Academic literature on the topic 'Stock market price variations'

Purpose This paper aims to provide evidence that market efficiency varies greatly across individual stock, and across market exchanges. Design/methodology/approach Three approaches, partial adjustment model, Dimson beta model and variance ratio test, are used on a large sample of US stocks. Findings This paper finds prices are closer to random walk benchmarks (i.e. more efficient) for stocks with better liquidity provision, frequent trading, greater return volatility, higher prices, larger market capitalizations and smaller trade sizes. These findings suggest that liquidity stimulates arbitrage activity, which, in turn, enhances market efficiency. Market efficiency also varies with information environment. The results show that stocks with greater information-based trading exhibit higher level of efficiency. Finally, market structure influences market efficiency. New York Stock Exchange stocks achieve higher level of efficiency than NASDAQ stocks do. The empirical results are robust and not driven by differences in stock attributes between the two markets. Research limitations/implications Overall, these results indicate that liquidity provision, stock attributes and market structure exert a significant impact on the realization of market efficiency. Practical implications In addition, this paper is also relevant to both stock exchanges facing increased competition and to market regulators. Originality/value Prior studies offer little evidence on the speed at which new information is impounded into the price. There is also limited evidence regarding how liquidity provision and market structure affect market efficiency. Using a transformation of the speed of price adjustment and other measurements as proxies for individual stock efficiency, this study may shed further lights on our understanding of market efficiency.

The present study is an attempt to examine the dynamic impact of crude oil price variations in the international market on the Indian stock market volatility. For the purpose, the study uses crude oil monthly price expressed in dollar per barrel, Bombay Stock Exchange (BSE)-listed index BSE Sensex and National Stock Exchange (NSE)-listed CNX Nifty prices for the period from January 2001 to December 2014. GARCH (1,1) model with net crude oil price change as exogenous variable is used to estimate the impact of net oil price change in international market on the conditional volatilities of both the indices. The findings report that net oil price change has a significant impact upon the conditional volatility of both the indices. These findings show that investors redesign their portfolios in response to crude oil price variations in the international market. They can use crude oil price as an important exogenous variable in forecasting models of stock returns and risk in the Indian stock market.

In order to address a series of issues, including energy security, global warming, and environmental protection, China has ranked first in global renewable investment for the seventh consecutive year. However, developing a renewable energy industry requires a significant capital investment. Also, the international oil price fluctuations have an important impact on the stock prices of renewable energy firms. Thus, in order to provide implications for market investment as well as policy recommendations, this paper studied the spillover effect of international oil prices on the stock prices of China’s renewable energy listed companies. We used a Vector Autoregressive (VAR) model with innovations using a Factor-GARCH (Generalized Autoregressive Conditional Heteroskedasticity) process to evaluate the impact of market co-movements and time-varying volatility and correlation between the international oil price and China’s renewable energy market. The results show that the international oil price has a significant price spillover effect on the stock prices of China’s renewable energy listed companies. Moreover, the fluctuations of international oil prices have an influence on the stock price variations of Chinese renewable energy listed companies.

Purpose The purpose of this study is to investigate the Granger causal link between the stock market index and housing prices in terms of apartment and villa prices. Design/methodology/approach Monthly data from September 2005 to October 2013 on apartment prices, villa prices, the stock market index, mortgage rates and the consumer price index were used. Statistical methods were applied to explore the long-run co-integration and Granger causal link between the stock market index and apartment and villa prices in Sweden. Findings The results indicate that the stock market index and housing prices are co-integrated and that a long-run equilibrium relationship exists between them. According to the Granger causality tests, bidirectional relationships exist between the stock market index and apartment and villa prices, respectively, supporting the wealth and credit-price effects. Moreover, variations in apartment and villa prices are primarily caused by endogenous shocks. Originality/value To the authors’ best knowledge, this study represents a first analysis of the causal nexus between the stock market and the housing market in terms of apartment and villa prices in the Swedish context using a vector error-correction model to analyze monthly data.

This study examines the oil price effect on Turkish stock market as an emerging country on firm level data. After controlling short term interest rate, nominal exchange rate and crude oil price, we find that firms behave differently to a change in oil prices. The findings include these: i) variations in oil prices do not significantly affect Turkish firm returns. Out of 153, only 38 firms are affected significantly by oil price after controlling exchange rate and interest rate; ii) oil prices influence stock returns of Turkish firms, suggesting that under reaction and gradual information diffusion hypotheses may hold. iii) small and middle-sized firms are more affected negatively from oil price changes, where large-sized firms affected more positively. The empirical findings of this study have potential implications and offer significant insights for both practitioners and policy makers.

