Int. J. Financial Stud., Volume 7, Issue 4 (December 2019) – 16 articles

We investigate the impact of extreme weather conditions on the stock market returns of the Hong Kong Stock Exchange and Shenzhen Exchange. For the weather conditions, we apply dummy variables generated by applying a moving average and moving standard deviation. Our study provides two interesting results. First, extreme weather conditions have a significant impact on the stock returns of the Shenzhen Exchange, indicating that the Shenzhen market is inefficient. Second, during the pre-QFII period, extreme weather conditions have a strong impact on the returns of the Shenzhen stock market, but the impact is significantly weaker in the period after QFII. This means that the efficiency of the Shenzhen stock market has significantly increased since the QFII program due to the market openness to foreign institutional investors. We emphasize the role of foreign investors not affected by local weather conditions by observing how market opening affects extreme weather impacts on stock market returns. Full article

As the importance of Chinese financial schemes in maritime business increases, and many issues on the ownership of the assets under the current Law remain obscured for international investors, this work argues that a streamlining to international practice is required; therefore, the ownership of the trust property under the shipping fund in China should be transferred to the trustee from the client. The trustee shall possess, employ, benefit, and dispose the trust property in his/her own name, which links up with China’s current property legislation, ship registration, and ship arrest regulations. The trust property under the shipping fund in China is independent of the fixed property or other management property of the trustee, the beneficiary, and the custodian. This gives full play to functional advantages of the trust system of the shipping fund, contributes to the expansion of financing channels in the shipping industry in China, guarantees the specialization and flexibility of shipping investment activities and the diversity of the investment subject, promotes development of China’s policies about the shipping industry and financial innovation, and boosts the realization of “The Strategy of National Revitalization Based on Marine Industry Development” and “The Belt and Road Initiatives” and construction of Shanghai International Shipping Center and International Finance Center. Full article

This paper studies option pricing based on a reverse engineering (RE) approach. We utilize artificial intelligence in order to numerically compute the prices of options. The data consist of more than 5000 call- and put-options from the German stock market. First, we find that option pricing under reverse engineering obtains a smaller root mean square error to market prices. Second, we show that the reverse engineering model is reliant on training data. In general, the novel idea of reverse engineering is a rewarding direction for future research. It circumvents the limitations of finance theory, among others strong assumptions and numerical approximations under the Black–Scholes model. Full article

Selecting funds is a common problem for investors who use published available data on fund indicators while they are selecting the funds. Since this process deals with more than one indicator, the investing issue becomes multi-criteria decision-making (MCDM) problem for the investors. Therefore, the purpose of this paper is to propose an effective approach that integrates grey relational analysis (GRA) and data envelopment analysis (DEA) for selecting the best utility exchange traded funds (ETFs). The current study uses GRA for deriving the grade relational coefficients and then puts them in the output side of competing no-input DEA models to derive weighed grey relational grades. Moreover, the ETFs are also evaluated by selected DEA models. This research is implemented with real data on utility ETFs available for three consecutive years (2008–2010). The results show that the top ETFs identified by the GRA-DEA approach are also DEA efficient. The proposed GRA-DEA approach is superior to conventional DEA as regards the fund ranking and therefore, it seems to be effective as a picking fund tool. Full article

This paper develops methods and a framework of financial market theory. We model financial markets as a system of agents which perform market transactions with other agents under the action of numerous expectations. Agents’ expectations are formed of economic and financial variables, market transactions, the expectations of other agents, and other factors that impact financial markets. We use the risk ratings of agents as their coordinates and approximate a description of financial variables, market transactions, and expectations of numerous separate agents by density functions of aggregated agents in the economic domain. The motion of separate agents in the economic domain due to a change of agents’ risk rating produces collective financial flows of variables, transactions, and expectations. We derive equations on collective financial variables, market transactions, expectations, and their flows in the economic domain. These flows define the evolution of financial markets. As an example, we present a simple model with linear dependence between disturbances of volume and the cost of transactions on one hand, and disturbances of expectations that determine transactions on the other hand. Our model describes harmonique oscillations of these disturbances with numerous frequencies and allows an explicit form for fluctuations of price and return to be derived. These relations show a direct dependence between price, return, and volume perturbations. Full article

