Is financial statement information about future earnings changes impounded in returns?

This thesis was submitted for the degree of Doctor of Philosophy and awarded by Brunel University.The thesis provides empirical evidence on the predictive ability and information content of UK financial statement report numbers. Specifically, I investigate the Ou and Penman (1989a) finding for the US that financial statement numbers convey information about the sign of the one year ahead earnings change, and that this is not reflected in current stock returns. The main motivation, however, of the thesis is the suggestion by Greig (1992) that the Ou and Penman results are driven by variations in accounting ratios across industries. In addition, it is further examined whether the Ou and Penman results are valid only for negative and/or positive values of the earnings changes and whether the Ou and Penman lagged impounding is confined to large and/or companies. The thesis complements the existing U. K. literature by offering this predictive perspective on, and interpretation of, the incremental information content of financial statement accounting numbers. The main results of the thesis provide evidence for a "predictive information link" between some annual report numbers and future earnings changes. However, these annual report numbers capture the temporary and not permanent changes in current earnings, thus for the market to look for the incremental information about future earning changes in accounting numbers is not worthy in terms of money and costs. Only, in the stores industry, the %A in current ratio indeed captures permanent changes in current earnings. The thesis also provides evidence for a "lagged impounding" phenomenon for some of the numbers as well as a "size effect". The incremental information of these accounting numbers is not impounded in current returns. The financial statement information of large companies is earlier reflected in current returns than the information of small companies. The predictive information link is established by fitting binary one-year ahead earnings change prediction models as well as regression models to annual report data for the period 1980-88. The lagged impounding phenomenon and size effect are established by running multivariate regression earnings information models over the period 1980-88

Common Stochastic Trends among the Cyprus Stock Exchange and the ASE, LSE and NYSE

Common stochastic trends among major international stock price indices has been a very intensively analyzed issue mainly as a result of the 1987 stock market crash and the need for policy coordination in financial markets. This paper investigates the existence of common stochastic trends among an emerging equity market, the Cyprus Stock Exchange and three mature equity markets namely ASE, LSE and NYSE. The main finding of our analysis is that there is evidence of one long-run relationship among the four equity markets and therefore three common stochastic trends. We use the Gonzalo and Granger (1995) methodology to identify, estimate and test for the number of common trends that leads to permanent changes among the four stock markets. Furthermore, we identify as driving forces of the system the ASE, LSE and NYSE equity markets while the emerging stock market of Cyprus does not enter significantly the common trends. Finally, we show that although cointegration exists there are small long-run benefits from international portfolio diversification since the stock prices adjust very slowly to these common trends.cointegration, common trends, identification, international stock markets,

Mean and variance causality between the Cyprus Stock Exchange and major equity markets

This paper examines the issue of mean and variance causality across four equities markets using daily data for the period 1996-2002. We apply the testing procedure developed by Cheung and Ng (1996) in order to test for mean and variance spillovers. The main findings are: (i) In contrast to the findings of previous studies, EGARCH-M processes characterize each stock returns series in all markets; (ii) There is substantial evidence of causality in both mean and variance with the causality in mean largely being driven by the causality in variance; and (iii) The results indicate the stock markets of Athens, London and New York are the major exporters of causality and the stock market of Cyprus is an importer of causality.Causality, cross-correlation function, EGARCH-M, equity market,

Regime Switching and Artificial Neural Network Forecasting

This paper provides an analysis of regime switching in volatility and out-of-sample forecasting of the Cyprus Stock Exchange using daily data for the period 1996-2002. We first model volatility regime switching within a univariate Markov-Switching framework. Modelling stock returns within this context can be motivated by the fact that the change in regime should be considered as a random event and not predictable. The results show that linearity is rejected in favour of a MS specification, which forms statistically an adequate representation of the data. Two regimes are implied by the model; the high volatility regime and the low volatility one and they provide quite accurately the state of volatility associated with the presence of a rational bubble in the capital market of Cyprus. Another implication is that there is evidence of regime clustering. We then provide out-of-sample forecasts of the CSE daily returns using two competing non-linear models, the univariate Markov Switching model and the Artificial Neural Network Model. The comparison of the out-of-sample forecasts is done on the basis of forecast accuracy, using the Diebold and Mariano (1995) test and forecast encompassing, using the Clements and Hendry (1998) test. The results suggest that both non-linear models equivalent in forecasting accuracy and forecasting encompassing and therefore on forecasting performance.Regime switching, artificial neural networks, stock returns, forecast

Cointegration, causality and domestic portfolio diversification in the Cyprus Stock Exchange

In this paper we provide an investigation on the potential benefits that may exist for portfolio managers, private and institutional investors from domestic portfolio diversification. We employ daily data for the period 1996-2002 from the Cyprus Stock Exchange, recently established emerging market. Cointegration as well as linear and nonlinear causality analysis is used in order to reveal whether there are benefits from domestic portfolio diversification. The cointegration analysis leads to the conclusion that we are unable to reject the null hypothesis of no cointegration in most bivariate cases of the 56 pairs of sectoral indices and this finding is taken to imply that the are benefits from portfolio diversification, when domestic investors construct portfolios which include stocks from the sectors which are not cointegrated. Furthermore, the application of linear and nonlinear Granger causality leads to a pattern of causality between these pairs of sectoral indices which is almost identical and therefore the linearity hypothesis is rejected. Furthermore, based on our causality analysis we provide evidence that traders and investors in the CSE set up short-run investment strategies. Moreover, this implies that the Cypriot investors do not adopt contrarian and momentum investment strategies. Therefore, we argue that the investors in the Cyprus stock market exhibit myopic investment behaviour.cointegration, Granger causality, nonlinear causality, domestic portfolio