Noisy information and stock market returns

2016 ◽  
Vol 33 (3) ◽  
pp. 338-358 ◽  
Author(s):  
Gang Li
Keyword(s):  
Growth Rate ◽  
Financial Market ◽  
Stock Return ◽  
Equity Premium ◽  
Average Risk ◽  
Return Volatility ◽  
Content Type ◽  
Stock Return Volatility ◽  
Noisy Information ◽  
The Us

Purpose This paper aims to study whether noisy public information that investors receive about the expected aggregate dividend growth rate can help better understand the large average equity premium and stock return volatility in the US financial market. Design/methodology/approach This paper considers a dynamic asset pricing model with a representative agent, who cannot observe the expected growth rate of dividends and must learn its value by using noisy information. In addition, this paper presents a simple model for noisy information calibration. Findings With a coefficient of relative risk aversion below 10 and the time impatience parameter between 0 and 1, the calibrated model is able to yield an average risk-free interest rate, equity premium and stock return volatility that are close to the stylized facts in the US financial market. Originality/value First, this paper presents a different equilibrium model with a simple “catching up with the Joneses” preference and noisy information. Second, this paper develops a simple calibration procedure to calibrate the information process to study whether the calibrated model can help explain the large average equity premium and stock return volatility in the US financial market data.

scholarly journals Corporate risk and the humpback of CEO narcissism

2018 ◽  
Vol 10 (3) ◽  
pp. 252-273 ◽  
Author(s):  
Tom Aabo ◽  
Nicklas Bang Eriksen
Keyword(s):  
Risk Taking ◽  
Stock Return ◽  
Return Volatility ◽  
Moderate Degree ◽  
Content Type ◽  
Stock Return Volatility ◽  
Unobtrusive Measure ◽  
Ceo Narcissism ◽  
High Level ◽  
Corporate Risk

Purpose The purpose of this paper is to investigate the association between CEO narcissism and corporate risk taking. Design/methodology/approach The authors provide a novel and unobtrusive measure of CEO narcissism based on LinkedIn profiling. The authors investigate the relationship between CEO narcissism and corporate risk taking (stock return volatility) for a sample of 475 US manufacturing firms in the period 2010-2014. Findings The authors find an inverse U-shape relationship between CEO narcissism and stock return volatility. The inverse U-shape relationship (the “humpback”) is caused by the paradoxical nature of the narcissistic personality in which the self-esteem is high but at the same time fragile with a combination of self-admiration and a constant need of having this positive self-view confirmed. The results are robust to alternative specifications of CEO narcissism and corporate risk taking. The results are economically meaningful. Thus, a moderate degree of CEO narcissism – as compared to a very low or a very high level of CEO narcissism – is associated with an increase in corporate risk taking of approximately 12 percent. Originality/value Previous literature provides multiple analyses on the association between managerial overconfidence and corporate decisions. As opposed to overconfidence, narcissism is a personality trait having both cognitive and behavioral dimensions. This paper provides a novel contribution to the growing literature on the association between managerial biases/traits and corporate decision-making.

scholarly journals The risk management role of nonexecutive directors: from capital expenditure perspective

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Tho Anh To ◽  
Yoshihisa Suzuki ◽  
Hong Thu Thi Ho ◽  
Siem Thi Tran ◽  
Tuan Quoc Tran
Keyword(s):  
Stock Return ◽  
Capital Expenditure ◽  
Generalized Method Of Moments ◽  
Moderating Effect ◽  
Return Volatility ◽  
Firm Risk ◽  
Content Type ◽  
Listed Firms ◽  
Stock Return Volatility

PurposeThis study investigates the impact of board independence on firm risk of Vietnamese listed firms and the moderating effect of capital expenditure on this relationship.Design/methodology/approachThis paper applies fixed effects and dynamic generalized method of moments (GMM) models to examine hypothesized associations between the proportion of nonexecutive directors and stock return volatility, as well as the moderating effect of capital expenditure. The robustness tests are implemented by applying alternative measures of overinvestment and firm risk.FindingsThe results show that the presence of nonexecutive directors on board increases firm risk. However, the combination of nonexecutive ratio and capital expenditure ratio has a significant negative impact on firm risk. The result is also confirmed by the difference between the monitoring role of nonexecutive directors in overinvesting and underinvesting firms.Research limitations/implicationsThe results imply that Vietnamese listed firms take stock return volatility into consideration before nominating and appointing nonexecutive directors into their board, especially in overinvesting firms. From another perspective, the shift toward having a majority of nonexecutive directors on boards can play a significant role in pursuing a stable or risky business strategy.Originality/valueThis paper investigates the influences of nonexecutive directors on firm risk in the context of Vietnam.

