Detection of structural regimes and analyzing the impact of crude oil market on Canadian stock market: Markov regime-switching approach

Purpose This study aims to analyze the impact of the crude oil market on the Toronto Stock Exchange Index (TSX). Design/methodology/approach The focus is on detecting nonlinear relationship based on monthly data from 1970 to 2021 using Markov-switching vector auto regression (VAR) model. Findings The results indicate that TSX return contains two regimes: positive return (Regime 1), when growth rate of stock index is positive; and negative return (Regime 2), when growth rate of stock index is negative. Moreover, Regime 1 is more volatile than Regime 2. The findings also show the crude oil market has a negative effect on the stock market in Regime 1, while it has a positive effect on the stock market in Regime 2. In addition, the authors can see this effect in Regime 1 more significantly in comparison to Regime 2. Furthermore, two-period lag of oil price decreases stock return in Regime 1, while it increases stock return in Regime 2. Originality/value This study aims to address the effect of oil market fluctuation on TSX index using Markov-switching approach and capture the nonlinearities between them. To the best of the author’s knowledge, this is the first study to assess the effect of the oil market on TSX in different regimes using Markov-switching VAR model. Because Canada is the sixth-largest producer and exporter of oil in the world as well as the TSX as the Canada’s main stock exchange is the tenth-largest stock exchange in the world by market capitalization, this paper’s framework to analyze a nonlinear relationship between oil market and the stock market of Canada helps stock market players like policymakers, institutional investors and private investors to get a better understanding of the real world.

Accounting for crypto-assets: stakeholders’ perceptions

Purpose The purpose of this paper is to analyse stakeholders’ perceptions on the accounting of crypto-assets. They also look at the need to amend/clarify existing accounting standards or develop new accounting standards. Design/methodology/approach The authors use a qualitative approach featuring interviews with four stakeholder groups including academics, professional bodies, standard setters and accounting practitioners. Interview recordings are transcribed and then analysed through NVivo. Findings The interviewees identify various issues in the application of current accounting standards to crypto-assets. The interviewees perceive that the rapid development of crypto-assets and fluidity hinder the development of accounting guidance. Hence, continuous monitoring by standard-setters is required. The general consensus is that unless there are crypto-assets with economic characteristics and functionality that are pervasive enough to warrant a new accounting standard, principles of current accounting standards are robust to address gaps in accounting requirements for crypto-assets. Originality/value This study adds to the discussion on harmonising the current practices in accounting of crypto-assets. By examining perceptions of multiple stakeholder groups, this study provides insights into the applicability of current accounting standards to the classification, measurement and disclosure of crypto-assets. The findings will inform standard setters and aid their efforts towards providing formal guidance on the accounting of crypto-assets.

Legal protection systems, corporate governance and firm performance: a cross-country comparison

Purpose This paper builds on the “Law and Finance” theory and aims to examine the effect of the legal and institutional environment on the governance–performance relationship in the context of non-US firms. More precisely, it examines whether and how the country’s legal system and the level of investor protection interact with the firm-level corporate governance and affect firm performance. Design/methodology/approach The authors used the “G-Index” governance score developed by the Governance Metrics International rating for a sample of 12,728 firm-year observations from 23 countries over the 2009–2016 period. Findings The results show that the interaction between the country-level institutions and corporate governance system significantly affect the firm performance. In particular, the findings indicate that firms operating in common law countries tend to exhibit a positive valuation effect and higher performance than firms with a comparable corporate governance level operating in civil law countries. More precisely, the authors find that in common law countries, higher investor protection with enhanced corporate governance is associated with better firm performance. However, firms operating in civil law countries with weaker investor protection and a comparable corporate governance level tend to experience a negative valuation effect. Originality/value The findings suggest that the institutional and legal environment is crucial and important in determining the value-maximizing level of good governance practices. Managers and regulators should carefully analyze the cost of these initiatives and should coordinate it with the needs of the country’s legal system. The challenge for the company will be how to adjust its corporate governance strategy according to the needs and demands of the country’s legal system in which the company operates to improve its performance. The regulators should ensure a fit between the specifics of the national legal and institutional environment and corporate governance standards and practices.

Price efficiency and safe-haven property of Bitcoin in relation to stocks in the pandemic era

Purpose When investors experience extreme uncertainty, they seek “safe havens” to reduce their risk, to limit their losses and to protect the value of their portfolios. The purpose of this paper is to examine the safe-haven properties of Bitcoin compared to the stock market. Design/methodology/approach Based on intraday data, this study compares the price efficiencies of Bitcoin and Morgan Stanley Capital Index (MSCI) using Multifractal Detrended Fluctuation Analysis for the second half of 2020. This study then evaluates Bitcoin’s safe-haven property using Detrended Partial-Cross-Correlation Analysis (DPCCA). Findings This study finds that the price efficiency of Bitcoin is lower than that of MSCI. Further, Bitcoin was not a safe haven at any time for the MSCI index. The net cross-correlations between Bitcoin and MSCI are weak and they vary at different time scales. Research limitations/implications The behavior of market prices varies over time. Therefore, it is important to replicate this study for other time periods. Social implications The paper sheds light on the price behavior of Bitcoin during a period of instability. The results suggest that the construction of portfolios should differ based on the time horizons of the investors. Originality/value The authors compare Bitcoin against a global equity index instead of a specific country index or commodity. They also demonstrate the applicability of DPCCA in finance research.

