Stock Market Stability Research Articles

Investigating Long-term Dynamic Causal Linkages between Hungarian and Romanian Stock Markets

This article aims to investigate long-term dynamic causal linkages between Hungarian and Romanian stock markets in order to obtain additional benefits based on international portfolio diversification, especially in terms of globalization. Emerging stock markets are generally considered to be more attractive for both institutional and individual financial investors due to certain stylized facts. The volatility transmission patterns, financial contagion effects, international interdependence and long-run causal linkages between international stock markets highlight the importance of a functional and stable financial environment. Technically, the structure of this research paper includes both theoretical developments and additional empirical results. The empirical analysis is based on daily returns of selected stock markets major indices during the sample period between January 2000 and January 2014. The financial econometrics framework includes descriptive statistics, Unit Root Test, Augmented Dickey-Fuller stationary test, BDS test and Granger causality test. The final results of this empirical study are highly relevant in order to understand investment decision making process and stock market stability.

Quantifying Proportional Variability

Real quantities can undergo such a wide variety of dynamics that the mean is often a meaningless reference point for measuring variability. Despite their widespread application, techniques like the Coefficient of Variation are not truly proportional and exhibit pathological properties. The non-parametric measure Proportional Variability (PV) [1] resolves these issues and provides a robust way to summarize and compare variation in quantities exhibiting diverse dynamical behaviour. Instead of being based on deviation from an average value, variation is simply quantified by comparing the numbers to each other, requiring no assumptions about central tendency or underlying statistical distributions. While PV has been introduced before and has already been applied in various contexts to population dynamics, here we present a deeper analysis of this new measure, derive analytical expressions for the PV of several general distributions and present new comparisons with the Coefficient of Variation, demonstrating cases in which PV is the more favorable measure. We show that PV provides an easily interpretable approach for measuring and comparing variation that can be generally applied throughout the sciences, from contexts ranging from stock market stability to climate variation.

Test of clustering volatility effect of Tadawul index using rolling autocorrelation

Capital market liberalization allows the access of foreign investors to Saudi stock market especially since 2005. The test of adaptation to the market volatility exhibits the existence of the volatility clustering in the daily return and volume of traded shares. This finding is corroborated by the absence of variance homoscedasticity using BF test. Also, the results indicate that the period between 11.2002 and 01.2006 is more efficient comparatively to other periods. Furthermore, from the start of 2010, there is a relative stability in stock market. The shocks on volatility market are persistent, but their intensity and permanence after the initial liberalization and institutional reforms of the capital market appear to be less in the volume, but more expanded in the prices.

Political uncertainty and stock market volatility in the Middle East and North African (MENA) countries

This paper examines the impact of political uncertainty (caused by the civil uprisings in the Arab World i.e., “Arab Spring”) on the volatility of major stock markets in the MENA region. Our main findings are as follows. First, by distinguishing between conventional and Islamic stock market indices, we find that these two groups of investments react heterogeneously to the recent political turmoil. Specifically, we document a significant increase in the volatility of Islamic indices during the period of political unrests whereas the uprisings have had little or no significant effect on the volatility in conventional markets. Such difference is confirmed by further analysis in a multivariate GARCH model. Second, regardless of its impact on volatility, there is little evidence to suggest that MENA markets have become more integrated with international markets after the political revolution. Third, similar results are not found for the benchmark indices which indicate that the changes are the result of political tensions. In general, these results are robust to model specification and consistent with the notion that political uncertainty contributes to financial volatility. Overall, the findings are important in understanding the role of political uncertainty on stock market stability and are of great significance to investors and market regulators.

Insider Trading Laws, Learning and Firm Valuation: A Global Perspective

We argue that a country’s institutional setting can affect investor learning and thereby stock valuation and market stability. For a global sample of firms we find that the speed with which analyst forecast errors decline and the speed with which M/B valuation attains its equilibrium value with progression in a firm’s age improves with active insider trading law enforcement. This effect is more pronounced among capital markets with better regulatory infrastructure based on World Governance Indicators (WGI) index. We also provide updated insider trading law enactment and enforcement dates (up to 2013) to Bhattacharya and Daouk (2002), of which their survey covered up to March 1999.

