Stock Return Volatility Research Articles

Sectoral Corporate Profits and Long‐Run Stock Return Volatility in the United States: A GARCH‐MIDAS Approach

ABSTRACTThis study aims to examine the usefulness of corporate profits in predicting the return volatility of sectoral stocks in the United States. We use a GARCH‐MIDAS approach to keep the datasets in their original frequencies. The results show a consistently positive slope coefficient across various sectoral stocks. This implies that higher profits lead to increased trading of stocks and, subsequently, a higher volatility in the long run than usual. Furthermore, the analysis also extends to predictability beyond the in‐sample. We find strong evidence that corporate profits can predict the out‐of‐sample long‐run return volatility of sectoral stocks in the United States. These findings are significant for investors and portfolio managers.

Testing the waters meetings, retail trading, and capital market frictions

AbstractPre-IPO firms may “test the waters” by meeting privately with investors in order to allow access to management and more time to make an investment decision. However, these meetings have the potential to undermine the SEC’s objectives of protecting investors and supporting market efficiency by allowing institutional investors, but not retail investors, private access to management. We find lower retail trading after IPOs of firms that held testing-the-waters meetings, consistent with the meetings reducing retail investor participation. Moreover, retail investors that still participate in the market in the presence of testing-the-waters meetings have inferior investment outcomes. Nonetheless, we find no evidence of lower overall market liquidity or slower price discovery following testing-the-waters meetings. In fact, we observe a reduction in stock return volatility. Overall our evidence suggests that, while testing-the-waters meetings may harm retail investors, there does not appear to be a negative impact on overall market function.

An ETF-based measure of stock price fragility

Equity mutual fund flows are commonly employed to measure stock price fragility - a stock’s exposure to non-fundamental demand risk. However, this approach may be biased by confounding fundamental information, potentially underestimating risk exposure. We propose an alternative method that uses the primary market data of exchange-traded funds (ETFs). This approach overcomes many limitations of mutual fund data, incorporates the influence of a broader set of investor demand, and strongly predicts stock return volatility and return comovement. Our study highlights the significant role that the arbitrage trading activity of ETFs play in signaling non-fundamental demand shocks.

The Memory in Return Volatility: An Analysis of Mutual Fund Returns

ABSTRACTThis paper examines long memory in the return volatility in the cross‐section of U.S. mutual funds. Our results provide evidence of this phenomenon. Through univariate analysis, we find that the long memory in mutual fund return volatility is more pronounced than in stock return volatility. Additionally, the long memory estimate is negatively related to expected fund returns. Holding a long position in shorter‐term memory funds and a short position in longer‐term memory funds generates significant excess returns of 0.26% per month for value‐weighted portfolios.

Valuation and Returns on Stock Return Volatility

ABSTRACT This paper provides an accounting-based valuation model that predicts that cross-sectional variation in firm-level returns to investments in both stock and stock return volatility are related to cross-sectional variation in firm-level fundamentals. The model predicts that expected stock returns have a positive quadratic relation with stock return variance and a negative quadratic relation with gains to trading in stock return variance. Consistent with these predictions, firms with high model-implied expected stock returns have high future stock return variance, and the relation is roughly quadratic. In contrast, firms with high expected stock returns have low future returns to trading in stock return variance through option contracts because these firms have high option-implied variance relative to future realized variance, i.e., low variance risk premia (VRP). The study provides a framework for using fundamentals for trading in individual stocks and options. JEL Classifications: G12; G14; G17.

Short selling and firms’ long-term stock return volatility: Evidence from Chinese concept stocks in Hong Kong

This paper examines the impact of short selling on the long-term volatility of firms' stock returns, highlighting the moderating effect of corporate governance quality. We analyze a sample of Chinese concept stocks listed in Hong Kong from 2015 to 2023, separating stock volatility into short- and long-term components with a GARCH-MIDAS model and differentiating between noisy and informed short selling. We provide evidence through portfolio and regression analyses that short selling increases stock return volatility, with the most significant impact observed in the long-term component, fueled in part by noisy short selling. However, this effect can be mitigated by managers who invest in improving their firms’ corporate governance quality. Implications of our findings for both research and practical applications are discussed.

