Stock Market Crises Research Articles

Liquidity premium in the presence of stock market crises and background risk

We analyse a portfolio optimization problem for a long-term investor in the presence of stock market crises. A crisis includes a crash of the stock market price, a sharp increase of its volatility and dramatic deterioration of liquidity. We model the stock market illiquidity by means of convex transaction costs that mimic the presence of an effective bid-ask spread that increases with the size of a trade. We find that the existence of stock market crises results in a significant liquidity premium. Furthermore, the presence of background risk has a negative impact on the liquidity premium.

Mining for critical stock price movements using temporal power laws and integrated autoregressive models

This paper investigates the practical applicability of the log-periodic power law model to forecast large drawdowns of stock prices and compares its performance with the performance of the classical integrated autoregressive time series model. Both models are fitted to the daily closing prices of the Dow Jones index. In the case of the log-periodic power law model an alarm is issued if any fit conforming to theoretically motivated parameter restrictions can be found. In the case of the integrated autoregressive model an alarm is issued if structural breaks are observed at the end of the fit interval. It is shown that both models are successful in predicting upcoming stock market crises. The log-periodic power law model is superior in filtering out extreme drawdowns. However, its performance is highly dependent on the fit procedure.

The burden of accounting standards for small and medium enterprises. A suggestive solution

Anglo-Saxon accounting literature has traditionally connected the U.S. stock market crisis of the late 1960s and the consequent proliferation of complex and detailed accounting standards with the origin of a complex problem, commonly known as “accounting standards overload”, that can be defined along two different but correlated perspectives: 1. the question of comparing costs and benefits of complying with accounting standards by small and/or privately held entities; 2. the competitive disadvantage for public accountants (CPAs) who serve these entities. This paper begins with a background and purposes of the study (par. 1) followed by the analysis of the main literature of the general phenomenon of accounting standard overload (par. 2). Paragraph 3 focalizes on the cost-benefit analysis of complying with accounting standards by small and medium entities and then paragraph 4 describes the solutions adopted in the main Anglo-Saxon countries (par. 4.1), with a particular reference to the “Non-reporting entity” concept (par. 4.2). Finally, the authors share their personal observations (par. 5).

Three Essays on Momentum Returns

This dissertation consists of three essays on momentum returns. The first essay is entitled ‘Momentum Returns, Market States and the Global Financial Crisis.’ This essay investigates the profitability of the momentum trading strategy in the stock exchanges of Shanghai, Shenzhen and Hong Kong over the period 1994 to 2010. My results show that there are significantly large momentum returns for Shanghai and Hong Kong but small and insignificant momentum returns for Shenzhen. Momentum returns remain almost the same for all datasets even after adjusting for the Fama-French risk factors. However, the momentum trading strategy generates negative returns for all markets during the Global financial crisis; it appears that the momentum trading strategy fails during a financial or stock market crisis and especially in the months when the market conditions improve. I find no significant relationship between momentum returns and market states, which contradicts the results of an earlier study conducted in the U.S. market. Instead of market state it appears that it is economic activity that explains momentum returns. In the second essay, entitled ‘Momentum Returns and Information Uncertainty’, I study the impact of information uncertainty on the profitability of the momentum trading strategy. Prior literature attributes returns of the momentum trading strategy to investor behavioural biases, such as under reaction to new information, and provides evidence that firms with higher information uncertainty earn lower future returns and higher momentum returns. This study investigates the relationship between information uncertainty, future returns and the momentum trading strategy in China over 1994 to 2010. Using age, volatility, volume and firm size as information uncertainty proxies, I find that firms with higher information uncertainty earn higher average returns over the succeeding 6-month period when information uncertainty is defined in terms of firm size and volume, consistent with the traditional risk based theories. However, firms with high information uncertainty earn lower returns if information uncertainty is defined in terms of firm age; however, firm age might not be an important factor in explaining future returns as the age difference among young and old firms is quite small and it might be the other firm-specific characteristics that drive lower future returns for the younger firms instead of their age. Therefore, my study rejects the findings of Jiang, Lee and Zhang (2005) that stocks with higher information uncertainty earn lower returns over the succeeding 6-month period. Using portfolio-level analysis and firm-level Fama and Macbeth regressions, I find that no robust significant relationship exists between information uncertainty and momentum returns. My findings suggest that it might be the activities of retail investors that drive momentum returns since China’s market is dominated by retail investors, whereas the momentum effect is weak among the U.S. stocks with higher institutional holdings.In the third and final essay, entitled ‘Momentum Returns, Long-Term Reversal and Idiosyncratic Volatility’, I study the impact of idiosyncratic volatility (IV) on the profitability of momentum and long-term reversal trading strategies in China over the period 1994 to 2010. The literature suggests that IV deters arbitrage, which results in higher momentum and reversal returns for stocks with high idiosyncratic volatility. However, my results indicate that the choice of the proxy used for IV, sorting method and number of portfolios (tercile versus quintile) play critical roles in determining the existence and significance of a relationship between IV and the profitability of momentum or reversal trading strategies. Both portfolio-level analysis and firm-level Fama and Macbeth regressions indicate that no robust relation exists between IV and momentum or reversal, which contradicts the results of earlier studies in the U.S. market. However, my findings suggest that reversal returns might be related to transaction costs since I find greater reversal returns among the stocks with high transaction costs. My findings also do not support the suggestion that momentum and reversal are part of same phenomenon.