This paper examines whether Amman stock market returns responds asymmetrically to oil price fluctuations for the quarterly period 2000-2015 by applying asymmetric cointegration. Using both TAR and MTAR specification of Enders and Siklos’s (2001) models, and based on the asymmetric ECM, the results provide evidence that stock returns react to oil price variations in an asymmetric manner. In particular, rising oil prices has a larger impact on stock returns; this implies that increases in oil prices have a significant effect on the behavior of stock market in Jordan. The significant relationship between oil prices and stock returns strengthen their predictability power, so that appropriate strategies may be built on the basis of expected increases or decreases in oil prices.

Purpose – The purpose of this paper is to examine cross-correlation in stock returns of SAARC countries, conditional and unconditional volatility of stock markets and to test efficient market hypothesis (EMH). Design/methodology/approach – Stock indices of India, Bangladesh, Sri Lanka and Pakistan are considered to serve as proxy for stock markets in SAARC countries. Data consist of daily closing price of stock indices from 2000 to 2011. Since preliminary testing indicated presence of serial autocorrelation and volatility clustering, family of GARCH models is selected. Findings – Results indicate presence of serial autocorrelation in stock market returns, implying dependence of current stock prices on stock prices of previous times and leads to rejection of EMH. Significant relationship between stock market returns and unconditional volatility indicates investors’ expectation of extra risk premium for exposing their portfolios to unexpected variations in stock markets. Cross-correlation revealed level of integration of South Asian economies with global market to be high. Research limitations/implications – Business cycles and other macroeconomic developments affect most companies and lead to unexplained relationships. The paper finds stock markets to exist at different levels of development as economic liberalization started at different points of time in SAARC countries. Practical implications – Correlation between stock indices of SAARC economies are found to be low which is in line with intra-regional trade being one of lowest as compared to other regional groups. Results point towards greater need for economic cooperation and integration between SAARC countries. Greater financial integration leads to development of markets and institutions, effective price discovery, higher savings and greater economic progress. Originality/value – The paper focuses on EMH and risk return relation for SAARC nations.

Reasoning that private firm-specific information causes firm-specific return variation that drives down market-model R2s, [Morck et al., 2000, The Information Content of Stock Markets: Why do Emerging Markets have Synchronous Stock Price Movements? Journal of Financial Economics, 58, 215–260] begin a large body of research which interprets R2 as an inverse measure of price informativeness. Low-R2s or "synchronicity," as it is called in this literature, signal that prices more efficiently incorporate private firm-specific information, and high R2s indicate less. For this to be true, we would expect that low-R2 stocks have characteristics that facilitate private informed trade, i.e., lower information costs and fewer impediments to arbitrage. However, in this paper we document the opposite: Low-R2 stocks are small, young, and followed by few analysts, and have high bid-ask spreads, high price impact, greater short-sale constraints and are infrequently traded. In fact, microstructure measures suggest that private-information events are less likely for low-R2 stocks than high, and that differences in R2 are driven as much by firm-specific volatility on days without private news as by firm-specific volatility on days with private news. These results call into question prior research using R2 to measure the information content of stock prices.

