Pub Date : 2025-11-20DOI: 10.1016/j.intfin.2025.102259
Xuchu Sun , Qing Zhang , Tangrong Li
It is increasingly recognized that retail trades may contain predictive information, but an open question remains: how are they informed? This paper explores a possible explanation through the lens of institutional trading intention exposure. Using tick-by-tick data from the Chinese market, we find that retail order imbalance positively predicts stock returns at the weekly horizon. Approximately 20% of this predictive power is attributable to institutional trading intentions exposed on the order book, suggesting that some retail investors may incorporate exposed institutional intentions into their own trading decisions. The information channel is particularly pronounced when institutional intentions are revealed through limit orders, among small retail traders, and in specific macro- and micro-level market environments. Overall, our findings highlight the critical role of institutional trading intention exposure in shaping the return predictability of retail investors, particularly in emerging market contexts.
{"title":"How are retail investors informed? A perspective from institutional trading intention exposure","authors":"Xuchu Sun , Qing Zhang , Tangrong Li","doi":"10.1016/j.intfin.2025.102259","DOIUrl":"10.1016/j.intfin.2025.102259","url":null,"abstract":"<div><div>It is increasingly recognized that retail trades may contain predictive information, but an open question remains: how are they informed? This paper explores a possible explanation through the lens of institutional trading intention exposure. Using tick-by-tick data from the Chinese market, we find that retail order imbalance positively predicts stock returns at the weekly horizon. Approximately 20% of this predictive power is attributable to institutional trading intentions exposed on the order book, suggesting that some retail investors may incorporate exposed institutional intentions into their own trading decisions. The information channel is particularly pronounced when institutional intentions are revealed through limit orders, among small retail traders, and in specific macro- and micro-level market environments. Overall, our findings highlight the critical role of institutional trading intention exposure in shaping the return predictability of retail investors, particularly in emerging market contexts.</div></div>","PeriodicalId":48119,"journal":{"name":"Journal of International Financial Markets Institutions & Money","volume":"106 ","pages":"Article 102259"},"PeriodicalIF":6.1,"publicationDate":"2025-11-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145569270","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-19DOI: 10.1016/j.intfin.2025.102261
Henrik Seikku , Imtiaz Sifat
We examine whether regulatory barriers segment technologically integrated financial markets using Bitcoin bans across 19 countries (2013–2024). Unlike traditional markets where infrastructure creates natural frictions, Bitcoin operates on a global, permissionless network. Using proper maximum likelihood BEKK-GARCH and CCC-GARCH estimation, we find no significant differences in market integration between liberal and conservative regulatory regimes across four complementary tests. However, country-specific analysis reveals substantial heterogeneity: major markets (China, Russia) achieve partial segmentation while smaller markets show counter-intuitive increases in integration post-ban. Market size and development explain less than 10% of regulatory effectiveness variation. These findings challenge traditional segmentation theory, demonstrating that decentralized technology creates persistent cross-market linkages that transcend regulatory boundaries. The heterogeneous and often counterproductive regulatory outcomes suggest policymakers should prioritize international coordination over unilateral restrictions when addressing digitally native assets.
