The impact of inventory dynamics on long-term stock returns – An empirical investigation of U.S. manufacturing companies

This paper investigates the relationship between the inventory dynamics and long-term stock returns of a large panel of U.S. manufacturing firms over the time period from 1991 to 2010. We propose two measures of inventory dynamics: one metric to assess the fluctuations of quarterly inventories within the year and a second metric to quantify relative year-over-year inventory growth. Our results indicate that within-year inventory volatility (IV) and abnormal year-over-year inventory growth (ABI) are associated with abnormal stock returns. Both metrics cannot be entirely explained by common risk factors. We find that firms with high IV and low ABI have the best long-term stock returns, and that stock performance decreases monotonically with higher ABI values. Our results are robust to various control variables including size, book-to-market value, industry and prior performance. We therefore conclude that changes in inventory levels provide valuable insights into the risks and opportunities faced by a company.     

Size and book-to-market factors in the relationship between average stock returns and average book returns: some evidence from an emerging market

The present paper examines the association between average stock returns and average book returns and addresses the question as to whether there are common size and book-to-market factors in earnings and returns. The results of the empirical research, conducted in the Athens Stock Exchange, suggest that when the sample firms are grouped into size, book-to-market portfolios stock returns properly reflect differences in the evolution of accounting profitability. Moreover, it is found that the return on investment (ROI) measure contains size and book-to-market factors analogous to the mimic risk factors inherent in stock returns, in the sense that they capture information missed by ROI.     

Anomalies in emerging markets: The case of Mexico

In this article we explore the relationship between 19 of the most common anomalies reported for the US market and the cross-section of Mexican stock returns. We find that 1-month stock returns in Mexico are robustly predicted only by 3 of the 19 anomalies: momentum, idiosyncratic volatility, and the lottery effect. Momentum has a positive relation with future 1-month returns, while idiosyncratic volatility and the lottery effect have a negative relation. For longer horizons of 3 and 6 months, only the 3 most important factors in the US market predict returns: size, book-to-market, and momentum.     

Monday returns and asset pricing

The seasonal patterns observed on Monday stock returns are still unexplained by different asset pricing models. We attempt to fill this gap in the finance literature by using the Fama-French (Journal of Financial Economics 33:3–56, 1993) risk factors to explain the Monday seasonal. The results in the study show that Monday returns are explained by risk factors such as the market return, the size of the firms, and the book-to-market ratios of firms.     

The influence and predictive powers of mixed-frequency individual stock sentiment on stock returns

In this article, we construct mixed-frequency individual stock sentiment using MIDAS model. We first investigate the influence power of mixed-frequency individual stock sentiment on excess returns. The results indicate that the higher the frequency of individual stock sentiment is, the better it explains the variation of excess returns, that mixed-frequency individual stock sentiment, especially mixed high-frequency sentiment, exerts greater influence on excess returns than the same frequency one and that the mixed-frequency sentiment has a stronger explanatory power to the variation of excess returns than size factor, book-to-market factor, profitability factor and investment factor do. Then, we study the predictive content of mixed-frequency individual stock sentiment. The results show that the higher the frequency of individual stock sentiment is, the better the forecast performs. Moreover, by comparing the corresponding statistics in influence and predictive power models, we find that the influence power of mixed-frequency individual stock sentiment is more significant than its predictive power.     

Higher moment exchange rate exposure of S&P500 firms

We examine the impact of higher order moments of changes in the exchange rate on stock returns of U.S. large-cap companies in the S&P500. We find a robust negative effect of exchange rate volatility on S&P500 company returns. The consumer discretionary and the consumer staples sectors have significant negative exposure to exchange rate volatility suggesting that exchange rate volatility affects stock returns through the channel of international operations. In terms of industries, the household products and personal products industries have significant negative exposure as well. The impact in the financial sector suggests that derivatives and hedging activity can mitigate exposure to exchange rate volatility. We find weak evidence that exchange rate skewness has an effect on S&P500 stock returns, but, find evidence that exchange rate kurtosis affects returns of companies that are more exposed to exchange rate volatility.     

Optimal Portfolio Choice Under Decision‐Based Model Combinations

We propose a density combination approach featuring combination weights that depend on the past forecast performance of the individual models entering the combination through a utility‐based objective function. We apply this model combination scheme to forecast stock returns, both at the aggregate level and by industry, and investigate its forecasting performance relative to a host of existing combination methods, both within the class of linear and time‐varying coefficients, stochastic volatility models. Overall, we find that our combination scheme produces markedly more accurate predictions than the existing alternatives, both in terms of statistical and economic measures of out‐of‐sample predictability. Copyright © 2016 John Wiley & Sons, Ltd.     

