nep-fmk New Economics Papers
on Financial Markets
Issue of 2012‒02‒08
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Equity Risk Premium: Empirical Evidence from Emerging Markets By Michael Donadelli; Lorenzo Prosperi
  2. Tactical allocation in falling stocks: Combining momentum and solvency ratio signals By Piotr Arendarski
  3. Time-Varying Beta Estimators in the Mexican Emerging Market By Zárraga Alonso, Ainhoa; Nieto Domenech, Belén; Orbe Mandaluniz, Susan
  4. Exchange Rate Volatility in BRICS Countries By MARADIAGA, DAVID I.; ZAPATA, HECTOR O.; PUJULA, AUDE L.

  1. By: Michael Donadelli (LUISS Guido Carli University); Lorenzo Prosperi (Toulouse School of Economics)
    Abstract: The analysis of the Equity Risk Premium (ERP) and the research efforts aimed at solving the Equity Premium Puzzle (Mehra and Prescott 1985), are still widely discussed in the economic and financial literature. The purpose of this paper is to show that differences in the ERP between developed and emerging markets lead to many empirical asset pricing issues. Using data from both markets, we first provide an ex-post simple time series analysis on the ERP. Compared to developed markets, and in line with existing literature, we find that emerging markets compensate investors with higher returns. We observe that the time varying nature of the ERP in emerging economies, relates mainly to economic cycles, shocks and other macro phenomena (i.e. global financial market integration). Basic statistics also show that during the last decade the ERP shrunk, especially in advanced economies. To improve investigations on the higher emerging marketsÕ equity premium, a standard global asset pricing model is adopted. On one hand, we mainly find that the one-factor model does not fully predict emerging marketsÕ equity premia. On the other hand, we discover that the inclusion of liquidity conditions and time-varying components provides reasonable explainations for the behaviour of equity premia in these ÒyoungÓ markets. Our final findings mainly suggests that global business cycle and financial integration process are crucial in determining the risk associated to emerging marketsÕ investments.
    Keywords: Stock markets returns, equity premium puzzle, Equity risk premium.
    JEL: C13 G12 G15 E44
    Date: 2012
  2. By: Piotr Arendarski (University of Warsaw, Faculty of Economic Sciences)
    Abstract: We identified 4500 US stocks with year ending losses of 50 percent or more during the 2001-2011 period. We screened our "falling knives" for financial strength to promote a greater likelihood of recovery and minimize any survivorship bias. We added the constraints of Altman Z-Scores, debt/equity ratio, and current ratio to our data set. We use GARCH-in-mean model to control the risk of the strategies. The results show consistent improvement of risk-standardized return profiles of the strategies in comparison with buy and hold strategy.
    Keywords: falling stocks, contrarian investing, financial strength ratios, GARCH in mean model, Augmented Dickey-Fuller test
    JEL: C58 G11 G17 G14
    Date: 2012
  3. By: Zárraga Alonso, Ainhoa; Nieto Domenech, Belén; Orbe Mandaluniz, Susan
    Abstract: This paper compares the performance of three different time-varying betas that have never previously been compared: the rolling OLS estimator, a nonparametric estimator and an estimator based on GARCH models. The study is conducted using returns from the Mexican stock market grouped into six portfolios for the period 2003-2009. The comparison, based on asset pricing perspective and mean-variance space returns, concludes that GARCH based beta estimators outperform the others when the comparison is in terms of time series while the nonparametric estimator is more appropriate in the cross-sectional context.
    Keywords: time-varying beta, nonparametric estimator, GARCH based beta estimator, G15, C12, C14,
    JEL: G15 C12 C14
    Date: 2011
    Abstract: This paper measures the impact of bilateral exchange rates, the world agricultural GDP and third-country exchange rate volatilities (Yen/USD and Euro/USD) on the BRICS agricultural exports using a vector autoregressive (VAR) model. Two measures of volatility are used: the standard deviation and the coefficient of variation of the rates of change of the real exchange rates. We found that most variables are integrated of order two except the third-country exchange rate volatilities which are stationary and thus considered as exogenous in the VAR models. The causality between I(2) variables was tested using the modified Wald test introduced by Toda and Yamamoto (1995). We found that both volatilities (Yen/USD and Euro/USD) Granger cause Brazilian agricultural exports and that the Yen/USD causes Chinese agricultural exports.
    Keywords: BRICS, Currency Exchange Rate, Volatility, Trade, Agricultural Exports, U.S. Dollar, Risk, International Relations/Trade,
    Date: 2012

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