The long-term effects of section transfers on return volatility: Intraday and overnight periods

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rodrigue Majoie Abo
Keyword(s):  
Information Disclosure ◽  
Fixed Effects ◽  
Stock Return ◽  
Control Variable ◽  
Return Volatility ◽  
Long Term Effects ◽  
Macroeconomic Factors ◽  
Content Type ◽  
Stock Return Volatility

Purpose Studies on transfers to a more regulated section show an increase in information disclosure and stocks’ liquidity levels. Classical theories suggest that volatility should also be reduced. This study aims to analyse the long-term effects of a section transfer to a more regulated section (TSE 1/TSE 2) on stock return volatility. Design/methodology/approach This study uses an empirical framework relying on two-sample t-tests and panel regressions. These use robust standard errors and control for fixed effects, day effects and macroeconomic factors. The return variance of comparable stocks’ benchmark sample, instead of market variance, is used as a control variable. Comparable stocks operate within the same industry and do not transfer during the sample period. The authors test our results’ robustness using generalized autoregressive conditional heteroskedasticity estimates. Findings The study’s main findings show that pre-transferred stocks are more volatile than the stocks’ benchmark sample. The transfer to a more regulated section leads to a gradual decrease in the total daily stock return volatility, intraday return volatility and overnight return volatility. Originality/value To the best of my knowledge, this study is the first to empirically address the volatility change caused by the stocks’ transfer to a more regulated section. This study highlights the benefits of choosing section transfers to reduce volatility.

Does domestic institutional ownership increase return volatility? The French context

2019 ◽  
Vol 61 (2) ◽  
pp. 421-433
Author(s):  
Mouna Aloui ◽  
Anis Jarboui
Keyword(s):  
Institutional Investors ◽  
Stock Markets ◽  
Stock Price ◽  
Stock Return ◽  
Price Volatility ◽  
Return Volatility ◽  
Stock Price Volatility ◽  
Content Type ◽  
Stock Return Volatility ◽  
Empirical Results

Purpose The purpose of this study is to examine the impact of domestic ownership on the stock return volatility. The authors use a detailed panel data set of 89 French companies listed on the SBF 120 over the period 2006-2013. The empirical results show that the domestic institutional investors have low stock price volatility in the French stock market. This result implies the stabilizing factor of domestic investors in France stock markets, which can be considered as one of the potential favor of growing the exhibition of domestic stock markets to institutional investors. This study employs a variety of econometric models, including feedbacks, to test the robustness of our empirical results. Design/methodology/approach To explain the relation between stock return volatility and domestic institutional investors (DIIs), the authors used two complementary methods: two-step generalized method of moments analysis as well as panel vector autoregressive framework and two-stage least squares (2SLS) method. Findings The authors’ empirical results show that the proportion of DIIs with advanced local degrees stabilizes the stock price volatility. However, firm’s size and the turnover have a positive effect on the volatility of the stock returns. This result is consistent with the hypothesis that the firm’s size and the turnover will increase price volatility during a financial crisis as a result of the deterioration of the monitoring mechanism and the reduction of the investors’ confidence in firms. Originality/value This result also indicates that the variables (the firm’s size, total sales and debt ratio) are poor corporate governance and have a role in the increased the stock return volatility.

scholarly journals A Multivariate Analysis of the Effects of Structural Breaks on Stock Return Volatility Persistence: The Case of the US and Japan

