Variation In Stock Returns Research Articles

In Search of a Factor Model for Optionable Stocks

We propose the first factor model that explains cross-sectional variation in optionable stock returns. Our model includes new factors based on option-implied volatility minus realized volatility, the call minus put implied volatility spread, and the difference between changes in call and put implied volatilities. The model outperforms previously-proposed factor models at explaining the performance of portfolios of optionable stocks formed by sorting on other option-based predictors, as well as other well-known stock return predictors. The predictive power of the option-based factors is driven by informed trading and their exposures to aggregate volatility and financial uncertainty.

Risk appetite and oil prices

We demonstrate that oil prices and their volatility are no longer determined solely by real economic shocks to supply of and demand for oil, but are also driven by shocks originating in the economic uncertainty and risk appetite of investors that prevail in the equity market. The contribution of the latter factor has become particularly remarkable since the mid-2000s. To establish these results, we dismantle the squared VIX index, determined in the S&P 500 options market, into the conditional variance in stock returns (to proxy for economic uncertainty) and the equity variance risk premium (to proxy for risk appetite). Using threshold-GARCH, structural vector auto regression and causality models, we provide evidence about the link between risk appetite, oil price returns and volatility. Furthermore, investors' appetite for risk drives changes in the OVX, which measures perceptions about future oil volatility, but not vice versa. Our results provide a better understanding of the relationship between oil, the VIX and its two proposed components. In particular, we show that changes in the risk appetite of investors are an important determinant not only for the price of equities but also for that of the most important energy resource – oil.

Sentiment’s effect on the variance of stock returns

ABSTRACT This study examines the effect that sentiment has on the conditional variance of stock returns. We find that the effect is asymmetric and differs depending upon the state of the economy. We also examine whether the effect is time-varying. To capture time-varying effects, we use rolling 10-year windows of daily data in a GARCH (1,1) model that allows positive and negative sentiment to have an asymmetric effect on the conditional variance of stock returns. We find that the negative sentiment has a positive effect on the conditional variance but dissipates after 1970.

Do Fama–French common risk-factor portfolio investors herd on a daily basis? Implications for common risk-factor regressions

Purpose The purpose of this paper is to examine whether Fama–French common risk-factor portfolio investors herd on a daily basis for five developed markets, namely, Europe, Japan, Asia Pacific ex Japan, North America and Globe. Design/methodology/approach To examine the herd behavior of common risk-factor portfolio investors, this paper utilizes the cross-sectional absolute deviations (CSAD) methodology, covering a daily data sampling period of July 1990 to January 2019 from Kenneth R. French-Data Library. CSAD driven by fundamental and non-fundamental information is assessed using Fama–French five-factor model. Findings The results do not provide evidence for herding under normal market conditions, either when reacting to fundamental information or non-fundamental information, for any region under consideration. However, Fama–French common risk-factor portfolio investors mimic the underlying risk factors in returns related to size and book-to-market value, size and operating profitability, size and investment and size and momentum of the equity stocks in European and Japanese markets during crisis period. Also, no considerable evidence is found for herding (on fundamental information) under crisis and up-market conditions except for Japan. Ancillary findings are discussed under conclusion. Research limitations/implications Further research on new risk factors explaining stock return variation may help improve the model performance. The performance can be improved by adding new risk factors that are free from behavioral bias but significant in explaining common stock return variation. Also, it is necessary to revisit the existing common risk factors in order to understand behavioral aspects that may affect cost of capital calculations (e.g. pricing errors) and valuation of investment portfolios. Originality/value This is the first paper that examines the herd behavior (fundamental and non-fundamental) of Fama–French common risk-factor investors using five-factor model.

The impact of corporate reporting readability on informational efficiency

Purpose Informational efficiency is a fundamental aspect of capital market quality, and therefore, regulators, managers and practitioners attempt to find ways to improve the informational efficiency. Since prior studies primarily focus on the numerical attributes of corporate reporting, it is not yet adequately known whether or not the linguistic attributes of corporate reporting affect informational efficiency. Thus, the purpose of this paper is to examine whether corporate reporting readability (readability), as an important linguistic attribute of corporate reporting, affects informational efficiency. Design/methodology/approach To measure readability, this paper uses Fog index. Moreover, to measure informational efficiency, the paper uses stock return variance ratios. Findings The findings reveal a positive and significant association between readability and informational efficiency. Moreover, the findings show that the association of readability and informational efficiency is stronger for firms facing higher information asymmetry. The findings further document the spillover effect of readability, in the sense that the readability of economically related public firms affects a firm’s informational efficiency. Overall, the results support the arguments that readability enhances informational efficiency. Originality/value This study contributes to the literature by providing evidence on the internalities and externalities of readability in the context of informational efficiency. Thus, the study will be of interest to regulators, managers and practitioners, especially in emerging capital markets, who tend to find practical and easy ways to improve informational efficiency.