Nexus Between Stock Return and Market Volatility in Indian Perspective

This research seeks to explore the volatility patterns for the SENSEX index to figure out the characteristics of volatility in Indian stock trading and to investigate the relationship between returns and volatility of the Indian market for the last ten years. The research adds to the existing knowledge about stock market fluctuations, their implications for investors, and their impact on developing the country's economy. The study involves using daily returns data from BSE SENSEX from 01 Jan 2014 to 31 Dec 2023. Daily closing prices are obtained from the official website of BSE, and returns are calculated based on these prices. The Dickey-Fuller and Phillips-perron are taken to make the time series static. ARCH, GARCH, and GARCH-M tests are utilized to capture volatility clustering, return and volatility relationship. The results reveal that Fluctuations in the Indian stock market, particularly shown in the SENSEX index of the BSE, were highest in the year 2020. Findings suggest that GARCH-M does not show any relation between expected returns and market volatility. The risk-premium parameter is positive but statistically insignificant. If you want to hedge against risk, the risk premium is not very high. It means that taking risks does not give you more returns. Durbin Watson's value of 1.981401 further supports the model's suitability.Copyright© 2024 The Author(s). This article is distributed under the terms of the license CC-BY 4.0., which permits any further distribution in any medium, provided the original work is properly cited.

Mapping Risk–Return Linkages and Volatility Spillover in BRICS Stock Markets through the Lens of Linear and Non-Linear GARCH Models

This paper explores the influence of the risk–return relationship and volatility spillover on stock market returns of emerging economies, with a particular focus on the BRICS countries. This research is undertaken in a context where discussions on de-dollarization and the expansion of BRICS membership are gaining momentum, making it a novel and distinct exercise compared to prior studies. Utilizing econometric techniques to investigate daily market returns from 1 April 2008 to 31 March 2023, a period that witnessed major events like the global financial crisis, the COVID-19 pandemic, and the Russia–Ukraine conflict, linear and non-linear models like ARCH, GARCH, GARCH-M, EGARCH, and TGARCH, are employed to assess stock return volatility behaviour, assuming a Gaussian distribution of error terms. The diagnostic test confirms that the distribution is non-normal, stationary, and heteroscedastic. The key findings indicate a lack of the risk–return relationship across all BRICS stock markets, except for South Africa; a more pronounced effect of unpleasant news over pleasant news; a slow mean-reverting process in volatility; the EGARCH model is the best fit model as evidenced by a higher log likelihood and lower Akaike information criterion and Schwardz information criterion parameters; and finally, the presence of significant bidirectional and unidirectional spillover effects in the majority of instances. These findings are valuable for investors, regulators, and policymakers in enhancing returns and mitigating risk through portfolio diversification and informed decision making.

Realized Stock Market Volatility of the United States: The Role of Employee Sentiment

Using data for the United States (US) stock market covering the sample period from 2008:06 to 2020:12, we study the incremental predictive value of employee sentiment for the realized volatility of stock returns. In doing so, we control four different measures of investor sentiment and various macroeconomic and financial factors and uncertainties. We report results for several combinations of forecast horizons and estimation windows and find that employee sentiment contributes to forecast accuracy for several combinations.

Measuring firm-level manager risk perception

Using textual analysis of Chinese listed firms’ filings, we construct a new firm-level measure of manager risk perception. The measure identifies the extent of risk perceived by managers. We validate our measure by showing that it varies over time and across industries, correlates with aggregate economic policy uncertainty and firm-level stock return volatility, and relates cross-sectionally with firm characteristics. Managers with higher risk perception leads to a lower level of firm investment.

