Macroeconomic risk

The modern history of the Russian stock market has mirrored ups and downs of the country's transition as well as swings in investor perceptions. In this paper, we describe the evolution of the Russian stock market over its first decade, with particular attention to the risk factors driving stock returns. First, we analyze the development of the institutional infrastructure and dynamics of the market's size and liquidity measured by the number of listed and traded stocks, depositary receipts and IPOs as well as trading volume in the local stock exchanges and abroad. Then, we examine major political and economic events, which influenced the investor perceptions of the country risk and were reflected in stock prices. Finally, we carry out quantitative analysis of risk factors explaining considerable time and cross-sectional variation in Russian stock returns. We document a significant role of corporate governance, political risk, and macroeconomic risk factors, such as global equity markets performance, oil prices, and exchange rates, whose relative importance varied a lot over time.

Liquidity Risk, Leverage and Long-Run IPO Returns* We examine the risk-return characteristics of a rolling portfolio investment strategy where more than six thousand Nasdaq initial public offering (IPO) stocks are bought and held for up to five years. The average long-run portfolio return is low, but IPO stocks appear as 'longshots', as five-year buy-and-hold returns of 1000% or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-tomarket ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed 'low minus high' (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristics-based risk factors, and we explore mimicking portfolios for leverage-related macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio's risk exposures, as defined here.

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We present an empirical model where output growth volatility and government expenditure are jointly endogenous and both are affected by policies and institutions. We ¯nd that output volatility increases government expenditure, but higher expenditure, causes greater out-put volatility. This suggests that discretionary government intervention is destabilising. Trade openness drives both higher expenditure and greater output volatility. Financial openness instead disciplines the size of government. Political institutions that strengthen policymaker's ac-countability towards the electorate result in lower expenditure and, in-directly, contribute to output stabilisation. Institutional arrangements concerning the central bank are not neutral: a more independent centralbank calls for lower output volatility.

Like many other developing countries in the past decade, Central European countries pursued financial market reforms based on the assumption that foreign finance would boost the depth and liquidity of their national financial systems, promote efficient economic management and enhance financial stability. Unlike other developing countries however, Central European countries expected to be shielded from the worst effects of global neoliberalism through the process of EU accession. This article evaluates the financial integration of Central Europe in the context of the global process of finance-led restructuring. The article concludes that the financial integration of Central Europe has failed to generate the promised optimisation of investment, let alone reduce macroeconomic risks. This is because the actual Eastward expansion strategies of Western European credit institutions were never geared towards addressing the developmental needs of the host Central European economies. Rather, they were always aimed at redressing the declining profitability of financial institutions operating in the already financialised economies of Western Europe. As a result, foreign financiers emerged as a powerful rentier class in Central Europe able to extract rent incomes far in excess of their profits in the west. The dominancy of foreign financiers in the region resulted
in a reorientation of state policy, corporate strategy and households’ behaviour, in line with the imperatives of financially based accumulation strategies. This lead not only to an unprecedented transfer of property rights from local society to foreign investors, but also to increased indebtedness and risk, which are ultimately unsustainable in the long run.

Purpose-The purpose of this paper is to provide an analysis of the relationship between expected risk premia on property stocks and some major macroeconomic risk factors as reflected in the general business and financial conditions Design/methodology/approach-Employs a three-step estimation strategy (principal component analysis, GARCH (1,1) and GMM) to model the macroeconomic risk variables (GDP growth, INDP growth, unexpected inflation, money supply, interest rate and exchange rate) and relate them to the first and second moments on property stock excess returns of four major markets, namely, Singapore, Hong Kong, Japan and the UK. Macroeconomic risk is measured by the conditional volatility of macroeconomic variables. Findings-The expected risk premia and the conditional volatilities of the risk premia on property stocks are time-varying and dynamically linked to the conditional volatilities of the macroeconomic risk factors. However there are some disparities in the significance, as well as direction of impact in the macroeconomic risk factors across the property stock markets. Consequently there are opportunities for risk diversification in international property stock markets. Originality/value-Results help international investors and portfolio managers deepen their understanding of the risk-return relationship, pricing of macroeconomic risk as well as diversification implications in major Asia-Pacific and UK property stock markets. Additionally, policy makers may play a role in influencing the expected risk premia and volatility on property stock markets through the use of macroeconomic policy.