This thesis examines the stock market price variations associated with physical asset expenditure announcements in Australia. With the exception of the study of Chen and Ho (1997) in Singapore, most capital expenditure studies in other markets investigate the announcement effects associated with changes in budgeted capital expenditures. The fact that there is almost never any firm level capital budget announcement in Australia presents a unique opportunity to examine individual physical asset expenditure announcements. ¶ Three primary hypotheses pertaining to growth opportunities, free cash flow theory, and the capital market monitoring argument are developed and tested. These arguments are formulated to explain the abnormal return variations associated with physical asset expenditure announcements. The growth opportunities hypothesis posits that the abnormal returns at physical asset expenditure announcements are positively related to a firm's growth opportunities. Both free cash flow theory and capital market monitoring hypothesis postulate that the abnormal returns at physical asset expenditure announcements are negatively related to a firm's free cash flow, and cash flow respectively. Other control explanators are incorporated from the merger and takeovers literature. ¶ Event study methodology is used to examine the abnormal returns associated with physical asset expenditure announcements. Two sets of data, intraday and daily, are used to investigate the market reaction. Intraday returns are calculated on a time-weighted approach and two methods are used to calculate intraday abnormal returns. The first method defines abnormal returns as the difference between actual returns and market returns. The second method defines abnormal returns as the difference between market-adjusted returns and market-adjusted returns on a control portfolio. Daily abnormal returns are calculated using the market model. ¶ Both univariate and multivariate analyses provide strong support for the growth opportunities hypothesis. The results suggest the quality of firms' growth opportunities is the key variable determining the direction and magnitude of the abnormal returns at announcement. Support for the capital monitoring argument and the free cash flow theory is mixed, generally with a lack of support. The free cash flow variable is found to be significantly negatively related to abnormal returns, only when a finer dummy is used in the multivariate regression. All other control variables are found to be insignificant in explaining the stock market variations once the growth opportunities variable is included in the regression. ¶ This thesis makes the following contributions. First, this thesis presents the initial empirical evidence concerning physical asset expenditure announcements in Australia. Second, the thesis shows that the quality of a firm's growth opportunities is the key factor in determining the direction and magnitude of abnormal returns around physical asset expenditure announcements. These results also suggest that the equity market in Australia reacts to physical asset expenditure announcements which contain information pertaining to growth opportunities rather than the relative size of the physical asset expenditure transactions to firm value. Third, support for the capital monitoring argument and the free cash flow theory is not strong. Fourth, all other control variables are found to be insignificant in explaining the stock market variations once market to book ratio is included in the regression. Fifth, the results suggest that prior research which fails to segregate market to book ratio and free cash flow proxy into finer partitions may have possibly underestimated the market to book and the free cash flow effects.

This thesis consists of four self-contained papers related to the change of market structure and the quality of equity market. In Paper [I] we found, by using of a Flexible Dynamic Component Correlations (FDCC) model, that the creation of a common cross-border stock trading platform has increased the long-run trends in conditional correlations between foreign and domestic stock market returns. In Paper [II] we study whether the creation of a uniform Nordic and Baltic stock trading platform has affected weak-form information efficiency. The results indicate that the stock market consolidations have had a positive effect on the information efficiency and turnover for an average firm. The merger effects are, however, asymmetrically distributed in the sense that relatively large (small) firms located on relatively large (small) markets experience an improved (reduced) information efficiency and turnover. Although the results indicate that changes in the level of investor attention (measured by turnover) may explain part of the changes in information efficiency, they also lend support to the hypothesis that merger effects may partially be driven by changes in the composition of informed versus uninformed investors following a stock. Paper [III] analyzes whether the measured level of trust in different countries can explain bilateral stock market correlations. One finding is that generalized trust among nations is a robust predictor for stock market correlations. Another is that the trust effect is larger for countries which are close to each other. This indicates that distance mitigates the trust effect. Finally, we confirm the effect of trust upon stock market correlations, by using particular trust data (bilateral trust between country A and country B) as an alternative measurement of trust. In Paper [IV] we present the impact of the stock market mergers that took place in the Nordic countries during 2000 – 2007 on the probabilities for stock price jumps, i.e. for relatively extreme price movements. The main finding is that stock market mergers, on average, reduce the likelihood of observing stock price jumps. The effects are asymmetric in the sense that the probability of sudden price jumps is reduced for large and medium size firms whereas the effect is ambiguous for small size firms. The results also indicate that the market risk has been reduced after the stock market consolidations took place.

Includes bibliographical references.
This research project examines stock price fragility, a measure developed by Greenwood and Thesmar (2011), which serves as a proxy for non-fundamental risk i.e. it aims to isolate the drivers of stock price volatility beyond traditional fundamental drivers, in particular examining the impact of concentrated stock ownership and correlated liquidity shocks on price volatility. Here, the measure is applied to the South African financial market. Subject to data complications, it is nevertheless shown that stock price fragility is a significant predictor of total return volatility owing to the ownership structure of South African funds, even when controlling for endogeneity, autocorrelation and heteroskedasticity in the model.

This thesis comprises, firstly, a careful and detailed description of the institutional workings of the Chinese stock market; secondly, a literature review of the Chinese segmented markets and dual-listed shares price premium; and thirdly, three evidence-based contributions designed to cast new light on the Chinese A-shares premium puzzle. Publicly-listed firms in China, under certain criteria, can issue two different types of shares, namely A-shares and B-shares, to local and foreign investors respectively. These shares carry the same rights and obligations, but are however priced differently due to market segmentation. After a review of the literature on determinants of the premium, the first contribution offers a complementary explanation. I propose that the premium reflects the difference in valuation preferences between the local and foreign investors, i.e., local investors pay more attention to stock liquidity, while foreign investors pay more attention to firm’s intrinsic value, and so firms having more favorable fundamentals tend to have lower premia. The second contribution involves the examination of a controversial question that which investor group is better informed about local assets, by testing the direction of information flows between the A- and B-shares markets. Both time series methods, and panel data techniques which are used for the first time in this context, are employed, in order to get a distinct and more insightful picture against the current literature. The third contribution compares and contrasts institutional settings of China, Singapore and Thailand which have similar market segmentation and dual-listing systems; examines whether or not the premia in the three countries are caused by same factors; and tries to answer why foreign investors in China pay less, rather than more, as commonly observed in other segmented markets, for identical assets. It provides the first cross-country comparison evidence after 1999 with updated data.

