Conditional Correlations in the Returns on Oil Companies Stock Prices and Their Determinants

The identification of the forces that drive stock returns and the dynamics of their associated volatilities is a major concern in empirical economics and finance. This analysis is particularly relevant for determining optimal hedging strategies based on whether shocks to the volatilities of returns of oil companies stock prices, relevant stock market indexes and oil spot and futures prices are high or low, and positively or negatively correlated. This paper investigates the correlations of volatilities in the stock price returns and their determinants for the most important integrated oil companies, namely Bp (BP), Chevron-Texaco (CVX), Eni (ENI), Exxon-Mobil (XOM), Royal Dutch (RD) and Total-Fina Elf (TFE). We measure the actual co-risk in stock returns and their determinants “within” and “between” the different oil companies, using multivariate cointegration techniques in modelling the conditional mean, as well as multivariate GARCH models for the conditional variances. We focus first on the determinants of the market value of each company using the cointegrated VAR/VECM methodology. Then we specifiy the conditional variances of VECM residuals with the Constant Conditional Correlation (CCC) multivariate GARCH model of Bollerslev (1990) and the Dynamic Conditional Correlation (DCC) multivariate GARCH model of Engle (2002). The “within” and “between” DCC indicate low to high/extreme interdependence between the volatilities of companies’ stock returns and the relevant stock market indexes or Brent oil prices.Constant conditional correlations, Dynamic conditional correlations, Multivariate GARCH models, Stock price indexes, Brent oil prices, Spot and futures prices, Multivariate cointegration, VECM

Long run relationship between entry and exit: time series evidence from Turkish manufacturing industry

This paper investigates the long run relationship between entry and exit using aggregate annual data from the Turkish manufacturing industry for the period 1968-2001. The time series properties of the data imply that simple OLS regressions may yield spurious results. We employ both bivariate and multivariate models to test for Granger causality. Utilizing relatively new time series techniques, we find that exit Granger causes entry in the long run, but not vice versa. However, unlike many empirical findings in the literature, past exit has a negative effect on entry. Entrants seem to be put off by past exit in the long run. Hence, our results do not seem to support the replacement effect in the Turkish manufacturing industry in general. None of the other variables included in the multivariate analysis has significant effects on entry or exit. The generalized impulse responses between entry and exit confirm Granger causality results.

Increased co-movement or contagion between economies? Evidence from 45 stock markets

The Global Financial Crisis of 2007 - 2009 and the European Sovereign Debt Crisis represent two of the most dangerous treats at the stability of the modern financial system. The consequences of these two crises translated their impulse all around the globe, contaminating everything in their way like falling domino pieces. This has revealed that the modern financial system has flows and that certain actions need to be implemented in order to avoid in the future these catastrophic events, and to preserve the stability of economy. This thesis investigates how the above mentioned crises have changed the co-movement and correlations between different countries and translated their consequences to other economies, by testing for contagion. Using an asymmetric GARCH model, the paper examines the evolution of the correlations between 45 major stock markets, in different economic states, for the period 2000 - 2014. The results reveal that during the Global Financial Crisis the correlations between individual stock markets and the global stock index increased significantly, resulting in contagion at the level of the majority of countries included in the analysis. After the crisis, the correlation levels tend to decrease. However, when compared to the pre-crisis level, values are considerably higher, suggesting that the global stock market is becoming more and more integrated, and that there may still be some contagion left in the markets. The results for the European Sovereign Debt crisis suggest that every member of the group felt the consequences but in different measure. The crisis originated at the periphery, and then gradually shifted to the core.fi=Opinnäytetyö kokotekstinä PDF-muodossa.|en=Thesis fulltext in PDF format.|sv=Lärdomsprov tillgängligt som fulltext i PDF-format

The Dynamic International Optimal Hedge Ratio

Instead of modeling asset price and currency risks separately, this paper derives the international hedge portfolio, hedging asset price and currency risk simultaneously for estimating the dynamic international optimal hedge ratio. The model estimation is specified in a multivariate GARCH setting with vector error correction terms and estimated for the commodity and stock markets of the U.S., the U.K., and Japan.Optimal Hedge Ratio, International Hedging, Multivariate GARCH, Currency

Examining market efficiency and integration of the Islamic stock indices / Noryati Ahmad.

The question of whether the stock market is efficient has been an ongoing debate among researchers. Generally, empirical evidence indicates that most conventional stock indices for developed countries are weak form efficient while inconclusive results are discovered for developing countries. With the growing importance of the Islamic capital markets that run parallel to the conventional stock markets, similar question arises as to whether these new Islamic capital markets are also efficient. Hence this paper aims to examine the weak form efficiency of the Islamic stock indices. Autocorrelation Function (ACF) test and Variance Ratio (VR) test are used to test the market efficiency of the Islamic stock indices from China, India, South Africa, Malaysia, Dubai, Qatar and Japan. The study uses daily data covering the year 2008 until 2012. In addition, this paper attempts to unveil the dynamic causal relationships among the Islamic capital markets. Bivariate Granger Causality test is employed to achieve the objectives. Interestingly only the Islamic stock indices for Malaysia and India are weak form efficient while the results of the Islamic stock indices for Qatar and Kuwait are not. The results of the other Islamic stock indices studied are inconclusive. Johansen multivariate cointegration tests reveal no long-term relationship among the Islamic stock indices. On the other hand, bivariate Granger Causality tests report short run co-movements between Islamic stock indices of Muslim countries and non-Muslim countries, an indication of growing interest of the Islamic financial markets among investors

The determinants of the euro-dollar exchange rate: synthetic fundamentals and a non-existing currency

