Spyros I. Spyrou

Contrarian Profits and the Overreaction Hypothesis: the Case of the Athens Stock Exchange

This paper investigates the existence of contrarian profits and their sources for the Athens Stock Exchange (ASE). The empirical analysis decomposes contrarian profits to sources due to common factor reactions, overreaction to firm-specific information, and profits not related to the previous two terms, as suggested by Jegadeesh and Titman (1995). Furthermore, in view of recent evidence that common stock returns are related to firm characteristics such as size and book-to-market equity, the paper decomposes contrarian profits to sources due to factors derived from the Fama and French (1993, 1996) three-factor model. For the empirical testing, size-sorted sub-samples that are rebalanced annually are employed, and in addition, adjustments for thin and infrequent trading are made to the data. The results indicate that serial correlation is present in equity returns and that it leads to significant short-run contrarian profits that persist even after we adjust for market frictions. Consistent with findings for the US market, contrarian profits decline as one moves from small stocks to large stocks, but only when market frictions are considered. Furthermore, the contribution to contrarian profits due to the overreaction to the firm-specific component appears larger than the underreaction to the common factors.

Are stocks a good hedge against inflation? evidence from emerging markets

Theory suggests that equities are a good hedge against inflation. However, most of the empirical evidence for industrialized economies suggests that the relationship between stock returns and inflation is negative. One explanation is the negative correlation between inflation and real output growth. This paper examines the relationship between inflation and stock returns for ten important Emerging Stock Market (ESM) markets, namely, Chile, Mexico, Brazil, Argentina, Thailand, S. Korea, Malaysia, Hong Kong, Philippines and Turkey, during the 1990s. To anticipate the results, the relationship between stock returns and inflation, for the whole sample period, is positive and statistically significant for three of the sample ESMs, while it is positive (but statistically insignificant) for a further three. Only for one ESM is the relationship negative and statistically significant. This result may be due to the role of money and the positive relationship between consumer prices and output.

Stock returns and inflation: evidence from an emerging market

Theory suggests that equities are a good hedge against inflation. However, most of the empirical evidence suggests that the relationship between stock returns and inflation is negative. One explanation is the negative correlation between inflation and real output growth. In this paper the relationship between inflation and stock returns is examined for the emerging economy of Greece, during the 1990s. To anticipate the results, the relationship seems to be negative and significant, but only for the period until 1995. Since then, the relationship is not statistically significant, and it is argued that this may be due to the increased role of monetary fluctuations.

Herding in financial markets: a review of the literature

Purpose - – The purpose of this paper is to provide a review of theory and empirical evidence on herding behavior in financial markets. Design/methodology/approach - – Review and discussion of the literature. Findings - – More than two decades of empirical and theoretical research have provided a significant insight on investor herding behavior. Research limitations/implications - – The discussion indicates that there are still open issues and areas with inconclusive evidence, e.g. the author knows relatively little for markets other than equity markets. Practical implications - – The paper may need empirical methodologies to evaluate herding that address current limitations. Originality/value - – The paper reviews recent empirical evidence and identifies open issues for future research.

Index Futures Trading and Spot Price Volatility

This article contributes to the debate whether the introduction of derivative instruments stabilises or destabilises markets for underlying assets. It has often been argued that due to the higher degree of leverage, futures markets tend to attract uninformed speculative investors and thus destabilise cash markets by increasing volatility. On the other hand, it has been pointed out that futures markets increase the overall market depth and informativeness, are important for price discovery, allow the transfer of risk, and may actually reduce spot volatility. The empirical evidence is controversial and has been concentrated on large capitalisation markets. This paper investigates the issue for a dynamic emerging market, the Athens Stock Exchange, employing a methodology that allows the examination of changes in the nature of volatility rather than changes in volatility per se, and allowing for asymmetric responses to news. To anticipate the results, spot volatility appears unaffected with some evidence to suggest that uncertainty is actually reduced following the introduction of futures trading.

