Stock Market Downturn Research Articles

Var Adam ekki lengi í helvíti? Hafa stjórnunarhættir á Íslandi breyst eftir hrunið 2008?

Íslensk fyrirtæki fóru mikinn á árunum fyrir efnahagshrunið árið 2008 og fjárfestingar stjórnenda skiluðu Íslandi í efsta sæti á hinum alþjóðlega World Investment Report lista ár eftir ár. „Mig er farið að klæja í puttana að loka nýjum díl, við höfum ekkert gert á þessu ári,” var eitt af þeim svörum sem komu fram í rannsóknum höfunda fyrir hrunið enda fjárfestu íslenskir stjórnendur meira en aðrir og iðulega í stærri fyrirtækjum en þeim sem þeir störfuðu fyrir. Eignarhald á hlutabréfum í aðdraganda hruns einkenndist mjög af skuldsetningu hluthafanna. Mikil vogun varð til þess að eigendur skráðra félaga urðu afar viðkvæmir fyrir niðursveiflum á hlutabréfamarkaði enda veðjuðu þeir djarft á öra hækkun. Það þýddi jafnframt mikla pressu á stjórnendur sem urðu helst að skila sífellt glæsilegri niðurstöðum í ársfjórðungsuppgjörum til að stuðla að endalausri hækkun hlutabréfaverðs. Í greininni er skoðað hvort stjórnunarhættir hafi breyst í íslensku viðskiptalífi frá hruni. Rannsóknin náði til 42 stjórnenda á lista yfir 300 stærstu fyrirtæki landsins. Voru þeir m.a. spurðir hvort stjórnunaraðferðir þeirra hefðu eitthvað breyst eftir hrunið 2008. Margar rannsóknir liggja fyrir um aðferðir og einkenni góðra stjórnenda og rannsóknir á aðferðum íslenskra stjórnenda á árunum fyrir hrun bentu til þess að þeir væru áhættusæknir og fljótir að taka ákvarðanir. Sjálfstraustið var mikið, birtist jafnvel sem hvatvísi. Þá virtist skortur á langtímastefnumótun. Rannsóknarspurningin sem hér er sett fram er hvort aðferðir (stjórnunarhættir) íslenskra stjórnenda hafi breyst eftir efnahagshrunið árið 2008. Í ljós kom að stjórnendur í íslensku atvinnulífi eru sammála um að margt hafi breyst í stjórnunarháttum frá því fyrir hrun, óttinn við mistök hafi verið alls ráðandi í atvinnulífinu fyrst eftir hrunið og um tíma dró úr áhættusækni stjórnenda. Tíu árum síðar séu hlutirnir að nálgast ört það sem áður var, þótt hugsanlega sé aðeins meiri varkárni við ákvarðanatöku, meira regluverk og formfesta og meiri áætlanagerð en var. Skuldsetning virðist minni en var á árunum fyrir hrun, þó eru margir stjórnendur á því að rúmum 10 árum eftir hrun sé allt að fara í svipað horf og það var. Bægslaganginum sé þó núna að mestu haldið bak við tjöldin.

Tracking Uncertainty Through the Relative Sentiment Shift Series

We examine the causal dynamic relationship between economic policy uncertainty and economic activities, using a Local Projection model with external instruments. Based on the psychological theory of conviction narratives, we construct a Relative Sentiment Shift (RSS) index and use it as an instrumental variable that captures exogenous variations in economic policy uncertainty. Our empirical results suggest that an increase in economic policy uncertainty induces recessionary pressures in the economy: reductions in production and employment, a sharp stock market downturn, and a constrained financial market.

Exploring the impact of investor sentiment on stock returns of petroleum companies

Based on the stock index of 20 internationally well-known petroleum companies from 27 February, 2001 to 3 July, 2018, we use the binomial probability distribution model to build a daily investor sentiment endurance index to explore the impact of investor sentiment on stock returns of petroleum companies. The results show that, first, the investor sentiment endurance index can effectively predict the stock returns of petroleum companies, and the predictive power will be weakened over time. Second, after considering the impact of macroeconomic environment, the sentiment effect remains significant across all the time horizons. Meanwhile, the sentiment effect appears more stronger in the period of economic expansion and in stock market downturns of oil and gas company.

Diversification and Financialization in Commodity Markets: Evidence from Commodity Trading Advisors

This paper provides new and integrated evidence on the causes and consequences of commodity financialization from the perspective of diversification. First, based on a large sample of commodity trading advisors, we find that financial investment in commodity markets is related to the diversification benefits against stock market downturns. Second, the aggregate financial investment positively predicts future commodity-stock return correlation. Finally, using terrorist attacks as shocks to diversification need, we present causal evidence that diversification-motivated investment in commodity markets increases the commodity-stock market comovement. Overall, our findings reveal the economic link between diversification benefits, commodity financialization, and the commodity-stock market comovement.