Can CDS indexes signal future turmoils in the stock market? A Markov switching perspective

Single-name Credit Default Swaps (CDS) are considered the main providers of direct information related with a reference entity’s creditworthiness and, for this reason, they have often been the core of news on the current financial crisis. The academic research has focused mainly on the capacity of CDS in anticipating agencies’ official rating changes and—in this respect—on their superior signalling power, compared to bond and stock markets. The aim of this work is, instead, to investigate the ability of fluctuations in CDS indexes in anticipating the occurrence of stock market crises. Our goal is to show that CDS indexes may provide investors and institutions with early warning signals of financial distresses in the stock market. We make use of a Markov switching model with states characterized by increasing levels of volatility and compare the times in which the first switch in a high volatility state occurs, respectively, in CDS and stock market index quotes. The data set consists of daily closing quotes for 5 years CDS and stock market index prices, covering the time period from 2004 to 2010. In order to capture possible geographic differences in CDS index capacity of foreseeing stock market distresses, data referring to two different regions, Europe and United States, are analyzed.

Are stock market crises contagious? The role of crisis definitions

Financial contagion studies generally examine whether co-movement between markets increases during a crisis. We use a flexible co-movement measure to examine how conclusions of such analyses depend on the sample chosen as the ‘crisis’. To this end, we analyse stock market co-movement during the 1997 Asian crisis and the 2007 global financial crisis for all possible source countries and for all possible time periods or extreme return quantiles. This way we account for the main crisis dating approaches adopted in the literature. Our results suggest there is no clear relationship between excess co-movement and commonly used crisis samples.

The French paradox: A financial crisis during the golden age of the 1960s

The French stock market crisis of 1961–67 was the biggest of the twentieth century after that of the 1930s. Using the new stock index (historical CAC 40), it is possible to get a fair idea of its amplitude and detail its chronology. The possibility is considered that the crisis of the 1960s was more of a market correction after the bull run of the 1950s. The fall of the stock prices is an adjustment to the abrupt halt of the growth of dividends, the potential impacts of internal political choices and of the structural characteristics of the French stock market during this period are also investigated.

The French Paradox: A Financial Crisis During the Golden Age of the 1960s

The French stock market crisis of 1961-1967 was the biggest of the twentieth century after that of the 1930s. By using the new stock index (historical CAC 40), we have been able to get a fair idea of its amplitude and detail its chronology. We consider the possibility that the crisis of the 1960s was more of a market correction after the bull run of the 1950s. The fall of the stock prices is an adjustment to the abrupt halt of the growth of dividends. Then, we investigate the potential impacts of internal political choices and of the structural characteristics of the French stock market during this period.

Was There a Contagion during the Asian Crises?

The contagion of financial crises surrounding the markets around the world has been in the forefront of academic and public discussions. In this paper, we attempt to study the “contagion effect” of the stock market crises around the world by studying the correlations of global stock returns and volatility. We analyze the daily returns of major stock indexes around the world to discover the timing and path of the transmission of shocks that manifest themselves in stock market returns. We construct VARs of major stock market index returns and volatilities. Our work differs from the literature in analyzing spillover effects between emerging markets and other major stock markets.

Financial Crises In Spain: Lessons From The Last 150 Years

AbstractFinancial crises are not unique to current financial systems. Are crises alike? Have they become more frequent, longer lasting and more severe since the 20thcentury? What does history tell us? The objective of this paper is to study the financial crises that have occurred in Spain over the last 150 years. We consider different types of crises (banking, currency and stock market crises), together with all their possible combinations, estimate their frequency by period and measure their length and depth. The main conclusion we obtain is that Spanish crises have been more frequent than in the rest of the world and have been more severe and more complex since 1973, as the 2007 crisis is confirming.

