Search

The standard predictive regression assumes expected returns to be perfectly correlated with predictors. In the recently introduced predictive system, imperfect predictors account only for a partial variance in expected returns. However, the out-of-sample benefits of relaxing the assumption of perfect correlation are unclear. We compare the performance of the two models from an investor's perspective. In the Bayesian setup, we allow for various distributions of R2 to account for different degrees of optimism about predictability. We find that relaxing the assumption of perfect predictors does not pay off out-of-sample. Furthermore, extreme optimism or pessimism reduces the performance of both models. [ABSTRACT FROM AUTHOR]

We estimate idiosyncratic tail risk according to the extreme value theory. Both portfolio analyses and cross-sectional regressions suggest a significant negative relationship between the idiosyncratic tail risk and the expected returns in Chinese stock markets after controlling for other risk measures including size, book-to-market ratio, beta, momentum, short-term reversals, liquidity, idiosyncratic volatility, downside beta, co-skewness, co-kurtosis, idiosyncratic skewness, idiosyncratic kurtosis, value at risk and maximum daily returns. Turnover explains the negative effect of the idiosyncratic tail risk in Chinese stock markets where individual investors dominate the markets and short sales are constrained. [ABSTRACT FROM AUTHOR]

Recent empirical evidence has shown that the relationship between idiosyncratic volatility and a stock's expected return depends on the pricing of the stock: it is negative among overvalued stocks and positive among undervalued ones. We provide both theoretical and numerical evidence that this risk-return relationship might be driven purely by mathematical properties of return distributions. Using a simulation-based approach, we document that even in completely random samples, the correlation between idiosyncratic risk and mean returns depends on the ex-post estimation of abnormal returns. [ABSTRACT FROM AUTHOR]

Abstract: If a risky asset is subject to a jump‐to‐default event, the investment horizon affects the optimal portfolio rule, even if the asset returns are unpredictable. The optimal rule solves a non‐linear differential equation that, by not depending on the investor's pre‐default value function, allows for its direct computation. Importantly for financial planners offering portfolio advice for the long term, tiny amounts of constant jump‐to‐default risk induce marked time variation in the optimal portfolios of long‐run conservative investors. Our results are robust to the introduction of multiple non‐defaultable risky assets. [ABSTRACT FROM AUTHOR]

This paper investigates the usefulness of the real-time macroeconomic news-flow as a leading indicator of firm-level end-of-quarter realized earnings. Using recent advances in macroeconomics, I develop a nowcasting model for quarterly earnings and provide two main findings. First, I show that my model provides out-of-sample expectations that are as accurate as analysts’ forecasts. Second, macroeconomic news embedded in my nowcasts is not fully incorporated into investors’ earnings expectations and predicts future abnormal returns around earnings announcements. These findings have three main implications for capital markets research. First, real-time macroeconomic news can be used to update earnings expectations in real-time. Second, there are economic benefits of doing so, as evidenced by the magnitude of risk-adjusted returns around earnings announcements. Third, after three decades of almost nonexistent research on time-series models for quarterly earnings, the door is open again for fruitful research in this area. [ABSTRACT FROM AUTHOR]

Theory suggests that firm value should include the value of real options; that is, firms have the option to expand more profitable businesses and liquidate less profitable businesses. In a diversified firm, each segment has its own real options. Applying real options theory to a diversified firm at the firm level neglects the value of segment-level options. If investors overlook segment-level options, mispricing will occur. Using data from 1981 to 2013, we find that a hedge portfolio buying diversified firms in the highest decile of the estimated real option value of segments (RVS) and selling those in the lowest RVS decile earns a significant 0.79% size-adjusted monthly return. The hedge returns are more significant for firms whose growth opportunities mainly lie in the more profitable segments. We also find that the predictive power of RVS is stronger for firms with high growth, lower analyst coverage, and stronger corporate governance. Further investigation links improved operating performance to the exercise of segment-level real options. [ABSTRACT FROM AUTHOR]

The positive cash-return relation, previously found in the USA, is similarly present in international Europe, Australasia, and the Far East (EAFE) markets over the sample period 1990-2016. Across the 20 developed non-U.S. equity markets, high-cash firms outperform low-cash firms on average by 4.2% per year after controlling for firm size, book-to-market, momentum, operating profitability, and investment. Though the observed cash premium varies with the firm's level of debt, a rational risk-based pricing view falls short of fully understanding the effect. Instead, the observed cash premium reflects price corrections arising from the reversal of investors' expectation errors concerning the impact of cash on the firm's future performance and is therefore the outcome of mispricing. [ABSTRACT FROM AUTHOR]

