By Dom Fonce
Ou Hu, associate professor of economics at Youngstown State University, and Ding Du, associate professor of economics at Northern Arizona University, had a paper accepted by the “Journal of International Money and Finance” in August titled “The World Market Premium and U.S. Macroeconomic Announcements.”
They presented this research at the Financial Management Association International this month.
Their research verified the international capital asset pricing model created by Bruno Solnik and Robert Grauer by studying market reaction on days U.S. macroeconomic announcements are released.
“The U.S. Bureau of Labor Statistics announces macroeconomic news the first Friday of every month,” Hu said. “And will release news randomly throughout the year, as well.”
The international capital asset pricing model applies the capital asset pricing model to world markets. The capital asset pricing model states that return on an investment should equal its cost, and the only way to earn higher returns is to take on more risk.
“Previous empirical studies failed to provide supportive evidence [to prove the international capital asset pricing model],” Hu said. “In our research, we found that looking at U.S. announcement days, and the U.S. being so important to the world’s economics, that investors digest the monthly news, and it amplifies the relationship between the individual stocks and the market.”
The duo looked at the releases of monthly unemployment, inflation and interest rates of the U.S. and cross-examined them with the rates in 20 other countries.
Du said they were trying to determine whether or not the relationship was causal.
“In this case, we were looking at if the global economical conditions causally determine the risk premium in the global stock market,” Du said. “To identify causality, we take an event study approach. Our paper made an important contribution because previous studies typically focus on predictability or association, which can be due to reverse causality.”
Du said the Financial Management Association Conference is not uncharted territory for the pair.
“FMA is quite selective, but Ou and I managed to present at the conference many times,” Du said. “This time, we have two papers accepted for presentation, of which one was nominated as a semi-finalist for the best paper in investment.”
Du explained that Hu cross-listed over 50 million observations, monthly, for the U.S. alone.
“Ou knows SAS [analytic software] so well that he has great skills to manage large data sets,” Du said. “Ou did all the data merges and formed the portfolios — rebalanced monthly — for our empirical tests. That was a lot of work required great data manipulation skills.”
While this research examined empirical data, Hu said that in the future the duo will be looking at the psychological side of macroeconomics.