Origin of & Solution to Global Financial Meltdown: An Islamic View

The meltdown of financial markets across the world is one of the most common characteristics of moderncapitalist economy. Starting with the stock market crash of 1901 through the great depression of 1930s to theBlack Monday of 1987, the Asian financial crisis of 1997 and finally the latest tsunami of global financial crisis,the history of major stock market crashes are undoubtedly a testimony of its nature. According to IMF, the worldhas witnessed more than 100 stock market crisis in last 30 years. However, with the endeavors of so manytalented academicians, policymakers, and researchers the reasons behind these crashes still remain unexplored.After almost 25 years nobody has a solid answer to the reasons behind stock market crash in 1987. Meetingsafter meetings, summits after summits, conferences after conferences of the world leaders, thinkers andacademicians in the form of DAVOS summit, G-8 summit, EU summits, G-20 summits etc. have failedmiserably to identify the root causes behind the crisis. At times the expectations of finding a common solution tothe problem from such high level summits have ended up with common blame-games while the crisis continuesto multiply as various economies enters into much painful long term recessions with human stories of sufferings,job loss and even suicide. Therefore, this article aims at uncovering the root causes of repeated form of globalfinancial crisis by critically investigating the philosophical and functional foundations of existing system offinancial economy. A detailed review of fundamentals, methods and facts about capitalism clearly highlights theinevitability of such problem to exist in existing financial economic model in the light of Islamic economicsystem.

Determinants of IPO Underpricing: An Empirical Evidence from Bombay Stock Exchange after Stock Market Crisis

Introduction: Underpricing of IPOs has been considered as a prevalent phenomenon across the world. When companies go public, the equity they sell in as initial public offering tends to be underpriced, resulting in a substantial price jump on the first-day trading. However, underpricing an IPO results in “money left on the table”- lost capital that could have been raised for the company had the stock been offered at a higher price. Purpose of study: This paper is attempts to design for and tests empirical models, which integrate theoretical, institutional, and other factors, which interact to explain ownership structure, Ex-ante in formation at the level of underpricing after the Indian stock market crunch. Number of share offered, institutional non promoters, issue size, market capitalization, and private IPO firm is constructed to be a significant effect on the level of underpricing after the Indian market crisis. Nevertheless, firm’s age, offer timing, foreign promoters, Indian promoters and non institutional non promoters have no significant difference in the level of underpricing after-market crisis. Research Methodology: The study is based on IPO that listed at BSE given that 2008 to 2011. Multiple linear regressions are used to distinguish the relationship between various independent variables with the dependent variable, i.e. level of underpricing. The study discriminates between issuer underpricing and Firm’s age, number of share offered, pricing mechanism (dummy), offer timing, ownership structure, issue size, market capitalization & government- private IPOs (dummy). This paper is attempts to recommend and tests empirical models, which embody theoretical, institutional, and other factors, which engage to explain ownership structure, Ex-ante in formation at the level of underpricing after the Indian stock market crisis. Findings: The results of multiple regressions reveal that, Firm’s age, Number of share offered, book building pricing mechanism, offer timing, ownership structure, issue size, market capitalization & government- private IPOs explained 48% of the variation in issuer underpricing, Durbin Watson’s value was 1.77. Number of share offered, institutional non promoters, issue size, market capitalization, and private IPO firm is constructed to be a significant effect on the level of underpricing after the Indian market crisis. Nevertheless, firm’s age, offer timing, foreign promoters, Indian promoters and non institutional non promoters have no significant difference in the level of underpricing after-market crisis. Originality: The study provides useful discernment into which market and firm specific variables are significant in determining the degree of underpricing of IPOs. The study has more prominent implications for investors who subscribe to different IPOs for listing day gain as this study would help them in understanding which type of firms are more likely to underpriced.

The Need for Global Adoption and Adaptation of International Financial Reporting Standards: Post Enron Consequences and the Restoration of Confidence to Capital Markets Following the 2008 Financial and Stock Market Crises

Many questions have been raised as to whether financial accounting has become more conservative. The value relevance and qualitative characteristics of accounting information have become topics of particular relevance given the role they have assumed in influencing the value judgment of investors (local or international) in deciding whether or not to invest in a certain market. Given the quality of accounting information – which has resulted in misleading and inaccurate information (amongst many other low quality attributes), it became evident, particularly following Enron's collapse, to adopt improved, enhanced, better quality standards: namely, International Financial Reporting Standards. This paper considers the background culminating in the adoption of IFRS – as well as the need for the adoption of IFRS. It also highlights why the value relevance of accounting information is also of vital significance in certain emerging economies and why the successful implementation of IFRS in these jurisdictions may be crucial in restoring investor confidence – particularly in the aftermath of stock market crashes in these economies.

