Frode Sættem

Causal relations among stock returns and macroeconomic variables in a small, open economy

Abstract We investigate to what extent important results on relations among stock returns and macroeconomic factors from major markets are valid in a small, open economy by utilizing the multivariate vector autoregressive (VAR) approach on Norwegian data. Unlike many previous studies, which use a different methodology on other European markets, we establish several significant links. Consistent with US and Japanese findings, real interest rate changes affect both stock returns and inflation, and the stock market responds accurately to oil price changes. On the other hand, the stock market shows a delayed response to changes in domestic real activity.

Earnings Manipulation: Cost of Capital versus Tax

We show that if taxable income were linked to accounting income, there will exist an automatic safeguard against manipulation of earnings within the analysed framework. Separating taxable income from accounting income will remove this self-controlled mechanism, and accordingly create a need for separate countermeasures to prevent earnings manipulation.

Linkages among European and world stock markets

Causal relations and dynamic interactions among equity returns in ten countries for the period 1983-1994 are analysed. An innovation accounting approach based on a multivariate vector autoregressive (VAR) model is used to estimate the proportion of each market returns forecast error attributable to innovations in foreign market returns. Three major results appear. The variance decompositions indicate a strong degree of economic interaction among stock markets. The US stock market has a considerable influence on stock market performance in almost every country, while there is no substantial inter-continental influence from the European stock markets on the worlds two largest equity markets in New York and Tokyo. Finally, the pattern of the impulse-response functions illustrates a rapid international transmission of stock market events, supporting the hypothesis of international stock market efficiency.

Earnings announcements and the variability of stock returns

This article is concerned with the dissemination process of firm-specific annual earnings information in the Norwegian capital market. We find a significant reduction in stock price volatility in the post-announcement period relative to the pre-announcement period for companies traded on the Oslo Stock Exchange in the period 1990-1995. Potential explanations for this phenomenon are tested by relating the observed return volatility to changes in the volatility of the underlying business, the speed at which information is incorporated into stock prices, and the amount of noise in the price process. The empirical analyses reveal no significant changes in either the underlying business variance or the price adjustment coefficients. However, we find a significant decline in the noise term for the largest companies after the earnings release date, supporting the hypothesis that earnings announcements reduce informational asymmetries among investors.

An examination of the Oslo Stock Exchange options market

Market prices of stock option contracts in the Norwegian options market are subjected to empirical testing. Deviations from lower boundary conditions for the value of a call are documented. Frequent violations of the put - call parity indicate that calls tend to be relatively overpriced compared to puts. The reported profits are eliminated for a public customer after adjustment for transaction costs. Comparisons between call market prices and call prices estimated by the Black - Scholes option pricing model indicate that the model performs on average well for at- and in-the money options, but that out-of-the-money options, near maturity, are underpriced by the model.

Performance evaluation of Norwegian mutual funds

Norwegian mutual fund managers claim that their funds are subject to different investment policies. We find no evidence of this. Funds belonging to the same management company have a similar risk profile. However, the risk profile of funds managed by different companies varies significantly. Although portfolio managers demonstrated market timing skills, our results indicate that their ability to successfully select stocks was limited. The scores on risk-adjusted performance measures showed that all funds outperformed the market in 1982-1984. Thereafter, the typical observation was below the market index benchmark value.

Evidence on Competitive Advantage and Superior Stock Market Performance

This article analyzes the value-relevance of industry-based and resource-based competitive advantage in a large sample of firms listed on the Oslo Stock Exchange. We measure competitive advantage by a single variable and perform a new decomposition into its underlying sources. In 1986-2005, the industry-based and the resource-based competitive advantage explain more than 20% of abnormal stock market returns, accumulated over five years. The resource-based advantage is almost four times more important than the industry-based advantage. Differences in both the return and the risk capability of firms’ net assets relative to their industry peers are significant parts of the resource-based advantage, estimated at 60% and 40%, respectively.