Stock Market Variables Research Articles

Are exchange rates disconnected from macroeconomic variables? Evidence from the factor approach

We use factor-augmented predictive regressions to analyze the relation between nominal exchange rates and macroeconomic variables. Using a panel of 121 US macroeconomic time series, we estimate eight factors through principal component analysis. Those estimated factors have significant predictive power and can substantially improve the predictive power of purchasing power parity through both in-sample and out-of-sample analyses. The estimated macroeconomic factor, which co-moves with US stock market variables, has strong predictive power for nominal exchange rate fluctuations in the short run, while estimated factors, co-moving with interest rate spreads, government-issued bond yields and employment variables, have strong predictive power in the long run. Moreover, optimal factors selected by the BIC in the out-of-sample analysis differ greatly depending on the time points when forecasts are made. Finally, we show that factors extracted from a panel of 121 US time series data and those extracted from a panel of 215 Korean macroeconomic series together can predict a substantial portion of movements in the Korea–US bilateral exchange rate.

Equity fund flows, market returns, and market risk: evidence from China

We examine contemporaneous and dynamic relationship among equity fund flows, market returns, and market risk in China by applying structural vector autoregression (SVAR) and reduced-form VAR models using monthly and quarterly data over the period of 2005–2016. Results from the reduced-form VAR suggest that equity funds can play important role in reducing market risk by actively participating in the equity market. Moreover, adverse market conditions can cause equity funds to refrain from active participation in trading activities. The results from the structural VAR show that market risk and stock returns are contemporaneously related to fund flows, suggesting that concurrent relationships are important in studying the linkages between aggregate equity fund flows and stock market variables. We also discuss the policy implications of findings in the context of recent downturn in the Chinese stock market.

Bank Distress in the European Union 2008-2015: A General Assessment

This paper focuses on EU banks that experienced distress during 2008-2015 and provides evidence regarding bank-specific, macroeconomic, and stock market variables and the probability of distress. The sample employed is unique in terms of the definition of distress. Results indicate that a combination of the above explains the probability of distress well, emphasizing the importance of the simple equity ratio and size. The paper also focuses on banks in EU countries that faced economic problems and documents that the probability of bank distress in these countries has been influenced by different factors, in comparison to the rest of the EU.

Can bubble theory foresee banking crises?

We consider the effectiveness of unit root exuberance tests in predicting banking crises. Using a sample of 15 EU countries over the past three decades, our crisis dating follows the scheme of the European Systemic Risk Board. The exuberance indicators slightly outperform benchmark signaling and logit models. Variables based on credit- and debt-service are identified as better predictors than housing market variables, which in turn outperform stock market variables. The results corroborate the existing literature, which says financial crises are typically preceded by leveraged bubbles, and more specifically, that initial bubble signals from explosive growth in credit and asset prices are followed by a lift-off in debt-servicing costs as a financial crisis nears. The risk of financial crisis peaks just after the bubble bursts. Our results indicate that exuberance tests, which can be used in crisis prediction in a manner similar to conventional early warning models, may be readily incorporated into the toolkit of financial stability supervisors.

Determinants of corporate credit spread: evidence from India

Understanding the behavior of corporate credit spread is of paramount importance to understand and manage risk in fixed income securities. This study examines the determinants of corporate credit spread in Indian bond market. By adopting a panel data approach, the study estimates a fixed-effects regression equation to analyze the determinants of corporate credit spread in Indian bond market. The variables used in the study are motivated from structural models and macroeconomic variables and include interest rate variables, stock market variables, inflation and economic growth. The study found that the interest rate variables, stock market variables and inflation are the key variables in explaining the level of corporate credit spread in Indian bond market. The results are robust to the traditional approach of using aggregate yield spread for the whole sample and also when the sample was divided using different industrial classification. Overall, the study highlights the importance of stable interest rate and inflationary environment for the development of Indian corporate bond market.

