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Momentum and nonlinear price discovery in sovereign credit risk and equity markets of the organization of Islamic cooperation (OIC) countries

This paper hypothesized that there is a differential response by agents to changes in sovereign credit risk in both calm (low default risk) and turbulent (high default risk) markets. These market conditions create two different states of the world or regimes. The two model regimes have been made u...

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Main Authors: Ngene, Geoffrey, M. Kabir Hassan,
Format: Article
Language:English
Published: Penerbit Universiti Kebangsaan Malaysia 2012
Online Access:http://journalarticle.ukm.my/6348/1/jeko_47-1.pdf
http://journalarticle.ukm.my/6348/
http://www.ukm.my/fep/jem/content/2012-2.html
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spelling my-ukm.journal.63482016-12-14T06:40:55Z http://journalarticle.ukm.my/6348/ Momentum and nonlinear price discovery in sovereign credit risk and equity markets of the organization of Islamic cooperation (OIC) countries Ngene, Geoffrey M. Kabir Hassan, This paper hypothesized that there is a differential response by agents to changes in sovereign credit risk in both calm (low default risk) and turbulent (high default risk) markets. These market conditions create two different states of the world or regimes. The two model regimes have been made using threshold cointegration and vector error correction model in three possible pairs of sovereign CDS, bond and equity markets for four emerging markets. Moreover, evidence of momentum in cointegration relationships in 75% of the time. Positive and negative divergences adjust to equilibrium relationship and value (threshold) at different speeds and magnitudes depending on the regime. Moreover, short-term nonlinear adjustment process is found in 50% of possible asymmetries. The informativeness of each asset in a pair is nonlinear and regime dependent in 14/24 possible price discovery processes. Therefore, dynamic interaction among assets held in a portfolio shift with regime change. Investors, in making decisions regarding portfolio rebalancing and hedging against downside risk need to identify when regimes change to make informed decisions while policy makers need to identify the threshold below or above which policy intervention in the market becomes necessary. Linear modeling may provide mis-specified and biased results as indicated by comparative results of linear and nonlinear modeling. Penerbit Universiti Kebangsaan Malaysia 2012 Article PeerReviewed application/pdf en http://journalarticle.ukm.my/6348/1/jeko_47-1.pdf Ngene, Geoffrey and M. Kabir Hassan, (2012) Momentum and nonlinear price discovery in sovereign credit risk and equity markets of the organization of Islamic cooperation (OIC) countries. Jurnal Ekonomi Malaysia, 46 (2). pp. 101-114. ISSN 0127-1962 http://www.ukm.my/fep/jem/content/2012-2.html
institution Universiti Kebangsaan Malaysia
building Perpustakaan Tun Sri Lanang Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider Universiti Kebangsaan Malaysia
content_source UKM Journal Article Repository
url_provider http://journalarticle.ukm.my/
language English
description This paper hypothesized that there is a differential response by agents to changes in sovereign credit risk in both calm (low default risk) and turbulent (high default risk) markets. These market conditions create two different states of the world or regimes. The two model regimes have been made using threshold cointegration and vector error correction model in three possible pairs of sovereign CDS, bond and equity markets for four emerging markets. Moreover, evidence of momentum in cointegration relationships in 75% of the time. Positive and negative divergences adjust to equilibrium relationship and value (threshold) at different speeds and magnitudes depending on the regime. Moreover, short-term nonlinear adjustment process is found in 50% of possible asymmetries. The informativeness of each asset in a pair is nonlinear and regime dependent in 14/24 possible price discovery processes. Therefore, dynamic interaction among assets held in a portfolio shift with regime change. Investors, in making decisions regarding portfolio rebalancing and hedging against downside risk need to identify when regimes change to make informed decisions while policy makers need to identify the threshold below or above which policy intervention in the market becomes necessary. Linear modeling may provide mis-specified and biased results as indicated by comparative results of linear and nonlinear modeling.
format Article
author Ngene, Geoffrey
M. Kabir Hassan,
spellingShingle Ngene, Geoffrey
M. Kabir Hassan,
Momentum and nonlinear price discovery in sovereign credit risk and equity markets of the organization of Islamic cooperation (OIC) countries
author_facet Ngene, Geoffrey
M. Kabir Hassan,
author_sort Ngene, Geoffrey
title Momentum and nonlinear price discovery in sovereign credit risk and equity markets of the organization of Islamic cooperation (OIC) countries
title_short Momentum and nonlinear price discovery in sovereign credit risk and equity markets of the organization of Islamic cooperation (OIC) countries
title_full Momentum and nonlinear price discovery in sovereign credit risk and equity markets of the organization of Islamic cooperation (OIC) countries
title_fullStr Momentum and nonlinear price discovery in sovereign credit risk and equity markets of the organization of Islamic cooperation (OIC) countries
title_full_unstemmed Momentum and nonlinear price discovery in sovereign credit risk and equity markets of the organization of Islamic cooperation (OIC) countries
title_sort momentum and nonlinear price discovery in sovereign credit risk and equity markets of the organization of islamic cooperation (oic) countries
publisher Penerbit Universiti Kebangsaan Malaysia
publishDate 2012
url http://journalarticle.ukm.my/6348/1/jeko_47-1.pdf
http://journalarticle.ukm.my/6348/
http://www.ukm.my/fep/jem/content/2012-2.html
_version_ 1643736734461067264
score 13.211869

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