Stock Return Volatility Research Articles

Do younger CEOs really increase firm risk? Evidence from sudden CEO deaths

This study uses sudden deaths of CEOs to provide causal evidence on the relation between CEO age and firm risk. I find that CEO age negatively influences firm risk, measured by stock return volatility, but has no effect on policy choices related to risk taking. These findings contrast prior studies, and suggest that the higher volatility is caused by uncertainty about the younger replacement CEOs' contribution to firm value, rather than changes to risk-related corporate policies.

Clawback Provisions and Firm Risk

AbstractMany of the events that trigger clawback provisions are associated with risky corporate policies and variable performance outcomes. We propose and test the hypothesis that clawback provisions motivate managers to reduce firm risk. Panel ordinary least squares, general method of moments with instrumental variables, and propensity square matching models all indicate that clawback provisions decrease the volatility of stock returns. The channels that connect clawback presence to firm risk include more conservative investment and financial policies. The clawback-induced reduction in risk-taking appears to benefit shareholders on average. The gains from reduced risk-taking are larger for firms with fewer growth options, lower R&D, and prior wrongdoing. (JEL G32, G34, J33, M41, M52, M55)

Stock market integration and volatility spillovers: new evidence from Asia–Pacific and European markets

PurposeThis work investigates the volatility spillovers across stock markets and the nature of such spillovers through different periods of crises and tranquility.Design/methodology/approachUsing daily stock return volatility data from June 2003 to June 2021, the generalized forecast error variance decomposition method (based on Diebold and Yilmaz, 2012 approach) is employed to measure the degree of volatility spillovers/connectedness among stock markets of 24 Asia–Pacific and 12 European Union (EU) economies.FindingsThe empirical results from static analysis suggested that about 28.1% (63.7%) of forecast error variance in return volatility for Asia–Pacific (EU) markets is due to spillovers. The evidence from dynamic analysis suggested that during mid of the global financial crisis, European debt crisis (EDC) and Covid-19, the gross volatility spillovers for Asia–Pacific (EU) was around 67% (80%), 65% (80%) and 73% (67%), respectively. The degree of net volatility transmission from Singapore (Denmark) to other Asia–Pacific (EU) markets was found to be highest.Practical implicationsThe findings have crucial implications for the investors and portfolio managers in assessment of risk and optimum allocation of assets and investment decisions.Originality/valueThis study adds to the literature on risk management by systematically examining the impact of global financial crises, EDC and Covid-19 on the market interactions by capturing the magnitude, duration and pattern of the shock-specific market volatilities for a large sample of Asian and European markets using recent and large data set.

IMPACT OF THE RUSSIA-UKRAINE CRISIS ON FOOD INFLATION AND STOCK MARKETS IN ASIAN ECONOMIES: WITH REFERENCE TO INDIA, CHINA, JAPAN AND THAILAND

The current geopolitical risk posed by the Russia-Ukraine war has significant implications on the stock markets and the commodities markets of several countries. Using monthly data from October 2020 to the present time period, we analyse the impact of Russia-Ukraine crisis on food inflation and stock market return volatility in the context of Asian countries, namely, India, China, Japan and Thailand with the help of regression analysis based on the OLS technique. Our main findings show us the impact of the Russia-Ukraine war on the food inflation to be visible in China and Japan whereas the war's effect on the stock markets of all the countries selected is shown to be insignificant. We observe the highest and lowest monthly food inflation in China, the highest monthly stock return volatility in Thailand and the lowest monthly stock return volatility in Japan among the selected countries. For the case of India, the war doesn't have much effect on its food inflation and stock market return volatility. We suggest reducing food import dependency by strengthening domestic production and going for alternative food suppliers so as to not be affected by the international food prices that are subjected to the turmoil of war. It is imperative to re-diversify portfolios based on the volatility trend of stock market returns in order to shield oneself from the perils of stock market volatility caused by wars.