{"title":"Bitcoin bans & regulatory segmentation in digitally native asset markets","authors":"Henrik Seikku , Imtiaz Sifat","doi":"10.1016/j.intfin.2025.102261","DOIUrl":"10.1016/j.intfin.2025.102261","url":null,"abstract":"<div><div>We examine whether regulatory barriers segment technologically integrated financial markets using Bitcoin bans across 19 countries (2013–2024). Unlike traditional markets where infrastructure creates natural frictions, Bitcoin operates on a global, permissionless network. Using proper maximum likelihood BEKK-GARCH and CCC-GARCH estimation, we find no significant differences in market integration between liberal and conservative regulatory regimes across four complementary tests. However, country-specific analysis reveals substantial heterogeneity: major markets (China, Russia) achieve partial segmentation while smaller markets show counter-intuitive increases in integration post-ban. Market size and development explain less than 10% of regulatory effectiveness variation. These findings challenge traditional segmentation theory, demonstrating that decentralized technology creates persistent cross-market linkages that transcend regulatory boundaries. The heterogeneous and often counterproductive regulatory outcomes suggest policymakers should prioritize international coordination over unilateral restrictions when addressing digitally native assets.</div></div>","PeriodicalId":48119,"journal":{"name":"Journal of International Financial Markets Institutions & Money","volume":"106 ","pages":"Article 102261"},"PeriodicalIF":6.1,"publicationDate":"2025-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145569271","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates how U.S. electricity and gas utility firms adapted their dividend policies in response to deregulation of the energy sector, with a focus on understanding the internal financial mechanisms that support or constrain dividend smoothing. Using Lintner’s (1956) speed of adjustment model and a variance decomposition framework, we provide new evidence that deregulation significantly reduced dividend smoothing among utility firms, unlike their counterparts in the broader energy sector or non-energy industries. Specifically, we find that after deregulation, utility firms relied more heavily on debt financing and curtailed investment when faced with an income shock but also reflected that shock in the dividends more than before deregulation. Our empirical analysis draws on firm-level data from 1969 to 2021 and compares behaviour before and after deregulation across multiple firm categories, including a matched sample of non-utility firms. We show that deregulation made it harder for firms to maintaining the same level of dividend smoothing. These findings give insights on the importance of regulatory context in corporate finance research, and how market liberalization can impact not only competition and pricing for the affected sectors, but also the strategies firms use to balance investor expectations and operational needs.
{"title":"Energy market deregulation: A new perspective on dividend smoothing","authors":"Faruk Balli , Hatice Ozer Balli , Indrit Hoxha , Hannah Nguyen , Tam Hoang Nhat Dang","doi":"10.1016/j.intfin.2025.102260","DOIUrl":"10.1016/j.intfin.2025.102260","url":null,"abstract":"<div><div>This paper investigates how U.S. electricity and gas utility firms adapted their dividend policies in response to deregulation of the energy sector, with a focus on understanding the internal financial mechanisms that support or constrain dividend smoothing. Using <span><span>Lintner’s (1956)</span></span> speed of adjustment model and a variance decomposition framework, we provide new evidence that deregulation significantly reduced dividend smoothing among utility firms, unlike their counterparts in the broader energy sector or non-energy industries. Specifically, we find that after deregulation, utility firms relied more heavily on debt financing and curtailed investment when faced with an income shock but also reflected that shock in the dividends more than before deregulation. Our empirical analysis draws on firm-level data from 1969 to 2021 and compares behaviour before and after deregulation across multiple firm categories, including a matched sample of non-utility firms. We show that deregulation made it harder for firms to maintaining the same level of dividend smoothing. These findings give insights on the importance of regulatory context in corporate finance research, and how market liberalization can impact not only competition and pricing for the affected sectors, but also the strategies firms use to balance investor expectations and operational needs.</div></div>","PeriodicalId":48119,"journal":{"name":"Journal of International Financial Markets Institutions & Money","volume":"106 ","pages":"Article 102260"},"PeriodicalIF":6.1,"publicationDate":"2025-11-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145569269","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study investigates how cross-stock information diffusion, driven by both retail and institutional investors, influences excess comovement in the Chinese retail-dominated market and the U.S. institution-dominated market. Using data from 4,533 Chinese stocks and 4,517 U.S. stocks from 2010 to 2022, we identify three key findings. First, the dominant investor group in each market significantly drives excess comovement. Specifically, in China, compared with institution-driven diffusion, retail-driven information diffusion has a notably stronger effect on excess comovement. In contrast, in the U.S., institution-driven diffusion is the primary driver of excess comovement, surpassing the influence of retail-driven diffusion. Second, we identify investors’ trading behavior as the underlying mechanism through which information diffusion affects excess comovement. Third, we observe a lead-lag relationship: stocks with faster retail-driven information diffusion exhibit comovement that precedes those with slower diffusion. Based on this finding, we further demonstrate that the predictive power of information diffusion varies across markets. In China, retail-driven diffusion shows strong and persistent predictability for excess comovement, whereas in the U.S., institution-driven diffusion exhibits similarly robust predictive capacity.