Doctor of Philosophy (PhD)
Allegations of market manipulation abound in the popular press, particularly during the recent financial turmoil. However, many aspects of manipulation are poorly understood. The purpose of this thesis is to enhance our understanding of market manipulation by providing empirical evidence on the prevalence, effects and determinants of closing price manipulation. The first issue examined in this thesis is the prevalence of closing price manipulation. This thesis uses a hand collected sample of prosecuted closing price manipulation cases from US and Canadian stock exchanges, and methods that explicitly model the incomplete and non-random detection of manipulation. The results suggest that approximately 1.1% of closing prices are manipulated. For every prosecuted closing price manipulation there are approximately 300 instances of manipulation that remain undetected or not prosecuted. Closing price manipulation is more prevalent on larger exchanges than smaller ones, but is detected at a higher rate on small exchanges. Second, this thesis examines the effects of closing price manipulation. Using a sample of prosecution cases, this thesis finds that closing price manipulation is associated with large day-end returns, subsequent return reversals, increases in day-end spreads and increases in day-end trading activity. At the broader level of market quality, this thesis provides evidence from a laboratory experiment that closing price manipulation decreases both price accuracy and liquidity. Even the mere possibility of manipulation decreases liquidity and increases trading costs. The third issue analysed in this thesis is the determinants of closing price manipulation and its detection. Estimating an empirical model of manipulation and detection, this thesis finds that the likelihood of closing price manipulation is increased by smaller regulatory budgets, greater information asymmetry, mid to low levels of liquidity, month-end days and lower volatility. Manipulation is more likely to be detected when regulatory budgets are larger and when the manipulation causes abnormal trading characteristics. Further evidence from laboratory experiments suggests that regulation helps restore price accuracy by deterring some manipulation and making remaining manipulation less aggressive. These experiments also show that regulation has an insignificant effect on liquidity because participants in regulated markets still face relatively high uncertainty about the presence of manipulators. This thesis also examines how closing price manipulation is conducted and how other market participants respond. It develops an index of closing price manipulation that can be used to study manipulation in markets or time periods in which prosecution data are not available. It also provides a tool for the detection of manipulation, which can be used by regulators in automated surveillance systems. Finally, this thesis has implications for economic efficiency and policy. Closing price manipulation is significantly more prevalent than the number of prosecution cases suggests. Further, it harms both pricing accuracy and liquidity and therefore undermines economic efficiency. The prevalence of closing price manipulation can be reduced by increasing regulatory budgets, improving the accuracy of market surveillance systems by using the detection tools developed in this thesis, structuring markets such that participants are better able to identify manipulation, and implementing closing mechanisms that are difficult to manipulate. These actions would enhance market integrity and economic efficiency.

Stock price prediction is a critical field used by most business people and common or retail people who tried to increase their money by value with respect to time. People will either gain money or loss their entire life savings in stock market activity. It is a chaos system. Building an accurate model is complex as variation in price depends on multiple factors such as news, social media data, and fundamentals, production of the company, government bonds, historical price and country's economics factor. Prediction model which considers only one factor might not be accurate. Hence incorporating multiple factors news, social media data and historical price might increase the model's accuracy. This paper tried to incorporate the issue when someone implements it as per the model outcome. It cannot give the proper result when someone implements it in real life since capital market data is very sensitive and news-driven. To avoid such a situation, we use the hedging concept when implemented.

In the period after transition, economically full-liberal policy implementations applied by Russia Federation has been taken attention as cyclical movement. No variations of goods are said to be effective about the main reasons about cyclical movement in liberalization. As a kind of indicator of the Russian economy, stock market’s sensitivity to oil prices analyzed. In this context, especially change of oil prices, exchange rate and money supply effects on Russia are analyzed for the period of 1996M1-2015M12. Stationarity of the series is investigated by Lee and Strazicich (2003) unit root test with multiple structural breaks, existence of cointegration relation between series is tested by Maki (2012) method of cointegration with multiple structural break, and cointegration coefficients are predicted with Dynamic Ordinary Learst Square-DOLS method. Furthermore, causality relations between series are investigated by Hacker and Hatemi-J (2012) symmetric causality test. As a result, Russian stock market is positively affected by oil prices, real effective exchange rate and real money supply. Also causality tests showed that bidirectional causality relation found on stock market with oil prices and real effective exchange rate, and unidirectional causality from real money supply to stock market.