Income Inequality and Stock Market Returns

In this paper, we study the relationship between income inequality and stock market returns. We develop a quantitative general equilibrium model that links shifts in both labour and capital income inequality to stock market variables. An increase of the share of capital ownersiincome from risky capital leads to higher equity premium and a rise in their non-risky, labor share of income reduces it. When we calibrate our model to match the empirical size of shifts in the last Ove decades, we Ond that the negative impact of the higher labour share of income of capital owners dominates and brings the equity premium below the historical value by 0.79 percentage points, in line with the data. If both capital and total income shares of top decile would continue growing at the historical rate between 1970 and 2014, the equity premium would continue decreasing to 6.11% in 2030, 0.92 percentage point lower than historical equity premium of 7.03%. If instead only the capital share of income continues to grow, the equity premium would be higher than the historical average by 0.57 percentage point. If the labour income dispersion remains constant, the historical equity premium of 7.03% would be reached by 2030 if the capital share of income was growing by 1.4% each year.

The Information Content of Stock Market Factors

This paper examines the information content within several popular stock market factors, asking whether they contain independent explanatory power for stock returns and whether their movements relate to economic variables. Given, the explosion in the number of such factors, it is important to consider whether each factor adds to our understanding of markets and the wider economy. We undertake three related exercises, whether a set of common factors contain independent predictive ability for stock return portfolios, what economic and market variables can explain movements in the factors and whether stock market factors have predictive power for future output growth. The results support the view that several of the considered factors do not contain independent information for stock returns. Further, most of these factors do not provide any predictive power for future output growth and thus appear not to contain any economic content or information regarding economic behaviour. Evidence suggest that movement in the factors is driven by considerations of current economic and market risk. Hence, stock market factors reflect existing economic conditions but do not provide a window on future behaviour.

Inflation Thresholds-Financial Development Nexus in South-Eastern Asian Emerging Markets

This paper investigated the maximum inflation threshold levels beyond which financial development declines in the South-Eastern Asian emerging markets using static panel threshold regression framework proposed by Bick (2010) with data ranging from 1994 to 2014. The negative impact of inflation on financial development is a settled matter in both theoretical and empirical literature. However, this study was prompted by recent literature (Boyd et al., 2001; Abbey, 2012; Kim and Lin, 2010) which argued that the relationship between inflation and financial development is not linear and is characterised by inflation thresholds. Moreover, no previous study that the author is aware of used the approach suggested by Bick (2010) to determine inflation threshold levels and financial development. Among previous inflation-finance studies, the current study is the first one according to the author’s best knowledge to use banking sector, stock market and bond sector development variables as previous studies were narrow focused in their definition of financial development. The study observed that lower levels of inflation is good for financial development whilst higher levels of inflation slows down the rate at which banking sector, stock and bond markets develop. These results agree with the theory underpinning inflation-financial development nexus. South-Eastern Asian emerging economies are therefore urged to implement macroeconomic policies that ensure inflation rates are kept at lower levels that do not stifle financial development.

Inflation Thresholds-Financial Development Nexus in South-Eastern Asian Emerging Markets

This paper investigated the maximum inflation threshold levels beyond which financial development declines in the South-Eastern Asian emerging markets using static panel threshold regression framework proposed by Bick (2010) with data ranging from 1994 to 2014. The negative impact of inflation on financial development is a settled matter in both theoretical and empirical literature. However, this study was prompted by recent literature (Boyd et al., 2001; Abbey, 2012; Kim and Lin, 2010) which argued that the relationship between inflation and financial development is not linear and is characterised by inflation thresholds. Moreover, no previous study that the author is aware of used the approach suggested by Bick (2010) to determine inflation threshold levels and financial development. Among previous inflation-finance studies, the current study is the first one according to the author’s best knowledge to use banking sector, stock market and bond sector development variables as previous studies were narrow focused in their definition of financial development. The study observed that lower levels of inflation is good for financial development whilst higher levels of inflation slows down the rate at which banking sector, stock and bond markets develop. These results agree with the theory underpinning inflation-financial development nexus. South-Eastern Asian emerging economies are therefore urged to implement macroeconomic policies that ensure inflation rates are kept at lower levels that do not stifle financial development.

Macroeconomic shocks and stock market returns: the case of Korea

ABSTRACTThis study examines the effects of macroeconomic shocks on key macro variables, including stock market returns in Korea, using the structural vector autoregression (SVAR) model. We suggest a three-variable SVAR model incorporating inflation, output growth and stock returns. We adopt a nonzero z-ratio restriction for the long-run identifying assumption to allow for economically meaningful relationships among variables. While our results support the negative (positive) relation of demand (supply) shocks to stock returns, we also find that demand shocks influence stock market variance more significantly than supply shocks do. The sub-period analysis finds that global market fluctuations during the global financial crisis have relatively little effect on Korean stock market performance. We also examine a generalized five-variable model that includes the foreign exchange rate and interest rate, confirming the results from the three-variable case.