At the beginning of 1999 the euro was launched as a common currency in 11 European countries. This paper addresses empirically the medium to long-term forces driving the real euro-dollar exchange rate. Constructing a synthetic euro-dollar exchange rate over a period from 1975 to 1998 and applying cointegration approaches, four factors are identified as fundamental determinants of the real euro-dollar exchange rate: the international real interest rate differential, relative prices in the traded and non-traded goods sectors, the real oil price and the relative fiscal position. A single equation error correction model outperforms multivariate models and seems to be best suited to analyse and forecast the behaviour of the euro-dollar exchange rate in the medium-term perspective. If this model is applied to the current developments in foreign exchange markets, the external value of the euro appears to be rather low in the winter of 1999/2000. -- Zum Jahresbeginn 1999 wurde der Euro als gemeinsame Währung in 11 europäischen Staaten eingeführt. In der vorliegenden Studie werden die mittel- bis langfristigen Determinanten des Euro empirisch untersucht. Unter Verwendung eines synthetisch berechneten Euro/Dollar-Wechselkurses werden auf der Basis der Kointegrationsanalyse vier Faktoren als fundamentale Bestimmungsgründe des realen Euro/Dollar Wechselkurses identifiziert: die internationale Realzinsdifferenz, das relative Preisverhältnis gehandelter und nicht-gehandelter Güter, der reale Ölpreis und die relative Staatsausgabenquote. Es zeigt sich, daß ein Eingleichungsfehlerkorrekturansatz zu besseren Ergebnissen führt als ein Vektorfehlerkorrekturmodell und damit am besten geeignet scheint, um das Verhalten des Euro/Dollar-Wechselkurses über die mittlere Frist zu analysieren und zu prognostizieren. Eine Anwendung des Modells auf die derzeitige Wechselkurssituation legt die Vermutung nahe, daß der Außenwert des Euro im Winter 1999/2000 recht niedrig bewertet ist.real exchange rates,fundamentals,cointegration,forecast

Long-run relationship between Islamic stocks returns and macroeconomic variables: An application of the autoregressive distributed lag model

Purpose – The purpose of this paper is to explore the extent to which macroeconomic variables affect the Islamic stock market behavior in Malaysia in the post 1997 financial crisis period. Design/methodology/approach – The paper employs the latest estimation technique of autoregressive distributed lag (ARDL) model approach to cointegration. Findings – The results suggest that real effective exchange rate, money supply M3, treasury bill rate (TBR) and federal fund rate (FFR) seem to be suitable targets for the government to focus on, in order to stabilize the Islamic stock market and to encourage more capital flows into the market. As for the interest rates and stock returns relationship, the paper finds that when interest rates rise either domestically (TBR) or internationally (FFR), the Muslim investors will buy more Shari’ah compliant stocks; thereby escalating the Islamic stock prices. Research limitations/implications – The results of this study are limited to the post 1997 financial crisis period until the beginning of the year 2006 for a small open economy, Malaysia. Practical implications – The paper reveals that both changes in the local monetary policy variables and in the US monetary policy as measured by the changes in the FFR have a significant direct impact on the Islamic stock market behavior in Malaysia. Originality/value – The paper adopts the latest time series econometrics technique to test for cointegration, ARDL. And it is among the earliest attempts to investigate the long-run effects of the macroeconomic variables changes either domestically or internationally on the Islamic stock market

Dissecting the PPP Puzzle: The Unconventional Roles of Nominal Exchange Rate and Price Adjustment

The conventional view, as expounded by sticky-price models, is that price adjustment determines the PPP reversion rate. This study examines the mechanism by which PPP deviations are corrected. Nominal exchange rate adjustment, not price adjustment, is shown to be the key engine governing the speed of PPP convergence. Moreover, nominal exchange rates are found to converge much more slowly than prices. With the reversion being driven primarily by nominal exchange rates, real exchange rates also revert at a slower rate than prices, as identified by the PPP puzzle (Rogoff, 1996).

Decomposing European bond and equity volatility

The paper investigates volatility spillover from US and aggregate European asset markets into European national asset markets. A main contribution is that bond and equity volatilities are analyzed simultaneously. A new model belonging to the 'volatilityspillover' family is suggested: The conditional variance of e.g. the unexpected German stock return is divided into separate effects from the contemporaneous idiosyncratic variance of US bonds, US stocks, European bonds, European stocks, German bonds, and German stocks. Significant volatility-spillover effects are found. The national bond (stock) volatilities are mainly influenced by bond (stock) effects. Global, regional, and local volatility effects are all important. The introduction of the euro is associated with a structural break.European Asset Markets; GARCH; International Finance; Volatility Spillover

The nexus between oil prices and stock prices of oil, technology and transportation companies under multiple regime shifts

This study investigates the interaction between crude oil prices and the stock prices of oil, technology and transportation companies listed on U.S. stock exchanges, using weekly data covering the period from 2 January 1990 to 3 February 2015. Considering the importance of regime shifts or structural breaks in econometric analysis, this study employs the Carrion-i-Silvestre, Kim, and Perron unit root tests and the Maki cointegration tests, allowing for multiple breaks. Cointegration results confirm the existence of long-run equilibrium relationships between these stock indices, crude oil prices, short-term interest rates and the S&P 500. These findings indicate that crude oil prices and the other explanatory variables are long-run determinants of the stock prices of oil, technology and transportation firms. Stock prices of oil companies are positively affected by crude oil prices to a greater degree than that of technology and transportation stocks. Time-varying causality results show that West Texas Intermediate crude oil (WTI) is relatively more likely to affect the stock prices of these companies rather than to be affected by them. Evidently, it is confirmed that financial crises have a substantial ability to intensify the causal linkages between WTI and the stock indices of these companies