New Economics Papers
on Financial Markets
Issue of 2014‒07‒05
three papers chosen by

  1. Stock Market Predictability: Global Evidence and an Explanation By Cheolbeom Park; Dong-hun Shin
  2. Stock Market Co-movement and Shock Transmission: Islamic versus Conventional Equity Indices By Dewandaru, Ginanjar; Alaoui, AbdelKader; Bacha, Obiyathulla; Masih, Mansur
  3. The Co-movement of Selective Conventional and Islamic Stock Markets in East Asia: Is there any Impact on Shariah Compliant Equity Investment in China? By Saiti, Buerhan; Masih, Mansur

  1. By: Cheolbeom Park (Department of Economics, Korea University, Seoul, Republic of Korea); Dong-hun Shin (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: Using a comprehensive dataset covering 34 countries from Datastream, we find that dividend-price ratio has a broad spectrum of forecasting abilities internationally. In some countries, such as the US, the dividend-price ratio is a powerful predictor of exclusively stock returns, whereas in others it is a powerful predictor of exclusively dividend growth rates. For many countries, however, the dividend-price ratio has some predictive power for both stock returns and dividend growth rates, although the relative degree of predictive power differs. We have provided an explanation for these differences in stock market predictabilities between countries. When a firm with a dominant shareholder is publicly traded, then the dominant shareholder determines cash-flow policy but the stochastic discount factor contained in the stock price may reflect the minority shareholders¡¯ stochastic discount factor. For this reason, the correlation between cash-flow and stochastic discount factor approaches zero as the disparity between voting rights and cash-flow rights increases. As a result, the stock price becomes more dependent on expected dividends than expected stock returns, and, therefore, the dividend-price ratio has a stronger predictive power for dividend growth. Consistent with our explanation, we find a strong positive relation between dividend growth predictability and disparity, but a significantly negative one between stock return predictability and disparity. These relations are found to be consistent across various robust tests.
    Keywords: Dividend-price ratio, Stock returns, Dividend growth, Predictability, Disparity
    JEL: G12 G32 E44
    Date: 2014
  2. By: Dewandaru, Ginanjar; Alaoui, AbdelKader; Bacha, Obiyathulla; Masih, Mansur
    Abstract: Our study measures co-movements in Islamic and conventional equity markets, to discover contagion and to measure integration level. We apply wavelet decomposition to unveil the multi-horizon nature of co-movement. We find that the subprime crisis generates fundamental-based contagion for both markets. The less exposure for some Islamic indices can be due to low leverage effect and the exclusion of conventional financial stocks. We also find higher fundamental integration for Islamic markets, attributable to their allocation related to the real sector. Finally, we show a leading role of the LIBOR negatively over Islamic indices in the long run.
    Keywords: Islamic finance, Shariah, Shock transmission, financial crisis, contagion, interdependence, market integration, wavelet analysis, wavelet coherency
    JEL: C58
    Date: 2014–06–26
  3. By: Saiti, Buerhan; Masih, Mansur
    Abstract: This paper investigates the dynamic causal linkages in the daily returns among seven major conventional and Islamic stock indices in East Asia through the application of the time series techniques. We analyse seven conventional and Shariah -compliant stock indices (such as, FTSE Shariah China Index, Asia Shariah index, Malaysia EMAS Shariah Index, China SSE Composite Index, Hang Seng Index, Nikkei 225 and KOSPI) covering the period from 26 October 2007 to 1 March 2011. Essentially, the purpose of this research is to identify the extent of influence of conventional and Islamic, regional and international equity markets on Shariah-compliant equity investment in China. Our study is focused on investigating the following empirical questions: (i) which indices do the Shariah China Index commove with? (ii) which indices is the Shariah China Index Granger-causally related with ? and (iii) which major stock market was driving the selective conventional and Islamic markets? Our findings tend to suggest: (i) the Sharia China Index appears to have a theoretical and long-run comovement with all the select conventional and Islamic markets (as evidenced in the Cointegration and LRSM tests) (ii) the Shariah China Index is Granger-caused by all the conventional and Islamic markets (as evidenced in the VECM tests) (iii) Finally, what stands out is the leadership of the China conventional SSE market followed by the Malaysia Shariah market in driving all indices including the Sharia China index (as evidenced in the VDCs tests).
    Keywords: Shariah-Compliant Stocks, Unit Root Test, Cointegration, LRSM, VECM, VDCs, IRFs, Persistent Profiles
    JEL: C58 G15
    Date: 2014–06–29

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