Expected stock return and mixed frequency variance risk premium data

Motivated by the research of the variance risk premium (VRP) and MIDAS model, we employ the VRP with different maturities and the ADL-MIDAS regression model to forecast the expected stock return in Standard & Poor 500 market. The VRP is defined as the difference between the realized variance and the implied variance of the options. By using Standard & Poor 500 index options, we provide the empirical tests of the forecasting performance provided by the VRP with different maturities to the expected stock returns in the Standard & Poor 500 stock index market. Based on the empirical results, we know the VRP with 1-month and 2-month maturities can provide the best out-of-sample forecast.

Pengaruh Economic Value Added, Profitabilitas, Leverage, dan Earning Per Share terhadap Return Saham Pada Perusahaan Oil dan Gas Periode 2011 -2016

This study aims to determine the economic value influence, profitability, leverage, and earnings per share on returns to oil amp; gas period 2011-2016 which is explained systematically about the facts and the nature of an object in the study then merges the variables associated with it with the presentation of secondary data from the financial statements of Oil and Gas companies in Indonesia, the population used in this study the Oil and Gas companies listed on the stock exchange in the period of 2011 to 2016. The samples used in this study were 8 Oil and Gas companies in Indonesia, using the purpose purpose sampling method to obtain representative samples that fit the criteria already confirmed. In this study, the data analysis method used is panel data (pooled data) which is a combination of data between times (time series) and data between individuals or spaces (cross section) in Oil and Gas companies in Indonesia. The results of the study show that Simultaneously or together the independent variables included in this study, namely EVA, ROI, ROA, ROE, DER and EPS affect the return of shares of oil and gas companies in Indonesia. This can be seen from the probability of the F-statistic of 0.00 being below the value of 0.05. Adjusted R square value in this model is 0.366 percent which means that the variation of stock returns which can be explained by the independent variables included in this model is 36.60 percent.

Google search and stock returns in emerging markets

The Fama-French model offers a framework explaining the stock return variability by capturing the size, value, profitability, and investment patterns of firms; but it fails in capturing the low average returns on small stocks. This article contributes to asset pricing models by investigating the role that the volume of Google search might play as augmented factor in explaining the stock returns. Through system-GMM estimations with the data in the period of 2009–2016 for 5-emerging markets (Indonesia, Malaysia, Philippines, Thailand, and Vietnam), we find that Fama-French model is not always effective. The increases in Google search volume appear to have significant negative impacts on stock returns in the case of Philippines, Thailand, and Vietnam. This suggests that investors might be more sensitive to bad news than good news in their investment decisions. Furthermore, our Google indicator is found to have an influence on the Fama-French factors in explaining the stock returns.

OPEN MARKET REPURCHASES AND STOCK PRICE INFORMATIVENESS: EVIDENCE FROM MALAYSIA STOCK MARKET

Abstract 
 The aim of research paper is to examine the effect of stock price informativeness, which is conveyed by stock prices, on firm’s open market repurchases (OMRs) activity. The finding of study is to provide evidence of presence of managerial learning whereby managers could use firm-specific stock return variation to buy back their shares via open market. Evidence is found in the subsample analysis where target sample is separated to two subsamples periods and test separately based on stock market performance. The finding of the 1st subsample (Q12008-Q42013) for OMRs activity indicates that variation of stock return and firm size significantly and positively explains OMRs activity. The finding of 1st subsample is robust in terms of random and fixed effect model. The finding implies that managers observed and learned information from firm-specific variation in stock return during financial crisis and recovery periods when performing open market repurchases.
 Keywords: Open market repurchase, managerial learning hypothesis, stock price informativeness, firm-specific return variation, informed trading.