This study examines herding behavior in four sectors of the Gulf Islamic stock markets. Based on the methodology of Chiang and Zheng (2010), results showed evidence of herding among investors in major sectors for the Gulf Cooperation Council (hereinafter GCC) Islamic stock market during falling periods. In addition, we found that conventional return dispersions have a dominant influence during both falling and rising market periods. We also found evidence of herding around the conventional sectors during down market periods only in banking, hotel and restaurant sectors. There is evidence of herding around the conventional sectors during up market periods for insurance and industrial sectors. Full article

This study establishes a dynamic panel model for 12 Chinese-listed commercial banks and seven international commercial banks. More specifically, it examines the impact of green credit on the profitability of commercial banks and the differences between China and other countries while using the generalized method of moments. The research shows that the Equatorial Principles project-financing ratio of international banks positively affects bank profitability, while the ratio of green credit for Chinese commercial banks is inversely related to their profitability. Further, a comparative study of China and other countries highlights that the green credit business is at significantly different stages in China and the rest of the world. This study also finds that the profitability of China’s banking sector is positively affected by asset size, management expense ratio, cash ratio, and GDP growth rate, in addition to the common influencing factor of non-performing loan ratio, whereas asset size and capital adequacy ratio negatively affects the international banking sector. Drawing on these empirical conclusions, this study offers suggestions for the further development of green credit in Chinese commercial banks. Full article

Inspired by the GARCH-MIDAS model, we revisit the relationship between Chinese futures and macroeconomic factors. We introduce the level of the macroeconomic variables into the GARCH-MIDAS model in order to test the impact of the macroeconomic level on the variance of futures’ return volatility. Based on the empirical results, we find the level of macroeconomic variables has a significant impact on the volatility of Chinese futures’ return. The influence of the macroeconomic level factor on the futures’ return volatility is statistically significant. Full article

This study investigates the impact of corporate governance characteristics and political connections of directors on the profitability of banks in Pakistan. The study uses the data of 26 domestic banks over the latest and large period of 2007–2016. Our findings firstly affirm that bank profitability is negatively affected by the presence of politically connected directors on the board, reporting significantly lower return on assets, return on equity, net interest margin, and profit margin. Secondly, our findings also affirm the negative political influence on the sustainability of the banking industry, reporting significantly lower return on assets, return on equity, net interest margin, and profit margin during the government transition of banks having politically connected directors sitting on their board. Our findings further report an inverted U-shaped relationship between board size and bank profitability, suggesting that a board size beyond 8–9 members decreases the profitability. The study further finds a positive impact of board composition, board independence, and director compensation on bank profitability, while also finding a negative impact of frequent board meetings, presence of foreign directors, and audit committee independence. Full article

This paper examines the nexus between financial inclusion and financial innovation while incorporating financial development and remittance inflows in the case of six South Asian countries—Bangladesh, India, Pakistan, Nepal, Bhutan, and Srilanka—by employing the panel autoregressive distributed lagged model under a linear and nonlinear framework using monthly data over the period 1990M1–2018M12. Further, a Granger-causality test with System GMM specification was performed for assessing directional causality. The study findings from Panel ARDL confirmed the positive association between financial innovation and financial inclusion, which was observed both in the long run and short-run. Considering the nonlinearity in the estimation, the standard Wald test confirms the existence of an asymmetric relationship both in the short-run and in long run horizon regarding causality test results. The study findings support the feedback hypothesis that the presence of bidirectional causality between the financial innovation and financial inclusion is both in the short-run and long run. Since the study findings established a critical relationship between financial innovation and financial inclusion, therefore effective policy guidelines are suggested so that the contribution from financial inclusion and financial innovation can assist in developing a vibrant financial sector. Full article