Democracy, Political Risks and Stock Market Performance

We study whether the emerging stock markets’ performance is affected by direct and indirect effects of democracy level and political risk. We argue that the relationship between democracy level and the political risk is parabolic instead of a simple linear relation i.e. there exists a limit in democracy after which the political risk begins to decline and this is reflected in stock prices. Using panel data for 38 emerging markets at yearly frequency and controlling for several domestic and international factors, we find a fairly robust evidence that during the period 2000-2010, this relationship is true and after some threshold, the more democratic countries produce higher returns. Similar relation is also found for several political risk components, namely: conflicts and tensions; military in politics, religious tensions and internal conflicts. No consistent evidence of the direct effects of democracy, political risk or its subcomponents on share prices is found. We also test whether the polynomial relationship between democracy and political risk can help to explain stock market crisis, but find no significant results.

Indonesian Stock Market Crisis Observation with Spectral and Composite Index

The paper discusses the employment of the index composed from the dynamical tree of correlations among stock prices both with the popularly used standard (conventional) composite one. The spectral index focus on the dynamics of the correlation coefficients among stock prices while composite index is the dynamical aggregate of the whole stocks traded in the market. Some advantages is conjectured by incorporating both indexes to the historical data of Indonesian Stock Market data. Both are shown potentially useful for detecting the crisis as well as the general stock-prices relations on fundamental issues, generally social, economic, and political situations on which the Indonesian stock market is influenced.

How Does Investor Sentiment Affect Stock Market Crises? Evidence from Panel Data

AbstractWe test the impact of investor sentiment on a panel of international stock markets. Specifically, we examine the influence of investor sentiment on the probability of stock market crises. We find that investor sentiment increases the probability of occurrence of stock market crises within a one‐year horizon. The impact of investor sentiment on stock markets is more pronounced in countries that are culturally more prone to herd‐like behavior, overreaction and low institutional involvement.

The Hazards of Volatility Diversification

Recent research advocates volatility diversification for long equity investors. It can even be justified when short-term expected returns are highly negative, but only when its equilibrium return is ignored. Its advantages during stock market crises are clear but we show that the high transactions costs and negative carry and roll yield on volatility futures during normal periods would outweigh any benefits gained unless volatility trades are carefully timed. Our analysis highlights the difficulty of predicting when volatility diversification is optimal. Hence insitutional investors should be sceptical of studies that extol its benefits. Volatility is better left to experienced traders such as speculators, vega hedgers and hedge funds.

Stock Market Crises, Background Risk and Liquidity Premium

We analyze a portfolio optimization problem for a long-term investor in the presence of stock market crises. A crisis includes a crash of the stock market price, a sharp increase of its volatility and dramatic deterioration of liquidity. We model the stock market illiquidity by means of convex transaction costs that mimic the presence of an effective bid-ask spread that increases with the size of a trade. We find that the existence of stock market crises results in a significant liquidity premium. Furthermore, the presence of background risk has a negative impact on the liquidity premium.

CAPITALIST WELFARE SOCIETIES' TRADE-OFF BETWEEN ECONOMIC EFFICIENCY AND SOCIAL SOLIDARITY

ABSTRACT Starting in the 1980s and 1990s, in various European welfare reforms, parts of the social insurance systems and the related resources were transferred to the financial market. In this sense, one can speak of privatisation and marketisation, both examples of a neo-liberal tendency. Now, after ‘the Fall of Finance Capitalism’, it is often stated that ‘the years of neoliberal triumph have come to an end’. This paper argues that there had already been a contrasting and powerful development previously, which might now be reinforced. This political and institutional development was moving towards extensive regulatory policies, in particular after the stock market crisis in 2001, and towards solidarity, two examples of a neo-etatistic tendency. I argue that the traditional exclusionary categorisation significantly underestimates the continuously changing mix. I will introduce a more complex approach which will be much more helpful to comprehend current developments in pension protection, and which might also be considered for providing an understanding of change in social protection schemes and welfare states in general. To my view, current changes in capitalist welfare societies are system-inherent substantiations of complexly intertwined dynamics, which can be comprehended by analysing changes in flows of resources and in the rights over these resources. These changes are manifest in what is termed social citizenship. Consequently, I will come to the conclusion that the observed changes promote new forms of social citizenship.

Debt Management with a Conscience

The inner stability and resilience of Islamic finance will not hold, and the low risk element therein is bound to diminish unless the shari'ah principles are diligently observed. The world experienced two major financial crises within a decade: the currency and stock market crises of 1997-98, and now a crippling recession that began with the US subprime debacle caused by excessive lending to borrowers unable to make repayment. Both originated in ‘asset bubbles’ and unlimited creation of fiat money that loaded the market with the sale of debts, or bay' al-dayn, as it is known in the jargon of shari'ah law. Dealing in debts that lacked any asset base overwhelmed the financial system.