Testing asymmetric correlations in stock returns via empirical likelihood method

2014 ◽  
Vol 4 (1) ◽  
pp. 42-57 ◽  
Author(s):  
Zhiyuan Pan ◽  
Xu Zheng ◽  
Qiang Chen
Keyword(s):  
Stock Market ◽  
Stock Returns ◽  
Empirical Likelihood ◽  
Critical Value ◽  
Likelihood Method ◽  
Content Type ◽  
Empirical Likelihood Method ◽  
Model Free ◽  
International Stock Markets ◽  
China Stock Market

Purpose – This study aims to propose a model-free statistic that tests asymmetric correlations of stock returns, in which stocks move more often with the market when the market goes down than when it goes up, and then empirically analyze the asymmetric correlations of the China stock market and international stock markets, respectively. Design/methodology/approach – Using empirical likelihood method, this study designs and conducts a model-free test, which converges to χ2 distribution under regulated conditions and performs well in the finite sample using bootstrap critical value method. Findings – By analyzing the authors' model-free test, the authors find that compared with Hong et al.'s test that closely relates to the authors, both of the tests are under rejected using asymptotic critical value. However, using the bootstrap critical value method can greatly improve the performance of the two tests. Second, investigating the power of the two tests, the authors find that the proportion of rejections of the authors' test is roughly 10-20 percent larger than Hong et al.'s test in mixed copula model setting. The last finding is the authors find evidence of asymmetric for small-cap size portfolios, but no evidence for middle-cap and large-cap size portfolios in the China stock market. Besides, the authors test asymmetric correlations between the USA and Japan, France and the UK; the asymmetric phenomenon exists in international stock markets, which is similar to Longin and Solnik's findings, but they are not significant according to both the authors' test and Hong et al.'s test. Research limitations/implications – The findings in this study suggest that both the authors' test and Hong et al.'s test are under rejected using asymptotic critical value. When applying these statistics to test asymmetric correlations, the authors should take care with the choice of critical value. Practical implications – The empirical analysis has a significant practical implication for asset allocation, asset pricing and risk management fields. Originality/value – This study constructs a model-free statistic to test asymmetric correlations using empirical likelihood method for the first time and corrects the size performance by bootstrap method, which improves the performance of Hong et al.'s test. To the authors' knowledge, this is the first study to test the asymmetric correlations in the China stock market.

scholarly journals On copula moment: empirical likelihood based estimation method

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jihane Abdelli ◽  
Brahim Brahimi
Keyword(s):  
Empirical Likelihood ◽  
Simulation Experiment ◽  
Likelihood Method ◽  
Estimation Methods ◽  
Content Type ◽  
Empirical Likelihood Method ◽  
Asymptotically Normal ◽  
Moment Estimation ◽  
Numerical Performance ◽  
Asymptotically Normal Estimator

PurposeIn this paper, the authors applied the empirical likelihood method, which was originally proposed by Owen, to the copula moment based estimation methods to take advantage of its properties, effectiveness, flexibility and reliability of the nonparametric methods, which have limiting chi-square distributions and may be used to obtain tests or confidence intervals. The authors derive an asymptotically normal estimator of the empirical likelihood based on copula moment estimation methods (ELCM). Finally numerical performance with a simulation experiment of ELCM estimator is studied and compared to the CM estimator, with a good result.Design/methodology/approachIn this paper we applied the empirical likelihood method which originally proposed by Owen, to the copula moment based estimation methods.FindingsWe derive an asymptotically normal estimator of the empirical likelihood based on copula moment estimation methods (ELCM). Finally numerical performance with a simulation experiment of ELCM estimator is studied and compared to the CM estimator, with a good result.Originality/valueIn this paper we applied the empirical likelihood method which originally proposed by Owen 1988, to the copula moment based estimation methods given by Brahimi and Necir 2012. We derive an new estimator of copula parameters and the asymptotic normality of the empirical likelihood based on copula moment estimation methods.

Empirical Likelihood Testing for Longitudinal Varying Coefficient Models

2014 ◽  
Vol 518 ◽  
pp. 356-360
Author(s):  
Chang Qing Liu
Keyword(s):  
Data Analysis ◽  
Empirical Likelihood ◽  
Real Data ◽  
Likelihood Method ◽  
Varying Coefficient Models ◽  
Empirical Likelihood Method ◽  
Real Data Analysis ◽  
Varying Coefficient ◽  
Testing Method

By using the empirical likelihood method, a testing method is proposed for longitudinal varying coefficient models. Some simulations and a real data analysis are undertaken to investigate the power of the empirical likelihood based testing method.