Exploring the impact of strategic emphasis on advertising versus R&D during stock market downturns and upturns

A strategic emphasis on value appropriation to value creation framework has emerged as a growing area of research. However, whether such emphasis is effective in periods of different market trends remains an unexplored area of research. Among 287 firms in 17 industries listed on the New York Stock Exchange between 1980 and 2010, the authors found that strategic emphasis on advertising significantly decreases a firm's systematic risk when the stock market is experiencing a downturn (i.e., shielding stock returns in market downturns). Similarly, strategic emphasis on advertising significantly increases a firm's systematic risk when the market moves upwards (i.e., stimulating stock returns during market upturns). These results highlight that a strategic emphasis on value appropriation to value creation helps investor confidence recover during dark times and boosts it during good ones.

Cross-Country Securities Enforcement as An Example of Pro-Cyclical Regulation

The procyclicality hypothesis predicts that after a stock market downturn, regulatory initiatives and therefore investor protections increase. Unlike the relevant literature which focuses on new legislation, we focus on the enforcement of securities law. Our work is consistent with the idea of crisis-driven regulation as we show that following the global financial crisis, there was an increase in settlements, total payments and number of parties sanctioned, suggesting more enforcement activity. We are the first study to examine securities regulatory enforcement across countries including Canada, the United Kingdom and the United States and to conclude that there is cross-country support for the pro-cyclicality hypothesis.

The cross-section and time-series effects of individual stock sentiment on stock prices

ABSTRACTIn this article, we construct an individual stock sentiment index by using the principal component analysis method. We empirically study the cross-section and time-series effects of investor sentiment on the stock prices based on the panel data model with dummy variable. The results indicate that individual stock sentiment has greater impact on small-firm stock prices than big-firm stock prices, which presents obvious cross-section effect. Moreover, individual stock sentiment leads to much sharper fluctuations of stock prices in the stock market downturn than in the stock market expansion, which shows obvious time-series effect. Specifically, the individual stock sentiment has the greatest impact on small-firm stock prices under the stock market downturn, exerting significant dual asymmetric effect. Our results are helpful to understanding the micro-mechanism of sentiment effect.

A NEW TIME-DEPENDENT TRADING STRATEGY FOR SECURITIZED REAL ESTATE AND EQUITY INDICES

The “buy-and-hold” strategy based on the EMH has been adopted by many investors for long. However, the global financial crisis in 2008 caused more doubt to be cast on EMH. Therefore, many scholars have attempted to create a trading strategy which can outperform the “buy-and-hold” strategy. In this study, we use the Shiryaev-Zhou index to derive a new generalized time-dependent strategy of which the moving-window size can be changed to see how the moving-window size affects the resulting profit of our strategy. We test our strategy on the securitized real estate and general equity indices of six economies, and find the optimal moving-window size for our strategy on each stock index. The results show that when the optimal moving-window size is used, our strategy outperforms the “buy-and-hold” strategy for most cases. Furthermore, during stock market downturns, it’s advisable to adopt our strategy, preferably with larger moving-window sizes, to prevent losses when the stock prices fall rapidly. However, during long periods of booms, it’s better to adhere to the “buy-and-hold” strategy. This implies that we should switch strategies when market fundamentals changes significantly. Property practitioners can also apply this strategy for a better portfolio management to increase their profit.

Inoculation messages as a preemptive financial crisis communication strategy with inexperienced investors

ABSTRACTThis study focuses on the problem of collapsed ‘stay in the market’ (SIM) beliefs during financial crises. More specifically, the goal of this investigation was to ascertain whether or not inoculation messages are a viable preemptive crisis communication strategy to protect the SIM beliefs of inexperienced investors amidst a major stock market downturn. Inoculation messages were compared to both supportive messages and no-message controls to determine their effectiveness in protecting SIM beliefs. Additionally, the impact of inoculation messages on beliefs in the absence of a crisis and the impact of crisis message modality (i.e. video versus print) on inoculation-generated resistance were explored. A between-subjects factorial design (3 × 2 plus one additional condition) was designed to explore three hypotheses and two research questions. Results indicate that inoculation messages can serve as a viable preemptive financial crisis communication strategy and that inoculation messages did not harm SIM beliefs in the absence of a crisis.

Forecasting quality of professionals: Does affiliation matter?