Predicting bitcoin price movements using sentiment analysis: a machine learning approach

Purpose Cryptocurrencies such as Bitcoin (BTC) attracted a lot of attention in recent months due to their unprecedented price fluctuations. This paper aims to propose a new method for predicting the direction of BTC price using linear discriminant analysis (LDA) together with sentiment analysis. Design/methodology/approach Concretely, the authors train an LDA-based classifier that uses the current BTC price information and BTC news announcements headlines to forecast the next-day direction of BTC prices. The authors compare the results with a Support Vector Machine (SVM) model and random guess approach. The use of BTC price information and news announcements related to crypto enables us to value the importance of these different sources and types of information. Findings Relative to the LDA results, the SVM model was more accurate in predicting BTC next day’s price movement. All models yielded better forecasts of an increase in tomorrow’s BTC price compared to forecasting a decrease in the crypto price. The inclusion of news sentiment resulted in the highest forecast accuracy of 0.585 on the test data, which is superior to a random guess. The LDA (SVM) model with asset specific (news sentiment and asset specific) input features ranked first within their respective model classifiers, suggesting both BTC news sentiment and asset specific are prized factors in predicting tomorrow’s price direction. Originality/value To the best of the authors’ knowledge, this is the first study to analyze the potential effect of crypto-related sentiment and BTC specific news on BTC’s price using LDA and sentiment analysis.

Are ESG stocks safe-haven during COVID-19?

Purpose The purpose of this study is to investigate safe-haven properties of environmental, social and governance (ESG) stocks in global and emerging ESG stock markets during the times of COVID-19 so that portfolio managers and equity market investors could decide to use ESG stocks in their portfolio hedging strategies during times of health and market crisis similar to COVID-19 pandemic. Design/methodology/approach The study uses a wavelet coherence framework on four major ESG stock indices from global and emerging stock markets, and two proxies of COVID-19 fear over the period from 5 February 2020 to 18 March 2021. Findings The results of the study show a positive co-movement of the global COVID-19 fear index (GFI) with ESG stock indices on the frequency band of 32 to 64 days, which confirms hedging and safe-haven properties of ESG stocks using the health fear proxy of COVID-19. However, the relationship between all indices and GFI is mixed and inconclusive on a frequency of 0–8 days. Further, the findings do not support the safe-haven characteristics of ESG indices using the market fear proxy (IDEMV index) of COVID-19. The robustness analysis using the CBOE VIX as a proxy of market fear supports that ESG indices do not possess safe-haven properties. The results of the study conclude that the safe-haven properties of ESG indices during the ongoing COVID-19 pandemic is contingent upon the proxy of COVID-19 fear. Practical implications The findings have important implications for the equity investors and assetty managers to improve their portfolio performance by including ESG stocks in their portfolio choice during the COVID-19 pandemic and similar health crisis. However, their investment decisions could be affected by the choice of COVID-19 proxy. Originality/value The authors believe in the originality of the paper due to following reasons. First, to the best of the knowledge, this is the first study investigating the safe-haven properties of ESG stocks. Second, the authors use both health fear (GFI) and market fear (IDEMV index) proxies of COVID-19 to compare whether safe-haven properties are characterized by health fear or market fear due to COVID-19. Finally, the authors use the wavelet coherency framework, which not only takes both time and frequency dimensions of the data into account but also remains unaffected by data stationarity and size issues.

Is Bitcoin a safe haven? Application of FinTech to safeguard Australian stock markets

Purpose This study aims to address the timely question of whether Bitcoin exhibited a safe haven property against the major Australian stock indices during the first and second waves of the COVID-19 pandemic in Australia and whether such property is similar or different in one year time from the first wave of the COVID-19. Design/methodology/approach The authors used the bivariate Dynamic Conditional Correlation, Generalized Autoregressive Conditional Heteroskedasticity model, on the five-day returns of Bitcoin and Australian stock indices for the sample period between 23 April, 2011 and 19 April, 2021. Findings The results show that Bitcoin offered weak safe haven and hedging benefits when combined in a portfolio with S&P/ASX 200 Financials index, S&P/ASX 200 Banks index or S&P/ASX 300 Banks index. In regard to the S&P/ASX All Ordinaries Gold index, the authors found Bitcoin a risky candidate with inconsistent safe haven and hedging benefits. Against S&P/ASX 50 index, S&P/ASX 200 index and S&P/ASX 300 index, Bitcoin was nothing more than a diversifier. The outset of the second COVID-19 wave, which was comparatively more severe than the first, is also reflected in the results with considerably higher correlations. Originality/value There is a lack of in-depth empirical evidence on the safe haven capabilities of Bitcoins for various Australian stock indices during the first and second waves of the COVID-19 pandemic. The study bridges this void in research.

