The Journal of Finance

Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets

Published: 6/1992,  Volume: 47,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1992.tb04399.x  |  Cited by: 261

GEERT BEKAERT, ROBERT J. HODRICK

The paper first characterizes the predictable components in excess rates of returns on major equity and foreign exchange markets using lagged excess returns, dividend yields, and forward premiums as instruments. Vector autoregressions (VARs) demonstrate one‐step‐ahead predictability and facilitate calculations of implied long‐horizon statistics, such as variance ratios. Estimation of latent variable models then subjects the VARs to constraints derived from dynamic asset pricing theories. Examination of volatility bounds on intertemporal marginal rates of substitution provides summary statistics that quantify the challenge facing dynamic asset pricing models.

Diversification, Integration and Emerging Market Closed‐End Funds

Published: 7/1996,  Volume: 51,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1996.tb02709.x  |  Cited by: 110

GEERT BEKAERT, MICHAEL S. URIAS

We study a new class of unconditional and conditional mean‐variance spanning tests that exploits the duality between Hansen‐Jagannathan bounds (1991) and mean‐standard deviation frontiers. The tests are shown to be equivalent to standard spanning tests in population, but we document substantial differences in the small sample performance of alternative tests. Our empirical application examines the diversification benefits from emerging equity markets using an extensive new data set on U.S. and U.K.‐traded closed‐end funds. We find significant diversification benefits for the U.K. country funds, but not for the U.S. funds. The difference appears to relate to differences in portfolio holdings rather than to the behavior of premiums in the United States versus the United Kingdom.

Time‐Varying World Market Integration

Published: 6/1995,  Volume: 50,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1995.tb04790.x  |  Cited by: 948

GEERT BEKAERT, CAMPBELL R. HARVEY

We propose a measure of capital market integration arising from a conditional regime‐switching model. Our measure allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample. We find that a number of emerging markets exhibit time‐varying integration. Some markets appear more integrated than one might expect based on prior knowledge of investment restrictions. Other markets appear segmented even though foreigners have relatively free access to their capital markets. While there is a perception that world capital markets have become more integrated, our country‐specific investigation suggests that this is not always the case.

Foreign Speculators and Emerging Equity Markets

Published: 4/2000,  Volume: 55,  Issue: 2  |  DOI: 10.1111/0022-1082.00220  |  Cited by: 1343

Geert Bekaert, Campbell R. Harvey

We propose a cross‐sectional time‐series model to assess the impact of market liberalizations in emerging equity markets on the cost of capital, volatility, beta, and correlation with world market returns. Liberalizations are defined by regulatory changes, the introduction of depositary receipts and country funds, and structural breaks in equity capital flows to the emerging markets. We control for other economic events that might confound the impact of foreign speculators on local equity markets. Across a range of specifications, the cost of capital always decreases after a capital market liberalization with the effect varying between 5 and 75 basis points.

Expectations Hypotheses Tests

Published: 8/2001,  Volume: 56,  Issue: 4  |  DOI: 10.1111/0022-1082.00371  |  Cited by: 183

Geert Bekaert, Robert J. Hodrick

We investigate the expectations hypotheses of the term structure of interest rates and of the foreign exchange market using vector autoregressive methods for U.S. dollar, Deutsche mark, and British pound interest rates and exchange rates. We examine Wald, Lagrange multiplier, and distance metric tests by iterating on approximate solutions that require only matrix inversions. Bias‐corrected, constrained VARs provide Monte Carlo simulations. Wald tests grossly overreject the null, Lagrange multiplier tests slightly underreject, and distance metric tests overreject. A common interpretation emerges from the small sample statistics. The evidence against the expectations hypotheses is much less strong than under asymptotic inference.

The Term Structure of Real Rates and Expected Inflation

Published: 4/2008,  Volume: 63,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2008.01332.x  |  Cited by: 389

ANDREW ANG, GEERT BEKAERT, MIN WEI

Changes in nominal interest rates must be due to either movements in real interest rates, expected inflation, or the inflation risk premium. We develop a term structure model with regime switches, time‐varying prices of risk, and inflation to identify these components of the nominal yield curve. We find that the unconditional real rate curve in the United States is fairly flat around 1.3%. In one real rate regime, the real term structure is steeply downward sloping. An inflation risk premium that increases with maturity fully accounts for the generally upward sloping nominal term structure.