Abstract Economists fulfilling a public mission – namely academics, Fed and government employees – demonstrate a tendency towards being pessimistic, whereas bankers in general are overly optimistic about future stock market developments. We show that these characteristics are of particular relevance and statistically significant during economic recessions and stock market downturns. Whilst investment bankers have always shown a tendency towards being optimistic, other affiliations are increasingly following their footsteps and most dominantly so for short-term forecasts. Especially during the most recent crises, their expectations of fast rebounds remained largely unsatisfied, questioning the applicability of economists’ forecasts as we move forward.

CONTAGIOUS EFFECTS OF OIL PRICES ON ASIAN STOCK MARKETS’ BEHAVIOUR

The main objective of this study is to examine the stock markets’ shock due to the effect of the price of oil in the East Asia Region. Particularly, this study examines if there is stock market interdependence during global oil price shocks (sudden changes) for a sample of five total oil importers (the Philippines, Hong Kong SAR, Taiwan, South Korea, and Japan), four net oil importers (Indonesia, Singapore, Thailand, and China), and one net oil exporter (Malaysia) between 1999 and 2014. From the result, an oil price change is collectively found to have a small but significant positive impact on the stock markets, in particular where a sudden decrease in oil prices tends to cause a stock market downturn and volatility. The world economy’s spending, financial investments in oil futures and foreign investment by oil rich nations are some underlying motives for inducing this oil-stock positive relation. The same direction of time-varying conditional correlations is found across East Asian stock markets during negative oil price shocks. The integration among East Asian stock markets is inducing the oil shock contagion to be transmitted from direct oil-affected countries (South Korea, Hong Kong, and Singapore) to non-direct oil affected countries’ (Japan and Taiwan) stock markets. In spite of a long practiced ASEAN+3 macroeconomics surveillance process and Early Warning System (EWS) which can be customized for stock markets to prevent or detect the oil risk, hedging against initial oil-affected stock markets and a stronger influence by the East Asian countries in the global world of oil and capital investment are strongly suggested.Keywords: oil price; capital market integration; stock market behaviour

The Role of Equity Funds in the Financial Crisis Propagation*

The early stage of the recent ?nancial crisis was marked by large value losses for bank stocks. This paper identi?es the equity funds most affected by this valuation shock and examines its consequences for the non-?financial stocks owned by the respective funds. We find that (i) ownership links to these ?distressed equity funds? lead to large underperformance of the most exposed non-fi?nancial stocks, and in aggregate this contributes an additional 10.9% to the overall stock market downturn; (ii) distressed ?fire sales and the associated price discounts are concentrated among those exposed stocks which perform relatively well; and (iii) stocks with higher fund ownership generally performed much better throughout the crisis.

An Empirical Examination of the Performance of Commodity Mutual Funds

The use of commodities to hedge inflation risk and diversify portfolios is generally thought to be an important consideration for portfolio management. Direct investment in commodities or commodity derivatives requires that investors have significant assets and/or expertise in these commodities or their respective derivatives markets. As an alternative to direct investment, investors in recent years have increasingly resorted to the use of commodity-based mutual funds. In this article we evaluate the performance, persistence, market timing, and selectivity of four categories of mutual funds whose returns are based on commodity prices. Our period of analysis begins with each fund’s inception and ends in December of 2012. Our results indicate that these funds have not been able to create positive alphas for their investors, have negative or insignificant performance persistence, and have no market timing ability. Some of the categories of funds, however, do exhibit some selectivity. We did find that when these commodity-based funds’ performance was evaluated during specific time periods of market downturns (e.g., the 2000 stock market downturn and the financial crisis that began in late 2007), their performance was significantly positive, which indicates that these funds provide a good hedge during bear markets/financial crises.

Forecasting Quality of Professionals: Does Affiliation Matter?

Affiliations fulfilling a public mission – namely academics, Fed and government employees – demonstrate a tendency towards being pessimistic, whereas bankers in general are overly optimistic about future stock market developments. We show that these characteristics are of particular relevance and statistically significant during economic recessions and stock market downturns. Whilst investment bankers have always shown a tendency towards being optimistic, other affiliations are increasingly following their footsteps and most dominantly so for short-term forecasts. Especially during the most recent crises did their expectations of fast rebounds remain largely unsatisfied, questioning the applicability of economists’ forecasts as we move forward.

Commodity Mutual Funds - Do They Add Value?

