Stock return predictability and determinants of predictability and profits

We examine stock return predictability for India and find strong evidence of sectoral return predictability over market return predictability. We show that mean-variance investors make statistically significant and economically meaningful profits by tracking financial ratios. For the first time in this literature, we examine the determinants of time-varying predictability and mean-variance profits. We show that both expected and unexpected shocks emanating from most financial ratios explain sectoral return predictability and profits. These are fresh contributions to the understanding of asset pricing.     

The cross-predictability of industry returns in international financial markets

This article finds evidence of return cross-predictability among trading partners in international financial markets. We show that the predictability of international customers dominates the predictability of domestic customers, and the predictability of international intra-industry customers dominates the predictability of international inter-industry customers. This return cross-predictability decreases with two country characteristics: financial sophistication and size.     

Adaptive Market Hypothesis: Evidence from the Ghanaian Stock Market

This study examines the return predictability of two indices – the GSEALSH index and the GSEFSII index on the Ghana stock market. We compare results from analyzing the return series between January 4, 2011 and August 28, 2015 using the generalized spectral test, the automatic portmanteau Box-Pierce test and the wild-bootstrapped automatic variance ratio test. A rolling window approach is used to track whether returns are predictable or not through time. It was observed that the GSEALSH index was more highly predictable than the GSEFSII index in all the three tests. The results obtained are consistent with the Adaptive Market Hypothesis.     

Dynamic return predictability in the Russian stock market

This paper explores whether the relevance of a conditional multifactor model and autocorrelation in predicting the Russian aggregate stock return fluctuates over time. The source of return predictability is shown to vary considerably with information flow. In general, predictability of the Russian stock market return is at a high level. Autocorrelation increases during periods of low information flow. During periods of high information, conditional exposure to the local market risk and changes in oil price influence the expected return on the Russian stock market. The lagged global stock market factor and currency returns have insignificant influence.     

Technology-investing countries and stock return predictability

For 77 technology-investing countries we test whether their stock market returns are predictable. We find that exchange rate returns and U.S. stock excess returns predict stock market returns for most countries in our sample, while crude oil and inflation predict returns of less than 40% of countries. While in out-of-sample tests the evidence of predictability declines, U.S. returns still beat the constant returns model for three-quarters of countries in our sample. A portfolio of all 77 countries offers a mean-variance investor annualized profits of between 5.7% and 8.0%, and profits are maximized when return forecasts are based on U.S. returns.     

Intraday return predictability,portfolio maximisation,and hedging

We examine whether intraday Chinese return predictability is linked to optimal portfolio holding and hedging. We find that: (1) S&P500 futures returns only predict Chinese spot market returns in up to 5-minute of trading with predictability disappearing at higher frequencies of trade; (2) the portfolio weight is maximised at the 5-minute trading frequency, when predictability is the strongest; and (3) when predictability is the strongest, significantly less shorting of the futures is required to minimise risk when a long position is taken in the Chinese market.     

Is Indonesia's stock market different when it comes to predictability?

We construct a unique dataset consisting of 342 firms aimed at stock return predictability. Using seven predictors, we show that unlike in conventional markets, it is capital expenditure that is the most successful predictor of returns. However, the overall evidence of out-of-sample predictability when using other conventional return predictors is weak. Capital expenditure-based forecasting models do lead to profits also although these are small. This tends to imply that for markets that are at the nascent stages of development, such as Indonesia, capital expenditure might have a role to play in shaping the market. Our results are in sharp contrast to the literature on emerging markets.     

Forecasting equity returns: The role of commodity futures along the supply chain

This paper examines equity return predictability using the returns of commodity futures along the supply chain in China's financial market. We find that a considerable number of commodities exhibit significant in‐sample forecasting ability at the daily horizon, especially for supplier‐side equity returns. The macroeconomic risk premium effect, captured by the aggregate commodity prices, is an important source for this predictability. The out‐of‐sample results show that for most commodities, the predictability remains both statistically and economically significant, and the forecasting performance improves substantially during recessions or with economic constraints.     

Testing for stock return predictability in a large Chinese panel

This paper proposes a simple panel data test for stock return predictability that is flexible enough to accommodate three key salient features of the data, namely, predictor persistency and endogeneity, and cross-sectional dependence. Using a large panel of Chinese stock market data comprising more than one million observations, we show that most financial and macroeconomic predictors are in fact able to predict returns. We also show how the extent of the predictability varies across industries and firm sizes.     

Common Divisors,Payout Persistence,and Return Predictability

In the finance and accounting literature, the use of a common divisor in the dependent and independent variables of ordinary least‐squares regressions is commonplace. What goes less recognized, however, is that their use induces spurious correlation between the regression variables and invalidates standard testing procedures. This paper analyses the common divisor problem by outlining analytical results concerning the expected R² and providing a simulation procedure that generates test statistics from which critical values can be drawn. To illustrate the procedure, we re‐investigate payout yield return predictability findings that have appeared in the literature and show that the results are spurious.     

Foreign Ownership Restriction and Momentum – Evidence from Emerging Markets

This study investigates the impact of foreign investors on stock price efficiency and return predictability in emerging markets. It finds that stocks fully investible for foreign investors exhibit stronger price momentum than non‐investible stocks. The difference in momentum effects between stocks with different levels of investibility cannot be fully explained by world market risk, size, turnover, or country‐specific factors. Further tests show that fully investible stocks have no post‐earnings‐announcement drift (PEAD), and their short‐term momentum reverses over a longer horizon. These results show that the stronger momentum of highly investible stocks does not appear to be driven by foreign investors' underreaction to firm‐specific information, but is more likely to be generated by their positive feedback trading.     