The article examines recent developments in international housing markets and makes an assessment of the current situation. The first section demonstrates that the last upward movement in house prices in advanced economies, that started during the mid-1990s, differed from previous upward phases because of its strength, duration and degree of synchronisation across countries. Low interest rates, financial innovation, relaxed credit conditions and demographic factors stimulated housing demand and led to higher prices and investment. The strongest increases were recorded in the UK, Spain, Ireland and France. Starting around the mid-2000s, housing markets increasingly displayed signs of overheating and the American subprime crisis of 2006 triggered a downward correction in the US housing market. Housing markets elsewhere displayed a similar pattern around the same period. Nevertheless, developments were less synchronised during this downturn than during the upturn, as the fall in house ...

We show risk exposures and premiums associated with the Chen, Roll, and Ross (1986) risk factors change over time and depend on stock market and business cycle condition. Findings also indicate that factor risk premiums change sign between January and non-January, especially during bull markets. These findings serve as acaveat for portfolio managers who allocate assets to match desired exposures to key macroeconomic risk factors.

The previous financial crisis has revealed the importance of risk in the financial and business cycle within the economy. This paper examines relationship among three cycles in the economy, namely (i) business cycle macro risk, (ii) credit cycle and (iii) risk cycle, and their impacts toward individual bank performance. We examine the responses of individual bank credit cycle and risk cycle toward a shock in business cycle macro risk and its consequence to the bank performance. We use Indonesian data for period of 2005q1 to 2014q4. We use unbalanced panel data of individual banks' balance sheet with Panel Vector Autoregressive approach based on GMM style estimation by implementing PVAR package developed by Abrigo and Love (2015). The result shows dynamic relationship between business cycle macro risk and financial risk cycles. The study also observes prominent role of risk cycles in driving bank performance. We also show the existence of financial accelerator phenomenon in Indonesian banking system, in which financial cycles precede the business cycle macro risk. Abstract Keywords : Business Cycle Risk, Credit Cycle, Bank Lending, Financial Risk

Is government size the desirable response to macroeconomic risk, or it is the consequence of distorted political incentives with adverse effects on macroeconomic volatility? This paper reconsiders the mutual interdependence between government size and growth volatility in a large sample of countries within a system of simultaneous equations. We find that higher volatility is associated with larger government size and vice versa. Thus emphasis on government size as a mean capable, per se, of reducing macroeconomic risk is ill-conceived. We also identify a set of institutional limits to government discretion that also have beneficial effects on volatility. These include domestic political institutions, de facto central bank independence and a stable nominal exchange rate regime.

The goal of this paper is to explain a recent regularity observed in economies in which central banks have moved from using a money aggregate as the instrument for the conduction of monetary policy towards a short-term interest rate (for example Peru in 2002). In particular, in those economies we observe that, after the change in the policy instrument, there is a decrease in the macroeconomic volatility accompanied by a reduction in the average level of both in ‡ation and interest rates vis-à-vis an increase in the average level of money aggregates (an increase in the money demand).

Significant time-varying risk premia exist in the foreign currency futures basis, and these risk premia are meaningfully correlated with common macroeconomic risk factors from equity and bond markets. The stock index dividend yield and the bond default and term spreads in the U.S. markets help forecast the risk premium component of the foreign currency futures basis. The specific source of

According to the models, the wage formation seems to be essentially different in different wage quartiles. GDP is statistically significant only for one wage group, but still the prediction accuracy is remarkably worse during the recession period when GDP drops. The prediction errors for the middlewage quarters seem to be considerably smaller than for the low and high-wage groups. There is some indication that the middle quarters can be predicted quite accurately several years ahead. The results show that individual aspects and the wage group play a significant role in modeling and prediction. This is potentially useful information when designing and developing pension schemes.

With increasing globalization, to what extent do stock market returns reflect global or domestic risk factors? We find a significant relationship between stock market returns and the global market risk factor and macroeconomic factors respectively. In particular, global factors offer four times more explanatory power than domestic factors for developed market stock returns. Yet domestic factors are as important as global ones in emerging economies. Our method allows for the proxies of the state variables to be endogenously determined. The relationship between macroeconomy and stock market returns is robust after accounting for the market factor, firm size and book-to-market characteristics.

While credit is essential for investment, innovation and economic growth, there are risks related to excessive indebtedness in the corporate sector in the form of increased likelihood of financial distress and bankruptcy. The recent global crisis has highlighted the macroeconomic risks of credit booms. This paper focuses on microeconomic implications of high leverage and provides an innovative firm-level approach to endogenously identify the threshold leverage beyond which corporate indebtedness becomes "excessive". Estimates for emerging central and eastern European countries suggest that total factor productivity (TFP) growth increases with leverage until it reaches a critical threshold. Beyond this threshold, higher leverage lowers TFP growth.

