Understanding Changes in International Business Cycle Dynamics

The volatility of economic activity in most G7 economies has moderated over the past forty years. Also, despite large increases in trade and openness, G7 business cycles have not become more synchronized. After documenting these twin facts, we interpret G7 output data using a structural VAR that separately identifies common international shocks, the domestic effects of spillovers from foreign idiosyncratic shocks, and the effects of domestic idiosyncratic shocks. This analysis suggests that, with the exception of Japan, the widespread reduction in volatility is in large part associated with a reduction in the magnitude of the common international shocks. Had the common international shocks in the 1980s and 1990s been as large as they were in the 1960s and 1970s, G7 business cycles would have been substantially more volatile and more highly synchronized than they actually were.

The Core, Periphery, and Beyond: Stock Market Comovements among EU and Non-EU Countries

We thank conference participants at the 2016 Financial Management Association and our discussant Fernando Moreira, and two anonymous referees for immensely helpful comments. We also thank Andrew Patton and James P. LeSage for sharing their MATLAB codes for computing quantile dependence. The authors of this paper are responsible for any errors or omissions. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the authors and do not necessarily reflect the views of the Commission or the authors\u27 colleagues on the staff of the Commission

Housing cycles in the major euro area countries.

The recent burst of the house price bubble in the United States and its spillover effects on real economies worldwide has rekindled the interest in the role of housing in the business cycle. In this paper, we investigate the relationships between housing cycles among the four major euro area countries (Germany, France, Italy and Spain) over the sample 1980q1 – 2008q4. Our main findings are that GDP cycles between 1.5 and 8 years show a high degree of comovement across these four countries, reflecting trade linkages. In contrast comovements in housing market cycles between 1.5 and 8 years are much weaker, idiosyncratic factors playing a major role. House prices are even less related across countries than quantities (residential investment, building permits, housing starts …). We find however much stronger relationships since 1999, i.e. in the common monetary policy period.Housing cycles, synchronisation measures, euro area countries.

Return and risk spillovers between the ESG global index and stock markets: Evidence from time and frequency analysis

In this paper, we examine comovements between stock market returns and investments that take into account Environmental, Social, and Governance (ESG) factors by studying the interconnections between the two returns in time and frequency space. We study interdependencies between the conventional stock market and ESG stocks using daily data from 2007 to 2021 for 19 developing and 19 developed countries. Our results show significant comovement patterns between ESG returns and stock returns at various frequencies, time scales, and sample episodes in all countries, particularly during periods of financial turmoil. For the most part, we document positive (in-phase) comovements between the stock returns and ESG returns in developing countries and negative (out-of-phase) comovements in developed countries. This implies limited portfolio gains from adding ESG stocks to portfolio diversification in developing countries but significant gains in developed countries.Copyright (c) 2022 Borsa Istanbul Anonim S, irketi. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)

Nonlinear Markov switching analysis of economic and stock market dynamics for emerging market economies

This dissertation presents a systematic and consistent analysis, for the first time, for a large and diverse group of emerging market economies to characterize the dynamics of their business and stock market cycles, the dynamic relationships between these cyclical interactions, and how different or similar the business cycles are among individual emerging market economies as well as between emerging markets and advanced economies. First, the study charecterizes and provides benchmark chronologies of business and stock market cycles for a diverse group of emerging market economies based on hidden Markov models that are robust to potential parameter instability. We identify three states of business cycles and provide estimates of turning points based on monthly industrial production data. Crises that are characterized by sharp drops in economic activity are preceded by slowdowns and are typically followed by strong recoveries during which the economies grow above long-run average rate. Second, the study explicitly models cyclical dynamics of the stock markets and relates it to the business cycles for a diverse group of emerging market economies. Stock markets go through three distinct regimes characterized by different risk-return dynamics. Findings present a consistent relationship between the real economies and the stock markets. The spikes in probabilities of the bear state of the stock market are highly correlated with the recessionary periods. Probabilities of stock market crashes increase before every recession and do not miss any of the business cycle peaks and correctly predict all recessions in the sample. The results suggest that bear markets characterized by negative returns precede every recession with a lead time between five to eleven months, implying that the stock market returns can be used as a forward looking indicator of emerging market economies. Third, we quantify the associations between business cycles across emerging markets and also with advanced G7 economies. The results identify distinct groups of emerging economies and stress the importance of using the information coming from other economies when constructing leading indicators and predicting turning points. Business cycles both for emerging markets and the advanced economies experience a high degree of commonality with the global recession of 2008

Investigating emerging market economies Reverse REIT-Bond Yield Gap anomalies: a case for tactical asset allocation under the multivariate Markov regime switching model