2019 ◽  
Vol 10 (3) ◽  
pp. 39
Author(s):  
Chikashi Tsuji
Keyword(s):  
Multivariate Analysis ◽  
Stock Returns ◽  
Stock Return ◽  
Structural Breaks ◽  
Structural Break ◽  
Return Volatility ◽  
Time Varying ◽  
Stock Return Volatility ◽  
Volatility Persistence ◽  
The Us

This paper quantitatively inspects the effects of structural breaks in stock returns on their volatility persistence by using the stock return data of the US and Japan. More concretely, applying the diagonal BEKK-MGARCH model with and without structural break dummies to the returns of S&P 500 and TOPIX, we reveal the following interesting findings. (1) First, we clarify that for both the US and Japanese stock returns, the values of the GARCH parameters, namely, the values of the volatility persistence parameters in the diagonal BEKK-MGARCH models decrease when we include the structural break dummies in the models. (2) Second, we further find that interestingly, during the Lehman crisis in 2008, the estimated time-varying volatilities from the diagonal BEKK-MGARCH model with structural break dummies are slightly higher than those from the no structural break dummy model. (3) Third, we furthermore reveal that also very interestingly, the estimated time-varying correlations from the diagonal BEKK-MGARCH model with no structural break dummy are slightly higher than those from the structural break dummy model.

Do institutional investors stabilize stock returns? Evidence from emerging IPO markets

2020 ◽  
Vol 32 (4) ◽  
pp. 585-600
Author(s):  
Konpanas Dumrongwong
Keyword(s):  
Initial Public Offerings ◽  
Institutional Investors ◽  
Stock Return ◽  
Emerging Market ◽  
Institutional Ownership ◽  
Growth Potential ◽  
Return Volatility ◽  
Content Type ◽  
Stock Return Volatility ◽  
The Relationship

Purpose The purpose of this paper is to investigate how institutional ownership is related to the stock return volatility of initial public offerings (IPOs) in an emerging market and to examine the relationship between institutional ownership and underpricing. Design/methodology/approach This paper investigates these relationships using White’s (1980) regression and 2 × 3 portfolios sorted by firm size and institutional holdings. The regression method examines the relationships across firms with different characteristics such as size, stock price, growth potential, firm age and type of investors. The data were chosen for this sample to cover the new equity issuances listed on the Thailand Stock Exchange for the period 2001–2019. Findings The empirical results suggest that institutional ownership is negatively associated with initial stock return volatility. This highlights the importance of institutional investors in maintaining stability in emerging stock markets. Additionally, it was found that institutional holding and underpricing are negatively correlated. The results are robust after controlling for potential heteroskedasticity and differences in firm characteristics. Originality/value To the best knowledge of the author, this paper is the first to study the relationship between institutional investors and volatility in Thai IPOs, and hence provides a deeper understanding of how investors influence the price formation and volatility of stock prices in emerging markets. Furthermore, besides academics, the results presented in this paper could be useful for market regulators and policymakers in designing future market regulations to efficiently stabilize equity markets.

Impact of board structure, board activities and institutional investors on the firm risk: evidence from India

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Pankaj Chaudhary
Keyword(s):  
Institutional Investors ◽  
Stock Return ◽  
Stock Exchange ◽  
Independent Directors ◽  
Board Structure ◽  
Return Volatility ◽  
Method Of Moment ◽  
Content Type ◽  
Stock Return Volatility ◽  
The Impact

PurposeStock return volatility is an important aspect of financial markets which requires specific attention of researchers. This study examines the impact of board structure, board activities and institutional investors on the stock return volatility of the Indian firms.Design/methodology/approachThe author had selected the non-financial companies of the National Stock Exchange (NSE), which form the part of the NSE 500 index. Regression models had been estimated using the system generalised method of moment (GMM) framework designed by Arellano and Bover (1995) and Blundell and Bond (1998) to deal with endogeneity concerns.FindingsThe author found that the stock return volatility was affected by the institutional investors, particularly pressure-insensitive (PI) investors. Moreover, this study supported the non-linear relationship between stock return volatility and institutional investors. Unlike developed world, the author found that the independent directors were positively associated with the stock return volatility.Research limitations/implicationsIt is important for the investors and regulators to understand that the behaviour of the institutional investors depends on its class and having more independent directors will not ensure containment of the stock return volatility as suggested in previous literature reviews.Originality/valueMost of the prior studies have used simple standard deviation (SD) to compute stock return volatility. In this study, besides SD, the author used the generalised autoregressive conditional heteroskedasticity (GARCH) model to compute the stock return volatility of the firms.

