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.     

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.     

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.     

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.     

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.     

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.     

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.     

Foreign exchange market liberalization and the international diversification of borrowing by Italian firms

In this article we try to assess the relative importance of real and financial determinants in firm's foreign currency borrowing by extending a model earlier developed by Kawai. We use this framework to examine the behavior of Italian firms during the 1980s. The financial components of firm's decisions are studied by means of a repeated mean-variance portfolio model based on ex ante expectation. We show that (a) the invoice currencies seem to be a good indicator of firm's real exchange risk; and (b) even at times of capital controls, corporate debt policy was affected by financial variables. The latter will become increasingly important as European financial integration moves on.     

Return predictability of variance differences: A fractionally cointegrated approach

This paper examines the fractional cointegration between downside (upside) components of realized and implied variances. A positive association is found between the strength of their cofractional relation and the return predictability of their differences. That association is established via the common long-memory component of the variances that are fractionally cointegrated, which represents the volatility-of-volatility factor that determines the variance premium. Our results indicate that market fears play a critical role not only in driving the long-run equilibrium relationship between implied-realized variances but also in understanding the return predictability. A simulation study further verifies these claims.     

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.     

Does Interindustry and Intraindustry Information Help Predict Financial Distress?

This study investigates whether and how the accounting ratios of peer firms within the same industry (the industry peers) or firms within the industry of their customers (the downstream peers) help improve the predictability of sample firm financial distress. We document that the Z‐score factors of the companies with high correlation in stock returns help predict financial distress. The results show that accounting‐based ratios of the industry peers and the downstream peers enhance the accuracy of early warnings of financial distress, especially when prior returns of peer firms are highly correlated with the sample firm.     

Out-of-sample exchange rate predictability with Taylor rule fundamentals

An extensive literature that studied the performance of empirical exchange rate models following Meese and Rogoff's [Meese, R.A., Rogoff, K., 1983a. Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample? Journal of International Economics 14, 3-24.] seminal paper has not convincingly found evidence of out-of-sample exchange rate predictability. This paper extends the conventional set of models of exchange rate determination by investigating predictability of models that incorporate Taylor rule fundamentals. We find evidence of short-term predictability for 11 out of 12 currencies vis-à-vis the U.S. dollar over the post-Bretton Woods float, with the strongest evidence coming from specifications that incorporate heterogeneous coefficients and interest rate smoothing. The evidence of predictability is much stronger with Taylor rule models than with conventional interest rate, purchasing power parity, or monetary models.     

The Persistence of Profits,Sectoral Heterogeneity and Firms’ Characteristics

The analysis of the persistence of profits has long been a controversial issue within empirical industrial organisation literature. The aim of our paper is to provide new empirical findings that may account for patterns of both sectoral and firm profit persistence. The distinctive feature of our study is that we analyse a number of firms’ ergodic distribution in each sector according to their profit level; we then calculate the difference between such a distribution and that prevailing in manufacturing as a whole. Finally, we break down this distribution; the resulting breakdown highlights the impact of each transition probability on inter‐sectoral differences clearly, and it also emphasises the role of intra‐sectoral dynamics in determining different persistence patterns. We then apply this methodology to both innovating and non‐innovating firms, and conclude that among surviving firms innovation is indeed crucial to the persistence of profits. In addition, we set up an econometric test which enables us to estimate the impact of firm and sectoral characteristics on a firm’s profit condition.     

Financial development,sectoral reallocation,and volatility: International evidence

This paper studies how financial development affects the volatility of GDP growth through the channel of sectoral reallocation. For 28 OECD countries over the period 1970–2007, we construct a benchmark industrial portfolio that minimizes the economy's long-term volatility for a given level of long-term labor productivity growth. We find that financial development substantially increases the speed with which the observed industrial composition of output converges toward the benchmark. To overcome endogeneity concerns, we exploit sectoral sensitivities to financial deepening and exogenous liberalization events.     

Aid,Aid Volatility and Sectoral Growth in Sub-Saharan Africa: Does Finance Matter?

This article examines the impact of aid and its volatility on sectoral growth by relying on panel dataset of 37 sub-Saharan African (SSA) countries for the period 1983–2014. Findings from the system-generalized methods of moments show that, while foreign aid significantly drives sectoral growth, aid volatility deteriorates sectoral value additions impacting heavily on non-tradable sectors with no apparent effect on the agricultural sector. The deleterious effect of aid volatility on sectoral value additions in SSA is weakened by a well-developed financial system with significant impact on the tradable sector. Evidently, development of domestic financial markets enhances aid effectiveness.     

Sustainable Asset Growth and the Accounting Rate of Return in Not–For–Profit Organizations: Theory and Evidence

Parties needing to monitor the financial performance of not–for–profit (NFP) organizations have traditionally relied upon financial ratios of accounting data. This practice can lead to misleading inferences about profitability in relation to organizational needs, since accounting rates of return are potentially poor proxies for economic rates of return. In this paper we show how to compensate for the imprecision of the accounting rate of return through the use of a simple interpretive rule based on the finding that accounting and economic rates of return are on the same side of the growth rate. According to our rule, the accounting rate of return must exceed the asset growth rate in order to sustain growth with internally–generated cash flow. Logistic regressions are used to test the rule's ability to predict sustainable asset growth in a sample of NFP hospitals. The findings not only validate the rule, but also show that the rule exploits all usable information contained in the accounting rate of return     

Incorporating time-varying jump intensities in the mean-variance portfolio decisions

This paper examines the role of time-varying jump intensities in forming mean-variance portfolios. We find that compared with the no-jump or constant-jump models, the model which incorporates time-varying jump intensities better fits the dynamics of the assets returns, and yields mean-variance portfolios with higher Sharpe ratios. Our research suggests that using a better econometric model that captures non-normal features in the data has benefits for portfolio allocation even for a mean-variance investor.     

The Dynamic Relationship Between Investments in Brand Equity and Firm Profitability: Evidence Using Trademark Registrations

Abstract

Most marketing practitioners and scholars agree that marketing assets such as brand equity significantly contribute to a firm’s financial performance. In this paper, we model brand equity as an unobservable stock that results from up to 30 years of past brand-related investment flows. Using firm-specific trademarks as investment proxies, our results show a significant long-run impact on financial performance. The dynamic profile of brand-related investments has an inverted-U shape that reaches its peak after 11 years. On average, it takes four years before brand-related investments show a positive return, and investments older than 19 years show no significant impact. For the median trademarking firm, brand equity contributes €265,000 to annual profits.     

Interaction effects of restructuring decisions on operating profit following performance shocks

This paper examines the interaction effects of restructuring activities for a sample of Australian firms experiencing significant declines in operating performance. Our sample firms respond to performance shocks with both financial and corporate restructuring and they achieve significant improvements in operating profits in each of the first 3 years following the shocks. We find that financial and corporate restructuring have both contemporaneous and lagged impact on operating performance. Most importantly, we show that the interaction of restructuring events has a strong influence on the corporate recovery process. We conclude that financial and corporate restructuring play complementary as well as interactive role in reversing a declining trend in operating profits.