Broker-dealer leverage volatility increases during booms and crisis periods, but its impact on stock prices is relatively unexplored. This paper aims to investigate whether…
Abstract
Purpose
Broker-dealer leverage volatility increases during booms and crisis periods, but its impact on stock prices is relatively unexplored. This paper aims to investigate whether broker-dealer leverage volatility is a key driver for stock prices.
Design/methodology/approach
This paper collects the US quarterly data of broker-dealer book leverage and three leading stock market indicators (S&P 500, DJIA and Nasdaq) for the period of 1967–2018. The research uses a multivariate GARCH-in-mean VAR to examine the impact of leverage volatility on each of the stock market indicators. A split-sample analysis (pre-1990 and post-1990) has also been performed to show the robustness of the result.
Findings
The research finds that broker-dealer leverage volatility does not have any significant impact on stock prices.
Originality/value
Broker-dealers are important financial intermediaries, and there is a huge literature exploring the relationship between their leverage and asset prices. But, the relationship between broker-dealer leverage volatility and asset prices is not explored yet. This study fills the gap and provides the first evidence that broker-dealer leverage volatility does not play any major role in the theory of stock pricing. The research proposes that the stock holding decisions of the investors should depend only on the first moment of leverage and not on the second moment of leverage. The study concludes that high broker-dealer leverage volatility is not a sinister signal for the US stock market.
Details
Keywords
Khandokar Istiak and Md Rafayet Alam
This study aims to investigate the nature and degree of US economic policy uncertainty spillover on the stock markets of a group of non-conventional economies like the Gulf…
Abstract
Purpose
This study aims to investigate the nature and degree of US economic policy uncertainty spillover on the stock markets of a group of non-conventional economies like the Gulf Cooperation Council (GCC) countries, where a risk-sharing-based financial system is prominent and foreign investment, risk-free interest, derivatives, etc. are not as widespread as in the western economies.
Design/methodology/approach
the monthly data of 1992–2018, linear and nonlinear structural vector autoregression (VAR) model, and an impulse response-based test to explore the nature and degree of US economic policy uncertainty spillover on the stock markets of the GCC countries.
Findings
This study finds that an unexpected increase in the US economic policy uncertainty significantly decreases the stock market index of all the GCC countries. This study also gets this relationship symmetric, meaning that the GCC stock market indices decrease and increase by the same amount when the US economic policy uncertainty increases and decreases, respectively.
Originality/value
This study investigates the characteristics of economic policy uncertainty spillover from the biggest economy of the world to the stock markets of the GCC region, which is new to the literature. The study results provide the first evidence that a risk-sharing based financial system does not necessarily protect the stock market from US uncertainty shock. However, the abundance of local investors, risk-sharing investment activities, the absence of derivatives, etc. may be responsible for the symmetric behavior of a stock market.
Details
Keywords
Khandokar Istiak and Md Rafayet Alam
The purpose of this paper is to investigate the possible asymmetric response of inflation expectations to oil price and policy uncertainty shocks.
Abstract
Purpose
The purpose of this paper is to investigate the possible asymmetric response of inflation expectations to oil price and policy uncertainty shocks.
Design/methodology/approach
The authors used the test of asymmetric impulse responses proposed by Kilian and Vigfusson (2011) to explore the issue of asymmetry.
Findings
Unlike other studies that assume symmetric effects, this study finds asymmetric effects of oil price and policy uncertainty on inflation expectations for positive and negative shocks and for pre- and post-financial-crisis periods. In particular other things being same, a same magnitude oil price shock has greater effect on inflation expectations in post-crisis period than in pre-crisis period. Moreover, in post-crisis period a positive increasing oil price shock has greater effect on inflation expectations than a negative decreasing oil price shock.
Practical implications
The paper concludes that FED’s greater focus on output stabilization since financial crisis has made inflation expectations less anchored and a sudden surge in oil price may quickly trigger inflation through inflation expectations.
Originality/value
Exploring the issue of the possible asymmetric effects of oil price and economic policy uncertainty on inflation expectations is a relatively new topic (as other studies only assumed symmetry and did not investigate the possible asymmetry in this regard).