{"title":"The effect of investor-driven information diffusion on excess comovement: Evidence from retail and institutional investors in China and the United States","authors":"Fei REN , Miaomiao YI , Zhang-Hangjian CHEN , Xiang GAO","doi":"10.1016/j.intfin.2025.102258","DOIUrl":"10.1016/j.intfin.2025.102258","url":null,"abstract":"<div><div>This study investigates how cross-stock information diffusion, driven by both retail and institutional investors, influences excess comovement in the Chinese retail-dominated market and the U.S. institution-dominated market. Using data from 4,533 Chinese stocks and 4,517 U.S. stocks from 2010 to 2022, we identify three key findings. First, the dominant investor group in each market significantly drives excess comovement. Specifically, in China, compared with institution-driven diffusion, retail-driven information diffusion has a notably stronger effect on excess comovement. In contrast, in the U.S., institution-driven diffusion is the primary driver of excess comovement, surpassing the influence of retail-driven diffusion. Second, we identify investors’ trading behavior as the underlying mechanism through which information diffusion affects excess comovement. Third, we observe a lead-lag relationship: stocks with faster retail-driven information diffusion exhibit comovement that precedes those with slower diffusion. Based on this finding, we further demonstrate that the predictive power of information diffusion varies across markets. In China, retail-driven diffusion shows strong and persistent predictability for excess comovement, whereas in the U.S., institution-driven diffusion exhibits similarly robust predictive capacity.</div></div>","PeriodicalId":48119,"journal":{"name":"Journal of International Financial Markets Institutions & Money","volume":"106 ","pages":"Article 102258"},"PeriodicalIF":6.1,"publicationDate":"2025-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145520293","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the effect of bank competition on non-financial firms’ tax avoidance in the context of China, where a new national policy on bank entry deregulation in 2009 increased bank competition. The findings suggest that corporate tax avoidance decreases after bank entry deregulation. This deterrence effect partially stems from banks’ increased information expectations and the greater availability of credit. Moreover, the restraining effect is more salient for non-financial firms subject to less bank monitoring, weaker external or internal monitoring, greater financial constraints, less access to credit, and high levels of internationalization. Overall, our findings shed new light on how bank competition shapes firms’ tax avoidance strategies.
{"title":"Bank competition and corporate tax avoidance: the Chinese experience","authors":"Yekun Xu , Jiayu Zhao , Ruohan Zhong , Qiang Zhang","doi":"10.1016/j.intfin.2025.102248","DOIUrl":"10.1016/j.intfin.2025.102248","url":null,"abstract":"<div><div>We examine the effect of bank competition on non-financial firms’ tax avoidance in the context of China, where a new national policy on bank entry deregulation in 2009 increased bank competition. The findings suggest that corporate tax avoidance decreases after bank entry deregulation. This deterrence effect partially stems from banks’ increased information expectations and the greater availability of credit. Moreover, the restraining effect is more salient for non-financial firms subject to less bank monitoring, weaker external or internal monitoring, greater financial constraints, less access to credit, and high levels of internationalization. Overall, our findings shed new light on how bank competition shapes firms’ tax avoidance strategies.</div></div>","PeriodicalId":48119,"journal":{"name":"Journal of International Financial Markets Institutions & Money","volume":"106 ","pages":"Article 102248"},"PeriodicalIF":6.1,"publicationDate":"2025-11-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145520292","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-07DOI: 10.1016/j.intfin.2025.102246
Anh-Tuan Le, Thao Phuong Tran, Phuong-Linh Vu
Using a large sample of 11,535 firms across 69 countries, this study finds that reputational risk induced by adverse environmental, social, and governance (ESG) exposure through media channels is associated with higher corporate dividend payout ratios. This result is robust to endogeneity concerns and alternative measures of key variables. The results of our channel analysis suggest that a higher level of free cash flow problems, greater agency costs, and higher corporate social responsibility (CSR) performance play a significant role in the association between reputational risk and dividend policy. We also find a stronger positive relationship between reputational risk and dividend payout ratios in countries with a weak rule of law, weak shareholder and creditor protections, and weak public enforcement. Overall, in a global context, our analysis highlights the significant reputational impact of media coverage of instances of corporate social irresponsibility on dividend policy.