Influence is a concept found in nature and society and is related to the interdependency among a set of objects. In the context of a stock market, the variation in price of shares can influence the variation in price of other shares, leading to influential and influenced shares. In this work we leverage the notion of transfer entropy to build a network of shares and pairwise directed influence that is used to rank the most influential and influenced shares. Classical network centrality metrics such as PageRank and HITS are leveraged to rank the nodes. We apply our methodology to the shares in the greater stock market in Brazil, we rank nodes to find source and destination of influence in that market, while also comparing the different rankings and their correlation with traded volume.

1.1 Macroeconomic summary Economic recovery has consistently outperformed the technical staff’s expectations following a steep decline in activity in the second quarter of 2020. At the same time, total and core inflation rates have fallen and remain at low levels, suggesting that a significant element of the reactivation of Colombia’s economy has been related to recovery in potential GDP. This would support the technical staff’s diagnosis of weak aggregate demand and ample excess capacity. The most recently available data on 2020 growth suggests a contraction in economic activity of 6.8%, lower than estimates from January’s Monetary Policy Report (-7.2%). High-frequency indicators suggest that economic performance was significantly more dynamic than expected in January, despite mobility restrictions and quarantine measures. This has also come amid declines in total and core inflation, the latter of which was below January projections if controlling for certain relative price changes. This suggests that the unexpected strength of recent growth contains elements of demand, and that excess capacity, while significant, could be lower than previously estimated. Nevertheless, uncertainty over the measurement of excess capacity continues to be unusually high and marked both by variations in the way different economic sectors and spending components have been affected by the pandemic, and by uneven price behavior. The size of excess capacity, and in particular the evolution of the pandemic in forthcoming quarters, constitute substantial risks to the macroeconomic forecast presented in this report. Despite the unexpected strength of the recovery, the technical staff continues to project ample excess capacity that is expected to remain on the forecast horizon, alongside core inflation that will likely remain below the target. Domestic demand remains below 2019 levels amid unusually significant uncertainty over the size of excess capacity in the economy. High national unemployment (14.6% for February 2021) reflects a loose labor market, while observed total and core inflation continue to be below 2%. Inflationary pressures from the exchange rate are expected to continue to be low, with relatively little pass-through on inflation. This would be compatible with a negative output gap. Excess productive capacity and the expectation of core inflation below the 3% target on the forecast horizon provide a basis for an expansive monetary policy posture. The technical staff’s assessment of certain shocks and their expected effects on the economy, as well as the presence of several sources of uncertainty and related assumptions about their potential macroeconomic impacts, remain a feature of this report. The coronavirus pandemic, in particular, continues to affect the public health environment, and the reopening of Colombia’s economy remains incomplete. The technical staff’s assessment is that the COVID-19 shock has affected both aggregate demand and supply, but that the impact on demand has been deeper and more persistent. Given this persistence, the central forecast accounts for a gradual tightening of the output gap in the absence of new waves of contagion, and as vaccination campaigns progress. The central forecast continues to include an expected increase of total and core inflation rates in the second quarter of 2021, alongside the lapse of the temporary price relief measures put in place in 2020. Additional COVID-19 outbreaks (of uncertain duration and intensity) represent a significant risk factor that could affect these projections. Additionally, the forecast continues to include an upward trend in sovereign risk premiums, reflected by higher levels of public debt that in the wake of the pandemic are likely to persist on the forecast horizon, even in the context of a fiscal adjustment. At the same time, the projection accounts for the shortterm effects on private domestic demand from a fiscal adjustment along the lines of the one currently being proposed by the national government. This would be compatible with a gradual recovery of private domestic demand in 2022. The size and characteristics of the fiscal adjustment that is ultimately implemented, as well as the corresponding market response, represent another source of forecast uncertainty. Newly available information offers evidence of the potential for significant changes to the macroeconomic scenario, though without altering the general diagnosis described above. The most recent data on inflation, growth, fiscal policy, and international financial conditions suggests a more dynamic economy than previously expected. However, a third wave of the pandemic has delayed the re-opening of Colombia’s economy and brought with it a deceleration in economic activity. Detailed descriptions of these considerations and subsequent changes to the macroeconomic forecast are presented below. The expected annual decline in GDP (-0.3%) in the first quarter of 2021 appears to have been less pronounced than projected in January (-4.8%). Partial closures in January to address a second wave of COVID-19 appear to have had a less significant negative impact on the economy than previously estimated. This is reflected in figures related to mobility, energy