Michael Donadelli

Global integration and emerging stock market excess returns

This article studies the effects of the global integration process on emerging stock market excess returns in a dynamic context. I improve the existing literature in four main directions. First, I show that the average excess returns rise as the level of financial and real integration rises. Second, I find overwhelming evidence that the financial liberalizations (i.e. de jure integration) of the late 1980s and early 1990s have not been simultaneously accompanied by a de facto integration. Third, I find that the percentage of variation in emerging excess returns explained by non-traded global risk factors rises as the level of market openness rises. Last, at the country level, I show that the correlation coefficient does not represent a robust measure of integration. Results also suggest that there are substantial cross-country differences in the dynamics of the degree of financial integration.

The Equity Risk Premium: Empirical Evidence from Emerging Markets

The analysis of the Equity Risk Premium (ERP) and the research efforts aimed at solving the Equity Premium Puzzle (Mehra and Prescott 1985), are still widely discussed in the economic and financial literature. The purpose of this paper is to show that differences in the ERP between developed and emerging markets lead to many empirical asset pricing issues. Using data from both markets, we first provide an ex-post simple time series analysis on the ERP. Compared to developed markets, and in line with existing literature, we find that emerging markets compensate investors with higher returns. We observe that the time varying nature of the ERP in emerging economies, relates mainly to economic cycles, shocks and other macro phenomena (i.e. global financial market integration). Basic statistics also show that during the last decade the ERP shrunk, especially in advanced economies. To improve investigations on the higher emerging marketsO equity premium, a standard global asset pricing model is adopted. On one hand, we mainly find that the one-factor model does not fully predict emerging marketsO equity premia. On the other hand, we discover that the inclusion of liquidity conditions and time-varying components provides reasonable explainations for the behaviour of equity premia in these OyoungO markets. Our final findings mainly suggests that global business cycle and financial integration process are crucial in determining the risk associated to emerging marketsO investments.

The Agency Problem, Financial Performance and Corruption: Country, Industry and Firm Level Perspectives

This paper studies the relationship between the agency problem, financial performance and corruption from country, industry and firm level perspectives. First, we observe that companies operating in countries with a high level of corruption tend to display relatively low returns. Second, in an industry-by-industry context, we find that the negative relationship between corruption and average stock returns is stronger in specific industries, which we define as ‘corruption sensitive’. Third, at the firm level, we show that agency problems are exacerbated in corruption-sensitive industries. Our study builds on the existing literature in three main areas. First, it proposes a novel macro-based approach aimed at identifying corruption-sensitive industries. Second, it provides evidence supporting that corruption exacerbates agency conflicts. Third, it provides evidence on the generalizability of standard corporate governance predictions to companies operating in corruption-sensitive industries.

Asian stock markets, US economic policy uncertainty and US macro-shocks

This paper studies the relationship between changes in the US macroeconomic conditions and the excess return of 10 Asian stock markets (China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Sri Lanka, Taiwan, Thailand). My main empirical findings are as follows. First, I find no evidence of a causal relationship (in Granger’s sense) between macroeconomic conditions in the US and Asian stock market excess returns. Second, in a vector autoregressive (VAR) framework, I find that bull Asian stock markets reduce US economic policy uncertainty. Last, I show that negative US credit and industrial production uncertainty shocks, and positive US stock market volatility shocks have generated a short-run drop in Asian stock markets’ performances in the post-subprime crisis era.

Google search-based metrics, policy-related uncertainty and macroeconomic conditions

We propose three novel measures of policy-related uncertainty based on the volume of Google searches for (i) ‘US stock market’; (ii) ‘US politics’; (iii) ‘US Fed’. In a VAR context, we find that a Google-search-based uncertainty shock has sizable adverse effects on US macroeconomic conditions. In particular, it produces (i) a drop in industrial production, consumer sentiment, equity prices, long-term rates and consumer credit; (ii) a rise in the unemployment rate. These effects are nearly identical to those generated by a shock to a standard policy-related uncertainty indicator. Our empirical findings suggest that a rise in the volume of internet searches for economic policy-related topics is a symptom of increasing uncertainty. It turns out that the proposed Google-search-based metrics meet standard policy-related uncertainty indicators.

Emerging Stock Premia: Do Industries Matter?

This paper studies the dynamics of emerging excess returns in a industry-by-industry context. Differently from the recent financial literature, which mainly focuses on �total market indexes�, we perform a standard ex-post empirical analysis aimed at capturing the industries� contribution to country stock performances. We obtain three key empirical findings. First, at industry level, we confirm the �high performance-high volatile nature� as well as the time-varying component of emerging excess returns. Second, at country level and in a dynamic context, we detect those industries that mainly contribute to the presence of emerging stock premia. Third, we show that some industries are much more exposed to global factors than others. We argue that these results display relevant implications for portfolio diversification and reflect consumption smoothing motive

A quasi real-time leading indicator for the EU industrial production

We build a quasi real-time leading indicator (LI) for the EU industrial production (IP). Differently from previous studies, the technique developed in this paper gives rise to an ex-ante LI that is immune to “overlapping information drawbacks�?. In addition, the set of variables composing the LI relies on a two-steps dynamic and systematic procedure. This ensures that the choice of the variables is not driven by subjective views. Our LI anticipates swings (including the 2007-2008 crisis) in the EU industrial production – on average – by 2 to 3 months. If revised, its predictive power largely improves. Via a couple of standard empirical exercises we show that the proposed LI (i) forecasts crises’ phases better than the ex-post LIs proposed by the OECD and the Conference Board and (ii) captures the interest rate policy pattern rather well.

Global temperature, R&D expenditure, and growth

We shed new light on the macroeconomic effects of rising temperatures. In the data, a shock to global temperature dampens expenditures in research and development (R&D). We rationalize this empirical evidence within a stochastic endogenous growth model, featuring temperature risk and growth sustained through innovations. In line with the novel evidence in the data, temperature shocks undermine economic growth via a drop in R&D. Moreover, in our endogenous growth setting temperature risk generates non-negligible welfare costs (i.e., 11% of lifetime utility). An active government, which is committed to a zero fiscal deficit policy, can offset the welfare costs of global temperature risk by subsidizing the aggregate capital investment with one-fifth of total public spending.

Financial Cyclical Factors and Growth: Insights from an Augmented Stochastic Solow Growth Model

We present an augmented stochastic version of the Solow neoclassical growth model to examine whether financial factors -- expressed as deviations from their trend -- represent important business cycle drivers.Our novel framework is used to study the dynamics of the US growth over the period 1890-2013. We find that financial cyclical factors played an important role in explaining output fluctuations in the US over the last century. By comparing different model specifications, we show that the role of each specific financial factor in explaining growth changes over time generating models instability. Taken together, our results have implications for the effectiveness of medium-term policy interventions.Accounting for such cyclical factors is thus relevant for policymakers.

Investment-Specific Shocks, Business Cycles, and Asset Prices

We introduce long-run investment productivity risk in a two-sector production economy to explain the joint behavior of macroeconomic quantities and asset prices. Long-run productivity risk in both sectors, for which we provide economic and empirical justification, acts as a substitute for shocks to the marginal efficiency of investments in explaining the equity premium and the stock return volatility differential between the consumption and the investment sector. Moreover, adding moderate wage rigidities allows the model to reproduce the empirically observed positive co-movement between consumption and investment growth.