What do foreign flows tell us about stock market movements in the presence of permanent and transitory shocks?

Purpose There is no research on understanding the difference in the nature of volatility and what it entails for the underlying relationship between foreign institutional investors (FII) flows and stock market movements. The purpose of this paper is to explore how permanent and transitory shocks dominate the common movement between FII flows and the stock market returns. As emerging markets are a major destination of international portfolio investments, the author uses India as a perfect case study to this end. Design/methodology/approach The paper uses the permanent-transitory as well as a trend-cycle decomposition approach to gain further insights into the common movement between foreign institutional investors (FII) flows and the stock market. Findings When the author identifies innovations based on their degree of persistence, transitory shocks dominate stock returns, whereas permanent shocks explain movements in foreign institutional investors (FII) flows. Also, stock returns have a larger cyclical component compared to cycles in foreign flows. The authors find the sharp downward (upward) movement in the stock market (FII flows) cycle in the initial period of the COIVD-19 pandemic was quickly reversed and currently, the stock market (FII flows) is historically above (below) the long-term trend, hinting at a correction in months ahead. The authors find strikingly similar stock market cycles during the global financial crisis and COVID-19 period. Research limitations/implications Evidence suggests the presence of long stock market cycles – substantial and persistent deviations of actual price from its fundamental (trend) value determined by the shared relationship with foreign flows. This refutes the efficient market hypothesis and makes a case favoring diversification gains from investing in India. Further, transitory shocks dominate the forecast error of stock market movements. Thus, the Indian market provides profit opportunities to foreign investors who use a momentum-based strategy. The author also finds support for the positive feedback trading strategy used by foreign investors. Practical implications There is a need for policymakers to account for the foreign undercurrents while formulating economic policies, given the findings that it is the permanent shocks that mostly explain movements in foreign institutional flows. Further, the author finds only stock markets error-correct in response to any short-term shocks to the shared long-term relationship, highlighting the disruptive (though transitory) role of FII flows. Originality/value Unlike existing studies, the author models the relationship between stock market returns and foreign institutional investors (FII) flows by distinguishing between the permanent and transitory movements in these two variables. Ignoring this distinction, as done in existing literature, can affect the soundness of the estimated parameter that captures the nexus between these two variables. In addition, while it may be common to find that stock market returns and FII flows move together, the paper further contributes by decomposing each variable into a trend and a cycle using this shared relationship. The paper also contributes to understanding the impact of COVID-19 on this relationship.

Geopolitical uncertainty and sovereign bond yields of BRICS economies

Purpose The politically unstable economies have high and volatile sovereign spread. The purpose of this paper is to investigate the impact of geopolitical uncertainty on sovereign bond yields. Design/methodology/approach The sovereign yields at various maturities were decomposed into three factors, namely, level, slope and curvature, using the Dynamic Nelson Siegel model. The relationship between geopolitical uncertainty and the yield curve factors was examined using a quantile causality test. Findings The study found that at the extreme high-rate regime, geopolitical uncertainty causes the yield curve factors positively, indicating bond investors demand a higher return for geopolitical uncertainty. On the other hand, during extreme low-rate regime geopolitical causes the short- and medium-term factors negatively. The extreme low-rate regime indicates the period of economic slowdown. During this regime, the central banks try to reduce the short-term rates to stimulate growth. Originality/value This is one of the few papers that investigates the relationship between the geopolitical risk and sovereign bond yields at the various maturities and interest rate regimes. Understanding the relationship between the geopolitical risk and short-term rates would help the central banks the efficacy of their policy actions. The long-term rates are influenced by the global investor preferences; examining the relationship with the long-term rates would help the investors frame the trading strategies.

Managers’ skills and fund flows in the Japanese mutual fund market

Purpose Mutual fund investors assess a fund manager’s skills when allocating their capital. To identify the rationale behind retail investors’ decisions, this study aims to examine the relation between mutual fund flows and abnormal returns (alpha), as well as the various risk factors in the Japanese mutual fund market, which has distinctive characteristics regarding investors and distributors. Design/methodology/approach Six standard asset pricing models are used to investigate how investors assess mutual fund managers’ skills: the market-adjusted return, the capital asset pricing model and the Fama–French three-factor model and its augmented versions. Findings Contrary to the literature, this study finds that investors in Japan mainly rely on alpha to assess mutual funds. In particular, investors respond to alpha for fund inflows and their evaluations depend on the market environment and their mutual fund search costs. Originality/value This study measures the response of investors to the skills of mutual fund managers in the Japanese market – especially for funds purchased through bank-related distributors that have aimed to capture inexperienced retail investors since deregulation in the 1990s – and reveals their high response to alpha.