Submitted in partial fulfilment of the requirements for the degree of Masters of Management in Finance and Investments In the Faculty of Commerce, Law and Management University of the Witwatersrand, Wits Business School, 2016This paper presents a first time application of a variant of the concepts underpinning the Fed Model, amalgamated with the Bond-Stock Earnings Yield Differential, by applying it to the dividend yields of REIT indices. This modification is termed the yield gap, quantitatively constructed and adapted in this paper as the Reverse REIT-Bond Yield Gap. This metric is then used as the variable of interest in a multivariate Markov regime switching model framework, along with a set of three regressors. The REIT indices trailing dividend yield and associated metrics are the FTSE/EPRA NAREIT series. All data are from Bloomberg Terminals. This paper examines 11 markets, of which the EMEs are classified as Brazil, Mexico, Turkey and South Africa, whereas the advanced market counterparts are Australia, France, Japan, the Netherlands, Singapore, the United Kingdom, and the United States. The time-frame spans the period June 2013 until November 2015 for the EMEs, whilst their advanced market counterparts time-span covers the period November 2009 until November 2015. This paper encompasses a tri-fold research objective, and aims to accomplish them in a scientifically-based, objective and coherent fashion. Specifically, the purpose is in an attempt to gauge the reasons underlying EMEs observed anomalies entailing reverse REIT-Bond yield gaps, whereby their tenyear nominal government bonds out-yield their trailing dividend yields on their associated REIT indices; what drives fluctuations in this metric; and whether or not profitable tactical asset allocation strategies can be formulated to exploit any arbitrage mispricing opportunities. The Markov models were unable to generate clear-cut, definitive reasons regarding why EMEs experience this anomaly. Objectives two and three were achieved, except for France and Mexico. The third objective was also met. The REIT-Bond Yield Gaps static conditions have high probabilities of continuing in the same direction and magnitude into the future. In retrospection, the results suggest that by positioning an investment strategy, taking cognisance of the chain of economic events that are likely to occur following static REIT-Bond Yield Gaps, then investors, portfolio rebalancing and risk management techniques, hedging, targeted, tactical and strategic asset allocation strategies could be formulated to exploit any potential arbitrage profits. The REIT-Bond Yield Gaps are considered highly contentious, yet encompasses the potential for significant reward. The Fed Model insinuates that EME REIT markets are overvalued relative to their respective government bonds, whereas their advanced market counterparts exhibit the opposite phenomenon.XL201

Essays in Emerging Market Finance and Integration

Financial integration is often perceived to lead to convergence of asset prices, as well as higher comovements across countries, with the idea that the dependence on world factors should increase as markets integrate. This dissertation focuses on analyzing how integration has changed over time in developed and, especially, emerging markets. In particular, the chapters tackle different aspects of how integration has changed over time and the relevance of particular global factors in pricing. In Chapter 1, I study the link between globalization and asset returns. Here, I provide a comprehensive analysis of the impact of economic and financial globalization on asset return comovements over the past 35 years. The globalization indicators draw a distinction between de jure openness that results from changes in the regulatory environment and de facto or realized openness, as well as between capital market restrictions across different asset classes. Although globalization has trended positively for most of the sample, the global financial crisis and its aftermath have provided new headwinds. Equity, bond, and foreign exchange returns often have different responses to globalization. I generally find weak evidence of comovement measures reacting to globalization and often find other economic factors to be equally or more important determinants. In Chapter 2, I analyze variance risk in global markets. Innovations in volatility constitute a potentially important asset pricing risk factor that can be easily tested through the return on variance swaps. I characterize the exposure of the returns on three asset classes (equities, bonds and currencies) in all regions of the world to United States based equity variance risk. I explore the implications for global risk premiums and asset return comovements using both developed and emerging markets. I first find that regional portfolios across all three asset classes and practically all countries exhibit negative loadings with respect to the variance risk factor. This exposure is not only statistically but also economically significant representing for most assets we consider around 50% of the global risk premiums implied by a simple three-factor model with global equity, bond, and variance risks. Second, this simple three-factor model also explains a substantive fraction of the comovements between international assets, but the fit is best for international equity correlations and is worse for currency returns and across asset correlations. In Chapter 3, I study the link between time-varying integration and asset pricing. Emerging markets are subject to constant integration shocks, which can make markets more integrated or more segmented. Changes in integration have dynamic effects that are difficult to accommodate in valuation models, as both time-varying betas and risk premium are needed to capture the direct and indirect effects of changes in integration on dividend yields. Here, I develop a novel present value model to value cash flows with time-varying expected returns, where integration affects the cost of capital in a time-varying fashion. This framework prices expectations about future integration, which is modeled as a mean reverting process. I calibrate the model using a segmentation shock in Argentina in 2011 as a case study, and find that the model is able to capture part of the increase in dividend yields as markets became more segmented. By assuming that investors perceive the shock as permanent and thus price lower mean integration following the segmentation shock, I am able to model the full extent of the change in dividends. The three chapters show that, while integration has broadly increased over time, different asset classes have different responses to globalization. I find that integration is time-varying and that markets can become more segmented; that is, integration is not a one-way street, as many models have assumed in the past. Finally, I show that global factors matter in emerging markets in all asset classes, and identify variance risk as a new risk factor which helps explain why global capital asset pricing models tend to yield low discount rates in these economies. Therefore, researchers and practitioners should take into account the importance of both local and global factors when valuing emerging market assets and take into account that the relative importance of each factor varies over time

Economic Integration and Stock Market Comovement: An Empirical Study Pairing Pakistan's Stock Exchange with 21 other Markets

Using daily stock returns from 2004 to 2014 for 21 countries paired with Pakistan, and using the Geweke methodology, the paper investigates the degree to which these stock markets are integrated with the Pakistani stock market. The paper also explores the factors that have an effect on the level of economic integration by applying fixed effect model. The result demonstrates statistically significant and high percentage of contemporaneous association between the 21 economies of the world and Pakistan. Greater comovement was observed between the equity markets during the period when Pakistani capital market and economy experience performance but less comovement was noted when Pakistan Stock Markets were under crises

The integration ofcredit default swapmarkets in the pre andpost-subprime crisis incommon stochastic trends

It was evident that credit default swap (CDS) spreads have been highly correlated during the recent financial crisis. Motivated by this evidence, this study attempts to investigate the extent to which CDS markets across regions, maturities and credit ratings have integrated more in crisis. By applying the Panel Analysis of Non-stationarity in Idiosyncratic and Common components method (PANIC) developed by Bai and Ng (2004), we observe a potential shift in CDS integration between the pre- and post-Lehman collapse period, indicating that the system of CDS spreads is tied to a long-run equilibrium path. This finding contributes to a credit risk management task and also coincides with the missions of Basel III since the more integrated CDS markets could result in correlated default, credit contagion and simultaneous downgrading in the future