Stock Return Predictability and Asset Pricing Models

This article develops an asset allocation framework that incorporatesprior beliefs about the extent of stock return predictabilityexplained by asset pricing models. We find that when prior beliefsallow even minor deviations from pricing model implications,the resulting asset allocations depart considerably from andsubstantially outperform allocations dictated by either theunderlying models or the sample evidence on return predictability.Under a wide range of beliefs about model pricing abilities,asset allocations based on conditional models outperform theirunconditional counterparts that exclude return predictability.     

The Predictability of Equity REIT Returns: Time Variation and Economic Significance

This article presents evidence on predictability of excess returns for equity REITs relative to the aggregate stock market, small-capitalization stocks, and T-bills using best-fit models from prior time periods. We find that excess equity REIT returns are far less predictable out-of-sample than in-sample. This inability to forecast out-of-sample is particularly true in the 1990s. Nevertheless, in the absence of transaction costs, active-trading strategies based on out-of-sample predictions modestly outperform REIT buy-and-hold strategies. However, when transaction costs are introduced, profits from these active-trading strategies largely disappear.     

REIT Operational Efficiency: Performance,Risk, and Return

The Journal of Real Estate Finance and Economics - Relations between Real Estate Investment Trust (REIT) efficiency and operational performance, risk, and stock return are examined. REIT-level...     

Stock Return Predictability and The Role of Monetary Policy

This article examines whether shifts in the stance of monetary policy can account for the observed predictability in excess stock returns. Using long-horizon regressions and short-horizon vector autoregressions, the article concludes that monetary policy variables are significant predictors of future returns, although they cannot fully account for observed stock return predictability. I undertake variance decompositions to investigate how monetary policy affects the individual components of excess returns (risk-free discount rates, risk premia, or cash flows).     

Stock Return Predictability: Is it There?

We examine the predictive power of the dividend yields for forecastingexcess returns, cash flows, and interest rates. Dividend yieldspredict excess returns only at short horizons together withthe short rate and do not have any long-horizon predictive power.At short horizons, the short rate strongly negatively predictsreturns. These results are robust in international data andare not due to lack of power. A present value model that matchesthe data shows that discount rate and short rate movements playa large role in explaining the variation in dividend yields.Finally, we find that earnings yields significantly predictfuture cash flows. (JEL C12, C51, C52, E49, F30, G12)     

Short Sales and Option Listing Decisions

We find that stocks with higher levels of prelisting short activity have a greater probability of option listing. These results are driven by the prelisting short activity of market makers, which suggests that exchanges believe that stocks with greater short selling will provide option market makers a better opportunity to hedge with short sales in the spot market. We also confirm that after options are listed, stocks with more prelisting short activity have more option trading activity. These results indicate that option exchanges strategically list options for stocks they believe with generate high trading volume thereby maximizing the profits of exchange members.     

Income Hedging,Dynamic Style Preferences,and Return Predictability

We propose a theoretical measure of income hedging demand and show that it affects asset prices. We focus on the value factor and first demonstrate that our demand estimates are correlated with the actual demands of retail and mutual fund investors. We then show that the aggregate high‐minus‐low (HML) demand predicts HML returns. Exploiting the state‐level variation in income risk, we demonstrate that state‐level hedging demands predict state‐level HML returns. A long‐short portfolio that exploits this hedging‐induced predictability earns an annualized risk‐adjusted return of 6%.     

Term Premium Determinants, Return Enhancement and Interest Rate Predictability

This paper investigates whether simple term premium estimation techniques provide potential for return enhancement and interest rate predictability. Using short-term US government securities, during 1959—93, it is demonstrated that utilization of such knowledge allows investors to enhance returns on fixed income portfolios, provided that other than money market alternatives can be considered as potential repositories of funds. In addition, such knowledge yielded short-term interest rate predictions that were weakly superior to other methodologies, including the naive no-change forecast, except during the volatile early 1980s.     

State‐Level Business Cycles and Local Return Predictability

This study examines whether local stock returns vary with local business cycles in a predictable manner. We find that U.S. state portfolios earn higher future returns when state‐level unemployment rates are higher and housing collateral ratios are lower. During the 1978 to 2009 period, geography‐based trading strategies earn annualized risk‐adjusted returns of 5%. This abnormal performance reflects time‐varying systematic risks and local‐trading induced mispricing. Consistent with the mispricing explanation, the evidence of predictability is stronger among firms with low visibility and high local ownership. Nonlocal domestic and foreign investors arbitrage away the predictable patterns in local returns in 1 year.     

Corporate Sales, Predisclosure Information and Return Variability

This paper investigates the determinants of return variability between accounting report and non-report periods. A model of information dissemination in financial markets is developed which shows that if corporate sales activity is a source of predisclosure information, the ratio of return variability between accounting report and non-report periods decreases in contribution margin per dollar sales. Greater contribution margin increases that portion of cash flow variability which is predictable by investors' observation of sales activity and, therefore, contribution margin indexes the informativeness of sales-related predisclosure information. Greater informativeness increases return variability in the predisclosure period relative to the accounting report period. Supporting evidence for this prediction is presented.     