Common Stochastic Trends in Emerging Equity Markets

Evidence suggests that stock markets in industrialized economies are increasingly integrated with the presence of common trends amongst national stock market indices. This implies that in the long run there is little gain from diversifying portfolios internationally. We investigate the existence of common trends in the increasingly important emerging equity markets of the Latin American and Asia-Pacific regions. While we find evidence of common trends, we argue that this in itself does not rule out long-run benefits to diversification. Examination of the composition of the common trends reveals that some countries do not enter that regions common trend and returns in some countries do not react to movements in the common trend, a result that generalizes to the inclusion of both the USA and the UK. Thus, even though common trends are detected, their impact is very limited and therefore emerging equity markets offer benefits in terms of diversification, even in the long run. Copyright 1999 by Blackwell Publishers Ltd and The Victoria University of Manchester

Short-term overreaction, underreaction and efficient reaction: evidence from the London Stock Exchange

We examine short-term investor reaction to extreme events in the UK equity market for the period 1989 to 2004 and find that the market reaction to shocks for large capitalization stock portfolios is consistent with the Efficient Market Hypothesis, i.e. all information appears to be incorporated in prices on the same day. However, for medium and small capitalization stock portfolios our results indicate significant underreaction to both positive and negative shocks for many days subsequent to a shock. Furthermore, the underreaction is not explained by risk factors (e.g. Fama and French, 1996) calendar effects, bid-ask biases or unique global financial crises.

Fundamental variables and the cross-section of expected stock returns: the case of Hong Kong

Recent empirical evidence indicates that size and book-to-market ratios explain adequately a large part of average stock returns. This paper examines the association of a number of fundamental variables with the cross section of stock returns in the Hong Kong Stock Exchange. The results suggest that, during the 1990s, the small-firm effect has actually gone into reverse and that size and book-to-market equity have a statistically significant relationship with average returns. Beta has little or no role as an explanatory variable.

Investor sentiment and yield spread determinants: evidence from European markets

– This paper aims to investigate the yield spread determinants for a sample of European markets in the light of the recent financial crisis. It utilises findings from two different strands in the literature: findings on bond spread determinants and findings on the effect of investor sentiment on equity returns. , – The explanatory variables in the regression models proxy not only for economic fundamentals (e.g. economic activity, default risk, liquidity risk, general market conditions) but also for investor sentiment. A vector autoregressive approach is employed. , – The results indicate that fundamental variables are significant for the determination of the level of yield spreads, as suggested by previous studies. Local and international investor sentiment, however, both current and past, is also a statistically significant determinant for both the level and monthly changes of yield, especially during the crisis period 2007-2011. , – The implication of this finding is significant for all parties involved: government officials, private lenders, EU/ECB/IMF officials, and market participants. , – Focusing solely on quantitative economic performance indicators may not have the desirable effect of reducing borrowing rates and facilitating the return to economic stability. Perhaps, reassuring and/or sending strong qualitative signals to financial markets may be as important. Involved agents may have to address not only technical financial issues but also the perception that market participants have about the proposed solutions to the crisis and eventually affect market sentiment. , – The issue of the effect of investor sentiment on government yield spreads during a crisis has not been investigated before.

Sentiment Changes, Stock Returns and Volatility: Evidence from NYSE, Amex, and Nasdaq Stocks

Using US stock portfolios that are formed on book-to-market equity (B/M), long term reversals, momentum, and size, a long sample period (1965--2007), and the comprehensive sentiment index of Baker and Wurgler (2006), this article shows that contemporaneous returns of extreme portfolios are significantly related to monthly sentiment changes and tend to be higher during periods of negative sentiment. Stock returns, however, seem to Granger-cause sentiment changes and are more important in predicting sentiment changes than vice versa. In addition, conditional return volatility is significantly affected by lagged volatility rather than sentiment changes.