The Dissimilar Market Volatility in Neighboring Financial Markets: An Empirical Study Using A Multivariate Garch Model

ABSTRACT: Conventional knowledge of market volatility represents that two proximate financial markets operated in the same country would display a similar pattern in their time-varying volatility. In this paper, we propose that the heterogeneity in financial policy orientation of stock markets creates significant inter-market differences in terms of the volatility of stock returns, even if they are culturally and geographically linked to each other. For the empirical investigation of our proposition, the volatility data from two major stock exchanges in the Middle East, the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM) are used. Both the ADX and DFM stock exchanges operate in the same country, the United Arab Emirates (UAE). The ADX is based in Abu Dhabi, the administrative capital, while the DFM is based in Dubai, the commercial and business hub of the UAE. They were both established in the year 2000, and their operational headquarters are located about 150 km from each other. This paper uses a multivariate GARCH model, in particular a diagonal VECH GARCH (1, 1) model to estimate volatility measures for stock returns between ADX-listed and DFM-listed stocks. The paper finds that the stock returns are significantly less volatile in the ADX compared to those in the DFM suggesting that the volatility transmission is incomplete between these two neighboring financial markets. This difference in volatility can potentially be attributed to the relatively conservative financial policies adopted by the oil-rich emirate of Abu Dhabi compared to the more market-oriented economic policies of Dubai, the country’s financial and commercial hub. Our findings have considerable implications for portfolio managers in ascertaining risk premiums when allocating investments across the two stock exchanges. For instance, this disparity in volatility should be taken into account by investors and policymakers when designing risk management strategies because it suggests that investors in the DFM may be exposed to higher levels of risk and uncertainty compared to their counterparts in the ADX. Investors operating in the DFM may require more robust risk management strategies, such as asset diversification and hedging, compared to their ASX counterparts.

Trading Volume, Intraday and Overnight Volatility of Stock Returns in the Nigerian Stock Exchange

Trading Volume, Intraday and Overnight Volatility of Stock Returns in the Nigerian Stock Exchange

Firms’ cost structure and stock return volatility

PurposeThis paper proposes a framework to identify a pattern in the relationship between firms’ cost structure (i.e. fixed versus variable) and their volatility in stock returns.Design/methodology/approachOur empirical analysis is based on a panel data regression where we use an extended sample period and a time-series regression-based elasticity measure of operating leverage.FindingsWe document significantly higher systematic risk among firms with large fixed costs, a conclusion which confirms theoretical predictions of earlier studies. In new findings, we document high firm-specific risk and high stock return volatility among firms with a fixed cost structure.Originality/valueThe paper fills a gap in the literature by examining the effect of cost structure using various operating leverage measures and other control measures for firm characteristics on idiosyncratic risk. Studies that seek to explain firms’ systematic risks are numerous; conversely, there are relatively fewer studies on the determinants of firms’ specific risks.

Inflation and stock return volatility in selected African countries: A GARCH-MIDAS approach

Amidst persistent inflationary pressures in Africa and central banks raising rates to counter inflation, leading to a shift from stocks to alternative assets and impacting stock return volatility, this paper investigates the influence of inflation on stock return volatility in five African countries using the GARCH-MIDAS approach, using mixed data of daily and monthly frequencies. We observe that inflation is important for stock return volatility, as higher inflation increases volatility and reduces returns. Our results provide a better understanding of the dynamics of stock market volatility while accounting for the role of inflation, using the natural frequencies of the variables. Our findings encourage monetary authorities to communicate their inflation expectations to the market participants/investors to moderate negative stock return volatility.

Impact of foreign ownership on stock return volatility of financial firms in Vietnam

The paper investigates the impact of foreign ownership on the stock return volatility of financial firms in Vietnam. Applying panel regression models on a year-end research sample of 23 banks and financial firms listed on stock exchanges in Vietnam from 2017 to 2022, the study assures the negative relationship between foreign ownership and the stock return volatility, implying that increasing foreign ownership reduces the volatility of stock returns of financial firms. Our study’s novelty is reflected in following aspects. First, our study, examining about the foreign ownership's impact on stock returns’ volatility in emerging stock market conditions, will enrich this research field by contributing additional empirical evidence to the field through a concrete and well-designed research. Additonally, our research findings not only provide useful information about the volatility of those influential shares in mentioned industries coupled with its determinants but also support investors and policymakers in making investment decisions informedly as well as reviewing suitable regulations for investors and capitals from foreign countries, which is a critical aspect in helping Vietnam's stock market to expand more steadily and sustainably.