Financial indicators, informational environment of emerging markets and stock returns

Purpose The purpose of this paper is to evaluate the influence of the informational environment on the relevance of accounting information in companies traded in stock exchanges of emerging markets. Design/methodology/approach For this purpose, the authors calculated indicators based on figures derived from the financial statements and variables that sought to capture the influence of the economic and institutional environment. The sample consisted of publicly traded companies from 20 countries classified as emerging by Standard & Poors. Macroeconomic information was obtained through the International Country Risk Guide database. The analysis period ranged from 2004 to 2013, excluding missing data, variables considered as outliers, besides the exclusion of data from companies that presented negative equity. Findings It was observed that the financial variables presented signs consistent with the literature, except for the price-to-book variable and the asset change variable. The inclusion of variables related to the accounting informational environment offered evidence that the more opaque the accounting environment in the country, the lesser the ability of the profits to portray the variations of stock returns. The variable that captured the adoption of international standards was consistent with expectations, i.e. the adoption of international standards would increase the quality of accounting information, showing a positive signal. Moreover, the variable aggressiveness of the earnings was statistically significant and negative, consistent with the literature. Research limitations/implications The variables earnings smoothing and aversion to losses did not show the expected behaviour though, highlighting the possible limitations of these proxies used to capture the opacity of the earnings. Originality/value When institutional moderators were included, it was observed that the adoption of the IFRS standards positively affected the relationship, which is more relevant when the accounting figures were under its aegis. Recently, countless nations’ transition to international accounting standards has been justified by the need to use high-quality reporting standards. The research sought to contribute to strengthen this dimension, presenting evidence that the dummy variable included to capture the adoption of international standards had a positive effect on the relationship.

Dynamic portfolio strategies under a fully correlated jump-diffusion process

This paper presents the first continuous-time model to feature a flexible dependence structure among jump intensity, stock variance, and stock returns. In particular, it addresses a gap in the financial portfolio optimization literature concerning the non-trivial correlation between stock return variance and the intensity of price jumps. The model permits closed-form representations for the optimal strategy and value functions in an expected utility theory setting. It also produces analytical expressions for the value function associated with relevant suboptimal strategies. Such an analytical setting allows for the first wealth-equivalent utility loss (WEL) analysis of the pitfalls of ignoring the aforementioned dependence. The model and results can be easily extended to the pair intensity-covariance in multi-assets. The WEL analysis is carried out for three different suboptimal classes: tailor-made incomplete markets, misspecifications in the parameters of the model, and time-independent (myopic) strategies. For the numerical section, we focus on the correlation between jump intensity and stock variance, which is assumed to be either zero or one in the existing literature. We demonstrate that simplistic assumptions like perfect dependence or independence could lead to wealth-equivalent losses of up to 61%. Similarly, a failure to hedge these variances and intensity drivers could cause losses of up to 95% (in particular, up to 60% due to the factors driving the dependence).

PENGARUH INVENTORY TURNOVER (ITO), DEBT TO EQUITY RATIO (DER), RETURN ON ASSET (ROA), EARNING PERSHARE (EPS), DAN PRICE EARNING RATIO (PER) TERHADAP RETURN SAHAM PADA PERUSAHAAN FOOD AND BEVERAGE YANG TERDAFTAR DI BURSA EFEK INDONESIA

This study aims to determine the effect of Inventory Turnover (ITO), Debt to Equity Ratio (DER), Return On Assets (ROA), Earning Per Share (EPS), Price Earning Ratio (PER) to Stock Returns on registered Food and Beverage Companies on the Indonesia Stock Exchange. The benefit of research is to provide information material to investors in making investment decisions. The number of companies to be sampled is 10 Food and Beverage Companies, namely: PT. Akasha Wira International Tbk (ADES), PT. Tiga Pilar Sejahtera Food Tbk (AISA), PT. Cahaya Kalbar Tbk (CEKA), PT. Multi Bintang Indonesia Tbk (MLBI), PT. Multi Bintang Indonesia Tbk (MLBI), PT. Sekar Laut Tbk (SKLT), PT. Ultrajaya Milk Industry and Trading Company Tbk (ULTJ), PT. Prashida Aneka Niaga Tbk (PSDN), PT. Indofood Sukses Makmur Tbk (INDF), PT. Delta Djakarta Tbk (DLTA), and PT. Mayora Indah Tbk (MYOR). In this study, secondary data is used, namely the Financial Report of Food and Beverage Companies listed on the Indonesia Stock Exchange for the period 2012-2016 which can be accessed via the internet. The data analysis method used is multiple regression analysis.
 Based on the results of the study, the regression equation was obtained as follows: Return = - 42,736 + 0,731 ITO + 13,582 DER + 3,306 ROA - 0,003 EPS + 3,203 PER + e showed that the ITO variable had a positive and not significant effect, the DER variable had a positive and insignificant effect. ROA variable has a positive and significant effect, EPS variable has a negative and not significant effect, and PER variable has a positive and significant effect on stock returns.
 ITO, DER, ROA, EPS and PER simultaneously influence the stock return of hospitality service companies. adjusted R2 value of 0.164. This means that 16.4 percent of variations in stock return variables can be explained by variations in ITO, DER, ROA, EPS and PER variables while the remaining 83.6 percent is explained by other variables outside the model.