Investors' Opinion Divergence and Stock Return Volatility: Evidence from User Generated Content

Investors' Opinion Divergence and Stock Return Volatility: Evidence from User Generated Content

Investors' opinion divergence and stock return volatility: evidence from user-generated content

Investors' opinion divergence and stock return volatility: evidence from user-generated content

Investors' Decision-making Under Risk: Evidence from the Croatian Stock Market

Purpose: This article deals with the retail investors’ decision-making under risk, firstly addressing several theories of decision-making under risk. Following this theoretical framework, an analysis on investment strategies on the Croatian capital market has been conducted. Design/methodology/approach: In this paper a non-parametric Data Envelopment Analysis (DEA) methodology is used to estimate input-oriented efficiency (minimization of risk i.e. stock return volatility, standard deviation) in retrospect to monthly stock returns of 15 selected stocks (due to a liquidity criteria) and five stock indices on the Croatian stock market in the period from 2016 until 2021. Findings: Results show that just but a few stocks provide high efficiency levels on the Croatian stock exchange, while the general CROBEX stock index proves to be a viable investment option for retail investors whose financial knowledge, expertise and time are limited. Research limitations/implications: This study was conducted on a limited sample of 15 most liquid stocks and five stock indices on the Croatian stock market in the period from 2016 until 2021. Due to the limited number of liquid stocks through time, the shallowness and illiquidity of the Croatian stock market provides a major limitation of this study. Furthermore, the limited sample attained dictated the use of nonparametric static DEA methodology that is suboptimal. For future studies, it is recommended to internationally expand the sample and use dynamic nonparametric and parametric techniques in stock efficiency estimation. Originality/value: The main aim of the study was to provide a theoretical overview on the theories of decision-making under risk. These theories provide insight that investors (retail but institutional nonetheless) are more loss avoidant than return seeking (risk aversion) which in the end affects their optimal investment strategy. In addition, this study used DEA methodology in efficiency estimation of 15 stocks on the Zagreb Stock Exchange (ZSE). The results from this study suggest that for untrained and inexperienced retail investor the investment in the general stock index could be a viable investment strategy. This study builds upon several studies on investment strategies on the Croatian stock market by providing more insight on stock and stock indices returns and efficiency several years previously and during the COVID-19 pandemic. Future studies dealing with similar topics should expand to a multinational sample that would solve the two main limitations of this study. Therefore, by expanding the sample to neighbouring countries, and increasing the number of liquid stocks observed and the possibility of using dynamic nonparametric and stochastic models in efficiency estimation of stocks to determine adequate investment strategies.

Response of stock return volatility to money market rates in Nigeria

Response of stock return volatility to money market rates in Nigeria

Management Ability Effects on Information Environment Quality

The purpose of this paper is to investigate the role of managerial ability in information environment quality in the listed companies on the Tehran Stock Exchange (TSE). This research has focused on the quality of the information environment and has attempted to investigate the impact of management ability along with other variables affecting the information environment quality such as size, performance, accrual quality, etc. In this study, to measure the quality of a company's information environment "ratio of stock return volatility to market return volatility " and to measure managerial ability The Demerjian et. al. (2012) model is used. The systematic elimination method was used for sampling 105 firms listed in Tehran Stock Exchange during the time range 2015 to 2021, and the model of panel data was applied to test hypotheses. Based on the research results while managerial ability can enhance the quality of a company's information environment, the size and growth rate of the company can also affect the information environment quality.

Forecasting Stock Return Volatility Using the Realized Garch Model and an Artificial Neural Network

Forecasting Stock Return Volatility Using the Realized Garch Model and an Artificial Neural Network

Trading Volume, Trading Price, Trading frequency and Stock Return Volatility of Everest Bank Limited

The primary objective of this study is to measure the relationship between stock returns, trading volume, trading frequency and trading price volatility of Everest Bank Limited. We analyzed studies using descriptive studies and randomized comparative studies. A 12-year panel data set was used. 1873 observations are analyzed to draw correct conclusions about the study. Descriptive models provide data on average stock returns, trading volume, and price volatility. EBL investors have faced high risk when investing in stocks for 12 years. There is an important and positive relationship between them. Likewise, volume and price have a positive and significant impact on stock returns.

VOLATILITY FORECASTING AFTER REMOVING THE NOISE: DOES IT REALLY PAY OFF?

The analysis in this paper represents the first attempt to examine whether the forecasting performance of one of the GARCH models can be improved after removing the noise from the stock market returns. Doing the analysis on eight developed stock markets helps in providing reliable results that can be generalized to more stock markets. This paper then examines the ability of GARCH models to forecast stock return volatility under a range of statistical forecasts. We specifically employ the multiscale-based approach, namely the maximum overlap discrete wavelet transformation, to remove the noisy data from the return series. Based on related theoretical literature, we assume that noise trading makes the forecasting performance more misleading, especially at the short-term horizon. Our particular interest then is whether wavelet de-noising of the data before estimation affects the ability of the models to provide accurate forecasts at a short investment horizon. To de-noise the data, we use soft thresholding and Stein’s Unbiased Risk Estimator to obtain the decomposition level-based threshold limit. Our key results demonstrate that de-noising returns improves the accuracy of volatility forecasts regardless of whether we used statistical metrics or tests of equal predictive accuracy. Moreover, in terms of a particular volatility model, the asymmetric GARCH approach tends to be preferred although this result is not universal. Indeed, the central result from our analysis is that the process of de-noising is more important than the specific model.

