a cross-quantilogram (CQ) test, which allowed us to uncover the predictive potential of GPR for the tourism sector equities. Our findings, obtained through the CiQ model, suggest that while both local and global GPRs carry significant potential for predicting the returns and volatility of tourism stocks of most emerging economies under normal market conditions, they seem to play no such role in certain countries. These countries include South Korea, for which only a limited number of tourism stocks trade on the domestic stock market compared to other sectors, and Colombia, for which both the domestic stock market and tourism sectors are at an emerging stage. Further, it turns out that, compared to its local counterpart, global GPR has a more pronounced predictive power for the tourism stocks of emerging economies. Finally, with some exceptions, the results are qualitatively similar, and hence reasonably robust, to those when a directional predictability model is applied. Given that geopolitical shocks are largely unanticipated, our findings underscore the importance of a robust tourism sector that can help the market recover to stability as well as an open economy that allows local investors to diversify country-specific risks in their portfolios. Implications and directions for future research are discussed.

Infrastructure Equity and Firm Performance in India

The growing financing requirements coupled with tightening of fiscal purse strings point to the pertinence of market-based finance for infrastructure provision and enhancement. For this, the question of the sectoral performance of infrastructure takes centre stage and this becomes the basis for the present study. The study assesses the risk-return and volatility profile of Nifty Infra, the National Stock Exchange (NSE) sectoral index for the 30 biggest infrastructure firms in India vis-à-vis the broader Nifty 50 for the time period 2010–2018. The study employs the standard financial economic analysis methods of capital asset pricing model (CAPM) and generalized autoregressive conditional heteroskedasticity in mean (M-GARCH) model and finds the sectoral equity performance of infrastructure to be marginally below that of a broadly diversified index. Further, the study analyses the cash flow and leverage characteristics which are imperative factors in medium-term risk-return profile of infrastructure stocks. The disaggregated firm level analysis of 10 select firms reveals that rent-like return does exist for the biggest players in the sector due to past installed capacities, while the subcontracting mechanism percolates to meagre cash flows for smaller players, partly bearing the greenfield risks. This suggests the need for state-induced measures to prop up liquidity in equity trade for infrastructure firms. This would not only enhance the risk-return profile but also mitigate excessive volatility for these heavily leveraged firms.

Are Indian sectoral indices oil shock prone? An empirical evaluation

We present the impact of oil shocks on a disaggregate Indian stock market by using 10 sectoral indices for the period from 2010-2019. We use the novel Ready's (2018) oil shock decomposition mechanism. Using the rolling regression and dynamic conditional correlation, we ascertain the time varying properties of different oil shocks on the sectoral returns. To understand the asymmetric effect, we employ the markov switching regression. The results of the study are presented in two sets: One, we observe a structural dynamic shift in the conditional correlation between the oil shocks and sectoral returns across the study period. Also, the markov regime regression confirms that demand shocks have positive effect on all sectors in high and low volatility regime signalling the huge consumption demand in Indian industries. The supply shocks are not significant either in low or high volatility regimes indicating collapse of economic activities in such case. the demand and supply shocks have positive and negative impact on all sectoral indices, respectively. The influence of risk shocks is observed to be negative and statistically significant on all the sectoral equity indices. These results are helpful for investors in devising optimal portfolio with rational risk exposure to different sectors. They would be able to ascertain the optimal market timing for investment and orient their investment strategy towards better industry rotation. The policymakers also be able to formulate better macroeconomic strategies commensurating with the time varying effects of oil price shocks on Indian economy.

Venture Capital and Private Equity Funds as Source of Financing Enterprises in Poland

Summary Subject and purpose of work: The main issue of the work is to present the essence of venture capital, i.e. Venture Capital funds and Private Equity funds. The aim of the article is to indicate the size of the share and the role of funds in financing enterprises located in Poland. The time horizon of the presented data covers the years 2012-2019. Materials and methods: The material for analysis is available statistical data, reports of commercial companies and other entities researching the size of the Venture Capital and Private Equity sector in Poland. For the purposes of the study, the literature on the subject was used as well as the data of: Narodowy Centrum Badań i Rozwoju, KPMG Sp. z o.o., the State Development Fund, the Startup Poland Foundation and the European Association of Venture Capital and Private Equity Investors. The method of analysis and criticism of the literature and the method of examining documents were used. Results: The research carried out in Poland makes it possible to assess the size of the implemented venture capital investments, i.e. VC and PE funds, over the years 2012-2019. The presented data indicate that the share of funds in financing Polish enterprises has a variable tendency. The percentage share of VC and PE investors in Europe in 2017-2018 is also variable. Conclusions: The Polish economic market is an attractive investment area in terms of cash allocation needs by venture capital funds. Increasing awareness of enterprise managers about the benefits of using these capitals to subsidize the activities of entrepreneurs allows them to discount VC and PE funds in innovative startups and in other processes, the implementation of which takes place in further phases of the company’s operations. The studies conducted so far cover the entire territory of Poland and are of an overview nature. The VC and PE funds, which are a new financial instrument, allow Polish enterprises to implement innovative projects.