International Stock Return Comovements

Published: 11/25/2009,  Volume: 64,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2009.01512.x  |  Cited by: 648

GEERT BEKAERT, ROBERT J. HODRICK, XIAOYAN ZHANG

We examine international stock return comovements using country‐industry and country‐style portfolios as the base portfolios. We first establish that parsimonious risk‐based factor models capture the data covariance structure better than the popular Heston–Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, there is no evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short‐lived phenomenon. Third, large growth stocks are more correlated across countries than are small value stocks, and the difference has increased over time.

The Global Crisis and Equity Market Contagion

Published: 11/10/2014,  Volume: 69,  Issue: 6  |  DOI: 10.1111/jofi.12203  |  Cited by: 661

GEERT BEKAERT, MICHAEL EHRMANN, MARCEL FRATZSCHER, ARNAUD MEHL

We analyze the transmission of the 2007 to 2009 financial crisis to 415 country‐industry equity portfolios. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. While we find evidence of contagion from the United States and the global financial sector, the effects are small. By contrast, there has been substantial contagion from domestic markets to individual domestic portfolios, with its severity inversely related to the quality of countries’ economic fundamentals. This confirms the “wake‐up call” hypothesis, with markets focusing more on country‐specific characteristics during the crisis.

Global Growth Opportunities and Market Integration

Published: 5/8/2007,  Volume: 62,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2007.01231.x  |  Cited by: 275

GEERT BEKAERT, CAMPBELL R. HARVEY, CHRISTIAN LUNDBLAD, STEPHAN SIEGEL

We propose an exogenous measure of a country's growth opportunities by interacting the country's local industry mix with global price to earnings ( PE ) ratios. We find that these exogenous growth opportunities predict future changes in real GDP and investment in a large panel of countries. This relation is strongest in countries that have liberalized their capital accounts, equity markets, and banking systems. We also find that financial development, external finance dependence, and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness. Finally, we formulate new tests of market integration and segmentation by linking local and global PE ratios to relative economic growth.

International Momentum Strategies

Published: 2/1998,  Volume: 53,  Issue: 1  |  DOI: 10.1111/0022-1082.95722  |  Cited by: 1357

K. Geert Rouwenhorst

International equity markets exhibit medium‐term return continuation. Between 1980 and 1995 an internationally diversified portfolio of past medium‐term Winners outperforms a portfolio of medium‐term Losers after correcting for risk by more than 1 percent per month. Return continuation is present in all twelve sample countries and lasts on average for about one year. Return continuation is negatively related to firm size, but is not limited to small firms. The international momentum returns are correlated with those of the United States which suggests that exposure to a common factor may drive the profitability of momentum strategies.

Local Return Factors and Turnover in Emerging Stock Markets

Published: 8/1999,  Volume: 54,  Issue: 4  |  DOI: 10.1111/0022-1082.00151  |  Cited by: 637

K. Geert Rouwenhorst

The factors that drive cross‐sectional differences in expected stock returns in emerging equity markets are qualitatively similar to those that have been documented for developed markets. Emerging market stocks exhibit momentum, small stocks outperform large stocks, and value stocks outperform growth stocks. There is no evidence that high beta stocks outperform low beta stocks. A Bayesian analysis of the return premiums shows that the combined evidence of developed and emerging markets strongly favors the hypothesis that similar return factors are present in markets around the world. Finally, there exists a strong cross‐sectional correlation between the return factors and share turnover.

A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets

Published: 11/12/2019,  Volume: 75,  Issue: 1  |  DOI: 10.1111/jofi.12845  |  Cited by: 186

WENJIN KANG, K. GEERT ROUWENHORST, KE TANG

This paper studies the dynamic interaction between the net positions of traders and risk premiums in commodity futures markets. Short‐term position changes are driven mainly by the liquidity demands of noncommercial traders, while long‐term variation is driven primarily by the hedging demands of commercial traders. These two components influence expected futures returns with opposite signs. The gains from providing liquidity by commercials largely offset the premium they pay for obtaining price insurance.