A variety of recent studies provide a skeptical view on the predictability of stock returns. Empirical evidence shows that most prediction models suffer from a loss of information, model uncertainty, and structural instability by relying on low-dimensional information sets. In this study, we evaluate the predictive ability of various lately refined forecasting strategies, which handle these issues by incorporating information from many potential predictor variables simultaneously. We investigate whether forecasting strategies that (i) combine information and (ii) combine individual forecasts are useful to predict US stock returns, that is, the market excess return, size, value, and the momentum premium. Our results show that methods combining information have remarkable in-sample predictive ability. However, the out-of-sample performance suffers from highly volatile forecast errors. Forecast combinations face a better bias-efficiency trade-off, yielding a consistently superior forecast performance for the market excess return and the size premium even after the 1970s. [ABSTRACT FROM AUTHOR]

Abstract: We investigate the impact of China's economic policy uncertainty (EPU) on the time series variation of Chinese stock market expected returns. Using the news‐based measure of EPU, we find that EPU predicts negatively future stock market return at various horizons. This negative relation between economic policy uncertainty and expected future return remains significant as we control for a number of economic and market uncertainty variables or conduct out‐of‐sample tests. Our findings are consistent with behavioural asset pricing models, in which high uncertainty amplifies behavioural biases and generates speculative mis‐pricing under short‐sales constraint. [ABSTRACT FROM AUTHOR]

• The role of climate risk exposure in the cross-sectional pricing is examined. • We find a premium of low climate risk exposure in the Chinese stock market. • The premium remains after controlling for well-known pricing factors. • The premium of low climate risk exposure is extremely robust. This paper examines the role of climate risk exposure in the cross-sectional pricing of individual stocks in China. We find a premium of low climate risk exposure: stocks with low climate risk exposure significantly outperform those with high climate risk exposure by 0.83% to 0.90% per month in the future, on a risk-adjusted basis. Results of Fama-MacBeth regressions show that the premium of low climate risk exposure remains after controlling for well-known pricing factors. Moreover, a range of alternative settings confirms that the premium is extremely robust. Finally, climate risk exposure is a combination of pricing factors such as profitability and investment, which provides potential explanations for our results. Our study documents the importance of climate risk in cross-sectional pricing in the Chinese stock market. [ABSTRACT FROM AUTHOR]

• The sentiment extracted from photos can successfully predict the cryptocurrency returns. • The sentiment-induced mispricing of photo sentiment exhibits subsequent return correction on day t+1. • The subsequent recuperation from negative emotion is also shown in a surge in trading activities. • Higher Photo Pessimism causes higher risks proxied by daily price volatilities. This study examines whether the emotions contained in new photos can affect the cryptocurrency market. Utilizing the daily data on top 100 cryptocurrencies, we find that the surge in ratio of photos comprising pessimistic tones is associated with negative coin returns. Photo sentiment positively predicts subsequent returns and trading intensity, implying the subsequent corrections. The photo sentiment also drives risks up with higher price volatilities. The predictive power is more pronounced during periods of elevated fear proxied by investors' risk aversion. Our results remain robust with alternative sentiment proxies, risk-adjusted returns, and a battery of subsample analyses. [ABSTRACT FROM AUTHOR]

The job openings-to-employment ratio (JOE), defined as the number of job postings divided by the employment level, is among the strongest known predictors of the equity premium. We find that JOE outperforms a broad set of over two dozen popular predictor variables in both in-sample and out-of-sample forecasting tests. Forecasts based on JOE also produce gains of 2.91% in annualized certainty equivalent return and 0.20 in annualized Sharpe ratio relative to forecasts based on the historical mean equity premium. The empirical results are consistent with a standard production-based asset pricing model with labor inputs and search frictions. • The job openings-to-employment ratio (JOE) is a strong predictor of the equity premium. • JOE outperforms other popular predictor variables in forecasting tests. • Return forecasts based on JOE are useful to real-time investors. [ABSTRACT FROM AUTHOR]

China’s stock market is the largest emerging market in the world. It is widely accepted that the Chinese stock market is far from efficiency and it possesses possible linear and nonlinear dependencies. We study the predictability of returns in the Chinese stock market by employing the wild bootstrap automatic variance ratio test and the generalized spectral test. We find that the return predictability vary over time and a significant return predictability is observed around market turmoils. Our findings are consistent with the Adaptive Markets Hypothesis (AMH) and have practical implications for market participants and policy makers. A predictability index can be constructed for each asset, which might help warn a crisis is in store, ease the development of the ongoing bubble, and stabilize the market.

