Jussi Nikkinen

Relative importance of scheduled macroeconomic news for stock market investors

This paper investigates the relative importance of scheduled U.S. macroeconomic news releases for stock valuation. The study focuses on 11 macroeconomic announcements selected on the basis of the previous literature and the Bureau of Labor Statistics classifications of major economic indicators. The paper shows that five out of the 11 announcements have significant influence on stock valuation. These are the Employment Report, NAPM (manufacturing), Producer Price Index, Import and Export Price Indices, and Employment Cost Index. Of these six announcements, the Employment Report and NAPM (manufacturing) exert the greatest influence. The time of the announcement, measured by days from the beginning of the month to the release day, has a moderating impact on the relationship between macroeconomic announcements and its importance.

The Co‐Movement Dynamics of European Frontier Stock Markets

We examine, through application of wavelet coherency, the co‐movement of European frontier stock markets with the USA and developed markets in Europe. We find that the strength of co‐movement varies considerably across the frontier markets, at different frequencies (time horizons), and over time. Co‐movement is relatively weaker for the frontier markets of Central and Southeastern Europe than in the Baltic region. Of the markets examined, Slovakia in particular shows low dependence, whereas Lithuania seems to be the most dependent market. Co‐movement is stronger at lower frequencies (longer horizons) and increases during the turbulent period of the global financial crisis of 2008/2009. We identify several macroeconomic factors related to variations in co‐movement at different time frequencies.

Co-movement of the Finnish and international stock markets: a wavelet analysis

We use wavelet analysis to examine the short-term and long-term co-movement of international stock markets from a European perspective. First, we assess the co-movement of the Finnish stock market with stock markets in both developed and emerging economies. Second, the co-movement of five major European markets and a global equity portfolio is analysed. Our results show that the co-movement of Finland and the emerging market regions is confined to long-term fluctuations. We also find evidence of co-movement between Finland and the developed regions in Europe, the Pacific, and North America across all frequencies, with higher levels of co-movement in higher frequencies toward the end of the return series. Furthermore, the results suggest that little may be gained by diversifying from a country stock portfolio from the perspective of investors in France, Germany, Switzerland, and the UK into a global stock portfolio, whereas diversifying into the Finnish market would be advantageous.

Terrorism and Stock Market Sentiment

This paper examines the effects of terrorism on stock market sentiment by focusing on the behavior of expected probability density functions of the FTSE 100 index around terrorist attacks. We find that terrorism has a strong adverse impact on stock market sentiment. In particular, terrorist attacks are found to cause a pronounced downward shift in the expected value of the FTSE 100 index and a significant increase in stock market uncertainty. Furthermore, our results show that the expected FTSE 100 probability densities became significantly more negatively skewed and fat-tailed in the immediate aftermath of terrorist acts.

Short-term and long-term dependencies of the S&P 500 index and commodity prices

We utilize wavelet coherency methodology with simulated confidence bounds to examine the short-term and long-term dependencies of the returns for S&P 500 and the S&P GSCI® commodity index. Our results indicate no evidence of co-movement between S&P 500 total return and the S&P GSCI® commodity index total return in the short term, thereby suggesting diversification gains for equity investors. Importantly, this finding encompasses the onset of the current financial crisis. However, long-term diversification benefits, particularly after the onset of the recent financial crisis, are limited. We find, moreover, no consistent evidence of co-movements between S&P 500 and 10 individual sub-indexes of the S&P GSCI® commodity index. Of particular importance, we report weak co-movement of returns between S&P 500 and S&P GSCI® Precious Metals total return and S&P 500 and S&P GSCI® Softs at all frequencies, implying significant diversification gains both for short-term and long-term investors.

DISTRIBUTIONAL PROPERTIES AND TRANSFORMATION OF FINANCIAL RATIOS: THE IMPACT OF THE ACCOUNTING ENVIRONMENT

Abstract This study investigates the distributional properties of financial ratios and the usefulness of the Box and Cox (1964) power transformation in normalizing financial ratios in different kinds of accounting environments. The results indicate that the Box-Cox power transformation can substantially improve the normality of financial ratios. The transformation can completely remove the non-normality induced by skewness. However, some kurtosis remains after the transformation. The distributional properties and the usefulness of the transformation are not dependent on the accounting environment. Therefore, researchers can use same financial ratios in different accounting environments. However, some caution is needed in the case of profitability ratios that are substantially affected by the accounting practices and economic situation.

Normality tests of option-implied risk-neutral densities: evidence from the small Finnish market

Abstract This study provides an empirical analysis of option-implied risk-neutral densities. The normality of the risk-neutral density is statistically assessed testing restrictions regarding the skewness and kurtosis of the implied distribution and by applying the traditional test approach involving a comparison of the pricing errors calculated using alternative models. It is found that both the approaches give similar results, whereas the former method has the advantage that the significance of the estimated parameters can be statistically tested. Using data from the small Finnish market, the normality of the distributions is soundly rejected as expected based on the theoretical framework by Damodaran [ J. Financ. Quant. Anal. 20 (1985) 423].

Oil Risk and Asset Returns: Evidence from Emerging Markets in the Middle East

In this paper, we investigate whether oil risk is priced in selected emerging markets of the Middle East region—in particular, oil-producing countries. Given that these countries have maintained fixed exchange rates against the U.S. dollar, we are able to modify the multivariate GARCH framework to include the oil-risk component. The results show that within the framework we adopt, the world market risk and oil risk are priced on all markets under investigation. The oil risk is highly significant in all markets, indicating that oil-risk exposure, to some extent, is nondiversifiable.

Risk in Audit Pricing: The Role of Firm-Specific Dimensions of Risk

Abstract This chapter investigates the impact of the firm-specific dimensions of risk suggested in the finance literature, the financial risk, operating leverage and business risk on audit fees. It is hypothesized that audit fees are related to these three dimensions of risk, size, audit complexity and a set of the agency theory based control variables. The hypothesis is empirically tested using a sample from the U.K. audit market. The results of the study show that audit fees as hypothesized are positively related to financial leverage, operating leverage and business risk of a firm and that the control variables behave according to expectations. This implies that the three dimensions of the firm-specific risk are taken into account in audit pricing decisions and should therefore be incorporated into models when investigating the audit pricing issues.

DO AUDITORS ASSESS THE SYSTEMATIC MARKET RISK IN THEIR AUDIT PRICING DECISIONS? INTERNATIONAL EVIDENCE

Abstract This study investigates whether auditors assess the systematic market risk in their audit pricing decisions. According to the audit pricing model of Simunic (1980) , the audit fee is a function of the audit effort and the auditor’s client specific risk. Since an auditor has several clients, the systematic risk of a firm should be taken into account in audit pricing. To empirically investigate this issue across different environments, data from Denmark, Hong Kong, Malaysia, Norway, Singapore, South Africa, and the United Kingdom are analyzed. The results of statistical tests show that the market-based risk measure explains auditing fees in addition to the risk measures based on accounting information. However, the performance of the model differs across countries. Moreover, the impacts of the variables in explaining audit fees vary across countries. These findings are in accordance with the proposition of Cobbin (2002) according to which cultural sensitive and market specific variables could potentially have a significant impact on audit fees paid.