Searching for hedging and safe haven assets for Indian equity market – a comparison between gold, cryptocurrency and commodities

Purpose This paper aims to evaluate the hedging and safe haven properties of gold, cryptocurrency and commodities against the Indian equity market. Design/methodology/approach First, the authors estimate the hedging and safe haven abilities of gold, cryptocurrency and commodities for the Indian stock market and further verify whether such properties vary across the broad stock market indices and over the different degrees of market volatility. Second, the authors use the multivariate GARCH framework to calculate the dynamic hedge ratios and hedging efficiencies to compare the hedging properties of the alternative asset classes. Third, the authors verify the robustness of the general findings during the recent crisis emanating from the outbreak of the COVID-19 pandemic. Findings Gold, cryptocurrency and most commodities have significant hedging abilities. Only natural gas, crude oil and aluminum, on the other hand, have safe haven property. Neither gold nor cryptocurrency qualifies as a safe haven asset. On the other hand, the financialization of the Indian commodities market provides a significant dividend to investors in terms of hedging and safe haven capabilities. The authors find the least negative hedge ratio and the highest positive hedging effectiveness for the stock-crude oil and stock-natural gas portfolios. The central observations of the paper remain immune to the COVID crisis. Originality/value Focusing on the Indian equity market, the paper compares the diversification abilities of traditional assets like gold with those of the modern class of assets, including cryptocurrency and other commodities.

Spillover Effects from the Volkswagen Emissions Scandal: An Analysis of Stock and Corporate Bond Markets

This study examines spillover effects following Volkswagen’s admission of emissions cheating. We first estimate initial operational losses of 8.45% of Volkswagen’s equity market capitalization on the date before the announcement, reputational losses up to five times these losses, and significant negative shocks to its stocks and bonds. Analyzing spillover effects from this shock beyond the usually only measured losses in equity value, we find significant negative net spillover effects to European competitors and suppliers in both stock and bond markets. Studying the economic effects in more detail, we show that Volkswagen’s total losses of 27.4 billion euros in terms of changes in equity market values over the first five event days are almost entirely composed of abnormal losses. Furthermore, competitors (suppliers) overall suffered 18.3 (12.6) billion euros of abnormal losses during this time, with 60% (69%) of the firms exhibiting negative changes, especially European competitors and suppliers connected to Volkswagen. These figures are further increased by negative bond market value changes. Overall, our results strongly emphasize that neglecting debt holders losses can lead to an underestimation of such events.

Postfundamentals Price Drift in Capital Markets: A Regression Regularization Perspective

Regression regularization techniques show that deviations of accounting fundamentals from their preceding moving averages forecast drifts in equity market prices. Deviations-based predictability survives a comprehensive set of prominent anomalies. The profitability applies strongly to the long leg and survives value weighting and excluding microcaps. We provide evidence that the predictability arises because investors anchor to recent means of fundamentals. A factor based on our fundamentals-based index yields economically significant intercepts after controlling for a comprehensive set of other factors, including those based on profit margins and earnings drift. This paper was accepted by Gustavo Manso, finance.

The mechanisms linking the finance-growth relationship in view of the financial crisis: an empirical investigation of the EU countries

PurposeThe paper aims to explore the mechanisms linking the impact of financial development on economic growth and focuses on the long-term post-global financial crisis.Design/methodology/approachThe study employs panel data for twenty-five European Union countries over the period 1995–2017. Principal Component Analysis is employed to produce two aggregate indices, namely financial banking sector development and stock market sector development. The empirical analysis is based on estimates through the autoregressive distributed lag (ARDL) method.FindingsThe results suggest that the outbreak of the crisis has led to a disruption of the positive finance-growth relationship, and the banking sector dominates in this adverse effect. The foreknowledge of the current study is that the linking mechanisms of the negative impact of financial development on economic growth, ten years after the global financial crisis, are household debt, private debt, and non-performing loans for the banking sector, while for the equity market this is the case through savings. Interestingly, the results reveal that unemployment increase excessively the borrowers' debt level and then the non-performing loans.Research limitations/implicationsAn implication is that the increase of credit supply and any monetary expansion along with lack of regulatory control and monitoring can lead banks to a higher risk exposure through household and private debt as well as non-performing loans. Besides, the higher levels of unemployment rates call attention for the trade-off between prudential regulation on the supply of loans and economic activity, since higher unemployment affect the non-performing loans and, as a consequence discourage the demand, increase precautionary savings, and cancel or postpone investment decisions, thus, affecting the equity market.Originality/valueThe paper provides useful insights to economists and policymakers who are interested in understanding the weakness of banking and stock market sectors to promote economic growth for a long time after the global financial crisis.