Liquidity skewness premium

Risk-averse investors may dislike decrease of liquidity rather than increase of liquidity, and thus there can be asymmetric preference in variation of liquidity. In addition, investors are likely to avoid extreme illiquidity. This paper examines whether the skewness of an individual firm’s liquidity capturing asymmetric distribution of liquidity and extreme illiquidity is priced in the US stock market. Using the skewness of the daily price impact, we find that it is positively priced, and this positive relation is significant up to eight months after controlling for other effects. Moreover, we find our results remain significant with the skewness of alternative liquidity measures, i.e., dollar-volume, and turnover.     

Value stocks and market efficiency

We form portfolios based on firm book-to-market equity ratios and apply stochastic dominance tests. Value (high book-to-market) portfolios dominate low book-to-market portfolios. Thus, value stocks are not rationally priced by the market and the book-to-market ratio is not an efficiently priced proxy for equity risk. We also find that the superior performance of value stocks is not due to the January effect.     

An intertemporal CAPM with higher-order moments

We propose an intertemporal asset pricing model that incorporates both preference for higher-order moments and stochastic investment opportunities and encompasses a wide range of existing models. We provide supporting evidence from the U.S. stock market and find that, not only is systematic skewness negatively priced, an extra return premium is also required for accepting high systematic risk associated with a rise in risk aversion. Our findings suggest that considering both skewness preference and intertemporal hedging demands improves the estimated risk-return trade-off, and that cross-sectional anomalies such as value, momentum, and failure probability puzzles can be partially explained by our model.     

Long-run underperformance following private equity placements: The role of growth opportunities

Our results show that the post-offering performance of private equity issuers is related to growth opportunities. We find significant long-run underperformance in stock returns following private placements only for firms with high Tobin's q. High-q firms experience not only poor stock price performance but also poor operating performance. Low-q firms, in contrast, do not display significant stock price or operating underperformance. We further examine three potential explanations for this relation: over-investment in assets by managers, investor skewness preference, and over-optimism about earnings prospects. Our results are consistent with the view that investors are overly optimistic about the prospects of high growth firms.     

Heterogeneous relationship between IPO return and risk across idiosyncratic variance characteristics

This paper analyzes the levels and changes in the post-IPO stock return volatility and provides insights into market responses to the presence of firm-specific risk. First, we document a negative relation between initial idiosyncratic volatility level and the post-IPO volatility change in that initially low volatility firms have more volatility increase and vice verse. This evidence suggests fundamental firm-specific changes after the IPO. Further, we find that underpricing and short-run post-IPO returns are positively related to the initial and corresponding idiosyncratic risk level. This finding suggests that underpricing compensates investors for acquiring costly information and firm-specific risk information is being incorporated into offer prices. Finally, we find that higher long-run post-IPO performance is related to both lower initial risk level and decreasing risk in the first year after the IPO.     

Is there a risk–return trade‐off? Evidence from high‐frequency data

This paper examines the intertemporal relation between risk and return for the aggregate stock market using high‐frequency data. We use daily realized, GARCH, implied, and range‐based volatility estimators to determine the existence and significance of a risk–return trade‐off for several stock market indices. We find a positive and statistically significant relation between the conditional mean and conditional volatility of market returns at the daily level. This result is robust to alternative specifications of the volatility process, across different measures of market return and sample periods, and after controlling for macro‐economic variables associated with business cycle fluctuations. We also analyze the risk–return relationship over time using rolling regressions, and find that the strong positive relation persists throughout our sample period. The market risk measures adopted in the paper add power to the analysis by incorporating valuable information, either by taking advantage of high‐frequency intraday data (in the case of realized, GARCH, and range volatility) or by utilizing the market's expectation of future volatility (in the case of implied volatility index). Copyright © 2006 John Wiley & Sons, Ltd.     