How do foreign investors affect China’s stock return volatility? Evidence from the Shanghai-Hong Kong Stock Connect Program

ABSTRACT This paper examines the influence of foreign investors on the stock return volatility via the Shanghai- Hong Kong Stock Connect Program (SHSCP). By analysing portfolios’ characteristics and utilising the Fama-Macbeth regression, we find that investing in China’s mainland stock market via the SHSCP could tame the stock return volatility. The results remain significant after taking into account endogenous factors and performing several robustness tests. Our findings support the rationale for opening up China’s capital market.

Modelling the Impact of the COVID-19 Pandemic on Some Nigerian Sectorial Stocks: Evidence from GARCH Models with Structural Breaks

This study provides evidence of the impact of COVID-19 on five (5) Nigerian Stock Exchange (NSE) sectorial stocks (NSE Insurance, NSE Banking, NSE Oil and Gas, NSE Food and Beverages, and NSE Consumer Goods). To achieve the goal of this paper, daily stock prices were obtained from a secondary source ranging from 2 January 2020 to 25 March 2021. Because of the importance of incorporating structural breaks in modelling stock returns, the Zivot–Andrews unit root test revealed 20 January 2021, 26 March 2020, 27 July 2020, 23 March 2020 and 23 March 2020 as potential break points for NSE Insurance, NSE Food, Beverages and Tobacco, NSE Oil and Gas, NSE Banking, and NSE Consumer Goods, respectively. This study investigates the volatility in daily stock returns for the five (5) Nigerian Stock Exchange (NSE) sectorial stocks using nine versions of GARCH models (sGARCH, girGARCH, eGARCH, iGARCH, aPARCH, TGARCH, NGARCH, NAGARCH, and AVGARCH); in addition, the half-life and persistence values were obtained. The study used the Student t- and skewed Student t-distributions. The results from the GARCH models revealed a negative impact of COVID-19 on the NSE Insurance, NSE Food, Beverages and Tobacco, NSE Banking, and NSE Consumer Goods stock returns; however, the NSE Oil and Gas returns showed a positive correlation with the COVID-19 pandemic. This study recommends that the shareholders, investors, and policy players in the Nigerian Stock Exchange markets should be adequately prepared in the form of diversification of investment in stocks that can withstand future possible crises in the market.

Leadership in a pandemic: Do more able managers keep firms out of trouble?

The Coronavirus crisis has led to unprecedented economic shocks to the corporate world and challenged how corporate management contributes to business resilience amid the pandemic. Employing a novel measure of managerial ability constructed for a large sample of U.S. publicly listed firms, we document that firms led by higher managerial ability exhibit lower stock return volatility, higher operating performance, and lower levels of default risk amid the pandemic. A difference-in-differences analysis suggests that the impact of managerial ability on firm performance is stronger during the pandemic than during the pre-pandemic period. The effect of managerial competency on corporate resiliency is more pronounced among firms that have high exposure to COVID-19. In addition, firms led by high managerial competency management are associated with higher stock liquidity and are less likely to exhibit employment, healthcare, safety, and consumer protection related violations amid the pandemic.

Stock Returns Volatility in Nepal: Evidence during Covid-19

This study scrutinizes the stock returns volatility pattern in Nepal during the COVID-19 period from March 3, 2020 to February 27, 2022. By examining GARCH family models with Generalized Error Distribution specification, the results of symmetric GARCH models show that there is persistent volatility in daily stock returns in Nepal over the study period. The observed persistent volatility in daily stock returns indicate that the current shocks in daily stock returns exist in forecasting variance for longer period in future. The results of asymmetric TGARCH (1, 1) model show that there is the leverage effects on the volatility of daily stock returns in Nepal during the study period. The observed leverage effects implies that uncomplimentary news have larger effects on the volatility than the complimentary news of the same intensity. Finally, results establish the GARCH (1, 1) model as the best fitted symmetric model to explain the volatility persistence and the TGARCH (1,1) model as the best fitted asymmetric models to predict the leverage effects on the time varying conditional volatility of daily stock in Nepal. The main implication of findings from this study is that it offers an additional insight to form sound investment strategy to address risk structure of Nepali stock market.