The use of commodities to hedge inflation risk and diversify portfolios is generally considered to be an important consideration for portfolio management. Direct investment in commodities or commodity derivatives requires that investors have significant assets and/or expertise in these commodities or their respective derivatives markets. As an alternative to direct investment, investors in recent years have increasingly resorted to the use of commodity based mutual funds. At issue is the question of whether or not these funds are delivering the benefits investors expect. In this paper we evaluate the performance, persistence, market timing and selectivity of four categories of mutual funds whose returns are based on commodity prices over the time period from each fund’s inception through December, 2012. Our results indicate that these funds have not been able to create positive alphas for their investors; have negative or insignificant performance persistence; and have no market timing ability. Some of the categories of funds, however do exhibit some selectivity. We did find that when these commodity based funds’ performance was evaluated during specific time periods of market downturns (e.g., the 2000 stock market downturn and the 2007 financial crisis), their performance was significantly positive which indicates that these funds provide a good hedge during bear markets/financial crises. JEL Classification: G12, G20, G23.

The asymmetric effects of investor sentiment and monetary policy on stock prices

We examine the impact of investor sentiment and monetary policy on the stock prices under different market states based on the Markov-switching vector autoregression (MS-VAR) model. The results show that the sentiment shocks, more than monetary policy shocks, lead to not only much larger fluctuations of stock prices but also much longer duration in the stock market downturn than in the stock market expansion, which shows obvious asymmetric effect. Moreover, the responses of stock prices to the sentiment shocks present an immediate effect, while the responses of stock prices to the monetary policy shocks show one-period lag effect.

Threshold Effects in the Relationships of REITs and Other Financial Securities in Developed Countries

We use a Panel Smooth Transition Regression model (PSTR) to investigate the nonlinear dynamic relationship between financial variables and REITs 1 of Japan and U.S with 3-month interest rate change as threshold variable. We discuss the relationship between explained variable of REITs return and explanatory variables (10 year bond interest rate, real estate return and stock return) within two regimes. Empirical results show that the transition function is an exponential type with region one, and two regimes. In regime 1, the relationships between REITs return and two explanatory variables (10-year bond interest rate change and real estate return) are significantly positive. The relationship between REITs return and stock return is significantly negative. In regime 2, the relationships between REITs return and two explanatory variables (real estate return and stock return) are significantly positive. REITs act as hedgy against stock market downturn when the magnitude of 3-month interest rate reduces greater than 0.9886%. In the low interest rate change regime, the REITs behave more like fix income and real estate than risky stock. In the high interest rate change regime, REITs behave more like stock and real estate than fix income.

Cross-correlation asymmetries and causal relationships between stock and market risk.

We study historical correlations and lead-lag relationships between individual stock risk (volatility of daily stock returns) and market risk (volatility of daily returns of a market-representative portfolio) in the US stock market. We consider the cross-correlation functions averaged over all stocks, using 71 stock prices from the Standard & Poor's 500 index for 1994–2013. We focus on the behavior of the cross-correlations at the times of financial crises with significant jumps of market volatility. The observed historical dynamics showed that the dependence between the risks was almost linear during the US stock market downturn of 2002 and after the US housing bubble in 2007, remaining at that level until 2013. Moreover, the averaged cross-correlation function often had an asymmetric shape with respect to zero lag in the periods of high correlation. We develop the analysis by the application of the linear response formalism to study underlying causal relations. The calculated response functions suggest the presence of characteristic regimes near financial crashes, when the volatility of an individual stock follows the market volatility and vice versa.

Macroeconomic Experiences and Risk Taking of Euro Area Households

This paper studies to what extent the experiences of households shape their willingness to take financial risks. It follows the methodology of Malmendier and Nagel (2011) and applies it to a novel data set on household finances covering euro area households. We show that experienced stock market returns matter in a statistically significant and economically substantial fashion: better experiences increase the financial risk households are willing to take as well as stock market participation along the intensive and the extensive margin. We find that more distant experiences receive a somewhat lower (but still substantial) weight than the corresponding findings suggest for the United States. Furthermore, there are additional effects stemming from the experience of extreme stock market downturns. Households in countries that witnessed a particularly severe 2008 stock market crash give substantially more weight to the most recent experience, suggesting that in these countries an even more pronounced underinvestment in the stock market should be expected in the years to come. The evidence highlights the relevance of personal experiences for household behaviour.

Did the Recent Financial Crisis Impact Integration between the Real Estate and Stock Markets?

We examine linkages between the real estate market and the stock market before and after the delisting of Lehman Brothers to determine if the recent financial crisis had an effect on the degree of integration between them. Using Granger causality tests, vector autoregression (VAR) models, and state space models, we find that real estate returns subsequently influence stock market returns, a unique result when compared to past financial crises, but consistent with recent findings of increased systematic risk in real estate investment trusts (REITs). We also find that some estimated transaction-based geographic/property type indices were less integrated with the stock market, which indicates that pure property indices may provide better portfolio diversification in the event of a real estate-related stock market downturn. These tests were made possible through the employment of a new daily transaction-based commercial real estate return series.