New Economics Papers
on Financial Markets
Issue of 2014‒08‒09
four papers chosen by

  1. An Empirical Evidence of Dynamic Interaction between institutional fund flows and Stock Market Returns By Naik, Pramod Kumar; Padhi, Puja
  2. When Growth Beats Value: Removing Tail Risk From Global Equity Momentum Strategies By Andrew Clare; James Seaton; Peter N. Smith; Stephen Thomas
  3. The Effects of Sentiment on Market Return and Volatility and The Cross-Sectional Risk Premium of Sentiment-affected Volatility By Yang, Yan; Copeland, Laurence
  4. Leverage versus volatility: Evidence from the Capital Structure of European Firms By el Alaoui, AbdelKader; Masih, Mansur; Bacha, Obiyathulla; Asutay, Mehmet

  1. By: Naik, Pramod Kumar; Padhi, Puja
    Abstract: This study examines the dynamics of the relationship between institutional investment flow and stock returns for India using daily data over the period of 1st Jan 2002 to 31st July 2012. The analysis has been conducted in a two and three factors vector autoregression framework in which we considered investment flow of two sets of institutional investors i.e., foreign institutional investors (FIIs) and domestic institutional investors (DIIs), separately as well as jointly to form the endogenous part of vector autoregression system. The separate analysis for each institutional investors group reveals that, FIIs flow do not have any significant impact on market returns, the DIIs investment flow do. We also find that the fund flow from both the investor groups significantly affected by their own lags and lagged returns, implying that they follow their own past strategy as well as the recent market behaviour albeit their trading strategy differs. Considering these two institutional investment groups jointly, we find that the net flow of both FIIs and DIIs significantly influences Indian stock market even after controlling for market fundamentals. Further we find a feedback relationship between the institutional investment flow and stock market returns. Overall, it is found that the institutional investment flow collectively impact the stock market returns.
    Keywords: Institutional Investment, Mutual fund flows, Foreign Institutional Investment, Stock market returns
    JEL: G10 G20 G23
    Date: 2014–08–02
  2. By: Andrew Clare; James Seaton; Peter N. Smith; Stephen Thomas
    Abstract: We investigate the relationship between value, growth and momentum investment styles across a wide range of developed and emerging economy equity markets. As would be anticipated, value investing generally beats growth. We then determine whether the application of relative momentum or trend following filters can enhance the risk-adjusted performance for either value or growth investors. We find that both value and growth portfolios benefit from momentum filters but particularly the latter, though the application of such a filter still leaves investors with return volatility that is typical of equity markets along with negative skewness and with high maximum drawdowns. However, our results show that the use of a simple trend following filter typically delivers a much more favourable investment performance than relative momentum with considerably lower volatility and smaller drawdowns. Furthermore, the application of a simple trend following filter either on its own or in combination with a relative momentum filter, not only reduces the performance advantage of value over growth investing but actually reverses this advantage.
    Keywords: International equity, Value investing, Growth investing, Relative momentum, Trend following, Tail risk
    JEL: G0 G11 G15
    Date: 2014–05
  3. By: Yang, Yan (Cardiff Business School); Copeland, Laurence (Cardiff Business School)
    Abstract: We construct investor sentiment of UK stock market using the procedure of principal component analysis. Using sentiment-augmented EGARCH component model, we analyse the impacts of sentiment on market excess return, the permanent component of market volatility and the transitory component of market volatility. Bullish sentiment leads to higher market excess return while bearish sentiment leads to lower excess return. Sentiment-augmented EGARCH component model compares favourably to the original EGARCH component model which does not take investor sentiment into account. Furthermore, we test the cross-sectional risk premia of the permanent and transitory components of sentiment-affected volatility in the framework of ICAPM.
    Keywords: investor sentiment; principal component analysis; EGARCH component model; ICAPM; cross-sectional risk premium
    JEL: G12 G15
    Date: 2014–07
  4. By: el Alaoui, AbdelKader; Masih, Mansur; Bacha, Obiyathulla; Asutay, Mehmet
    Abstract: The capital structure theory advocates a mix between debt and equity to optimize a firm‘s value (Modigliani & Miller, 1958). However, Islamic finance recognizes more conservative levels of debt for firms, based not on capital structure, but on debt to total assets or debt to market capitalization. This study is the first attempt to investigate the role of leverage in affecting the returns and the firm‘s share price volatility in relation to an Islamic finance perspective (IFP). The paper is based on a sample of 320 European companies distributed into different portfolios with high and low debt, high and low assets and focused on ten different countries. Comparative portfolio analysis was used to obtain a number of testable hypotheses, which specify the factors at the level of the firm and at the level of the market, in order to determine optimal financial risk. Specifically, we use the mean variance efficient frontier (MVEF) to confirm, in accordance with the theory, that a portfolio with a higher capital structure has higher volatility and lower returns compared to a portfolio with a lower capital structure. Then, the Shari‘ah screening method of improving the firm‘s stability in the market has been analyzed based on econometric analysis. Dynamic GMM is used in order to correlate the firm‘s leverage to total assets with its return and volatility in portfolios with high and low capital structure. To ensure the robustness of results, the business cycle effects have been considered after adding the firm and the country characteristics with a view to taking into account the heterogeneity across different firms and different markets. The preliminary results tend to indicate that there are significant correlations between capital structure and both returns and volatility, but not necessarily with high debt to assets given different sizes and growth of firms. The paper suggests that are three main factors which need to be considered by the firms in order to improve their stability in the market: firstly, the level of capital structure but not the debt to total assets as suggested by some scholars using the IFP; secondly, the capitalization or the firm size and finally, the level of the sovereign debt and country dynamics. Although the latter may be beyond the firm‘s control, it is up to the firm to consider its own market with implications on its leverage policy in relation to the frequency-dependent strategy.
    Keywords: Volatility, leverage, dynamic GMM, Wavelet Time–frequency analysis
    JEL: C22 C58 E44 G15
    Date: 2014–06–23

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.