Disaster learning and aggregate investment

We extend a production-based asset pricing model by introducing learning about disaster risk. The information is not perfect, and Bayesian learning is adopted to update beliefs about the likelihood of rare disasters. We show that disaster learning reconciles key stylized facts about macroeconomic quantities and financial markets. For macroeconomic quantities, during the crisis, the decline in aggregate investments is much worse than that of output, whereas the decline in aggregate consumption is moderate relative to that of output. Additionally, the model endogenously features lower consumption volatility and higher investment volatility than that of output. For financial markets, belief updating over a rare disaster produces a higher equity premium, lower risk-free rate, and more volatile stock returns. Finally, we show that jump intensity uncertainty accounts for a substantial fraction of the total welfare cost of rare disasters.

ESG and stock return volatility: Evidence from industry analysis in Europe

This study investigates the impact of environmental, social and governance fac- tors on stock return volatility in different European industries. Employing a sample of European companies belonging to different industries (Basic Materials, Consumer Cyclicals, Consumer Non-Cyclicals, Energy, Financials, Healthcare, Industrials, Real Estate, Technol- ogy and Utilities), I tested if ESG performance and ESG controversies influence volatility. Additionally, the study analyses the impact of the individual Environmental, Social and Governance pillars of ESG to determine through which component ESG affects volatility. Research findings showed that ESG factors impact stock return volatility across industries. The findings of the study contribute to and enrich the academic literature in this field through an industry analysis

Faktor Yang Mempengaruhi Volatilitas Return Saham di Indonesia: Perusahaan LQ45

This article is an empirical article with purpose of providing evidence regarding to factors influence volatility stock return such as dividend policy, leverage and investor sentiment. This study consists of 145 observation year-firm of LQ45 corporate on the Indonesia Stock Exchange for the 2017-2021 period as a research samples based on the purposive sampling method. This study also uses secondary data from company financial report and multiple linear regression analysis as an analytical tool. The result of analysis show that dividend policy doesn’t play a role in influencing stock returns volatility. While, leverage and investor sentiment can positively influence volatility stock returns. This research can be a guide for capital market investors in estimating stock return volatility by considering macroeconomic factors such as dividend policy and leverage as well as through investor sentiment.

Does climate policy uncertainty predict renewable energy stocks? A quantile-based (a)symmetric causality analysis

The identification of factors influencing the renewable energy stock market has recently received much attention from scholars. While the implications of economic policy uncertainty on renewable energy stock markets have been extensively studied in recent literature, less attention has been paid to climate policy uncertainty. This study adds to the existing body of knowledge by investigating whether the U.S. climate policy uncertainty predicts the return and volatility of five NASDAQ OMX Green Economy indices (fuel cell, wind, solar, developer/operator, and geothermal). The analysis is based on the nonparametric causality-in-quantile test and employs data from November 2010 to August 2022. The findings provide strong evidence of heterogeneous distributional predictability of climate policy uncertainty on the return and volatility of renewable energy stocks, which depends on the renewable energy sector and the market condition. More specifically, climate policy uncertainty does not cause stock returns during extreme downward and/or upward renewable energy market conditions. Additionally, uncertainty cannot predict volatility during the turmoil episodes that occurred in the renewable energy stock market. Further in-depth analysis considering the asymmetry reveals that a decrease (increase) in climate policy uncertainty improves the prediction of renewable energy stock returns (volatility) instead of a decrease (increase). These findings still hold when using a parametric causality-in-quantile test. The findings underscore the critical role of climate policy transparency and sector-specific strategies in reducing uncertainty and encouraging long-term investments in the renewable energy sector.

Does reform policy of municipal bonds raise firm risk? A quasi-natural experiment from China

Does reform policy of municipal bonds increase firm risk? We address this question by examining the effects of the ‘Local Issuance and Local Repayment’ (LILR) reform policy launched by the Chinese central government on firm stock return volatility between 2009 and 2019. We find that the LILR reform policy increases the volatility of firms' stock returns. Possible explanations for the effect of reform policy are that it exacerbates firms' financial constraints and reduces the effectiveness of fiscal policy. Consistently, we find that the aggravating effect of reform policy is more pronounced in regions characterized by worse financial environment, worse fiscal condition, firms in growth and decline stages and in downstream and service and support industries. We provide empirical evidence from a Chinese quasi-natural experiment to address the long-term economic development issues of local government debts.