Predicting exchange rate returns

We test whether forward premiums predict spot exchange rate returns for 16 currencies. We apply a recently developed time series predictability test that allows us to model data features including heteroskedasticity in forward premium. We discover return predictability for 75% (12/16) of currencies in our sample. Trading strategies show that investors can make more profits from our proposed forward premium model compared to a random walk model and foreign exchange carry trade model.     

The risk and predictability of equity returns of the EU accession countries

This paper investigates the importance of global risk factors and the predictability of returns of the 13 EU accession countries, using both unconditional and conditional asset-pricing tests during the turbulent period of 1997–2002. Applied for the first time to the full sample of EU accession countries, we conclude that the world excess return has only somewhat importance for Hungary, Poland and Turkey, indicating low financial liberalization and low integration with the world. The real G-7 interest rate followed by the world excess return, global foreign exchange rate and global inflation rates are the most influential in their explanation of the variation of local market returns. Predictability of local returns is high and variant; global instrumental variables have higher predictive power for eight countries, especially for Bulgaria, Cyprus, Estonia, Lithuania, Romania and Hungary, whereas local instruments are more important for the Czech Republic, Latvia, Poland and Slovenia. The failure of the conditional asset-pricing model to correctly price assets confirms partial integration with the world. Except for Bulgaria, Hungary, Latvia and Malta, predictability cannot be explained by time variation in economic risk premiums, but by local information, market inefficiency and/or investor irrationality.     

Introduction

This study decomposes the unconditional stock return volatility into two categories: systematic versus idiosyncratic risk, to re-examine the link between size and risk in the banking industry. The feasibility of the model is tested using data for US banks from 1998 to 2007. The evidence uncovered suggests that the practice of size-related diversification obtained with large banks reduces the firm-specific risk, and thus weakens stock return variances. However, rather than eliminating firm-specific risk, it is being transformed into systematic risk. Additionally, our empirical findings can potentially explain why a bank's size-related diversification does not result in a reduction in its unconditional stock return volatility reported in Demsetz and Straha [Historical patterns and recent changes in the relationship between bank size and risk. Federal Reserve Bank of New York Economic Policy Review, 1(2), 13–26 (1995); Diversification, size, and risk at bank holding companies. Journal of Money, Credit, and Banking, 29, 300–313 (1997)].     

Volatilities in emerging MENA stock markets

This article examines the interrelationships among the emerging stock markets of the Middle East and North Africa (MENA) region, as well as the relationship between each MENA stock market and the larger and more developed markets of Europe and the United States. It explores whether MENA stock markets can offer international investors unique risk/return characteristics to diversify international and regional portfolios. This study adds to the existing literature by focusing—for the first time— on the dynamic relationships in the volatilities of the returns in MENA stock markets. The econometric part of the article uses the causality‐in‐variances GARCH model, the TARCH and ARCH‐M models, and VAR analysis to model conditional volatilities in stock market returns and the dynamic responses of volatilities to innovations in conditional variances. © 2006 Wiley Periodicals, Inc.     

Impact of bitcoin futures on the informational efficiency of bitcoin spot market

This study examines the informational efficiency of the bitcoin spot market by evaluating the predictive power of mechanical trading rules designed to exploit price continuation. Significant return predictability is found until the introduction of bitcoin futures in December 2017. The forecasting ability of trend‐chasing trading rules declines dramatically afterwards. Although evidence suggests that the introduction of bitcoin futures has increased the informational efficiency of the bitcoin spot market, no signs of improvement in informational efficiency are found in ethereum, the second‐largest cryptocurrency—following the introduction of bitcoin futures.     

When do informed traders acquire and trade on informational advantage? Evidence from Federal Reserve stress tests

Using Federal Reserve bank stress test announcements, we examine when option traders acquire informational advantage and when they exploit it. We find consistent evidence of informed options trading around announcements. However, when test results are announced in successive weeks we find high abnormal option volume, considerably positive abnormal returns and significant return predictability in the first week, but not the following week. This suggests that informed option traders are able to anticipate upcoming news events and skillfully process public information but it also suggests that trading on acquired information is conditioned on the level of information asymmetry in the market.     

Financial Statement Comparability and Idiosyncratic Return Volatility

This study examines the association between financial statement comparability and idiosyncratic return volatility (IRV). A greater degree of comparability lowers information acquisition costs, reduces the uncertainties associated with performance evaluation, and increases the overall quantity and quality of information available to corporate outsiders, which, in turn, helps investors to understand and evaluate the cash flow and performance of firms more accurately. Therefore, we hypothesize a negative association between financial statement comparability and IRV. Using a large US sample from 1981 to 2013, we show that financial statement comparability is associated with lower level of IRV significantly. We also find this association to be more pronounced in a poor information environment. This study contributes to the emerging research that stresses the benefits of financial statement comparability.     

Informed options trading on the implied volatility surface: A cross-sectional approach

This study investigates the cross-sectional implication of informed options trading across different strikes and maturities. We explore the term structure perspective of the one-way information transmission from options markets to stock markets by adopting well-known option-implied volatility measures to examine stock return predictability. Using equity options data for U.S. listed stocks spanning 2000–2013, we find that the shape of the long-term implied volatility curve exhibits extra predictive power for stock returns of subsequent months even after orthogonalizing the short-term components. Our findings indicate that the inter-market information asymmetry rapidly disappears before the expiration of long-term option contracts.