The aim of this paper was to examine the relationship between changes in the US and China macroeconomic conditions and the excess returns of nine Asian-Pacific public real estate markets (Singapore, Indonesia, Malaysia, the Philippines, Thailand, Australia, Taiwan, Hong Kong, and Japan). We found that there are insignificant correlations between macroeconomic conditions in the US and China and the real estate markets’ excess returns. Additionally, whilst the US macroeconomic factors show stronger causal relationships with the real estate markets in the long run, China’s macroeconomic variables have experienced a stronger causal relationship in the short run. Finally, key macroeconomic variables, such as the industrial production output index, long-term interest rates, and economic policy uncertainty, produced fluctuating impulse responses to shocks from the US and China. Overall, we conclude that the US economy continues to have a dominant influence in the Asian-Pacific real estate markets. However, during economic crises and in the short run, the impact of China’s economy grows significantly and outweighs that of the US In the context that a high degree of economic and financial integration has affected the interdependent level of international financial markets, the Asian-Pacific securitized real estate markets’ performances are also impacted by global shocks. Full article

This research observes a time varying relationship between stock returns, volatilities and the online search volume in regard to selected CESEE (Central, Eastern and South-Eastern European) stock markets. The main hypothesis of the research assumes that a feedback relationship exists between stock returns, volatilities and the investor’s attention variable (captured by the online search volume). Moreover, the relationship is assumed to be time varying due to changing market conditions. Previous research does not deal with the time-varying multi-directional relationship. Thus, the contribution to existing research consists of estimating the aforementioned relationship between return, volatility and the search volume series for selected CESEE countries by using a novel approach of spillover indices within the VAR (Vector AutoRegression) model framework. The results indicate that the Google search volume affects the risk series more than the return series on the selected markets. Full article

In this study, we analyze the forecast accuracy and profitability of buy recommendations published in five major German financial magazines for private households based on fundamental analysis. The results show a high average forecast accuracy but with a very high standard deviation, which indicates poor forecast accuracy with regard to individual stocks. The recommendation profitability slightly exceeds the performance of the MSCI World index. Considering the involved risk, which is represented by a high standard deviation, the excess returns appear to be insufficient. Full article

The Turn of the month effect is one of the better-known calendar anomalies. If a stock market is affected by the Turn of the month effect, it records significantly higher returns during a relatively short time period around the end of the old month and the beginning of the new one, than during the remainder of the month. This paper investigates the presence of the Turn of the month effect in the stock markets of 11 Central and Eastern European (CEE) countries. We focused not only on the anomaly in returns, but also on the anomaly in price volatility. The results show that, during a 20-year period (1999–2018), a statistically significant Turn of the month effect was present in the stock markets of seven out of 11 investigated countries. However, the anomaly affected only the stock market returns, not price volatility. Full article

In this paper, which is the third installment of the author’s trilogy on margin loan pricing, we analyze 1367 monthly observations of the U.S. broker call money rate, e.g., the interest rate at which stockbrokers can borrow to fund their margin loans to retail clients. We describe the basic features and mean-reverting behavior of this series and juxtapose the empirically-derived laws of motion with the author’s prior theories of margin loan pricing (Garivaltis 2019a, 2019b). This allows us to derive stochastic differential equations that govern the evolution of the margin loan interest rate and the leverage ratios of sophisticated brokerage clients (namely, continuous-time Kelly gamblers). Finally, we apply Merton’s (1974) arbitrage theory of corporate liability pricing to study theoretical constraints on the risk premia that could be generated in the market for call money. Apparently, if there is no arbitrage in the U.S. financial markets, the implication is that the total volume of call loans must constitute north of $70\%$ of the value of all leveraged portfolios. Full article

The purpose of this study is to investigate the relationship of firms with family ownership and their performance in Indonesia and further examine on how political connections affect this relationship. This study used 933 samples from 413 companies listed on the Indonesia Stock Exchange (IDX) in the period between 2014 and 2016. Using ordinary least square (OLS) regression, the results shows that firms without family ownership (non-family firms) have better performance than firms with family ownership (family firms) in Indonesia. Furthermore, the findings also show that the performance of family firms significantly improve when the firms are affiliated with political connections. Our findings imply that establishing political connections in family firms will increase the performance of the firms. Full article