demand, industry and retail sales, foreign trade, commercial transactions from selected banks, and the national statistics agency’s (DANE) economic tracking indicator (ISE). Output is now expected to have declined annually in the first quarter by 0.3%. Private consumption likely continued to recover, registering levels somewhat above those from the previous year, while public consumption likely increased significantly. While a recovery in investment in both housing and in other buildings and structures is expected, overall investment levels in this case likely continued to be low, and gross fixed capital formation is expected to continue to show significant annual declines. Imports likely recovered to again outpace exports, though both are expected to register significant annual declines. Economic activity that outpaced projections, an increase in oil prices and other export products, and an expected increase in public spending this year account for the upward revision to the 2021 growth forecast (from 4.6% with a range between 2% and 6% in January, to 6.0% with a range between 3% and 7% in April). As a result, the output gap is expected to be smaller and to tighten more rapidly than projected in the previous report, though it is still expected to remain in negative territory on the forecast horizon. Wide forecast intervals reflect the fact that the future evolution of the COVID-19 pandemic remains a significant source of uncertainty on these projections. The delay in the recovery of economic activity as a result of the resurgence of COVID-19 in the first quarter appears to have been less significant than projected in the January report. The central forecast scenario expects this improved performance to continue in 2021 alongside increased consumer and business confidence. Low real interest rates and an active credit supply would also support this dynamic, and the overall conditions would be expected to spur a recovery in consumption and investment. Increased growth in public spending and public works based on the national government’s spending plan (Plan Financiero del Gobierno) are other factors to consider. Additionally, an expected recovery in global demand and higher projected prices for oil and coffee would further contribute to improved external revenues and would favor investment, in particular in the oil sector. Given the above, the technical staff’s 2021 growth forecast has been revised upward from 4.6% in January (range from 2% to 6%) to 6.0% in April (range from 3% to 7%). These projections account for the potential for the third wave of COVID-19 to have a larger and more persistent effect on the economy than the previous wave, while also supposing that there will not be any additional significant waves of the pandemic and that mobility restrictions will be relaxed as a result. Economic growth in 2022 is expected to be 3%, with a range between 1% and 5%. This figure would be lower than projected in the January report (3.6% with a range between 2% and 6%), due to a higher base of comparison given the upward revision to expected GDP in 2021. This forecast also takes into account the likely effects on private demand of a fiscal adjustment of the size currently being proposed by the national government, and which would come into effect in 2022. Excess in productive capacity is now expected to be lower than estimated in January but continues to be significant and affected by high levels of uncertainty, as reflected in the wide forecast intervals. The possibility of new waves of the virus (of uncertain intensity and duration) represents a significant downward risk to projected GDP growth, and is signaled by the lower limits of the ranges provided in this report. Inflation (1.51%) and inflation excluding food and regulated items (0.94%) declined in March compared to December, continuing below the 3% target. The decline in inflation in this period was below projections, explained in large part by unanticipated increases in the costs of certain foods (3.92%) and regulated items (1.52%). An increase in international food and shipping prices, increased foreign demand for beef, and specific upward pressures on perishable food supplies appear to explain a lower-than-expected deceleration in the consumer price index (CPI) for foods. An unexpected increase in regulated items prices came amid unanticipated increases in international fuel prices, on some utilities rates, and for regulated education prices. The decline in annual inflation excluding food and regulated items between December and March was in line with projections from January, though this included downward pressure from a significant reduction in telecommunications rates due to the imminent entry of a new operator. When controlling for the effects of this relative price change, inflation excluding food and regulated items exceeds levels forecast in the previous report. Within this indicator of core inflation, the CPI for goods (1.05%) accelerated due to a reversion of the effects of the VAT-free day in November, which was largely accounted for in February, and possibly by the transmission of a recent depreciation of the peso on domestic prices for certain items (electric and household appliances). For their part, services prices decelerated and showed the lowest rate of annual growth (0.89%) among the large consumer baskets in the CPI. Within the services basket, the annual change in rental prices continued to decline, while those services that continue to experience the most significant restrictions on returning to normal operations (tourism, cinemas, nightlife, etc.) continued to register significant price declines. As previously mentioned, telephone rates also fell significantly due to increased competition in the market. Total inflation is expected to continue to be affected by ample excesses in productive capacity for the remainder of 2021 and 2022, though less so than projected in January. As a result, convergence to the inflation target is now expected to be somewhat faster