This paper investigates asset growth pricing in firm-level cross section stock return in Tehran Stock Exchange for the period from 1379 to 1389. In order to test cross section stock return predictability by the firm's asset growth, the relation between asset growth rate and subsequent stock return is examined in a sample of 280 firms using portfolio analysis approach and Fama-Macbeth (1973) regression model. Unlike previous findings in developed and developing markets, the results of this study suggest that stocks with high past asset growth rate experience high future return. However, by contraction of total sample to the big firms, the relation is positive and statistically insignificant. The results of this paper are robust for different future stock return time horizons.

We show that the quality of information-sharing networks linking firms' institutional investors has stock return predictability implications. We find that firms with high shareholder coordination experience less local comovement and less post-earnings announcement drift, consistent with the notion that information-sharing networks facilitate information diffusion and improve stock price efficiency. In support of the view that coordination acts as an information diffusion channel, we document that the stock return performance of firms with high shareholder coordination leads that of firms with low shareholder coordination. [ABSTRACT FROM AUTHOR]

This paper analyzes the degree of return predictability (or weak-form informational efficiency) of Dow Jones Islamic and conventional size and sector-indices using the data from 1996 to 2013. Employing the automatic portmanteau and variance ratio tests for the martingale difference hypothesis of asset returns, we find that all Islamic and conventional sub-index returns have been predictable in a number of periods, consistent with the implications of the adaptive markets hypothesis. Overall, the Islamic sector-indices exhibit a higher degree of informational efficiency than the conventional ones, especially in the Consumer Goods, Consumer Services, Financials and Technology sectors. We also find that the Islamic sub-indices tend to be more efficient than the conventional ones during crisis periods. [ABSTRACT FROM AUTHOR]

Berk and van Binsbergen (2016) have shown that the Capital Asset Pricing Model (CAPM) best represents the revealed preferences of any investor who can invest in mutual funds (i.e., all investors). This claim seems overly broad, as it applies to all asset classes. However, we show that hedge fund investors' revealed preferences are also best modeled by the CAPM. Because hedge fund investors are sophisticated and can access all assets classes, our finding supports this broad claim. Using the CAPM is rational, as we show that CAPM alpha correlates with managerial skill and predicts performance better than other multi-factor models. [ABSTRACT FROM AUTHOR]

We investigate whether value-relevant foreign information only gradually dilutes into stock prices of multinational firms worldwide. Using an international sample of firms from twenty-two developed countries, we find that a portfolio strategy based on firms' foreign sales information yields future returns of more than 10% p.a. globally. The return spread due to foreign information is substantial across different geographical regions and cannot be explained by traditional risk factors, firm characteristics, and industry momentum. Our results are in line with limited attention of investors to foreign information being the main driver of this effect worldwide. [ABSTRACT FROM AUTHOR]

This study investigates the momentum effect in factor premia in international government bond markets. The investigations are based on a range of fixed-income factor strategies related to volatility, credit risk, value, and momentum that are tested in a sample of data from 25 countries for the years 1992–2016. We demonstrate a strong and robust long-run performance persistence in the returns on factor portfolios of government bonds. Furthermore, our results support the view that the momentum in factor premia is driven by cross-sectional differences in expected returns on various factors rather than by behavioral overreaction. [ABSTRACT FROM AUTHOR]

The predictive power of the dividend-price ratio has been the subject of intense scrutiny. Most studies on return predictability assume that predictor variables follow stationary processes with constant long-run means. Following recent evidence on the role of structural breaks in the dividend-price ratio mean, we propose an estimation method that explicitly incorporates uncertainty about the location and magnitude of structural breaks in the predictor that extracts the regime mean component of the dividend-price ratio. Adjusting for structural changes in the ratio's mean and estimation error significantly improves predictive power of the dividend-price ratio as well as other standard predictors in sample and out of sample. [ABSTRACT FROM AUTHOR]

The main goal of this study is to examine firm and market level variables that predict stock returns by using quarterly data taken from July 1999 to December 2015. The study sample is sub-divided into pre and post financial crisis of 2007-08. The results of the study depict that in the pre-financial crisis period momentum and earnings growth rate are the significant predictors of stock returns while momentum, earnings growth rate, institutional ownership and trading volume are the significant predictors of stock returns in the post-financial crisis period. Furthermore, overall results show that momentum, earnings growth rate and size are the significant predictors of stock returns for the overall sample period. The results of the study are robust and can be generalized to other time periods. [ABSTRACT FROM AUTHOR]

This article documents a significant time-series momentum effect that is consistent and robust across all examined conventional asset classes from 1969 to 2015. We find that the duration and magnitude of time-series momentum is different in developed and emerging markets, but this is no longer the case when controlling for the currency component. We further demonstrate that time-series momentum captures a significant proportion of internationalmutual fund performance, but this is predominantly with respect to its long aspect. Finally, the market interventions by central banks in recent years have distorted correlations across assets; this challenges the performance of such portfolios. [ABSTRACT FROM AUTHOR]

