Sector Stock Returns Research Articles

Oil price and reserve location—Effects on oil and gas sector returns

We provide market evidence of the effects of reserve location on oil and gas (O&G) company returns. Prior studies have shown that commodity sector stock returns are affected by commodity prices. In a new contribution to natural resource valuation literature, returns for 51 O&G companies are shown to be directly and negatively affected by exposures to (location specific) progressive fiscal terms. We add a reserve location proxy—‘R’—to the Fama–French framework; differentiating between companies' performances based on the proportion of oilfield assets subject to progressive tax terms. Companies with oilfield assets owned under progressive production sharing fiscal terms are unable to capture the benefits of oil price increases—and as result significantly under-perform companies with concession asset holdings.

Oil Price and Industry Stock Returns: Evidence from Indonesia

This study examines the impact of oil price changes on stock returns of nine industry sectors in Indonesia using monthly data during the period January 1996 to June 2008. The results suggest that that in general oil price changes do not have significant impacts on industry stock returns. However, the Government decision to liberalize domestic oil price in October 2005 has a positive and significant impact on stock returns of the mining, but a negative and significant impact on stock returns of the trading sectors. Moreover, using a dummy interaction variable to observe the impact of oil price hikes following the oil price liberalization policy, we find a consistent result for the mining and trading sectors, although the impact is also negative and significant to the consumption and infrastructure sectors. Nevertheless, the sensitivity of stock returns of these sectors on oil price changes is asymmetric, given decreasing oil price does not have significant effects on stock returns of any sectors. This may indicate that decreasing oil price does not always bring good news to investors.

Exchange rate exposure: do size and foreign operations matter?

PurposeThe purpose of this paper is to examine the effect of firm size and foreign operations on the exchange rate exposure of UK non‐financial companies from January 1981 to December 2001.Design/methodology/approachThe impact of the unexpected changes in exchange rates on firms’ stock returns is examined. In addition, the movements in bilateral, equally weighted (EQW) and trade‐weighted and exchange rate indices are considered. The sample is classified according to firm size and the extent of firms’ foreign operations. In addition, structural changes on the relationship between exchange rate changes and individual firms’ stock returns are examined over three sub‐periods: before joining the exchange rate mechanism (pre‐ERM), during joining the ERM (in‐ERM), and after departure from the ERM (post‐ERM).FindingsThe findings indicate that a higher percentage of UK firms are exposed to contemporaneous exchange rate changes than those reported in previous studies. UK firms’ stock returns are more affected by changes in the EQW, and US$ European currency unit exchange rate, and respond less significantly to the basket of 20 countries’ currencies relative to the UK pound exchange rate. It is found that exchange rate exposure has a more significant impact on stock returns of the large firms compared with the small and medium‐sized companies. The evidence is consistent across all specifications using different exchange rate. The results provide evidence that the proportion of significant foreign exchange rate exposure is higher for firms which generate a higher percentage of revenues from abroad. The sensitivities of firms’ stock returns to exchange rate fluctuations are most evident in the pre‐ERM and post‐ERM periods.Practical implicationsThis study provides important implications for public policymakers, financial managers and investors on how common stock returns of various sectors react to exchange rate fluctuations.Originality/valueThe empirical evidence supports the view that UK firms’ stock returns are affected by foreign exchange rate exposure.

Market frictions and stock return dynamics

PurposeThis paper seeks to test the hypothesis that stock returns in the Athens Stock Exchange (ASE) adjust asymmetrically to past information due to differential adjustment costs.Design/methodology/approachThe methodological approach is based on the asymmetric price adjustment model suggested by Koutmos. The model is estimated using daily sector stock return data for the ASE over the period 2 January 1992‐1 March 1999.FindingsThe empirical evidence suggests that prices respond asymmetrically to past information. Specifically, positive past returns are more persistent than negative past returns of an equal magnitude. This behavior is consistent with an asymmetric partial adjustment price model where news suggesting overpricing (negative returns) are incorporated faster into current market prices than news suggesting underpricing (positive returns).Research limitations/implicationsThis paper does not investigate the possibility that the asymmetric price adjustment is related to conditional heteroscedasticity in stock return. Further research in this area should prove very useful.Practical implicationsThe findings in this paper have important theoretical and practical implications. On the theoretical level the findings suggest that violations of the efficient markets hypothesis could be due to market frictions and costly adjustments. On the practical level, the asymmetric adjustment process could improve trading profits, especially those based on momentum strategies.Originality/valueThis paper presents new findings on the stock price dynamics of the ASE. These findings should be of interest to researchers, regulators and market participants.