Asymmetric volatility spillover in the Tokyo stock exchange

This paper examines volatility transfers between size-based stock indexes from the Tokyo Stock Exchange. We use a bivariate EGARCH model to test for volatility spillover effects between large- and small-cap stock indexes. We find an asymmetric volatility spillover from large-cap stock returns to small-cap returns, but not vice versa. We also find a small-firm January effect, but not a June seasonality, in either large-and small-cap stock returns. Instead, we find that the conditional correlation between large- and small-cap indexes is time-varying, showing a tendency to increase during the month of June.(JEL G12, G15)     

A Firm-Specific Analysis of the Exchange-Rate Exposure of Dutch Firms

We examine the relationship between exchange‐rate changes and stock returns for a sample of Dutch firms over 1994–1998. We find that over 50 per cent of the firms are significantly exposed to exchange‐rate risk. Furthermore, all firms with significant exchange‐rate exposure benefit from a depreciation of the Dutch guilder relative to a trade‐weighted currency index. This result confirms that firms in open economies, such as the Netherlands, exhibit significant exchange‐rate exposure. We collect unique information on the most relevant individual currencies for each firm with respect to their influence on firm value. Our results indicate that the use of a trade‐weighted currency index and the use of individual exchange rates are complements. We also measure the determinants of exchange‐rate exposure. As expected, we find that firm size and the foreign sales ratio are significantly and positively related to exchange‐rate exposure. In contrast with our hypothesis, off‐balance hedging using derivatives has no significant effects. Finally, in line with theory, we find that exposure is significantly reduced through on‐balance sheet hedging, i.e., through foreign loans and by producing in factories abroad.     

The cross section of Chinese commodity futures return

This paper investigates the cross-section of expected commodity futures returns in China using a large panel of 13 individual factors. We find that 6 out of 13 individual factors produce positive and significant returns. To aggregate the information among these factors, we apply not only the traditional Fama-MacBeth regression (FM), but also a set of alternative methods, including the forecast combination method (FC), principal component analysis (PCA), principle component regression (PCR) and partial least squares (PLS). It turns out that PLS outperform other methods in forecasting the cross-section of Chinese expected futures returns. The equally weighted combination of 5 methods produces an even higher annualized return and lower standard deviation compared to each single method. The investigation of factor importance reveals that the skewness (SKEW) factor is more important than other factors in predicting expected futures returns in Chinese markets.     

Robustness of stable volatility strategies

The paper analyzes the robustness of stable volatility strategies, i.e. strategies in which the portfolio weight of the stock is inversely proportional to its local volatility. These strategies are optimal for a CRRA investor if the stock follows a diffusion process, the expected excess return is proportional to its volatility, and the hedging demand is zero. We assess the performance of stable volatility strategies when these restrictive assumptions do not hold, in particular, when the risk premium is not proportional to volatility and when the stock price is subject to jumps. We find that stable volatility strategies are indeed robust or close to robust under a maxmin decision rule. In addition to our theoretical results, we perform a simulation analysis to evaluate strategies that scale the portfolio weight by the volatility, variance or a constant portfolio weight, and also analyze the strategies using empirical excess returns. Both analyses confirm the robustness of stable volatility strategies.     

用违约距离判别信用风险:一个实证研究

本文选取了在中国A股市场上市的4家具有一定代表性的ST公司和4家对照公司，并通过计算从2003年到2005年的静态违约距离和不变增长率假设下的违约距离，发现后者比前者具有更好的判别能力；同时对影响违约距离大小的输入变量进行了敏感性分析，发现违约距离对股票收益波动率的变化最为敏感，因而精确计算波动率是关键。     

An investigation of causality between insider transactions and stock returns

Prior research shows that corporate insiders engage in profitable transactions by trading securities of their own firms. The main purpose of this study is to examine whether insider transactions and stock returns have causality relationships at the firm level for a sample of 2,521 firms during the period 1988 to 1998. We find a large impact of stock returns on subsequent insider transactions at both the aggregate and firm levels. The impact appears to be negative which suggests that insiders buy after stock price decreases and sell after stock price increases. Our findings on the predictive content of insider transactions for subsequent stock returns are primarily consistent with prior literature. We observe a positive but weak relationship between insider transactions and future stock returns.     

Extreme risk transmission channels between the stock index futures and spot markets: Evidence from China

We develop a skewness-dependent multivariate conditional autoregressive value at risk model (SDMV-CAViaR) to detect the extreme risk transmission channels between the Chinese stock index futures and spot markets. The proposed SDMV-CAViaR model improves the forecast performance of extreme risk by introducing the high-frequency realized skewness. Specifically, the realized skewness has a significant impact on the spillovers, but the realized volatility and realized kurtosis do not, which implies that the jump component plays an important role in extreme risk spillovers. The empirical results indicate there are bidirectional extreme risk spillovers between the stock index futures and spot markets, the decline of one market has direct and indirect channels to exacerbate the extreme risk of the other market. Firstly, the market decline will directly increase the extreme risk of related markets by decreasing market returns. Besides, the decline will indirectly increase the extreme risk by increasing the negative realized skewness and extreme risk spillovers.