The response of corporate investments in the US to oil price changes: the role of asymmetries

This paper investigates the influence of oil price changes on corporate investment in the US using a large sample of 15,411 companies from 1984 to 2017. It adds to the literature by showing an asymmetric response of capital investments to oil price changes for non-oil companies. Particularly, positive oil price changes have a larger adverse impact on investments than the positive impact created by negative oil price changes. These results are important in assessing the impact of energy price fluctuations on the long-term investment decisions of US companies

Financial and monetary policy responses to oil price shocks: evidence from oil-importing and oil-exporting countries

In this study, we investigate the financial and monetary policy responses to oil price shocks using a Structural VAR framework. We distinguish between net oil-importing and net oil-exporting countries. Since the 80s, a significant number of empirical studies have been published investigating the effect of oil prices on macroeconomic and financial variables. Most of these studies though, do not make a distinction between oil-importing and oil-exporting economies. Overall, our results indicate that the level of inflation in both net oil-exporting and net oil-importing countries is significantly affected by oil price innovations. Furthermore, we find that the response of interest rates to an oil price shock depends heavily on the monetary policy regime of each country. Finally, stock markets operating in net oil-importing countries exhibit a negative response to increased oil prices. The reverse is true for the stock market of the net oil-exporting countries. We find evidence that the magnitude of stock market responses to oil price shocks is higher for the newly established and/or less liquid stock market

Value-at-risk under extreme values: the relative performance in MENA emerging stock markets

Purpose – The paper aims to investigate the relative performance of the most popular value-at-risk (VaR) estimates with an emphasis on the extreme value theory (EVT) methodology for seven Middle East and North Africa (MENA) countries. Design/methodology/approach – The paper calculates tails distributions of return series by EVT. This allows computing VaR and comparing the results with Variance-Covariance method, Historical simulation, and ARCH-type process with normal distribution, Student-t distribution and skewed Student-t distribution. The paper assesses the performance of the models, which are used in VaR estimations, based on their empirical failure rates. Findings – The empirical results demonstrate that the return distributions of the MENA markets are characterized by fat tails which implies that VaR measures relies on the normal distribution will underestimate VaR. The results suggest that the extreme value approach, by modeling the tails of the return distributions, are more relevant to measure VaR in most of the MENA. Research limitations/implications – The results show that the use of conventional methodologies such as the normal distribution model to estimate the financial market risk in MENA countries may lead to faulty estimation of risk in the world of volatile markets. Originality/value – The paper tried to fill the gap in the literature and perform an evaluation of the relative performance of the most popular VaR estimates with an emphasis on the EVT methodology in seven MENA emerging stock markets. A comparison of the performance between EVT and other VaR techniques should support the decision whether more or less sophisticated methods are appropriate in order to assess stock market risks in the MENA countries.Financial instruments, Financial risk, Middle East, North Africa, Stock markets

THE RELATIVE RISK PERFORMANCE OF ISLAMIC FINANCE: A NEW GUIDE TO LESS RISKY INVESTMENTS

We examine the relative risk performance of the Dow Jones Islamic Index (DJIS) and find that the index outperforms the Dow Jones (DJIM) WORLD Index in terms of risk. Using the most recent Value-at-Risk (VaR) methodologies (RiskMetrics, Student-t APARCH, and skewed Student-t APARCH) on the 1996–2005 period, and assuming one-day holding period for both indices with a moving window of 500 day data, we show that the value of VaR is greater for DJIM WORLD than for DJIS Islamic. We interpret the results mainly to the profit-and-loss sharing principle of Islamic finance where banks share the profits and bear losses (Mudarabah) or share both profits and losses (Musharaka) with the firm.Islamic investment, profit-and-loss sharing, risk performance, Value-at-Risk

The tail behavior of extreme stock returns in the Gulf emerging markets: An implication for financial risk management

Purpose – In this paper, the aim is to investigate the tail behavior of daily stock returns for three emerging stock in the Gulf region (Bahrain, Oman, and Saudi Arabia) over the period 1998-2005. In addition, the aim is also to test whether the distributions are similar across these markets. Design/methodology/approach – Following McNeil and Frey, Wanger and Marsh, and Bystrom, extreme value theory (EVT) methods are utilized to examine the asymptotic distribution of the tail for daily returns in the Gulf region. As a first step and to obtain independent and identically distributed residuals series, the returns are prefiltered with an ordinary time-series model, taking into account the observed Gulf return dynamics. Then, the “Peaks-Over-Threshold” (POT) model is applied to estimate the tails of the innovational distribution. Findings – Not only is the heavy tail found to be a facial appearance in these markets, but also POT method of modelling extreme tail quantiles is more accurate than conventional methodologies (historical simulation and normal distribution models) in estimating the tail behavior of the Gulf markets returns. Across all return series, it is found that left and right tails behave very different across countries. Research limitations/implications – The results show that risk models that are able to exploit tail behavior could lead to more accurate risk estimates. Thus, participants in the Gulf equity markets can rely on EVT-based risk model when assessing their risks. Originality/value – The paper extends previous studies in two aspects. First, it extends the classical unconditional extreme value approach by first filtering the data by using AR-FIAPARCH model to capture some of the dependencies in the stock returns, and thereafter applying ordinary extreme value techniques. Second, it provides a broad analysis of return dynamics of the Gulf markets.Persian Gulf States, Risk management, Stock markets, Stock returns

Price Limit and Volatility in Taiwan Stock Exchange: Some Additional Evidence from the Extreme Value Approach

We reexamine the effects of price limits on stock volatility of Taiwan Stock Exchange using a new methodology based on the Extreme-Value technique. Consistent with the advocates of price limits, we find that stock market volatility is sharply moderated under more restrictive price limits.Price limits, Extreme value theory, Volatility, Taiwan stock exchange

A nonparametric cointegration analysis of the forward rate unbiasedness hypothesis

The nonparametric cointegration method of Breitung (2002) is applied to test for the forward rate unbiasedness hypothesis (FRUH) using monthly data of the US dollar vis-à-vis two major currencies viz. the British pound and the Canadian dollar over the period spanned from 1973 to 2002. The results of the nonparametric test are compared with the parametric test suggested by Johansen (1988 and 1992) and Johansen and Juselius (1990). Robust cointegration is found between the spot and the forward rates but the FRUH is rejected. The result is robust whether the trend is included in the model or not.