Investigation of the Wave Nature of the Ukrainian Stock Market

In this work we concentrate on the long-term and short term cycles of Ukrainian stock market, being based on the nonlinear approach of the analysis of open systems. First, the paper gives an algorithmic model for the investigation of the nonlinear nature of stock market, which comprises five individual stages. Then, by analyzing the Hurst coefficient for the PFTS index for the Ukrainian stock market it is shown that it is persistent, i.e. contains the fractals. As the results, a parabolic function is used for the approximation of a nonlinear trend in the PFTS series. Moreover, the major tendency of the PFTS index gives the correlation trends of blue chips. The elimination of trends and the usage of Fourier analysis allow one to determine the long-term and short-term cycles in the index and shares. Finally, by investigating the weight of the long-term harmonics in the cyclic component of the PFTS index, the stability of Ukrainian stock market is studied in a short-time period. The application of the results involves the forecasting of the crisis points of stock market and proves the effectiveness of shareholders

Short Sale Constraints and the Likelihood of Crashes and Bubbles

In this paper, we investigate short sale constraints' impact on the incidence of extreme stock market movements. The latter can be used to proxy for the likelihood of tail events like crashes and bubbles in a market and, thus, is a crucial measure of stock market stability. Since crashes and bubbles are, almost by definition, unpredictable, we, unlike scarce prior research which relies on simple descriptive statistics, address only the component of the return which hits investors unexpectedly. To this end, we rely on long lasting short selling regimes in 3 Asian markets which, unlike the short-lived bans analyzed in existing studies, provide us with a setting to consistently estimate sophisticated time series models for the market return. Our evidence suggests that, during some market phases, short sale restrictions lead to an increased kurtosis of pricing errors which, in turn, indicates a higher probability for tail events.

House price‐stock price relations in Thailand: an empirical analysis

PurposeThe purpose of this paper is to empirically evaluate the wealth and credit‐price effects in the relations between housing prices and stock prices for Thailand using quarterly data from 1995 to 2006.Design/methodology/approachThe analysis relies on a four‐variable vector autoregression (VAR) framework consisting of house prices, stock prices, real output and consumer prices. Granger causality tests, impulse‐response functions and variance decompositions simulated from the estimated VAR systems are adopted as bases for inferences.FindingsThe results obtained from Granger causality tests, impulse‐response functions and variance decompositions all suggest a unidirectional causality that runs from stock prices to house prices. Thus, the wealth effect is unequivocally supported for the Thai case. The paper also documents the importance of real activity in influencing both house and stock prices. Likewise, stock prices do exert significant effects on real output and to some extent the general price level. These results have an implication that stock market stability is critical for the stability of the housing market as well as the goods market.Originality/valueThe paper provides an emerging market perspective on stock price – house price relations, which seem to be lacking in the literature.

The Role of the International Investor Mix in the Stock Market Stability

The Role of the International Investor Mix in the Stock Market Stability

Stock market stability index: An intelligent approach

A stable stock market is essential to the entire financial market and economy stressing the significance of monitoring the stability of the stock market. In this paper, we propose stock market stability index (SMSI), which monitors market stability through a statistical model. SMSI is based on the idea that the proper statistical model for the past stable period would significantly fail when the current market becomes unstable (see also Kim et al. [9]). To construct SMSI, the behavior of the regular stock market index on the past stable period is investigated with the asymptotic stationary autoregressive model (ASAR) proposed mainly for non-stationary time series by Kim et al. [4]. Major advantage of this approach is to provide the probability (or p-value) of the current stock market's stability. As an empirical example, SMSI for the Korean stock market is developed in order to demonstrate its potential application.

(Stock Market Stability Index for Early Warning System of Financial Crisis)

Korean Abstract: 본 연구에서는 금융 위기를 조기에 대처하기 위한 한 방법으로 주식시장 안정성 지수를 제안하고자 한다. 본 연구에서 제안하는 주식시장 안정성 지수(Stock Market Stability Index: SMSI )는 현재의 금융 시장 상태와 과거 안정적으로 움직였던 기준 시장 상태(base period)의 차이를 측정하여, 1997년에 발생한 외환위기와 같은 경제위기상황에 대해 즉각적인 경고 메시지를 발생하도록 설계되었다. 기존의 경제 위기예측 모형들은 대부분 과거의 금융위기 상황을 기준 상태로 설정하여 설계하였기 때문에 이용할 수 있는 데이터의 수(위기 사례)가 한정되어 있어 실증분석이 용이하지 않는 문제점이 있다. 이러한 점을 감안하여 본 연구에서는 과거의 안정된 경제 상태를 기준으로 모형을 설계함으로써 많은 관찰치를 확보할 수 있게 되어 모형의 추정 및 결과 활용에 있어 신뢰도와 유용성을 제고하였다. 한국의 KOSPI를 대상으로 실증 분석을 한 결과, 본 연구에서 제안한 주식시장 안정성 지수( SMSI )는 금융 리스크 관리를 위한 조기경보시스템(Early Warning System)으로서의 활용가능성이 충분함을 보여주었다. English Abstract: This paper proposes to utilize stock market stability index (SMSI) to develop an early warning system for financial crisis. The system measures the differences between the current market conditions and the past conditions of the market when stable. The system turns out better results than the conventional system - which detects the similarities between the conditions of the current market and the conditions of previous markets that were in crisis-since the new system has access to much more data. Therefore, it should be considered as a more advanced tool to prevent financial crises than the conventional one. As an empirical example, SMSI for the Korean stock market is developed in order to demonstrate the usefulness of SMSI as an early warning system.