The impact of microblogging data for stock market prediction: Using Twitter to predict returns, volatility, trading volume and survey sentiment indices

In this paper, we propose a robust methodology to assess the value of microblogging data to forecast stock market variables: returns, volatility and trading volume of diverse indices and portfolios. The methodology uses sentiment and attention indicators extracted from microblogs (a large Twitter dataset is adopted) and survey indices (AAII and II, USMC and Sentix), diverse forms to daily aggregate these indicators, usage of a Kalman Filter to merge microblog and survey sources, a realistic rolling windows evaluation, several Machine Learning methods and the Diebold-Mariano test to validate if the sentiment and attention based predictions are valuable when compared with an autoregressive baseline. We found that Twitter sentiment and posting volume were relevant for the forecasting of returns of S&P 500 index, portfolios of lower market capitalization and some industries. Additionally, KF sentiment was informative for the forecasting of returns. Moreover, Twitter and KF sentiment indicators were useful for the prediction of some survey sentiment indicators. These results confirm the usefulness of microblogging data for financial expert systems, allowing to predict stock market behavior and providing a valuable alternative for existing survey measures with advantages (e.g., fast and cheap creation, daily frequency).

Did Quantitative Easing Only Inflate Stock Prices? Macroeconomic Evidence from the US and UK

This paper considers the impact of US and UK Quantitative Easing (QE) on their respectiveeconomies with a particular focus on the stock market, production and price levels. We conduct anempirical quantitative exercise based on a novel six-variable VAR model, which combines macroeconomic and forward-looking financial variables and uses a 'pure' measure of QE. The results suggest a positive response of equity prices, and a 'V' shaped reaction of volatility and the bid-ask spread to the monetary stimulus. Output and inflation, in contrast with some previous studies, show an insignificant impact providing evidence of the limitations of the central bank's programmes. We attribute the variation to this difference in our modelling approach, which includes stock market variables, and we conclude that its presence is of critical importance in the assessment of unconventional monetary policy. Economically, we argue that the reason for the negligible economic stimulus of QE is that the money injected funded financial asset price growth more than real projects.

The impact of macroeconomic and conventional stock market variables on Islamic index returns under regime switching

The objective of this paper is to study the impact of conventional stock market return and volatility and various macroeconomic variables (including inflation rate, short-term interest rate, the slope of the yield curve and money supply) on Islamic stock markets returns for twenty developed and emerging markets using Markov switching regression models. The empirical results for the period 2002–2014 show that both developed and emerging Islamic stock indices are influenced by conventional stock indices returns and money supply for both the low and high volatility regimes. However, the other macroeconomic variables fail to explain the dynamics of Islamic stock indices especially in the high volatility regime. Similar conclusions are obtained by using the MS-VAR model.

An Empirical Analysis of Macroeconomic Variability on the Ghanaian Stock Market: A Vector Autoregression Approach

This study investigates the dynamic interrelationships among stock prices and selected macroeconomic indicators namely; economic activity, global commodity price index, inflation and interest rates in Ghana. By employing a Vector Autoregression (VAR) Model, the empirical results reveal that stock prices depreciate with an increase in global commodity prices and interest rates indicating a negative relationship. On the other hand, stock prices appreciate with an increase in inflation and economic activity indicating a positive relationship. Examining stock market variability on the selected macroeconomic variables also showed that inflation and interest rates respond negatively to changes in asset prices while the stock market itself is not found to be a leading indicator for economic activity. The evidence suggests that the listed equities on the GSE are a hedge against inflation in Ghana. Increasing economic activity over time is advantageous for the Ghanaian stock market.

Banks, Stock Market Development and Economic Growth in Kenya: An Empirical Investigation

ABSTRACTIn this paper, we have examined the impact of both bank- and market-based financial development on economic growth in Kenya during the period 1980 to 2012, using the autoregressive distributed lag bounds testing approach. To capture as far as possible the breadth and depth of the Kenyan bank- and market-based financial systems, the study employs the method of means-removed average to construct both bank- and market-based financial development indices from an array of banking sector and stock market variables. The empirical results of this study show that market-based financial development has a positive impact on economic growth in Kenya. However, the results have also shown that bank-based financial development has no impact on economic growth in the study country. These results apply irrespective of whether the regression analysis is conducted in the long run or in the short run. The findings of this study, therefore, lend more support to pro-market-based financial development policies in Kenya.