Performance comparison between Islamic and conventional stocks: evidence from Pakistan's equity market

PurposeThis paper aims to examine the performance of Islamic and conventional stocks listed at the Pakistan Stock Exchange by using both parametric and non-parametric approaches. The motivation is to do risk-return analysis of Islamic stock prices and conventional stock prices.Design/methodology/approachIt uses various measures of performance, e.g. Sharpe ratio, Treynor ratio, Jensen's alpha, beta, generalized auto-regressive conditional heteroskedasticity and stochastic dominance. Using the Karachi Meezan Index-30 (KMI-30) and the Karachi Stock Exchange Index-30 (KSE-30) as proxies for Islamic and conventional stock prices, respectively, it examines the performance of Islamic and conventional stocks. The daily data of KMI-30 and KSE-30, covering period from June 9, 2009 to June 20, 2020 are used.FindingsThe results show that the overall KMI-30 outperforms the KSE-30. The returns of the KMI-30 are greater than the KSE-30. However, the risk and volatility of the KMI-30 and KSE-30 are similar. Further, the KMI-30 has higher excess returns per unit of total risk than the KSE-30. But both indexes have similar excess returns per unit of systematic risk. Moreover, the KMI-30 returns have stochastically dominance over the KSE-30 returns. These results reveal that the Islamic index performs better than the conventional index.Practical implicationsThe findings provide several practical implications in financial and investment decisions making by investors, managers and policymakers such as strategies for asset allocation and investment. Further, in risk management, it provides guidance for allocating portfolios and managing risk. The investment in Islamic stocks may mitigate potential risk within asset portfolios.Originality/valueThis research is unique in its approach to the analysis of the performance comparison of conventional and Islamic stock by using comprehensive parametric and non-parametric estimation techniques. Such research has not been undertaken in the Pakistan's equity market since.

Does the low-risk anomaly exist in the Indian equity market? A test using alternative risk measures

PurposeThis study aims to investigate the risk-return trade-off in the Indian equity market at both the aggregate equity market level and in the cross-sections of stock return using alternative risk measures.Design/methodology/approachThe study uses weekly and monthly data of 3,085 Bombay Stock Exchange-listed stocks spanning over 20 years from January 2000 to December 2019. The study evaluates the risk-return trade-off at the aggregate equity market level using the value-weighted and the equal-weighted broader portfolios. Eight different risk proxies belonging to the conventional, downside and extreme risk categories are considered to analyse the cross-sectional risk-return relationship.FindingsThe results show a positive equity premium on the value-weighted portfolio; however, the equal-weighted portfolio of these stocks shows an average return lower than the return on the 91-day Treasury Bills. The inverted size premium mainly causes this anomaly in the Indian equity market as the small stocks have lower returns than big stocks. The study presents a strong negative risk-return relationship across different risk proxies. However, under the subsample of more liquid stocks, the low-risk anomaly regarding other risk proxies becomes moderate except the beta-anomaly. This anomalous relationship seems to be caused by small and less liquid stocks having low institutional ownership and higher short-selling constraints.Practical implicationsThe findings have important implications for investors, managers and practitioners. Investors can incorporate the effects of different highlighted anomalies in their investment strategies to fetch higher returns. Managers can also use these findings in their capital budgeting decisions, resource allocations and other diverse range of direct and indirect decisions, particularly in emerging markets such as India. The findings provide insights to practitioners while valuing the firms.Originality/valueThe study is among the earlier attempts to examine the risk-return trade-off in an emerging equity market at both the aggregate equity market level and in the cross-sections of stock returns using alternative measures of risk and expected returns.