UK Stock Returns and the Impact of Domestic Monetary Policy Shocks

Abstract: We investigate the influence of changes in UK monetary policy on UK stock returns and the possible reasons behind such a response. Firstly, we conduct an event study to assess the impact of unexpected changes in monetary policy on aggregate and sectoral stock returns. The decomposition of unexpected changes in the policy rate is based on futures markets data. Secondly, using a variance decomposition in the spirit of Campbell (1991) we attempt to identity the channels behind the response of stock returns to monetary policy surprises. The variance decomposition results indicate that the monetary policy shock leads to a persistent negative response in terms of future excess returns for a number of sectors.

Macroeconomic risk factors in Australian commercial real estate, listed property trust and property sector stock returns

This paper employs a Generalised Autoregressive Conditional Heteroske‐dasticity in Mean (GARCH‐M) model to consider the effect of macroeconomic factors on Australian property returns over the period 1985 to 2002. Three direct (office, retail and industrial property) and two indirect (listed property trust and property stock) returns are included in the analysis, along with market returns, short, medium and long‐term interest rates, expected and unexpected inflation, construction activity and industrial employment and production. In general, macroeconomic factors are found to be significant risk factors in Australian commercial property returns. However, the results also indicate that forecast accuracy in these models is higher for direct office, listed property trust and property stock returns and that the persistence of volatility shocks varies across the different markets, with volatility half lives of between five and seven months for direct retail and industrial property, two and three months for direct office property and less than two months with both forms of indirect property investment.

The impact of capital offering on real estate developers and construction sector stock return in Hong Kong

PurposeNumerous studies suggest that announcements of capital offerings cause abnormal price reaction in stock markets. However, despite extensive research, relevant studies on the property sector are still relatively scarce, especially in the case of Hong Kong. The determinants of the post‐offering price effects, which vary across industries and regions, are yet to be identified. This paper aims to examine the abnormal stock return phenomenon of Hong Kong property developers and construction companies surrounding the announcement and offer dates of capital issuances.Design/methodology/approachIt employs the event‐study methodology and regression analysis to verify such effects.FindingsThe major findings are: on equity offering announcements, there is a significant negative price reaction; the pre‐offering debt/equity ratio of a firm is significantly associated with the level of abnormal price reactions; and on debt offerings there is, to the contrary, a modest increase in stock prices.Practical implicationsThis study has identified a set of determinants of the post‐offering stock price effects.Originality/valueIt can be concluded that there is evidence of abnormal price effects over the announcement and offer dates of capital issuances with unique characteristics of the property and construction sectors in Hong Kong.

An Investigation of the Impact of Interest Rates and Interest Rate Volatility on Australian Financial Sector Stock Return Distributions

Abstract: This paper extends the existing literature by analysing the dual impact of changes in the interest rate and interest rate volatility on the distribution of Australian financial sector stock returns. In addition, a multivariate GARCH‐M model is used to analyse the impact of deregulation on the financial institutions sector. It was found that there is a consistent inter‐temporal trade off between risk and return over the different regulatory periods. Moreover, finance corporations were found to be highly sensitive to new shocks across the financial sector and deregulation increased the risk faced by finance corporations and small banks – effectively increasing the required rate of return and explaining the continued rationalisation of these sectors. Furthermore, deregulation has changed the fundamental relationship between interest rates and large bank stock excess returns from positive in the pre‐deregulation period to negative in the post‐deregulation period. This reflects the changing institutional environment from one of controlled credit rationing to a more competitive environment.

An Investigation of the Impact of Interest Rates and Interest Rate Volatility on Australian Financial Sector Stock Return Distributions

This paper extends the existing literature by analysing the dual impact of changes in the interest rate and interest rate volatility on the distribution of Australian financial sector stock returns. In addition, a multivariate GARCH-M model is used to analyse the impact of deregulation on the financial institutions sector. It was found that there is a consistent inter-temporal trade off between risk and return over the different regulatory periods. Moreover, finance corporations were found to be highly sensitive to new shocks across the financial sector and deregulation increased the risk faced by finance corporations and small banks - effectively increasing the required rate of return and explaining the continued rationalisation of these sectors. Furthermore, deregulation has changed the fundamental relationship between interest rates and large bank stock excess returns from positive in the pre-deregulation period to negative in the post-deregulation period. This reflects the changing institutional environment from one of controlled credit rationing to a more competitive environment.

