Publications of Szilagyi, Peter G

Liquidity, surprise volume and return premia in the oil market

We investigate oil market price dynamics in the context of the Mixture of Distributions Hypothesis (MDH). Our econometric model addresses autoregressive properties in returns, the impact of surprise volume and conditional oil market return volatility as well as oil market liquidity in the conditional return equation. Surprise volume as a proxy of private information flow is shown to be unrelated to a set of standard market liquidity proxies. Oil return heteroscedasticity is found to be partly explained by surprise volume, a finding that is consistent with the MDH. Our findings further show that both oil market liquidity as well as surprise volume shocks are priced in the oil market. As such, lower levels of lagged market liquidity relate to above average conditional returns. Surprise volume shocks are associated with lower conditional oil market returns jointly with higher contemporaneous conditional return volatility. Lagged market liquidity dominates conditional volatility in predicting conditional oil price returns.

Time-Varying Energy and Stock Market Integration in Asia

The degree of integration between energy and stock markets is critical for the diversification, risk management and funding decisions of global corporations and investors alike. We investigate the integration relation between ten major Asian stock markets and a diversified energy portfolio that comprises oil, coal and gas. Estimation of the relation in a time-varying asset pricing framework, which allows for regime switching, identifies two major regimes. The first regime represents periods of low energy-stock market integration, where markets tend to be segmented. It accounts for over two-thirds of the sample period during December 1992 to December 2015. The second regime represents periods of high integration, as characterized by limited diversification opportunities and increased levels of volatility. Also, corporate funding conditions are less favorable in the second regime. The two regimes differ in the way equity markets price energy risk. In addition to a positive energy-unrelated equity risk premium during the low integration regime, our results identify a significant positive energy-related equity risk premium during the high integration regime. Finally, we demonstrate that investors can use the conditional information of our integration model to outperform passive portfolio investment strategies in the stock and energy markets.

When Kamay Met Hill: Organization Ethics in Practice

The Kamay and Hill insider trading conviction in Australia highlights many of the issues and problems involved in the prevention, detection and prosecution of insider trading. The case uniquely highlights how ethical behaviour is instilled at home, in school and in society, and the need for ethical responsibility at the personal and organisational level to complement legal rules and enforcement. We use the Kamay and Hill case to explore the reasons behind the failure of the traditional top-down approach to insider trading prevention, where institutional ethical codes of conduct largely reflect and rely upon national rules, norms, and regulation. We propose a bottom-up approach to ensure that individual and organisational behaviour is ethical, where emphasis is not on compliance but on a set of core ethical values that allow individual and corporate expression. It is our strong belief that compliance cannot replace ethics.

Addressing COP21 using a Stock and Oil Market Integration Index Energy Policy

COP21 implementation should lead to a decline in the future demand for fossil fuels. One key implication for investors is how to best manage this risk. We construct a monthly integration index and then demonstrate that oil investors can offset adverse oil price risk by holding various global stock portfolios. The portfolios are formed from eight different combinations of developed and emerging stock markets. We show that measuring the degree of stock-oil market integration for these portfolios is critical to managing the time-varying degrees of integration that exist between oil and stock markets. Importantly, under normal market conditions, when markets are segmented, there is the opportunity for oil investors to diversify the additional energy price risk, caused by COP21, through the purchase of stocks. The optimal oil-stock diversified portfolio provides risk-adjusted positive benefits to investors, with the weightings changing over time as COP21 implementation proceeds.

Creditor rights, claims enforcement, and bond performance in mergers and acquisitions

This article shows that country-level differences in creditor protection affect bond performance around cross-border M&A announcements. Using Eurobonds and a global sample of 1,100 cross-border M&As, we find that the bondholders of bidding firms respond more positively to deals that expose their firm to a jurisdiction with stronger creditor rights and more efficient claims enforcement through courts. Positive creditor protection spillovers are enhanced by now-global jurisdictional cooperation in multinational insolvencies and creditors’ ability to do insolvency arbitrage. The spillover effects we observe are stronger for firms with higher asset risk, longer maturity bonds, and a higher likelihood of financial distress.

Can Stock Market Investors Hedge Energy Risk? Evidence from Asia

​The relationship between energy and stock prices is investigated in the context of Asia, including China and Japan. Oil, gas and coal prices are considered both individually and as an energy portfolio. Consistent with evidence from international markets, during the post Global Financial Crisis (GFC) period, Asian stock markets moved in tandem with oil prices. However, using asset pricing and portfolio theory, we identify a time-varying integration between individual stock markets and the energy portfolio, which in turn may limit the benefit of risk reduction through diversification. This relation can also be used to hedge the common factor arising from energy risk. Doing so provides benefits to investors in the form of positive time-varying risk adjusted returns.

The Internationalisation of the RMB: New Starts, Jumps and Tipping Points

We investigate the process of currency internationalisation of the Chinese Renminbi (RMB). Aggregated cross-border data provided by the Society for Worldwide Interbank Financial Telecommunications (SWIFT) allows better measurement of the role played by a currency in trade and settlement. RMB transactions are significant and increasing but remain concentrated in key financial centres. Analysis using an asset pricing framework shows that the footprint of Chinese corporations in international markets has at times been significant, with the size of these transactions prompting many to reassess the likely pace of RMB internationalisation and its usage as an alternate vehicle currency.

Should Emerging Market Investors Buy Commodities?

One reason that investors hold commodities is to receive diversification benefits. However, while an extensive set of existing studies demonstrate diversification benefits when investors hold international stocks or bonds, they are generally silent on the implications of holding commodities. Using an asset pricing framework, we investigate the benefits to investors from holding commodities, both individually and in portfolios. Generally, commodity and stock markets are integrated, although there are time-varying benefits to investors that are subject to sample period selection and investment horizon. We show that Asian investors receive positive risk adjusted returns in gold and rice markets but not in any of the other commodity markets investigated. The risk adjusted returns are time-varying: during the Asian financial crisis risk adjusted returns were negative – a penalty for investing in commodities – whereas during the global financial crisis the reverse was true and investors earned positive excess returns. The time-varying nature of the benefits that arise from diversification in commodities and their breakdown during periods of crisis, highlight the problems that investors may face when using commodities for long-term investment in addition to traditional holdings of stocks and bonds.

Time Varying Asian Stock Market Integration

We employ an asset pricing framework with varying estimation lengths to show that there has been an increasing degree of integration between Asian and international stock markets, but very little with Japan. This finding is consistent with prior studies and highlights the impact of recent regulatory and economic reform undertaken throughout the region. Our results show that instability in the asset variance structure underpins the observed varying degrees of financial market integration. In particular, modeling integration using shorter estimation periods helps explain the time varying nature of financial market integration and the benefits that may accrue to international and domestic investors.

Stock Market Spread Trading: Argentina and Brazil Stock Indices

Brazil has the largest stock market in South America; Argentina has one of the smallest. We investigate the spread relationship between these two markets, measured as the ratio of Brazil's Bovespa index to Argentina's Merval index. Using rescaled range analysis, we identify the presence of a time-varying fractal structure in this ratio. When a Hurst-based trading rule is applied, we find that episodes of fractality may be exploited by traders. Under some circumstances, these strategies are more profitable than economic gains from simple moving average systems, which exploit the autocorrelation structure of the series.