{"title":"ESG reputational risk and corporate dividend policy: International evidence","authors":"Anh-Tuan Le, Thao Phuong Tran, Phuong-Linh Vu","doi":"10.1016/j.intfin.2025.102246","DOIUrl":"10.1016/j.intfin.2025.102246","url":null,"abstract":"<div><div>Using a large sample of 11,535 firms across 69 countries, this study finds that reputational risk induced by adverse environmental, social, and governance (ESG) exposure through media channels is associated with higher corporate dividend payout ratios. This result is robust to endogeneity concerns and alternative measures of key variables. The results of our channel analysis suggest that a higher level of free cash flow problems, greater agency costs, and higher corporate social responsibility (CSR) performance play a significant role in the association between reputational risk and dividend policy. We also find a stronger positive relationship between reputational risk and dividend payout ratios in countries with a weak rule of law, weak shareholder and creditor protections, and weak public enforcement. Overall, in a global context, our analysis highlights the significant reputational impact of media coverage of instances of corporate social irresponsibility on dividend policy.</div></div>","PeriodicalId":48119,"journal":{"name":"Journal of International Financial Markets Institutions & Money","volume":"106 ","pages":"Article 102246"},"PeriodicalIF":6.1,"publicationDate":"2025-11-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145468179","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-07DOI: 10.1016/j.intfin.2025.102244
Md Hamid Uddin , Masnun Al Mahi , Shabiha Akter , Sabur Mollah , Jia Liu
Microfinance institutions (MFIs) play critical roles in providing financial access to low-income communities worldwide. Yet, reliance on donation funding in the operations poses fundamental challenges to their long-term sustainability. We argue that this dependence creates an unclear agency relationship between donors (principal) – providing cost-free funds – and the MFI managers (agent), heightening moral hazard concerns. Also, due to the nature of the business model, MFIs’ operating leverage increases as they increasingly expand lending operations with more cost-free donation funds. Based on a global dataset of 2653 MFIs across 119 countries over 20 years, we find that greater reliance on donations weakens MFIs’ financial stability and reduces their likelihood of survival in the long run. The destabilizing effect intensifies over time, confirming the ex-post inefficiency of donation-reliant models. Our findings are robust across multiple empirical techniques and consistent across various dimensions such as profit orientation, legal status, geography, and country characteristics. By jointly examining financial stability and institutional survival, the study provides a comprehensive assessment of the long-term risks of donation dependence. These findings have important implications for donor agencies and policymakers in re-evaluating the effectiveness of the donation-based microfinance and in designing measures to promote sustainable models.
{"title":"Is donation funding a dilemma for microfinance institutions?","authors":"Md Hamid Uddin , Masnun Al Mahi , Shabiha Akter , Sabur Mollah , Jia Liu","doi":"10.1016/j.intfin.2025.102244","DOIUrl":"10.1016/j.intfin.2025.102244","url":null,"abstract":"<div><div>Microfinance institutions (MFIs) play critical roles in providing financial access to low-income communities worldwide. Yet, reliance on donation funding in the operations poses fundamental challenges to their long-term sustainability. We argue that this dependence creates an unclear agency relationship between donors (principal) – providing cost-free funds – and the MFI managers (agent), heightening moral hazard concerns. Also, due to the nature of the business model, MFIs’ operating leverage increases as they increasingly expand lending operations with more cost-free donation funds. Based on a global dataset of 2653 MFIs across 119 countries over 20 years, we find that greater reliance on donations weakens MFIs’ financial stability and reduces their likelihood of survival in the long run. The destabilizing effect intensifies over time, confirming the ex-post inefficiency of donation-reliant models. Our findings are robust across multiple empirical techniques and consistent across various dimensions such as profit orientation, legal status, geography, and country characteristics. By jointly examining financial stability and institutional survival, the study provides a comprehensive assessment of the long-term risks of donation dependence. These findings have important implications for donor agencies and policymakers in re-evaluating the effectiveness of the donation-based microfinance and in designing measures to promote sustainable models.