Analysis of shares frequency components on daily value-at-risk in emerging and developed markets

Value-at-Risk was estimated using the technique of wavelet decomposition with the goal to analyze the frequency components’ impacts on variances of daily stock returns, and VaR forecasts. Daily returns of twenty-one shares of the Ibovespa and daily returns of twenty-two shares of the DJIA were used. The FIGARCH(1,d,1) model was applied to the reconstructed returns to model and establish the prediction of conditional variance, applying the rolling window technique. The Value-at-Risk was then estimated, and the results showed that the DJIA shares showed more efficient market behavior than those of Ibovespa. The differences in behavior induce to affirm that VaRs, used in the analysis of financial assets from different markets with different governance premises, should be estimated by series of returns reconstructed by aggregations of components of different frequencies. A set of back-testing was applied to confront the estimated VaRs, which demonstrated that the estimations of VaRs models are consistent.

PENGARUH DEBT TO EQUITY RATIO (DER), RETURN ON ASSET (ROA), EARNING PERSHARE (EPS), PRICE EARNING RATIO (PER) TERHADAP RETURN SAHAM PADA PERUSAHAAN JASA PERHOTELAN YANG TERDAFTAR DI BURSA EFEK INDONESIA

This study aims to determine the effect of Debt to Equity Ratio (DER), Return On Assets (ROA), Earning Per Share (EPS), Price Earning Ratio (PER) to Return of Stock at Hospitality Services Company listed on Indonesia Stock Exchange. The benefits of research is to provide information material to investors in making investment decisions. The number of companies to be sampled are 5 Hospitality Services Companies, namely: Bayu Buana Tbk (BAYU), Fast Food Indonesia Tbk (FAST), Grahamas Citrawisata Tbk (GMCW), Destination Tirta Nusantara Tbk (PDES), and Golden Eagle Energy Tbk SMMT). In this study used secondary data that is Financial Statements Hospitality Services Companies listed in Indonesia Stock Exchange 2010-2013 period that can be accessed via the internet. Method of data analysis used is multiple regression analysis (multiple regression analysis).
 Based on the result of research, the regression equation is obtained as follows: Return = 0,979 - 0,438 DER - 0,093 ROA + 0,002 EPS + 0,002 PER indicate that DER variable variable have negative and insignificant influence, ROA variable has negative and significant influence, EPS variable has positive and significant effect, and variable of PER have positive and insignificant effect to stock return. DER, ROA, EPS and PER simultaneously affect the stock return of hotel services company. value adjusted R2 of 0.909. This means that 90.9 percent of stock return variables can be explained by variations of DER, ROA, EPS and PER variables while the remaining 9.1 percent is explained by other variables outside the model.

INTERRELATIONS IN SAUDI STOCKS MARKET

This study asks about the existence of co-variances and correlations among variances in the Saudi stock returns and aims at knowing which stocks are the most closely related to other stocks. A sample of five stocks representing basic materials, banking, services, food and transport sectors and reflecting the main trends in the Saudi market were selected (SABIC, Al Rajhi, Etisalat, Almarai and Al Bahri respectively). Daily stock returns were collected during the period from 2011 to 2016, representing the life of the five-year plan. The authors used the MARCH-DVEC methodology to estimate the variances and correlations of stock return variances, considering the interactions of stock return variances. The results confirmed the existence of positive co-variances and correlations between stock returns. Al Rajhi, Sabic and Etisalat stock returns showed the largest co-variances and correlations. The general trend values of co-variances indicated positive growth except for Al Bahri. This study concluded that relations between Saudi stocks are stable over time, confirming the Saudi stocks market stability.

