New Economics Papers
on Financial Markets
Issue of 2012‒05‒02
four papers chosen by

  1. Value matters: Predictability of Stock Index Returns By Natascia Angelini; Giacomo Bormetti; Stefano Marmi; Franco Nardini
  2. Risk spillovers in international equity portfolios By Matteo Bonato; Massimiliano Caporin; Angelo Ranaldo
  3. Socially responsible mutual funds: An efficiency comparison among the European countries By Antonella Basso; Stefania Funari
  4. Comparative Analysis of Zero Coupon Yield Curve Estimation Methods Using JGB Price Data By Kentaro Kikuchi; Kohei Shintani

  1. By: Natascia Angelini; Giacomo Bormetti; Stefano Marmi; Franco Nardini
    Abstract: The aim of this paper is twofold: to provide a theoretical framework and to give further empirical support to Shiller's test of the appropriateness of prices in the stock market based on the Cyclically Adjusted Price Earnings (CAPE) ratio. We devote the first part of the paper to the empirical analysis and we show that the CAPE is a powerful predictor of future long run performances of the market not only for the U.S. but also for countries such as Belgium, France, Germany, Japan, the Netherlands, Norway, Sweden and Switzerland. We show four relevant empirical facts: i) the striking ability of the logarithmic averaged earning over price ratio to predict returns of the index, ii) how this evidence increases switching from returns to gross returns, iii) moving over different time horizons, the regression coefficients are constant in a statistically robust way, and iv) the poorness of the prediction when the precursor is adjusted with long term interest rate. In the second part we provide a theoretical justification of the empirical observations. Indeed we propose a simple model of the price dynamics in which the return growth depends on three components: a) a momentum component, naturally justified in terms of agents' belief that expected returns are higher in bullish markets than in bearish ones; b) a fundamental component proportional to the log earnings over price ratio at time zero, from which the actual stock price may deviate as an effect of random external disturbances, and c) a driving component ensuring the diffusive behaviour of stock prices. Under these assumptions, we are able to prove that, if we consider a sufficiently large number of periods, the expected rate of return and the expected gross return are linear in the initial time value of the log earnings over price ratio, and their variance goes to zero with rate of convergence equal to minus one.
    Date: 2012–04
  2. By: Matteo Bonato; Massimiliano Caporin; Angelo Ranaldo
    Abstract: We define risk spillover as the dependence of a given asset variance on the past covariances and variances of other assets. Building on this idea, we propose the use of a highly flexible and tractable model to forecast the volatility of an international equity portfolio. According to the risk management strategy proposed, portfolio risk is seen as a specific combination of daily realized variances and covariances extracted froma high frequency dataset, which includes equities and currencies. In this framework, we focus on the risk spillovers across equities within the same sector (sector spillover), and fromcurrencies to international equities (currency spillover). We compare these specific risk spillovers to a more general framework (full spillover) whereby we allow for lagged dependence across all variances and covariances. The forecasting analysis shows that considering only sector- and currency-risk spillovers, rather than full spillovers, improves performance, both in economic and statistical terms.
    Keywords: Risk spillover, portfolio risk, currency risk, variance forecasting, international portfolio, Wishart distribution
    JEL: C13 C16 C22 C51 C53 G17
    Date: 2012
  3. By: Antonella Basso (Department of Economics, Università Ca' Foscari Venezia); Stefania Funari (Department of Management, Università Ca' Foscari Venezia)
    Abstract: The first objective of this contribution is to evaluate the performance of SRI equity mutual funds in the main European countries with three different DEA models. Secondly, with a series of statistical tests we compare the performance of SRI and non SRI mutual funds in the various countries, to determine if SRI mutual funds have to sacrifice something in terms of financial performance. Thirdly, we compare the performance obtained by SRI mutual funds among the different European countries.
    Keywords: SRI mutual funds; Performance evaluation; Data envelopment analysis
    JEL: C65 G1 G23
    Date: 2012–04
  4. By: Kentaro Kikuchi (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Kohei Shintani (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper conducts a comparative analysis of the diverse methods for estimating the Japanese government bond (JGB) zero coupon yield curve (hereafter, zero curve) according to the criteria that estimation methods should meet. Previous studies propose many methods for estimating the zero curve from the market prices of coupon-bearing bonds. In estimating the JGB zero curve, however, an undesirable method may fail to accurately grasp the features of the zero curve. In order to select an appropriate estimation method for the JGB, we set the following criteria for the zero curve: (1) estimates should not fall below zero, (2) estimates should not take abnormal values, (3) estimates should have a good fit to market prices, and (4) the zero curve should have little unevenness. The method which meets these criteria enables us to estimate the zero curve with a good fit to the JGB market prices and a proper interpolation to grasp the features of the zero curve. Based on our analysis, we conclude that the method proposed in Steeley [1991] is the best in light of the criteria for the JGB price data. In fact, the zero curve based on this method can fully capture the characteristics of the JGB zero curve in a prolonged period of accommodative monetary policy.
    Keywords: coupon-bearing government bond, zero coupon yield, piecewise polynomial function
    JEL: C13 C14 G12
    Date: 2012–04

General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.