Tail Risks and Stock Return Predictability: Evidence From Asia-Pacific

Hinging on the recently established relevance of tail thickness information, we examine the predictability of fifteen major stocks in the Asia-Pacific region using conditional autoregressive value at risk (CAViaR) model estimates of tail risks. We used a Westerlund and Narayan–type distributed lag model to examine the nexus between returns and tail risk under controlled global and US stocks spillover effects. Country-specific tail risks induce a near-term rise (completely disappears) in returns on “bad” (“good”) days. Our results are robust

To “ECO” or not to “ECO”? Evidence for the single currency agenda of ECOWAS

In this study, we provide results to aid the ECOWAS in its final decision on the adoption of the single currency (the “ECO”) for the proposed regional monetary union. We demonstrate, with the fractional integration and cointegration techniques, evidences for the proposed monetary policy mechanism in the region to deal with shocks and the single currency to serve as a stabilisation tool. Hence, the results support the adoption of the ECO, with emphasis on preferably linking it with the US dollar than the Euro

An Information-Based Index of Uncertainty and the predictability of Energy Prices

We develop an index of uncertainty, the COVID-19 induced uncertainty (CIU) index, and employ it to empirically examine the vulnerability of energy prices amidst the COVID-19 pandemic using a distributed lag model that jointly accounts for conditional heteroscedasticity, autocorrelation, persistence, and structural breaks, as well as day-of-the-week effect. The nexus between energy returns and uncertainty index is analyzed, using daily price returns of eight energy sources (Brent oil, diesel, gasoline, heating oil, kerosene, natural gas, propane, and WTI oil) and four news/information-based uncertainty proxies [CIU, EPU, Global Fear Index (GFI) and VIX]. The CIU and alternative indexes are used, respectively for the main estimation and sensitivity analysis. We show the outperformance of CIU over alternative news uncertainty proxies in the prediction of energy prices. News (aggregate) and bad news are found to negatively and significantly impact energy returns, while good news has a significantly positive impact. Imperatively, energy variables lack hedging potentials against the uncertainty occasioned by the COVID-19 pandemic, while we find no strong evidence of asymmetry. Our results are robust to the choice of news variables, forecast horizons employed, with likely sensitivity to energy prices

Pandemics and cryptocoins

This study examines the effect of pandemic-induced uncertainty on cryptocoins (Bitcoin, Ethereum and Ripple). It employs the Westerlund and Narayan (2012, 2015) predictive model to examine the predictability of pandemic-induced uncertainty and our model’s forecast performance. We examine the role of asymmetry in uncertainty and the sensitivity of our results to the recently-developed Salisu and Akanni (2020) Global Fear Index. Cryptocoins act as a hedge against uncertainty due to pandemics, albeit with reduced hedging effectiveness in the COVID 19 period. Accounting for asymmetry improves predictability and model forecast performance. Our results may be sensitive to the choice of measure of pandemic-http://www.elsevier.com/locate/iimbEconomicsSDG-08:Decent work and economic growt

Investigating Structural break-GARCH-based Unit root test in US exchange rates

This paper applied a structural break-GARCH-based unit root test in studying the US exchange rates for twenty-two different currencies across America, Europe, Asia-Pacific and Southern Africa. The study employed three different data frequencies – daily, weekly and monthly with a view to understand the dynamics of a high frequency series that is characterized by alternating trend patterns and plausible presence of structural breaks. The chosen sample interval included periods of financial crisis or peculiar events. The exchange rates were found to exhibit ARCH effects at higher lags, thus informing the adaptation of the more parsimonious GARCH process in the residuals in contrast to the white noise disturbance assumption. The non-trended and trended structural break-GARCH-based unit root tests performances were adjudged with other existing tests. With significant break dates, between 2 and 5, the presence or otherwise of a unit root in foreign exchange rate series would be better captured when the inherent heteroscedasticity, trend and structural breaks in foreign exchange rate series are put into consideratio

Investigating Structural break-GARCH-based Unit root test in US exchange rates

This paper applied a structural break-GARCH-based unit root test in studying the US exchange rates for twenty-two different currencies across America, Europe, Asia-Pacific and Southern Africa. The study employed three different data frequencies – daily, weekly and monthly with a view to understand the dynamics of a high frequency series that is characterized by alternating trend patterns and plausible presence of structural breaks. The chosen sample interval included periods of financial crisis or peculiar events. The exchange rates were found to exhibit ARCH effects at higher lags, thus informing the adaptation of the more parsimonious GARCH process in the residuals in contrast to the white noise disturbance assumption. The non-trended and trended structural break-GARCH-based unit root tests performances were adjudged with other existing tests. With significant break dates, between 2 and 5, the presence or otherwise of a unit root in foreign exchange rate series would be better captured when the inherent heteroscedasticity, trend and structural breaks in foreign exchange rate series are put into consideratio

Life Expectancy in West African Countries: Evidence of Convergence and Catching Up with the North

We investigate the possibility of convergence and catching up of life expectancy values of West African countries with those of North African countries. Following the theory of time series convergence documented in Bernard and Durlauf (1996) and Greasley and Oxley (1997), we apply more robust unit root tests, based on Fourier nonlinearity and instantaneous breaks, proposed in Furuoka (2017) in investigating the convergence of each pair, that is, a West African country with that of a particular North Africa country. As no unit root in the differences of the pair implies convergence, the results obtained by the new statistical approach quite outperform those of classical unit root tests. The results show general evidence of convergence of life expectancy values of those in West Africa to those of the North

Geopolitical risk and stock market volatility in emerging markets : a GARCH–MIDAS approach

In this study, we examine the connection between geopolitical risk (GPR) and stock market volatility in emerging economies. Our motivation for this study is premised on the need to assess both the predictability and the associated economic gains in relation to the subject in order to offer more useful insights to investors and practitioners. To the best of our knowledge, this is the first study that jointly considers these objectives. Consequently, we employ the GARCH-MIDAS framework which accommodates mixed data frequencies thereby circumventing information loss or any associated bias. We find that emerging stock market volatility responds more positively to geopolitical risks although the act-related GPR index offers better out-of-sample forecasts than the threat-related GPR. We also find that accounting for global economic factors in the predictability analysis is crucial for robust outcomes. Finally, we provide some utility gains of including GPR in the predictive model of stock market volatility while also highlighting some useful implications of our findings for investment and policy decisions.https://www.elsevier.com/locate/najefhj2023Economic

Energy-related uncertainty and international stock market volatility

This paper predicts the daily return volatility of 28 advanced and developing stock markets using monthly metrics of the corresponding country and global energy-related uncertainty indexes (EUIs) recently proposed in the literature. Using data in their “natural” frequencies to avoid aggregation bias, the results show that country-specific and global EUIs have predictive powers for stock returns volatility for the in-sample periods, with increased levels of EUIs exhibiting the tendency to heighten volatility. This predictability also withstands various out-of-sample forecast horizons, implying that EUI is a statistically relevant predictor in the out-of-sample analysis. The forecast precision of the GARCH-MIDAS model is improved by incorporating global EUIs relatively more than country-specific EUIs. The robustness of the findings with respect to the choice of EUI and sample definition is further confirmed. The outcomes have important policy implications for the concerned stakeholders who are concerned with stability in the global financial system and economy.https://www.elsevier.com/locate/qrefhj2024EconomicsSDG-08:Decent work and economic growt