The aim of this study is to provide empirical evidence of the international diversification benefits obtained employing not only time-varying volatility forecasts but also time-varying return forecasts from a multivariate approach that considers the dynamic relationships in return series as well as in volatilities and correlations. To that end, instead of using market indexes from different investment areas, we employ exchange trade funds actively traded on the New York Stock Exchange in recent years. It avoids nonsynchronous problems as well as allowing us to allocate internationally on a daily basis for which this approach is especially appropriate. Our overall results show that using this technique, it is possible to obtain economic gains and outperform the common benchmark strategies, even when the costs associated with the daily rebalance of each portfolio are taken into account. [ABSTRACT FROM AUTHOR]

The article examines the efficiency of 31 stock index series spanning 26 countries across the world, using generalized spectral test (GST) and detects departure from the martingale difference hypothesis (MDH). A moving window of 24 months was used and p-values of GST were estimated. In order to explore whether the departure from market efficiency can be used for generating profitable trades, an exponentially weighted-moving-average-based trading rule was applied and was found that average profits per trade were significantly higher when p-value of the GST was less than 0.1. These observations are in consistent with the adapted market hypothesis. [ABSTRACT FROM AUTHOR]

We examine return predictability of Australian managed funds in twenty-four categories by using twenty-nine macroeconomic indicators. The time-series regression results suggest that coal price, GDP, and Treasury bill rate have predictive power over fund returns. [ABSTRACT FROM AUTHOR]

We investigate the relationship between 24 different categories of Australian managed funds and 13 macroeconomic variables from the third quarter of 1998 to the first quarter of 2013. Using principal component and regression analyses, we find that fund returns can be significantly explained by principal components that reflect both the international and domestic variables, especially at the next two quarters. The relationships between fund returns and macroeconomic variables are predominantly negative. Further, the pooled regression results show that, at a more general level, the explanatory power of macroeconomic variables is relatively weak on fixed interest and on international shares funds, but is strong on multiple assets, property, and Australian shares funds. [ABSTRACT FROM AUTHOR]

We consider the non-parametric measure of tail risk (TR) proposed by Almeida, Ardison, Garcia and Vicente (2017) and illustrate the impact of some of the trade-offs involved when computing it both on real data and in controlled experiments with known dynamics of TR. We also propose an extremely simple to compute conditionally normal benchmark approximation of TR as a baseline to compare against other tail risk measures that aim to capture deviations from conditional normality. Given the empirical challenges associated with identifying and estimating tail risk, we strongly advocate evaluating tail risk measures in simple stylized models with well-understood properties and calibrated to real data as a useful device for understanding the behavior of alternative TR implementations as a function of specific features of themodel. [ABSTRACT FROM AUTHOR]

This letter measures human capital returns in a microeconomic sense as returns to education using Korean survey data, and compares them to the traditional macroeconomic measures, such as labor income growth. Both measures exhibit similar patterns of correlation with important economic variables and financial returns. However, returns to education are distinguished from labor income growth by a notable positive correlation with stock cash flow innovation and the consumption–wealth ratio (cay). Further, in a predictive regression of financial asset returns, labor income growth presents a negative effect for future excess stock returns, whereas returns to education exert a positive influence similar to cay. These results show that returns to education reflect another aspect of human capital returns that labor income growth does not reveal. [ABSTRACT FROM AUTHOR]

If past prices can successfully predict future price movements, it would contradict the notion of weak-form market efficiency. Return predictability can be assessed via a variety of random walk statistical tests or via the application of mechanical trading rules. Findings of return predictability and state of market efficiency are compared by applying a battery of popular random walk statistical tests and a large set of mechanical trading rules to a family of equity indexes in Asia-Pacific equity markets over a 20-year period of time. Inferences drawn from different random walk based econometric tests of market efficiency often disagree among themselves and tend to exaggerate the extent of predictability in returns. Testing of return predictability via a set of mechanical trading rules allows one to account for a possible data snooping bias, error measurements due to nonsynchronous trading and market frictions such as trading costs. Persistent predictability of returns that cannot be explained by the combination of data snooping bias, nonsynchronicity bias and moderate level of transaction costs is found in just two emerging equity markets in the region. Copyright © 2016 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]

We compare and contrast time series momentum (TSMOM) and moving average (MA) trading rules so as to better understand the sources of their profitability. These rules are closely related; however, there are important differences. TSMOM signals occur at points that coincide with a MA direction change, whereas MA buy (sell) signals only require price to move above (below) a MA. Our empirical results show MA rules frequently give earlier signals leading to meaningful return gains. Both rules perform best outside of large stock series which may explain the puzzle of their popularity with investors, yet lack of supportive evidence in academic studies. [ABSTRACT FROM AUTHOR]