A quantile regression approach to evaluate the relative impact of global and local factors on the MENA stock markets

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Slah Bahloul ◽  
Nawel Ben Amor
Keyword(s):  
Stock Market ◽  
Quantile Regression ◽  
Stock Returns ◽  
Stock Markets ◽  
Financial Integration ◽  
Ordinary Least Squares ◽  
Market Returns ◽  
Stock Market Returns ◽  
Content Type ◽  
The Impact

PurposeThis paper investigates the relative importance of local macroeconomic and global factors in the explanation of twelve MENA (Middle East and North Africa) stock market returns across the different quantiles in order to determine their degree of international financial integration.Design/methodology/approachThe authors use both ordinary least squares and quantile regressions from January 2007 to January 2018. Quantile regression permits to know how the effects of explanatory variables vary across the different states of the market.FindingsThe results of this paper indicate that the impact of local macroeconomic and global factors differs across the quantiles and markets. Generally, there are wide ranges in degree of international integration and most of MENA stock markets appear to be weakly integrated. This reveals that the portfolio diversification within the stock markets in this region is still beneficial.Originality/valueThis paper is original for two reasons. First, it emphasizes, over a fairly long period, the impact of a large number of macroeconomic and global variables on the MENA stock market returns. Second, it examines if the relative effects of these factors on MENA stock returns vary or not across the market states and MENA countries.

Weather, investor psychology and stock returns: evidence from Fiji's stock market

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Janesh Sami
Keyword(s):  
Stock Market ◽  
Stock Returns ◽  
Sunshine Duration ◽  
Market Returns ◽  
Modeling Framework ◽  
Stock Market Returns ◽  
Content Type ◽  
Asset Pricing Models ◽  
Weather Changes ◽  
Practical Implications

PurposeThis paper investigates whether weather affects stock market returns in Fiji's stock market.Design/methodology/approachThe author employed an exponential general autoregressive conditional heteroskedastic (EGARCH) modeling framework to examine the effect of weather changes on stock market returns over the sample period 9/02/2000–31/12/2020.FindingsThe results show that weather (temperature, rain, humidity and sunshine duration) have robust but heterogenous effects on stock market returns in Fiji.Research limitations/implicationsIt is useful for scholars to modify asset pricing models to include weather-related variables (temperature, rain, humidity and sunshine duration) to better understand Fiji's stock market dynamics (even though they are often viewed as economically neutral variables).Practical implicationsInvestors and traders should consider their mood while making stock market decisions to lessen mood-induced errors.Originality/valueThis is the first attempt to examine the effect of weather (temperature, rain, humidity and sunshine duration) on stock market returns in Fiji's stock market.

Do Indian stock market sentiments impact contemporaneous returns?

2018 ◽  
Vol 7 (3) ◽  
pp. 332-346
Author(s):  
Divya Aggarwal ◽  
Pitabas Mohanty
Keyword(s):  
Stock Market ◽  
Stock Returns ◽  
Temporal Dynamics ◽  
Stock Exchange ◽  
Principal Component ◽  
Stock Index ◽  
Content Type ◽  
Investor Sentiments ◽  
Indian Stock Market ◽  
The Impact

Purpose The purpose of this paper is to analyse the impact of Indian investor sentiments on contemporaneous stock returns of Bombay Stock Exchange, National Stock Exchange and various sectoral indices in India by developing a sentiment index. Design/methodology/approach The study uses principal component analysis to develop a sentiment index as a proxy for Indian stock market sentiments over a time frame from April 1996 to January 2017. It uses an exploratory approach to identify relevant proxies in building a sentiment index using indirect market measures and macro variables of Indian and US markets. Findings The study finds that there is a significant positive correlation between the sentiment index and stock index returns. Sectors which are more dependent on institutional fund flows show a significant impact of the change in sentiments on their respective sectoral indices. Research limitations/implications The study has used data at a monthly frequency. Analysing higher frequency data can explain short-term temporal dynamics between sentiments and returns better. Further studies can be done to explore whether sentiments can be used to predict stock returns. Practical implications The results imply that one can develop profitable trading strategies by investing in sectors like metals and capital goods, which are more susceptible to generate positive returns when the sentiment index is high. Originality/value The study supplements the existing literature on the impact of investor sentiments on contemporaneous stock returns in the context of a developing market. It identifies relevant proxies of investor sentiments for the Indian stock market.

scholarly journals Pandemic and Indonesia Stock Market Performance

2021 ◽  
Vol 2 (4) ◽  
pp. 254-262
Author(s):  
Intan Surya Lesmana ◽  
Siti Saadah
Keyword(s):  
Stock Market ◽  
Stock Returns ◽  
Market Performance ◽  
Government Policies ◽  
Likelihood Method ◽  
Symmetric Model ◽  
Asymmetric Model ◽  
Government Response ◽  
Stock Market Performance ◽  
The Impact

This study aims to analyze the impact of the COVID-19 pandemic on Indonesia’s stock market performance. Considering the characteristics of daily stock return data that shows the characteristics of volatility clustering, the analytical method used is to develop a heteroscedastic model specification whose parameters are estimated using the maximum likelihood method. Based on data from March 2020 to January 2021, this study finds that the Exponential-GARCH asymmetric model is the best model compared to the Standard-GARCH symmetric model or the asymmetric Threshold-GARCH model. The inference analysis conducted on the Exponential-GARCH asymmetric model in this study shows that the stock market's performance that is significantly affected by this pandemic is the volatility of its returns. Stock price volatility is one of the important variables in stock market performance. This study produces empirical findings that government policies on social restrictions contribute significantly to suppressing stock market volatility. As for government policies in mitigating the risk of the spread of the epidemic, in this study, it is measured through a stringency index. This index was released by the Oxford COVID-19 Government Response Tracker (OxCGRT) which monitors the government's response to the coronavirus in 160 countries and is a parameter that evaluates the policies taken by a country's government based on nine metrics. This index does not measure the effectiveness of a country's government response, but only the level of tightness. However, the results of the tests carried out in this study did not find a significant impact of pandemic indicators, the number of cases, and the number of daily deaths related to COVID-19 on stock returns.

