Stock market and economic growth: Evidence from three CEECs

This paper estimates a bivariate VAR-GARCH(1,1) model to examine linkages between stock market and economic growth in three CEEC countries (the Czech Republic, Hungary and Poland). The empirical findings suggest that there is unidirectional causality running from stock markets to growth in the levels, this linkage becoming stronger following the EU accession, which appears to be beneficial, presumably as a catalyst for institutional building and development. The same holds in most cases for volatility spillovers as well. In addition, Germany is confirmed to act as a locomotive for these countries, and a tight monetary policy is found to affect both economic and stock market growth adversely

Stock market integration between three CEECs

This paper estimates a trivariate VAR-GARCH(1,1) model to examine volatility linkages between the stock markets of three Central and Eastern European countries (CEECs), namely the Czech Republic, Hungary and Poland. The empirical findings suggest that following the EU accession regional linkages have become even stronger, and that therefore portfolio diversification within the region has become an even less effective investment strategy. This can be plausibly interpreted as reflecting deeper integration with the "old" EU economies, and has important implications for appropriate policy responses to shocks originating in those countries and affecting the financial stability of the CEECs

Stock market integration between three CEECs, Russia and the UK

This paper estimates a tri-variate VAR-GARCH(1,1)-in-mean model to examine linkages between the stock markets of three Central and Eastern European countries (CEECs), specifically the Czech Republic, Hungary, and Poland, and both the UK and Russia. The adopted framework allows to analyse interdependence by estimating volatility spillovers, and also contagion by testing for possible shifts in the transmission of volatility following the introduction of the euro and EU accession. Further evidence on possible changes in the transmission mechanism (namely, on whether there is contagion) can be obtained by examining the conditional correlations implied by the estimated model over different time periods. The empirical findings suggest that there is significant co-movement (interdependence) of these CEEC markets with both the Russian and the UK ones. Furthermore, whilst the introduction of the euro has had mixed effects, EU accession has resulted in an increase in volatility spillovers between the three CEECs considered and the UK (contagion)

Herd behaviour in extreme market conditions: The case of the Athens stock exchange

This paper examines herd behaviour in extreme market conditions using data from the Athens Stock Exchange. We test for the presence of herding as suggested by Christie and Huang (1995) and Chang, Cheng, and Khorana (2000). Results based on daily, weekly and monthly data indicate the existence of herd behaviour for the years 1998-2007. Evidence of herd behaviour over daily time intervals is much stronger, revealing the short-term nature of the phenomenon. When the testing period is broken into semi-annual sub-periods, herding is found during the stock market crisis of 1999. Investor behaviour seems to have become more rational since 2002, owing to the regulatory and institutional reforms of the Greek equity market and the intense presence of foreign institutional investors

Liquidity risk, credit risk and the overnight interest rate spread: A stochastic volatility modelling approach

In this paper we model the volatility of the spread between the overnight interest rate and the central bank policy rate (the policy spread) for the euro area and the UK during the two main phases of the financial crisis that began in late 2007. During the crisis, the policy spread exhibited signs of volatility, owing to the breakdown in interbank market activity. The determinants of this volatility are assessed using Stochastic Volatility models to gauge the role played by liquidity risk, credit risk (financial and sovereign), and interest rate expectations. Our results suggest that liquidity risk is the main determinant of the volatility of the policy spread, but also that private bank credit risk has become more apparent in the post-Lehman collapse phase of the crisis for the euro area as financial CDS premia rose due to possible default fears. In addition, the ECB appears to have been more effective in addressing liquidity risk since the onset of the crisis, and this may be related to its greater direct access to a broader range of counterparties and its acceptance of a broader range of eligible collateral. The main implication is that, in crisis times, a sufficiently flexible operational framework for monetary policy implementation produces the most timely response to market tensions