The trade war's impact on the financial market: Observations from the historical global trade war - the Smoot Hawley Tariff Act

This study examines financial market reactions to political events that led to the passage and repeal of the Smoot–Hawley Tariff Act (SHTA) from the perspective of political uncertainty. The events were a series of debates and votes held by the U.S. House and Senate before the SHTA was signed into law in 1930 and repealed in 1934. These events increase political uncertainty about trade policy, thereby creating a unique setting to measure the impact of political uncertainty on financial market reactions. We find that each event resulted in an average loss of 3.6% in the U.S. aggregate stock market over a [−1, +1] three-day window. Such negative returns were observed at the firm level. Moreover, we find that firms with higher tariff protection performed significantly better than firms with lower tariff protection on nonevent dates. Furthermore, we discovered that trading volumes were significantly higher on event dates than on nonevent dates. Stock return volatility was significantly higher during the entire debating and voting period than during the 12 months preceding its inception and 6 months following the SHTA's passage into law. However, higher tariff protection was associated with lower return volatility outside the event window. Our findings show that political uncertainty events commanded the risk premium.

How do fintech start-ups affect financial institutions’ performance and default risk?

ABSTRACT We examine the impact of fintech start-ups on the performance and default risk of traditional financial institutions. We find a positive relationship between fintech start-up formations and incumbent institutions’ performance for the period 2005–2018 and a large sample of financial institutions from 87 countries. We further analyze the link between fintech start-up formations and the default risk of traditional financial institutions. Fintech start-up formations decrease stock return volatility of incumbent institutions and decrease the systemic risk exposure of financial institutions. The findings indicate that legislators and financial supervisory authorities should closely monitor the development of fintech start-ups, because fintechs not only have a positive effect on the financial sector’s performance but also can improve financial stability relative to the status quo.

Simultaneous Inference on the Korean Won-US Dollar Forward Premium Anomaly

The forward premium anomaly, which refers to the empirical failure of the uncovered interest parity (UIP), has been primarily examined by the forward premium regression of [Fama, E. (1984). Forward and spot exchange rates. Journal of Monetary Economics, 14(3), 319–338. https://doi.org/10.1016/0304-3932(84)90046-1]. Some studies apply the rolling-window regression to capture the time-varying coefficient on the forward premium, with difficulty in statistically testing the deviation of the coefficient from the UIP over time. We follow [Baillie, R., & Kim, K. (2015). Was it risk? Or was it fundamentals? Explaining excess currency returns with kernel smoothed regressions. Journal of Empirical Finance, 34, 99–111] to apply the simultaneous inference procedure to the Korean Won-US Dollar spot and forward exchange rates by estimating the time-varying coefficient from the kernel-smoothed local-linear regression and constructing the uniform confidence band to test the local deviation. We find that, while the UIP is not rejected from the baseline regression, the simultaneous inference shows that the deviation from the UIP is mainly observed during the early 2000s and 2010s. Time-variation of the forward premium coefficient tends to be significantly affected by economic uncertainties such as the interest rate, inflation, and stock return volatilities in Korea and US.

We are under attack: Terrorist attacks and director turnover

Motivated by the challenge in the director turnover literature to distinguish between board-initiated dismissals (i.e., ‘clean house’) and director-initiated departures (i.e., ‘jump ship’), we study director turnover in firms local to terrorist attacks (hereafter, TA firms). We argue that director turnover following a terrorist attack is more likely to reflect directors' ‘jump ship’ decision rather than a board's ‘clean house’ decision. We find that directors have a disproportionately greater tendency to leave TA firms after an attack. Further analyses reveal that director turnover is lower when directors perceive the larger benefits or lower costs of staying in TA firms. We also find that directors' decisions to exit or stay are economically meaningful to TA firms and directors themselves. Specifically, by retaining directors, TA firms can reduce their post-attack stock return volatility; by remaining with TA firms, directors will receive more future board seats and committee roles. Overall, our results suggest that the act of staying, in and of itself, signals directors' superior quality within the labour market, and the labour market tends to assess directors' abilities through their turnover decisions after terrorist attacks.