Does corporate governance matter for stock returns volatility in the Brazilian context?

2019 ◽  
Vol 19 (6) ◽  
pp. 1236-1252
Author(s):  
Guilherme Cardoso ◽  
Dannie Delanoy Carr ◽  
Pablo Rogers
Keyword(s):  
Corporate Governance ◽  
Stock Market ◽  
Stock Returns ◽  
Term Structure ◽  
Good Governance ◽  
Corporate Boards ◽  
Content Type ◽  
Error Measures ◽  
Good Corporate Governance ◽  
Governance Practices

Purpose This paper aims to examine the Brazilian stock market behavior and volatility term structure of two portfolios that, theoretically, the companies that comprise them have different degrees of idiosyncratic risk: one portfolio consists of firms with good corporate governance and the other comprises firms with poor corporate governance. Design/methodology/approach The sample comprises corporate firms listed in the Brazilian stock market during the period from January 2008 to December 2017. Generalized autoregressive conditional heteroskedasticity models were applied. Findings The results show that the portfolio of firms with good corporate governance practices presents fluctuations that are more often temporary and reactive, with trends’ persistence of shorter durations, when considering the punctual volatility of the parameters estimated. This opposed expectation that the portfolio comprised of companies with good governance practices are better protected from short-term movements. However, over time and with standard error measures in consideration, both portfolios’ volatilities behave in similar ways. These findings may be related to Brazilian market characteristics, such as ownership concentration, ineffective corporate boards and the ever-developing nature of the stock market in Brazil. Any one of these characteristics present challenges to effective enforcement of the corporate governance practices in the Brazilian context. Originality/value The findings are potentially to the interest of researchers and practitioners for several reasons. First, this paper contributes to the growing literature on the relationship between corporate governance and market volatility. Second, it informs that volatility in the Brazilian context is likely only partially, if at all, influenced by corporate governance practices. Third, longitudinally, both indices follow the same pattern and converge to the same place.

Asymmetric impact of exchange rate changes on stock returns: evidence of two de facto regimes

2019 ◽  
Vol 19 (2) ◽  
pp. 147-173
Author(s):  
Walid M.A. Ahmed
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Stock Market ◽  
Stock Returns ◽  
Stock Prices ◽  
Spillover Effects ◽  
Content Type ◽  
Currency Depreciation ◽  
Long Run ◽  
Exchange Rate Changes

Purpose This study focuses on Egypt’s recent experience with exchange rate policies, examining the existence of spillover effects of exchange rate variations on stock prices across two different de facto regimes and whether these effects, if any, are asymmetric. Design/methodology/approach The empirical analysis is carried out using a nonlinear autoregressive distributed lag modeling framework, which permits testing for the presence of short- and long-run asymmetries. Relevant local and global factors are also included in the analysis as control variables. The authors divide the entire sample into a soft peg period and a free float one. Findings Over the soft peg regime period, both positive and negative changes in EGP/USD exchange rates seem to have a significant impact on stock returns, whether in the short or long run. Short-term asymmetric effects vanish in the free float period, while long-term asymmetries continue to exist. By and large, the authors find that currency depreciation tends to exercise a stronger influence on stock returns than does currency appreciation. Practical implications The results offer important insights for investors, regulators and policymakers. With the domestic currency depreciation having a negative impact on stock prices, investors should contemplate implementing appropriate currency hedging strategies to abate depreciation risks and, hence, preserve their expected rate of return on the Egyptian pound-denominated investments. In the current post-flotation era, the government could pursue a flexible inflation targeting monetary policy framework, with a view to both lowering the soaring inflation toward an announced target rate and stabilizing economic growth. The Central Bank of Egypt (CBE) could adopt indirect monetary policy instruments to secure tightened liquidity conditions. Besides, the CBE could raise policy rates to incentivize people to keep their money in local currency-denominated instruments, instead of dollarizing their savings, thereby relieving banks of foreign currency demand pressures. Nevertheless, while being beneficial to the country’s real economy on several aspects, such contractionary monetary measures may temporarily impinge on stock market performance. Accordingly, policymakers should consider precautionary measures that reduce the potential for price distortions and unnecessary volatility in the stock market. Originality/value To the best of the authors’ knowledge, the current study represents the first attempt to explore the potential impact of exchange rate changes under different regimes on Egypt’s stock market, thus contributing to the relevant research in this area.

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