than estimated in the previous report, assuming the absence of significant additional outbreaks of COVID-19. The technical staff’s year-end inflation projections for 2021 and 2022 have increased, suggesting figures around 3% due largely to variation in food and regulated items prices. The projection for inflation excluding food and regulated items also increased, but remains below 3%. Price relief measures on indirect taxes implemented in 2020 are expected to lapse in the second quarter of 2021, generating a one-off effect on prices and temporarily affecting inflation excluding food and regulated items. However, indexation to low levels of past inflation, weak demand, and ample excess productive capacity are expected to keep core inflation below the target, near 2.3% at the end of 2021 (previously 2.1%). The reversion in 2021 of the effects of some price relief measures on utility rates from 2020 should lead to an increase in the CPI for regulated items in the second half of this year. Annual price changes are now expected to be higher than estimated in the January report due to an increased expected path for fuel prices and unanticipated increases in regulated education prices. The projection for the CPI for foods has increased compared to the previous report, taking into account certain factors that were not anticipated in January (a less favorable agricultural cycle, increased pressure from international prices, and transport costs). Given the above, year-end annual inflation for 2021 and 2022 is now expected to be 3% and 2.8%, respectively, which would be above projections from January (2.3% and 2,7%). For its part, expected inflation based on analyst surveys suggests year-end inflation in 2021 and 2022 of 2.8% and 3.1%, respectively. There remains significant uncertainty surrounding the inflation forecasts included in this report due to several factors: 1) the evolution of the pandemic; 2) the difficulty in evaluating the size and persistence of excess productive capacity; 3) the timing and manner in which price relief measures will lapse; and 4) the future behavior of food prices. Projected 2021 growth in foreign demand (4.4% to 5.2%) and the supposed average oil price (USD 53 to USD 61 per Brent benchmark barrel) were both revised upward. An increase in long-term international interest rates has been reflected in a depreciation of the peso and could result in relatively tighter external financial conditions for emerging market economies, including Colombia. Average growth among Colombia’s trade partners was greater than expected in the fourth quarter of 2020. This, together with a sizable fiscal stimulus approved in the United States and the onset of a massive global vaccination campaign, largely explains the projected increase in foreign demand growth in 2021. The resilience of the goods market in the face of global crisis and an expected normalization in international trade are additional factors. These considerations and the expected continuation of a gradual reduction of mobility restrictions abroad suggest that Colombia’s trade partners could grow on average by 5.2% in 2021 and around 3.4% in 2022. The improved prospects for global economic growth have led to an increase in current and expected oil prices. Production interruptions due to a heavy winter, reduced inventories, and increased supply restrictions instituted by producing countries have also contributed to the increase. Meanwhile, market forecasts and recent Federal Reserve pronouncements suggest that the benchmark interest rate in the U.S. will remain stable for the next two years. Nevertheless, a significant increase in public spending in the country has fostered expectations for greater growth and inflation, as well as increased uncertainty over the moment in which a normalization of monetary policy might begin. This has been reflected in an increase in long-term interest rates. In this context, emerging market economies in the region, including Colombia, have registered increases in sovereign risk premiums and long-term domestic interest rates, and a depreciation of local currencies against the dollar. Recent outbreaks of COVID-19 in several of these economies; limits on vaccine supply and the slow pace of immunization campaigns in some countries; a significant increase in public debt; and tensions between the United States and China, among other factors, all add to a high level of uncertainty surrounding interest rate spreads, external financing conditions, and the future performance of risk premiums. The impact that this environment could have on the exchange rate and on domestic financing conditions represent risks to the macroeconomic and monetary policy forecasts. Domestic financial conditions continue to favor recovery in economic activity. The transmission of reductions to the policy interest rate on credit rates has been significant. The banking portfolio continues to recover amid circumstances that have affected both the supply and demand for loans, and in which some credit risks have materialized. Preferential and ordinary commercial interest rates have fallen to a similar degree as the benchmark interest rate. As is generally the case, this transmission has come at a slower pace for consumer credit rates, and has been further delayed in the case of mortgage rates. Commercial credit levels stabilized above pre-pandemic levels in March, following an increase resulting from significant liquidity requirements for businesses in the second quarter of 2020. The consumer credit portfolio continued to recover and has now surpassed February 2020 levels, though overall growth in the portfolio remains low. At the same time, portfolio projections and default indicators have increased, and credit establishment earnings have come down. Despite this, credit disbursements continue to recover and solvency indicators remain well above regulatory minimums. 1.2 Monetary policy decision In its meetings in March and April the BDBR left the benchmark interest rate unchanged at 1.75%.