Measuring Half-Lives Using A Non-Parametric Bootstrap Approach

In this paper we extend the Murray and Papell (2002) study by using a non-parametric bootstrap approach which allows for non-normality, and focusing on quarterly real exchange rate in twenty OECD countries in the post-1973 floating period. We run Augmented Dickey-Fuller (ADF) regressions, and estimate the half-lives (and confidence intervals) from the corresponding impulse response functions. Further, we use an approximately median-unbiased estimator of the autoregressive parameters, and report the implied point estimates and confidence intervals. We find that accounting for nonnormality results in even higher estimates of the degree of persistence of PPP deviations, but, as in Murray and Papell (2002), the confidence intervals are so wide that no strong conclusions are warranted on the existence of a PPP puzzle

Interest and exchange rate risk and stock returns: A multivariate GARCH-M modelling approach

In this paper we examine the sensitivity of stock returns to market, interest rate, and exchange rate risk in three financial sectors (Banking, Financial Services and Insurance) in 16 countries, including various European economies, the US and Japan. We also test for the presence of causality-in-mean and volatility spillovers. The econometric framework is a four-variate GARCH-in-mean model, which incorporates long-and short-term interest rates in turn. We find in most cases a positive effect of stock market returns on mean returns in each sector; by contrast, interest rates and exchange rates have a significant effect only in a few cases, respectively negative and without a clear sign pattern. As for the three types of risk, these are found to play a role in a minority of cases, with mixed signs. Finally, most cases of volatility spillovers occur from market return to sectoral returns in the insurance and banking sector in European economies, though there are also some instances of interest rate and exchange rate spillovers, both in Europe and the US

Selectivity, market timing and the morningstar star-rating system

This paper evaluates the Morningstar mutual fund ranking system. We find that indeed higher Morningstar ratings are associated with higher returns on the portfolios including respectively five-, four-, three-, two- and one-star funds only (STAR5 to STAR1). We then perform an unconditional and conditional portfolio performance evaluation. In both cases the evidence suggests that the better performance of the STAR3, STAR4 and STAR5 categories reflects superior stock selection rather than market timing abilities. Overall, the implication for the Morningstar ranking system is that this is most effective in identifying the worst-performing funds (STAR1 or STAR2) rather than the best-performing ones

Exchange rate uncertainty and international portfolio flows

This paper examines the impact of exchange rate uncertainty on different components of portfolio flows, namely equity and bond flows, as well as the dynamic linkages between exchange rate volatility and the variability of these two types of flows. Specifically, a bivariate GARCH-BEKK-in-mean model is estimated using bilateral data for the US vis-à-vis Australia, the UK, Japan, Canada, the euro area, and Sweden over the period 1988:01-2011:12. The results indicate that the effect of exchange rate uncertainty on equity flows is negative in the euro area, the UK and Sweden, and positive in Australia, whilst it is negative in all countries except Canada (where it is positive) in the case of bond flows. Under the assumption of risk aversion, this suggests that exchange rate uncertainty induces a home bias and causes investors to reduce their financing activities to maximise returns and minimise exposure to uncertainty. Furthermore, since exchange rate volatility and the variability of flows are interlinked, exchange rate or credit controls on these flows can be used to pursue economic and financial stability

Testing For Financial Contagion Between Developed And Emerging Markets During The 1997 East Asian Crisis

In this paper we examine whether during the 1997 East Asian crisis there was any contagion from the four largest economies in the region (Thailand, Indonesia, Korea and Malaysia) to a number of developed countries (Japan, UK, Germany and France). Following Forbes and Rigobon (2002), we test for contagion as a significant positive shift in the correlation between asset returns, taking into account heteroscedasticity and endogeneity bias. Furthermore, we improve on earlier empirical studies by carrying out a full sample test of the stability of the system that relies on more plausible (over)identifying restrictions. The estimation results provide some evidence of contagion, in particular from Japan (the major international lender in the region), which drastically cut its credit lines to the other Asian countries in 1997