Globalization and Stock Market Stability

The world stock markets are moving so rapidly towards globalization, and integration of local financial markets to international financial systems and institutions through cross borders transactions. The globalization phenomenon may be a blessing and enhance national economies, or may increase pricing volatility and trading instability, due to the fact that the irrational trading, instability or crises in one market or region may move to other markets and regions as witnessed in the last two decades. Accordingly, this paper aims to discuss the issue; it examined about fifty stock markets practices, laws, and regulations including developed as well as emerging markets, and their movement towards globalization. Other new developments incorporated by the world related organizations and commissions also were considered in the study. The study found that the majority of the world stock markets adopted various aspects of globalization environment; which created new challenges reflected in the stability, and efficiency of the world stock markets, including the inefficient global integration, impairment of market efficiency, less stable market, market fragmentation, adverse effects of new legal changes, and new introduced practices. However, these negative aspects do not exist in all periods of stock trading, but they may be materialized and have adverse impact during periods of deep falling prices and unstable periods of trading. Accordingly, and to avoid the adverse affects that might accompany the world stock markets globalization, several regulations, measures and practices need to be adopted in order to keep the world stock markets work in a relevant environment.

Stock Prices and Bank Loan Dynamics in a Developing Country: The Case of Malaysia

This paper estimates a six-variable VAR model and simulates generalized impulse response functions to assess dynamic interactions between bank loans and stock prices and evaluate whether bank loans play a role in transmitting financial shocks to the real sector. We find evidence that bank loans react positively to the increase in stock prices but there seems to be no influence from bank loans to stock prices. Similarly, bank loans seem to accommodate expansion in real output with, again, no influence of bank loans on real economic activity. Interestingly, despite the noted currency mismatch of bank assets and liabilities as a factor that aggravates the currency crisis, we find no evidence that the exchange rate fluctuations have impact on bank lending. If anything, the exchange rate seems to affect bank lending activities through its effects on real output and stock prices. From the dynamic responses, we tend to conclude that bank loans play no significant role in transmitting stock market shocks to the real sector. An important implication from our analysis is that the health of the banking sector depends crucially on stock market stability and real output stability. Additionally, policy attempts to stimulate bank loans as a way to boost stock market activities as well as to expand real activities may be futile.

Monetary policy and the stock market in the euro area

In this paper we study the role of the stock market in the transmission mechanism in the euro area and evaluate whether price stability and financial stability are mutually consistent and complementary objectives. Four major conclusions can be drawn from our work. First, stock prices and, more generally, relative asset prices seem to play an important role in the transmission mechanism in the euro area. Second, we do not find any significant, direct impact of stock prices on inflation. These two findings taken together support the view that stock market prices may be important for monetary policy, independently of their direct impact on inflation. Third, permanent productivity shocks are the driving force of the stock market in the long-term and contribute significantly to its cyclical behaviour. Nevertheless, the bulk of cyclical dynamics in the stock market is explained by transitory shocks. Fourth, a monetary policy focused on maintaining price stability in the long-term can contribute also to stock market stability.

Monetary Policy and the Stock Market in the Euro Area

In this paper we study the role of the stock market in the transmission mechanism in the euro area and evaluate whether price stability and financial stability are mutually consistent and complementary objectives. Four major conclusions can be drawn from our work. First, stock prices and, more generally, relative asset prices seem to play an important role in the transmission mechanism in the euro area. Second, we do not find any significant, direct impact of stock prices on inflation. Third, permanent productivity shocks are the driving force of the stock market in the long-run and contribute significantly to its cyclical behaviour. Nevertheless, the bulk of cyclical dynamics in the stock market is explained by transitory shocks. Fourth, a monetary policy focused on maintaining price stability in the long-run can contribute also to stock market stability.

Imitation and stability in a stock market

Imitation and stability in a stock market

Stock market dynamics with institutional trading

In this paper, the impact of institutional trading on stock market dynamics is analysed. We study the problem in an abstract context in which stocks of only one type are traded and institutions' portfolio choices are simply restricted to the partition of portfolio between stocks and bonds; in this simplified context it is shown how institutions' monitoring of individual investors' potentially destabilizing behavior (hearding and positive-feedback behavior) can be effective to obtain stock market stability.