Refugees and equity policy in Australian higher education

ABSTRACT Measured in per capita terms, Australia has one of the most generous refugee resettlement programs in the world. This paper investigates the extent to which refugee status is recognized as a category of disadvantage in Australian higher education. Drawing on a scalar view of policy work and Fraser’s notion of misframing, the paper assesses the policy visibility of humanitarian entrants. It compares sectoral equity provisions with national and institutional arrangements that target refugees. The findings reveal scalar misalignments. That is, although national educational and multicultural initiatives recognize refugee status as a category of disadvantage, refugees remain hidden from the sectoral policy view. However, in translating sectoral policies, many universities have managed to maintain a balance between compliant enactment of equity strategies and responsive adjustment of equity targets. The paper also highlights instances of policy misframing – equity provisions that target refugees are characterized by issue omissions and deficit accounts. It is further argued that the convergence of scalar misalignment and policy misframing constitutes a structural factor of disadvantage that inhibits higher education participation of refugees. For Australia to fully integrate humanitarian entrants, there is an urgent need for a streamlined policy response to the educational needs and aspirations of the group.

The Relationship of Equity Sector Returns and Composite Index in Malaysia

The Relationship of Equity Sector Returns and Composite Index in Malaysia

Active Sector Funds and Fund Manager Skill

The authors investigate the performance of active sector funds whose potential outperformance has not been exhausted entirely by decreasing returns to scale. The authors document that despite good track records, most sector funds are relatively smaller than their equilibrium fund sizes, at which they are expected to generate zero net alphas. In particular, from 1998 to 2016, a passive indexation strategy of actively managed sector funds earns an annual benchmark-adjusted return of 5.70% and a monthly alpha of 27 bps. Moreover, the strategy’s outperformance is present in market downturns (i.e., resilient to tail risk) and robust to change of rebalancing frequency and inclusion of expenses. Efficient diversification and underappreciated skill, illustrated by an alpha-arithmetic to guide similar strategies, explain the strategy’s success. TOPICS:Manager selection, mutual fund performance, exchange-traded funds and applications Key Findings • Using data on active equity sector mutual funds, the authors find that an equal-weighted portfolio of sector funds delivers reliable alpha that is resilient to market downturns and only requires infrequent rebalancing. • Active sector funds individually show only weak evidence of selection skill, which may make them somewhat undersized, but an equal-weighted portfolio of them brings out the skill signal and diversifies away much of the alpha-seeking noise. • A portfolio of sector funds benefits from two layers of diversification: It not only washes off the sector-specific risk, it also diversifies the manager-specific active risk because managers in different sectors often make independent active bets.

The asymmetric oil price and policy uncertainty shock exposure of emerging market sectoral equity returns: A quantile regression approach

We examine the asymmetric impact of oil, and economic policy uncertainty shocks on the emerging markets composite sectoral equity indexes. We use the novel shock decomposition approach propounded by Ready (2018) to disentangle the oil price changes into the oil demand, supply and risk shocks. We find that the demand shocks are positively related to sectoral returns. However, the supply, risk and EPU shocks are negatively associated with sectoral returns. Additionally, the sectoral returns are mainly vulnerable to these shocks at the bearish market conditions. Further, we also investigate the asymmetric exposure of sectoral returns to these shocks, and we find that the lower demand shocks are associated with higher returns. Besides, the higher supply, risk and EPU shocks have a more intense impact on sectoral returns than otherwise. Hence, we document the evidence of the asymmetric relationship of oil and EPU shocks with sectoral returns. We believe that our results are novel and add value to the existing literature in this domain.

Exploring Option Pricing and Hedging via Volatility Asymmetry

This paper evaluates the application of two well-known asymmetric stochastic volatility (ASV) models to option price forecasting and dynamic delta hedging. They are specified in discrete time in contrast to the classical stochastic volatility models used in option pricing. There is some related literature, but little is known about the empirical implications of volatility asymmetry on option pricing. The objectives of this paper are to estimate ASV option pricing models using a Bayesian approach unknown in this type of literature, and to investigate the effect of volatility asymmetry on option pricing for different size equity sectors and periods of volatility. Using the S&P MidCap 400 and S&P 500 European call option quotes, results show that volatility asymmetry benefits the accuracy of option price forecasting and hedging cost effectiveness in the large-cap equity sector. However, ASV models do not improve the option price forecasting and dynamic hedging in the mid-cap equity sector.