Jin Man Lee

Volatility relationship between stock performance and real output

This paper investigates the interaction between stock index returns and the real output growth for five countries. This study focuses on the second moment relationship using various forms of the bivariate generalized autoregressive conditional heteroscedastic models (BGARCH). This study shows that interactivity between stock returns and growth rates are robust at the second order. The results imply that high volatility in the stock market is likely to be followed by increased volatility in the output sector and periods of high volatility in real output is likely to be followed by increased volatility in the stock market.

Adaptive market hypothesis: evidence from the REIT market

We tests two important implications for Real Estate Investment Trust (REIT) market efficiency from the adaptive markets hypothesis (Lo, 2004): first, market efficiency is not an all-or-none condition but is a characteristic that varies continuously over time; second, market efficiency is dependent upon market conditions. By using the automatic variance ratio test of Choi (1999), and the automatic portmanteau test of Escanciano and Lobato (2009), we confirm both implications for the US REIT market. The degree of REIT return predictability is found to be time varying. More specifically, it appears to be declining over time, which implies that the REIT market has become more efficient. Furthermore, we show that the return predictability is indeed influenced by market conditions. The level of market development appears to be the primary driver for REIT market efficiency. Other factors like inflation and the overall equity market volatility also have impacts. Finally, we demonstrate that the REIT regulatory changes in the early 1990s have greatly improved market efficiency.

Sources of output volatility from financial crisis in emerging markets

We investigate how output fluctuates before and after these financial crises hit the E-7 countries by excluding the crisis period defined earlier from the sample. The E-7 is referred to a group of seven emerging market countries–Thailand, Malaysia, Indonesia, the Philippines, South Korea, Mexico and Argentina. The main focus of this study is on the source of change in output variability whether it is due to the shocks (impulses) or due to the structure (propagation mechanism). Thailand, Argentina and the Philippines have lower output variability after crisis, while South Korea, Mexico, Indonesia and Malaysia have higher output variance. The counterfactual Vector Autoregression (VAR) analysis shows that the source of output variability change is mainly attributable to the change in structure (propagation mechanism) rather than the change in shocks (impulses) for the E-7, except the Philippines.

Unlocking the sources of the apparent episodic stationarity of the P/E ratio: Impulses or propagation?

Purpose - The purpose of this paper is to investigate the sources of the apparent episodic stationarity of the P/E ratio. Design/methodology/approach - The Stock–Watson procedure is used to decompose a VAR/VMA model into changes in structure and changes volatility. In theory, if the P/E ratio is properly anticipated and shocks are random, according to Samuelsons proof, it should exhibit the characteristics of a pure martingale and therefore it should not be possible to statistically reject trend nonstationary. Findings - Using a rolling window, the P/E ratio is shown to have episodic periods when trend nonstationarity could be rejected and that the P/E ratio was not properly anticipated. However, if there were changes in the structure of the underlying P/E ratio model or changes in the volatility of the underlying model, it suggests that the shocks impacting the P/E ratio would not be random and it might be possible to reject nonstationarity. This is investigated further with the objective of determining whether there was underlying structural change or volatility changes that are associated with these periods when trend nonstationarity in the P/E ratio could be rejected. The results are tested and found to be robust to a number of different specifications examined, including different data periods and frequencies. Research limitations/implications - Results findings should be tested in other countries and in other periods. Originality/value - The paper developed a methodology whereby it is possible to detect periods there the P/E ratio is not properly anticipated.