An Empirical Analysis of Macroeconomic Variability on the Ghanaian Stock Market: A Vector Autoregression Approach

This dissertation investigates the dynamic interrelationships among stock prices and selected macroeconomic indicators namely; economic activity, global commodity price index, inflation and interest rates in Ghana. By employing a Vector Autoregression (VAR) Model, the empirical results reveal that stock prices depreciate with an increase in global commodity prices and interest rates indicating a negative relationship. On the other hand, stock prices appreciate with an increase in inflation and economic activity indicating a positive relationship. Examining stock market variability on the selected macroeconomic variables also showed that inflation and interest rates respond negatively to changes in asset prices while the stock market itself is not found to be a leading indicator for economic activity. The evidence suggests that the listed equities on the GSE are a hedge against inflation in Ghana. Increasing economic activity over time is advantageous for the Ghanaian stock market.

Sentiment analysis em relatórios anuais de empresas brasileiras com ações negociadas na BM&FBovespa

We investigated the association between the tone of annual reports issued by a sample of listed Brazilian firms and market variables (abnormal returns, trading volume and price volatility). The tone was measured using sentiment analysis techniques (Liu et al., 2005; Liu, 2010). As in Loughran and McDonald (2011), we developed and used lists of positive, negative, litigious, uncertainty-related and modal words in Portuguese to assess the tone of annual reports. Using a sample of 829 annual reports from 1997 to 2009, we observed a weak association between the tone of annual reports and stock market variables in Brazil. Additionally, we considered a sub-sample prior to GAAP changes in Brazil (1997-2007) and our results are maintained. Contrary to other studies using data from the United States, we found that the tone of annual reports released by Brazilian firms is not conducive to estimating returns. Keywords : sentiment analysis, textual sentiment, positive words, negative words, annual reports.

Forecasting Stock Market Volatility using GARCH Models: Evidence from the Indian Stock Market

The present article attempts to modelling and forecasting the volatility of the BSE-SENSEX Index returns of Indian stock market, using daily data covering a period from 1, July 1997 to 31, December 2015. The forecasting models that are considered in this study range from the symmetric GARCH (1,1) model to asymmetric GARCH models (including Exponential GARCH (1,1) and Threshold GARCH (1,1) models). On the basis of out of the sample forecasts and a majority of evaluation measures our result shows that the asymmetric GARCH models do perform better in forecasting conditional variance of the BSE-SENSEX returns rather than the symmetric GARCH model, confirming the presence of leverage effect. Our findings are consistent with the evidence of Banerjee and Sarkar (2006) and Srinivasan (2015) that reveals relatively asymmetric GARCH models are found superior in forecasting the conditional variance of Indian stock market returns rather than the parsimonious symmetric GARCH models.

Examining the influence of stock market variables on microblogging sentiment

This research investigates different combinations of causal conditions that may relate to microblogging sentiment. The study considers financial variables, such as VIX, Tobin's Q, capitalization, or P/E ratio, and variables related to social media activity, such as number of twits, number of followers, or the experience of the users. Using a fuzzy-set qualitative comparative analysis, this research analyzes the sentiment of stock-related microblogging messages of S&P 500 Index posted between October 2009 and October 2014. The model where the message sentiment increases finds three causal recipes and all of them contain user experience and number of followers: (1) the configuration within user experience, number of followers, and Tobin's Q; (2) the configuration within user experience, number of followers, and lower P/E ratio, lower capitalization, and lower Tobin's Q; (3) and the configuration within user experience, number of followers, P/E ratio, and Tobin's Q. The study discusses the results.

Stock Market Development and Economic Growth: Empirical Evidence from Kazakhstan

The study examines a causal relationship between the stock market and economic growth variables for Kazakhstan. The stock market is found to promote economic growth in the country but the causation between the variables is not always significant. Consistent efforts are required on the part of the Kazakhstan authorities in order to ensure well-organized and competent operation of the stock market because the more efficient market attracts investors. For example, it can be achieved through stimulation of trading activities in the Kazakhstan Stock Exchange.