scholarly journals Pemodelan Volatilitas Return Saham: Studi Kasus Pasar Saham Asia

2017 ◽  
Vol 18 (1) ◽  
pp. 35-52
Author(s):  
Linda Karlina Sari ◽  
Noer Azam Achsani ◽  
Bagus Sartono
Keyword(s):  
Financial Market ◽  
Stock Return ◽  
Stock Index ◽  
Return Volatility ◽  
Interesting Phenomenon ◽  
Stock Return Volatility ◽  
Asymmetric Model ◽  
Stock Model ◽  
The Right ◽  
Fitting Model

Modelling Volatility of Return Stock Index: Evidence from Asian CountriesVolatility is one of the interesting phenomenon in financial market; the reason is because of its eect to the existence of global financial market. The existence of volatility closely related to the risk in stock model. This research aims to determine the right model in modeling stock return volatility taken from four Asian countries with symmetric and various asymmetric model of GARCH. The result from fitting the right model for all of four stock markets showed that asymmetric model of GARCH showing a better estimation in portraying stock return volatility. Moreover, the model can reveal the existence of asymmetric eects on those four stock markets.Keywords: GARCH Asymmetric; Stock Market; Modelling; GARCH Symmetry; Volatility AbstrakVolatilitas pada pasar keuangan merupakan salah satu fenomena yang sangat menarik karena dampaknya terhadap eksistensi pasar finansial global. Keberadaan volatilitas berhubungan dengan risiko sebuah. Tulisan ini bertujuan menentukan model terbaik dalam memodelkan volatilitas return saham pada empat negara di Asia dengan menggunakan model simetris GARCH dan berbagai macam model asimetris GARCH. Hasil dari fitting model terbaik untuk keempat pasar saham menunjukkan bahwa model asimetris GARCH menunjukkan estimasi yang lebih baik dalam menggambarkan volatilitas return saham. Lebih jauh lagi, model tersebut mengungkapkan keberadaan efek asimetris pada keempat pasar saham. 

scholarly journals The effectiveness of risk disclosure practices in the European insurance industry

2018 ◽  
Vol 17 (1) ◽  
pp. 130-147
Author(s):  
Irma Malafronte ◽  
Maria Grazia Starita ◽  
John Pereira
Keyword(s):  
Firm Value ◽  
Stock Return ◽  
Insurance Industry ◽  
Return Volatility ◽  
Risk Disclosure ◽  
Content Type ◽  
Stock Return Volatility ◽  
Embedded Value ◽  
European Insurance ◽  
The Relationship

Purpose This paper aims to examine whether risk disclosure practices affect stock return volatility and company value in the European insurance industry. Design/methodology/approach Using a self-constructed “risk disclosure index for insurers” (RDII) to measure the extent of information disclosed on risks and using panel data regression on a sample of European insurers for 2005-2010, it tests the relationship between RDII and stock return volatility; whether this relationship is affected by financial crisis; and whether RDII affects insurance companies’ embedded value. Findings The main results indicate that higher RDII contributes to higher volatility, suggesting that “less is more” rather than “more is good”. However, higher RDII leads to lower volatility when the insurer has a positive net income, thus “more is good when all is good” and “less is good when all is bad”. Furthermore, the relationship between RDII and stock return volatility is not affected by financial crisis, raising concerns regarding the effectiveness of insurers’ risk disclosure to reassure the market. Moreover, higher RDII is found to impact positively on embedded value, thus contributing toward higher firm value. Practical implications The findings could drive insurers’ choices on communication and transparency, alongside regulators’ decisions about market discipline. They also suggest that risk disclosure could be used to strengthen market discipline and should be added to the other variables traditionally used in stock return volatility and firm value estimation models in the insurance industry. Originality/value This paper offers new insights in the debate on the bright and dark sides of risk disclosure in the insurance industry and provides interesting implications for insurers and their stakeholders.

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