Stock Return Predictability: A Bayesian Model Selection Perspective

Attempts to characterize stock return predictability have resultedin little consensus on the important conditioning variables,giving rise to model uncertainty and data snooping fears. Weintroduce a new methodology that explicitly incorporates modeluncertainty by comparing all possible models simultaneouslyand in which the priors are calibrated to reflect economicallymeaningful information. Our approach minimizes data snoopinggiven the information set and the priors. We compare the priorviews of a skeptic and a confident investor. The data implyposterior probabilities that are in general more supportiveof stock return predictability than the priors for both typesof investors.     

Return Predictability of Turkish Stocks: An Empirical Investigation

Employing the portfolio method and cross-sectional regressions, this paper provides a comprehensive analysis of stock return predictability in Turkey from January 1997 to July 2011. In the risk-related predictors, we found predictive power for beta, total volatility, and idiosyncratic volatility. The "cheapness" variable, book-to-market ratio, is the most important return predictor for the stocks traded on the Istanbul Stock Exchange (now part of the Borsa Istanbul). Grouping the stocks as small and large according to the median value of the market capitalization of the stocks adds important insights to the analysis. Our results show the set of large stocks on the Istanbul Stock Exchange to be the least predictable set of stocks.     

REIT Momentum and Characteristic-Related REIT Returns

Recent evidence confirms that in factor-model examinations of the cross-section of REIT returns, REIT momentum emerges as the dominant driver. Acknowledging the importance of momentum, the current study explores whether and how REIT return patterns are linked to the underlying characteristics of the REITs themselves, in the manner of Daniel and Titman’s (Journal of Finance 52(1):1–33, 1997, Journal of Portfolio Management 24(4):24–33, 1998) characteristics model. Over the period 1993 through 2009, we find that after controlling for momentum, book-to-market, institutional ownership, and illiquidity are all strongly associated with REIT returns while size and analyst coverage are not. We further extend prior research by examining the influence of changes in interest rate cycles on REIT returns, and find that the characteristic-return relationships are heavily influenced by interest rates.     

我国证券市场卖空机制模式的选择分析

现有卖空机制模式基本可分为日本模式、瑞士模式、芬兰模式、美国模式等四种模式,这四者对证券借贷的专控性体现出依次趋弱特征.从模式运行背景来看,芬兰模式对于我国证券市场具有较明显的优势特征,我国证券卖空机制模式较宜选择芬兰模式.     

A Dynamic Model of Characteristic‐Based Return Predictability

We present a dynamic model that links characteristic‐based return predictability to systematic factors that determine the evolution of firm fundamentals. In the model, an economy‐wide disruption process reallocates profits from existing businesses to new projects and thus generates a source of systematic risk for portfolios of firms sorted on value, profitability, and asset growth. If investors are overconfident about their ability to evaluate the disruption climate, these characteristic‐sorted portfolios exhibit persistent mispricing. The model generates predictions about the conditional predictability of characteristic‐sorted portfolio returns and illustrates how return persistence increases the likelihood of observing characteristic‐based anomalies.     

Monetary Policy, Term Structure and Asset Return: Comparing REIT, Housing and Stock

This paper confirms that a regime-switching model out-performs a linear VAR model in terms of understanding the system dynamics of asset returns. Impulse responses of REIT returns to either the federal funds rate or the interest rate spread are much larger initially but less persistent. Furthermore, the term structure acts as an amplifier of the impulse response for REIT return, a stabilizer for the housing counterpart under some regime, and, perhaps surprisingly, almost no role for the stock return. In contrast, GDP growth has very marginal effect in the impulse response for all assets.     

Short Sales Constraints and Momentum in Stock Returns

Abstract:   We show that stock characteristics identified by D'Avolio (2002) provide a reliable index of the mostly unobservable short sales constraints. Specifically, we find that this index is positively related to the level of short interest and to short selling costs implied by the disparity in prices in the options and stock markets, and is negatively related to future returns. Using this index, we show that the magnitude of momentum returns for the period 1984 to 2001 is positively related to short sales constraints, and loser stocks rather than winner stocks drive this result. We conclude that short sales constraints are important in preventing arbitrage of momentum in stock returns.     

Options,Short Sales,and Market Completeness

This paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales. The significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling. We also find significant effects on option prices, related to the short interest in the underlying stock. We then present evidence that options also increase information efficiency. Earlier work, that is replicated and extended here, has suggested that short sale constraints cause stock prices to underweight negative information. Options appear to reduce that effect.     

Investor Sentiment and Return Predictability of the Option to Stock Volume Ratio

We study the effect of investor sentiment on the relation between the option to stock volume ratio (O/S) and future stock returns. Relative option volume has return predictability under short sale constraints. For this reason, we expect and find a stronger O/S‐return relation during high sentiment periods than during low sentiment periods. We find that Baker and Wurgler's Investor Sentiment Index affects the O/S‐return relation after controlling for consumer sentiment indices and economic environment factors. While prior studies have used consumer sentiment indices as alternative measures of investor sentiment, our results suggest these effects are distinct.     

Time-Varying Variance Risk Premium and the Predictability of Chinese Stock Market Return

A number of studies have shown that the variance risk premium (VRP), defined as the difference between risk-neutral and physical expected variances, has strong predictive power for the excess stock market return, and this predictability peaks at 3- to 6-month prediction horizons. However, little research presents empirical evidences for Chinese stock market due to the absence of option market. Under general equilibrium asset pricing framework, this article estimates time-varying VRP using the Chinese stock market data. We find that the estimated VRP predicts the excess Chinese stock market return, and this forecasting power is stronger at 4- and 5-month horizons, which is consistent with the findings of existing literature.