From this edition, the Financial Stability Report will have fewer pages with some changes in its structure. The purpose of this change is to present the most relevant facts of the financial system and their implications on the financial stability. This allows displaying the analysis more concisely and clearly, as it will focus on describing the evolution of the variables that have the greatest impact on the performance of the financial system, for estimating then the effect of a possible materialization of these risks on the financial health of the institutions. The changing dynamics of the risks faced by the financial system implies that the content of the Report adopts this new structure; therefore, some analyses and series that were regularly included will not necessarily be in each issue. However, the statistical annex that accompanies the publication of the Report will continue to present the series that were traditionally included, regardless of whether or not they are part of the content of the Report. In this way we expect to contribute in a more comprehensive way to the study and analysis of the stability of the Colombian financial system. Executive Summary During the first half of 2015, the main advanced economies showed a slow recovery on their growth, while emerging economies continued with their slowdown trend. Domestic demand in the United States allowed for stabilization on its average growth for the first half of the year, while other developed economies such as the United Kingdom, the euro zone, and Japan showed a more gradual recovery. On the other hand, the Chinese economy exhibited the lowest growth rate in five years, which has resulted in lower global dynamism. This has led to a fall in prices of the main export goods of some Latin American economies, especially oil, whose price has also responded to a larger global supply. The decrease in the terms of trade of the Latin American economies has had an impact on national income, domestic demand, and growth. This scenario has been reflected in increases in sovereign risk spreads, devaluations of stock indices, and depreciation of the exchange rates of most countries in the region. For Colombia, the fall in oil prices has also led to a decline in the terms of trade, resulting in pressure on the dynamics of national income. Additionally, the lower demand for exports helped to widen the current account deficit. This affected the prospects and economic growth of the country during the first half of 2015. This economic context could have an impact on the payment capacity of debtors and on the valuation of investments, affecting the soundness of the financial system. However, the results of the analysis featured in this edition of the Report show that, facing an adverse scenario, the vulnerability of the financial system in terms of solvency and liquidity is low. The analysis of the current situation of credit institutions (CI) shows that growth of the gross loan portfolio remained relatively stable, as well as the loan portfolio quality indicators, except for microcredit, which showed a decrease in these indicators. Regarding liabilities, traditional sources of funding have lost market share versus non-traditional ones (bonds, money market operations and in the interbank market), but still represent more than 70%. Moreover, the solvency indicator remained relatively stable. As for non-banking financial institutions (NBFI), the slowdown observed during the first six months of 2015 in the real annual growth of the assets total, both in the proprietary and third party position, stands out. The analysis of the main debtors of the financial system shows that indebtedness of the private corporate sector has increased in the last year, mostly driven by an increase in the debt balance with domestic and foreign financial institutions. However, the increase in this latter source of funding has been influenced by the depreciation of the Colombian peso vis-à-vis the US dollar since mid-2014. The financial indicators reflected a favorable behavior with respect to the historical average, except for the profitability indicators; although they were below the average, they have shown improvement in the last year. By economic sector, it is noted that the firms focused on farming, mining and transportation activities recorded the highest levels of risk perception by credit institutions, and the largest increases in default levels with respect to those observed in December 2014. Meanwhile, households have shown an increase in the financial burden, mainly due to growth in the consumer loan portfolio, in which the modalities of credit card, payroll deductible loan, revolving and vehicle loan are those that have reported greater increases in risk indicators. On the side of investments that could be affected by the devaluation in the portfolio of credit institutions and non-banking financial institutions (NBFI), the largest share of public debt securities, variable-yield securities and domestic private debt securities is highlighted. The value of these portfolios fell between February and August 2015, driven by the devaluation in the market of these investments throughout the year. Furthermore, the analysis of the liquidity risk indicator (LRI) shows that all intermediaries showed adequate levels and exhibit a stable behavior. Likewise, the fragility analysis of the financial system associated with the increase in the use of non-traditional funding sources does not evidence a greater exposure to liquidity risk. Stress tests assess the impact of the possible joint materialization of credit and market risks, and reveal that neither the aggregate solvency indicator, nor the liquidity risk indicator (LRI) of the system would be below the established legal limits. The entities that result more individually affected have a low share in the total assets of the credit institutions; therefore, a risk to the financial system as a whole is not observed. José Darío Uribe Governor