</div></div>","PeriodicalId":48119,"journal":{"name":"Journal of International Financial Markets Institutions & Money","volume":"106 ","pages":"Article 102244"},"PeriodicalIF":6.1,"publicationDate":"2025-11-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145468177","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-03DOI: 10.1016/j.intfin.2025.102247
Maoyong Cheng , Huiqin Duan , Liuchuang Li
We investigate how political uncertainty influences equity market performance by leveraging the temporary absences of municipal political leaders in China, which serve as plausibly exogenous variations in political uncertainty. We find that the absence of Secretaries of Municipal Party Committees (SMPCs) and Mayors is largely uncorrelated with local economic and social development indicators, supporting their exogeneity. Our results show that stock returns decline significantly following SMPC absences, particularly in the first month. Further analysis suggests that this effect does not stem from changes in cash flows, consistent with a discount rate channel. Cross-sectional analysis shows that the decline in stock returns is more pronounced among firms in economically advanced cities, with greater political or international exposure, and among non-state-owned enterprises (non-SOEs). Overall, our findings underscore the role of unexpected political disruptions in financial markets.
{"title":"Political leaders’ absences and equity market returns: Evidence from a novel uncertainty in China","authors":"Maoyong Cheng , Huiqin Duan , Liuchuang Li","doi":"10.1016/j.intfin.2025.102247","DOIUrl":"10.1016/j.intfin.2025.102247","url":null,"abstract":"<div><div>We investigate how political uncertainty influences equity market performance by leveraging the temporary absences of municipal political leaders in China, which serve as plausibly exogenous variations in political uncertainty. We find that the absence of Secretaries of Municipal Party Committees (SMPCs) and Mayors is largely uncorrelated with local economic and social development indicators, supporting their exogeneity. Our results show that stock returns decline significantly following SMPC absences, particularly in the first month. Further analysis suggests that this effect does not stem from changes in cash flows, consistent with a discount rate channel. Cross-sectional analysis shows that the decline in stock returns is more pronounced among firms in economically advanced cities, with greater political or international exposure, and among non-state-owned enterprises (non-SOEs). Overall, our findings underscore the role of unexpected political disruptions in financial markets.</div></div>","PeriodicalId":48119,"journal":{"name":"Journal of International Financial Markets Institutions & Money","volume":"106 ","pages":"Article 102247"},"PeriodicalIF":6.1,"publicationDate":"2025-11-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145468181","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.intfin.2025.102245
Olakunle Olaboopo , Evans O. Boamah
We examine the effect of climate change news risk on corporate advertising spending. Using a novel measure of media-driven climate risk matched to firm-level advertising data, we find a robust negative relationship between climate news risk and advertising spending. Mechanism tests show that financial constraints mediate this relationship. The effect is stronger for firms with low stock market liquidity and high cash-flow volatility. We also find that domestic firms reduce their advertising spending relative to their multinational counterparts, which aligns with the idea that international operations provide diversification and stronger cash flow benefits that enhance firms’ resilience to the effects of domestic climate risk shocks. The results remain consistent across different advertising measures, and after correcting for selection bias with a Heckman two-step method. We address endogeneity concerns through instrumental variable estimation. Our findings support the risk management hypothesis that firms proactively adjust their financial policies to mitigate the negative effects of rising climate risk exposure.