Korean bank governance reform after the Asian financial crisis

We discuss corporate governance reforms in the Korean banking sector, which include reforms in board composition and executive compensation, implemented after the Asian financial crisis in 1997 and examine the stock market's response to the reforms. We find that the banking returns and volatilities became more Granger-causally prior to both KOSPI and finance sector returns after 1998. The announcements of banking governance reforms are generally associated with significant increases in banking sector stock returns. The KIF survey finds that board governance is considered essential in assessing the value of the firm. The participants in the McKinsey survey indicate that they are willing to pay a premium of 24% on average for firms with outstanding corporate governance systems.

Telecommunications Stocks and the FCC's Triennial Review

The purpose of this POLICY BULLETIN is evaluate the link between the FCC's Triennial Review and the erosion of market cap in the telecommunications industry by applying standard empirical tests to measure the effects of the Triennial Review on the stock returns (and, consequently, the market cap) of the major sectors of the telecoms industry. After review, analysis of the data suggests that BOC market capitalization may have actually increased by $5.8 billion as a consequence of the Triennial Review. And, while UNE-P CLECs in general gained about $40 million in market capitalization, CLECs relying heavily on line-sharing - a sector that depending on the final draft of the order appears to consist only of Covad Communications - are found to be net negatively affected by the decision, losing about $120 million in market cap. Other telecommunications sectors, including long distance, mobile and equipment manufacturers, were unaffected.

Nonlinearity and Low Deterministic Chaotic Behavior in Insurance Portfolio Stock Returns

AbstractThis article presents new empirical evidence indicating a deterministic component in the portfolio return dynamics of life‐health and property‐liability insurance company stocks. Our research is motivated by the fact that nonlinearities are a fact of economic life for many financial applications the source of which is logically apparent, yet empirical evidence of their existence is at best weak. The primary reason attributed to the weak findings of nonlinearities reported in previous research is the use of aggregate data that can hide nonlinearities at the micro level. Insurance sector stock returns are analyzed because unique institutional characteristics indicate the possibility of identifying nonlinear dynamics. Tests based on the correlation dimension partially confirm the presence of nonlinearity. However, the more powerful Brock, Dechert, and Scheinkman (BDS) statistic strongly suggests the presence of nonlinearities in the insurance stock portfolio data. The BDS statistic applied to the standardized residuals of exponential generalized auto regressive conditional heteroskedasticity (EGARCH) models strongly rejects the null of independent and identically distributed, indicating that conditional heteroskedasticity is not responsible for the presence of the nonlinear structures in the data. In addition, tests for chaos based on locally weighted regressions indicate that insurance stock portfolio returns indicate low‐complexity chaotic behavior. This is an important result since most previous research has failed to report evidence of chaotic behavior in the time series of stock returns. Important contributions of this article are the application of tests of nonlinearities and chaos to more desegregated data sets and the findings of statistically significant evidence indicating nonlinearities and low‐deterministic chaotic behavior in insurance stock portfolio returns.

BUSINESS CYCLES AND STOCK MARKET RETURNS: EVIDENCE USING INDUSTRY‐BASED PORTFOLIOS

AbstractMuch evidence has emerged recently that suggests stock returns are predictable. In representative agent consumption‐based asset pricing models, asset returns are related to aggregate output and consumption through changes in the intertemporal marginal rate of substitution. An alternative view is that the amount of variation required in the intertemporal marginal rate of substitution is too large to be rationally explained. We shed further light on this debate by investigating whether the stock returns of certain sectors of the economy can predict future market returns even after controlling for the information contained in the aggregate market index. In the consumption‐based models, aggregate output and consumption affect the discount rates of all assets synchronously; no particular sectoral return should have any more predictive ability than the others. We find evidence that the stock returns of five industry‐based portfolios have significant information about future market returns that is not in the market index. This stylized empirical result is not consonant with existing models relating output to stock returns.