The role of the volatility index in asset pricing: The case of the Indian stock market

This study examines whether the volatility index, a proxy for aggregate volatility risk, can be used as an additional factor in the standard asset pricing model for the Indian stock market after controlling for well-documented risk factors. This study first examines the empirical performance of the capital asset pricing model, the Fama-French three-factor model and the Carhart four-factor model. On the basis of a GRS test, the Fama-French three-factor model is used as the baseline model to explore the role of the volatility index as an additional factor considered in the asset pricing model. The factor mimicking portfolio returns for the volatility index innovations is constructed and is included as an additional factor in the Fama-French three-factor model. The study provides strong evidence of size effects but relatively weak value-growth and momentum effect. Further, stock’s sensitivity to volatility index innovation is a priced risk factor during high volatility period, but not during low volatility period. Nevertheless, the addition of volatility risk factor leads to marginal improvements in the capacity for the model to explain the variation in stock returns. The results of this study will help financial analysts and corporate financial managers to evaluate the performance of professionally managed portfolios.

Are contingent convertibles going-concern capital?

Contingent convertibles (CoCos) are intended to either convert to new equity or be written down prior to failure while a bank is a going-concern. Yet, in the first actual test case, CoCos never converted before its bank failed. We develop a model that predicts that CoCos lead to less (more) extreme stock returns and have yields greater than (similar to) standard subordinated debt yields if investors do (do not) expect them to convert or be written down prior to failure. These predictions are tested using data on CoCos issued by European banks during 2011 to 2017. We find evidence that equity conversion CoCos reduce stock return variance and several other measures of downside risk, consistent with the perception that they are going-concern capital. However, we also provide event study evidence that recent regulatory actions reduced the CoCo–subordinated debt yield spread, which indicates a diminished investor belief that CoCos are going-concern capital.

Are Macroeconomic Factors Adequate Proxies for Systematic Influences in Stock Returns?

This paper investigates whether pre-specified macroeconomic factors can adequately proxy for the pervasive influences in stock returns, within the context of macroeconomic linear factor models motivated by the multifactor Arbitrage Pricing Theory (APT). Variation in stock returns can be attributed to systematic and idiosyncratic sources of variation. As idiosyncratic factors can be diversified away, systematic variation will remain and the only factors that will be relevant will be those representative of systematic influences. In this study, systematic influences are quantified by statistically derived factor scores which are then related to a set of carefully selected macroeconomic factors. The identification of macroeconomic factors that proxy for systematic influences in returns is a challenge in itself. Once identified, macroeconomic factors are found to be poor and unstable proxies for systematic influences. The use of a residual market factor, an often-applied solution the factor omission problem in linear factor models motivated by the APT, does not significantly improve the approximation of factor scores. Macroeconomic factors are unlikely to provide a complete representation of the return generating process. Researchers should recognize that macroeconomic linear factor models are likely to be underspecified, even if a residual market factor is included.

The Extended Fama-French Three Factor Model : Revisited

This paper is aimed to validate the four-factor asset pricing model as an improvement towards the standard Fama-French three-factor model. Using U.S. monthly stock returns data from period January 1963 to December 2010 , we construct 25 portfolios and t he four-factor model includes the market factor (beta), the size factor (SMB), the book-to-market factor (HML), and the ‘momentum' factor (MOM). Similar time series method as in Fama and French (1993) are employed to elaborate the three-factor model and the four-factor model regression. Our findings show that the four-factor model to some extent has significant capability in explaining the variations in average excess stock returns. Although the R 2 extracted from the four-factor model is just slightly higher than the three-factor model, yet it provides suggestive for the robustness of the four-factor model. In addition , our robustness test shows that January seasonal effect is absorbed by the risk factors including the market factors, SMB, HML, and MOM factor. The consistency of the four-factor model in explaining the U.S stock market return variations for the newest data, provide relevance to apply this model in emerging markets data in order to give guidance for investor in understanding the market condition.

Which oil shocks really matter in equity markets?

This paper examines the relationship between structural oil shocks and US equity markets. The recent oil shock decomposition of Ready (2018) is reconsidered and refined, providing a clearer delineation between shocks to equity market discount rates and aggregate demand, leading to an oil shock specification which attributes substantially more explanatory power to the latter in explaining equity market variation. Providing links with the literature dating back to Kilian and Park (2009), an explicit role is given to precautionary demand shocks using an independent measure constructed from oil futures data, reducing the role of the supply shocks obtained as the final residual in the recursive identification scheme. In an extended sample that allows an analysis of the oil/equity market relationship since the global financial crisis, the modified aggregate demand shocks have approximately twice as much explanatory power for stock return variation than the demand shocks of Ready (2018). The importance of these shocks in driving oil price changes and equity market volatility has only increased since the financial crisis, with the role of supply shocks diminishing. Once these demand effects are accounted for, there is little relationship between precautionary demand shocks and equity returns, in contrast to the existing literature.