A contribution to the study of volatility and country risk is made in order to achieve a successful crosscountry comparison. We present a methodology for the evaluation of country risk that include endogenous detection of multiple structural breaks (also identifying its different kinds), determination of persistence of shocks through their structural-break free fractional integration order and determination of the adjusted volatility which best characterizes the economy. This methodology is applied to developed and emerging countries' GDPs (taking 9 countries from each group). Although the former have fewer structural breaks than the latter, these breaks are extremely relevant in 14 of the 18 countries. This affects the calculation of the series persistence and volatility. Comparing a traditional risk indicator to our suggested one we find that the cluster of reference of 60% of the countries changes. Most countries present fractional integration (long memory) being the distribution between both groups heterogeneous. Country volatility varies strongly if we isolate structural breaks that present a probabilistic distribution different from intrinsic GDP volatility. Clusters arrangement is different with some risk country evaluation methodologies.

A contribution to the study of volatility and country risk is made in order to achieve a successful crosscountry comparison. We present a methodology for the evaluation of country risk that include endogenous detection of multiple structural breaks (also identifying its different kinds), determination of persistence of shocks through their structural-break free fractional integration order and determination of the adjusted volatility which best characterizes the economy. This methodology is applied to developed and emerging countries' GDPs (taking 9 countries from each group). Although the former have fewer structural breaks than the latter, these breaks are extremely relevant in 14 of the 18 countries. This affects the calculation of the series persistence and volatility. Comparing a traditional risk indicator to our suggested one we find that the cluster of reference of 60% of the countries changes. Most countries present fractional integration (long memory) being the distribu...

While credit is essential for investment, innovation and economic growth, there are risks related to excessive indebtedness in the corporate sector in the form of increased likelihood of financial distress and bankruptcy. The recent global crisis has highlighted the macroeconomic risks of credit booms. This paper focuses on microeconomic implications of high leverage and provides an innovative firm-level approach to endogenously identify the threshold leverage beyond which corporate indebtedness becomes “excessive”. Estimates for emerging central and eastern European countries suggest that total factor productivity (TFP) growth increases with leverage until it reaches a critical threshold. Beyond this threshold, higher leverage lowers TFP growth.

We show risk exposures and premiums associated with the Chen, Roll, and Ross (1986) risk factors change over time and depend on stock market and business cycle condition. Findings also indicate that factor risk premiums change sign between January and non-January, especially during bull markets. These findings serve as acaveat for portfolio managers who allocate assets to match desired exposures to key macroeconomic risk factors.

Purpose – The purpose of this paper is to provide an analysis of the relationship between expected risk premia on property stocks and some major macroeconomic risk factors as reflected in the general business and financial conditions Design/methodology/approach – Employs ...

This paper employs a Generalised Autoregressive Conditional Heteroskedasticity in Mean (GARCH-M) model to consider the effect of macroeconomic factors on Australian property returns over the period 1985 to 2002. Three direct (office, retail and industrial property) and two indirect (listed property trust and property stock) returns are included in the analysis, along with market returns, short, medium and long-term interest rates, expected and unexpected inflation, construction activity and industrial employment and production. In general, the macroeconomic factors examined are found to be significant risk factors in Australian commercial property returns. However, the results also indicate that forecast accuracy in these models is higher for direct office, listed property trust and property stock returns and that the persistence of volatility shocks varies across the different markets, with volatility half lives of between five and seven months for direct retail and industrial property, two and three months for direct office property and less than two months with both forms of indirect property investment.

Downloadable! The Chilean experience with price-based capital account regulations (ie, deposits or reserve requirements on capital inflows) has been subject to extensive discussion in the recent literature. This paper presents evidence on the effectiveness of similar regulations ...

Depositor behavior has been associated with bank-specific characteristics, random runs, or contagion episodes. Using evidence on the 2000-02 bank runs in Argentina and Uruguay, this paper shows that macroeconomic risk is also important. Few macroeconomic shocks can quickly cause large runs. Macroeconomic risk affects deposits regardless of traditional bank-specific characteristics. Furthermore, bank exposure to macroeconomic factors can explain differences in deposit withdrawals. During crises, the evolution of bank-specific characteristics is mainly driven by macroeconomic factors, while the informational content of bank-specific variables declines. Overall, depositors seem responsive to risk in a broader sense than that often considered by the literature. Copyright (c) 2010 The Ohio State University.

Shipping is an industry that is highly geared towards international trade and therefore, would seem to be highly susceptible to fluctuations in macroeconomic factors. This article investigates the impact of exchange rates, interest rates and oil prices on stock returns of 143 shipping companies from 16 countries. We also investigate the factors which determine the extent to which firm are