{"title":"Climate change news risk and advertising spending","authors":"Olakunle Olaboopo , Evans O. Boamah","doi":"10.1016/j.intfin.2025.102245","DOIUrl":"10.1016/j.intfin.2025.102245","url":null,"abstract":"<div><div>We examine the effect of climate change news risk on corporate advertising spending. Using a novel measure of media-driven climate risk matched to firm-level advertising data, we find a robust negative relationship between climate news risk and advertising spending. Mechanism tests show that financial constraints mediate this relationship. The effect is stronger for firms with low stock market liquidity and high cash-flow volatility. We also find that domestic firms reduce their advertising spending relative to their multinational counterparts, which aligns with the idea that international operations provide diversification and stronger cash flow benefits that enhance firms’ resilience to the effects of domestic climate risk shocks. The results remain consistent across different advertising measures, and after correcting for selection bias with a Heckman two-step method. We address endogeneity concerns through instrumental variable estimation. Our findings support the risk management hypothesis that firms proactively adjust their financial policies to mitigate the negative effects of rising climate risk exposure.</div></div>","PeriodicalId":48119,"journal":{"name":"Journal of International Financial Markets Institutions & Money","volume":"106 ","pages":"Article 102245"},"PeriodicalIF":6.1,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145468180","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-10-30DOI: 10.1016/j.intfin.2025.102242
David G. McMillan
The stock and bond return correlation remains important given its central role in portfolio behaviour. Previous, primarily US, evidence indicates sign switching, which implies that bonds change between diversifying and hedging behaviour. This paper considers time-variation in the stock–bond correlation for the G7 markets, including the nature of its economic drivers. Using monthly data over a period spanning 1980 to 2023 evidence demonstrates that the correlation switches from positive to negative in the late 1990s for six of the seven markets (the switch for Japan occurs in the first half of the 1990s). A switch back to positive is observed towards the end of the sample for most markets but earlier for France and Italy. Evidence of time-variation within the correlation drivers is also noted. Nonetheless, results suggest that inflation and interest rates typically exhibit a positive effect on the correlation, consistent with previous work and theoretical underpinnings. That is, higher inflation and interest rates depress stock and bond prices due to higher discount rates and lower real cash flows, moving them in the same direction. Growth also largely imparts a positive effect on the correlation, but this contrasts with the prevailing view. This arises through portfolio considerations where higher growth leads to an increase in demand for all assets. Of importance for investors, the switch in correlation implies that a portfolio manager will need to alter asset weights to maintain a target value for returns or risk. A portfolio variance decomposition reveals that while the bond contribution remains broadly constant over the sample, that from stocks increases as the correlation contribution shifts from positive to negative. The results are of importance to investors and those engaged in modelling market behaviour.
{"title":"Stock-bond return correlation: Understanding the changing behaviour","authors":"David G. McMillan","doi":"10.1016/j.intfin.2025.102242","DOIUrl":"10.1016/j.intfin.2025.102242","url":null,"abstract":"<div><div>The stock and bond return correlation remains important given its central role in portfolio behaviour. Previous, primarily US, evidence indicates sign switching, which implies that bonds change between diversifying and hedging behaviour. This paper considers time-variation in the stock–bond correlation for the G7 markets, including the nature of its economic drivers. Using monthly data over a period spanning 1980 to 2023 evidence demonstrates that the correlation switches from positive to negative in the late 1990s for six of the seven markets (the switch for Japan occurs in the first half of the 1990s). A switch back to positive is observed towards the end of the sample for most markets but earlier for France and Italy. Evidence of time-variation within the correlation drivers is also noted. Nonetheless, results suggest that inflation and interest rates typically exhibit a positive effect on the correlation, consistent with previous work and theoretical underpinnings. That is, higher inflation and interest rates depress stock and bond prices due to higher discount rates and lower real cash flows, moving them in the same direction. Growth also largely imparts a positive effect on the correlation, but this contrasts with the prevailing view. This arises through portfolio considerations where higher growth leads to an increase in demand for all assets. Of importance for investors, the switch in correlation implies that a portfolio manager will need to alter asset weights to maintain a target value for returns or risk. A portfolio variance decomposition reveals that while the bond contribution remains broadly constant over the sample, that from stocks increases as the correlation contribution shifts from positive to negative. The results are of importance to investors and those engaged in modelling market behaviour.</div></div>","PeriodicalId":48119,"journal":{"name":"Journal of International Financial Markets Institutions & Money","volume":"106 ","pages":"Article 102242"},"PeriodicalIF":6.1,"publicationDate":"2025-10-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145419548","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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