Excess volatility and the cross-section of stock returns

We document a reliable positive relation between excess volatility and the cross-section of stock returns over the sample period of 1963 to 2010. Significantly positive differentials have been found between the two decile portfolios with the largest and the least excess volatility, under all the situations we have examined. Size, value, and momentum effects cannot explain our empirical results. Likewise they cannot be explained by liquidity, bid-ask bounce, and risk-aversion-related inventory effects.     

A spatial dominance approach to evaluate the performance of stocks and bonds: Does the investment horizon matter?

The common advice by practitioners is to allocate a greater proportion of stocks for long-term investors than for short-term investors. However, part of the academic literature disagrees with this advice. We use a spatial dominance test which is suited for comparing alternative investments for a given time horizon. Using daily data for the US from 1962 to 2012, we test for dominance of cumulative returns series for stocks versus bonds at different investment horizons from 1 to 15 years. We find evidence that bonds second order spatially dominate stocks for horizons from 1 to 4 years. In contrast, for horizons of 6 years and longer, we find evidence that stocks dominate bonds. The conclusion that bonds dominate stocks at short horizons, while stocks dominate bonds at long horizons is consistent across different periods and international markets. When different portfolios of stocks and bonds are compared, we find that for long investment horizons only those portfolios with a sufficiently high proportion of stocks are efficient in the sense of spatial dominance.     

The Valuation-relevance of Earnings and Cash Flows: an International Perspective

We investigate which variable, earnings or cash flows, provides greater information for equity valuation within the United States, the United Kingdom, Canada, Germany, and Japan. We regress returns on earnings and cash flow metrics. We generally find earnings developed in three Anglo-Saxon countries—where capital is traditionally raised in public markets and reporting rules are unencumbered by taxation requirements—to have greater explanatory power for stock returns than cash flow metrics. Conversely, in two non-Anglo-Saxon countries—where capital is traditionally raised from private sources—earnings are generally not superior to cash flows for equity valuation, except in Japan, non-consolidated sample. While sensitivity analyses generally support the conclusions of our primary tests, in some of the additional analyses, earnings were superior to cash flows for samples from all countries. As expected, in all countries earnings have incremental information content over cash flows in explaining returns. Collectively, our findings provide two contributions. First, we generalize the findings of prior US research by showing that earnings are more important than cash flows for equity valuation in other Anglo-Saxon countries. Second and more importantly, our findings demonstrate that the superiority of earnings over cash flows is not universal. Rather, it depends on the national reporting regime and attendant institutional factors.     

An approximate long-memory range-based approach for value at risk estimation

This paper proposes new approximate long-memory VaR models that incorporate intra-day price ranges. These models use lagged intra-day range with the feature of considering different range components calculated over different time horizons. We also investigate the impact of the market overnight return on the VaR forecasts, which has not yet been considered with the range in VaR estimation. Model estimation is performed using linear quantile regression. An empirical analysis is conducted on 18 market indices. In spite of the simplicity of the proposed methods, the empirical results show that they successfully capture the main features of the financial returns and are competitive with established benchmark methods. The empirical results also show that several of the proposed range-based VaR models, utilizing both the intra-day range and the overnight returns, are able to outperform GARCH-based methods and CAViaR models.     

Pricing unexpected illiquidity

The well documented positive relation between returns and lagged illiquidity suggests that illiquidity is a priced characteristic of stocks. Recent studies suggest that stock returns are inversely related to the contemporaneous unexpected illiquidity, which is consistent with price revisions to reflect realized illiquidity. This study analyzes the relations between stock returns and illiquidity innovations and finds that that the negative illiquidity shock premium persists beyond the contemporaneous interval. However, transaction costs overwhelm any potential profits from strategies that attempt to exploit the price adjustments to the shocks, suggesting the markets are efficient with respect to illiquidity information.     

Estimating and predicting multivariate volatility thresholds in global stock markets

We propose a general double tree structured AR‐GARCH model for the analysis of global equity index returns. The model extends previous approaches by incorporating (i) several multivariate thresholds in conditional means and volatilities of index returns and (ii) a richer specification for the impact of lagged foreign (US) index returns in each threshold. We evaluate the out‐of‐sample forecasting power of our model for eight major equity indices in comparison to some existing volatility models in the literature. We find strong evidence for more than one multivariate threshold (more than two regimes) in conditional means and variances of global equity index returns. Such multivariate thresholds are affected by foreign (US) lagged index returns and yield a higher out‐of‐sample predictive power for our tree structured model setting. Copyright © 2006 John Wiley & Sons, Ltd.     

Forecasting abnormal stock returns and trading volume using investor sentiment: Evidence from online search

We examine the ability of online ticker searches (e.g. XOM for Exxon Mobil) to forecast abnormal stock returns and trading volumes. Specifically, we argue that online ticker searches serve as a valid proxy for investor sentiment — a set of beliefs about cash flows and investment risks that are not necessarily justified by the facts at hand — which is generally associated with less sophisticated, retail investors. Based on prior research on investor sentiment, we expect online search intensity to forecast stock returns and trading volume, and also expect that highly volatile stocks, which are more difficult to arbitrage, will be more sensitive to search intensity than less volatile stocks. In a sample of S&P 500 firms over the period 2005-2008, we find that, over a weekly horizon, online search intensity reliably predicts abnormal stock returns and trading volumes, and that the sensitivity of returns to search intensity is positively related to the difficulty of a stock being arbitraged. More broadly, our study highlights the potential of employing online search data for other forecasting applications.     

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.     

Modelling oil price expectations: Evidence from survey data

Using Consensus Forecast survey data on WTI oil price expectations for 3- and 12-month horizons over the period November 1989 to December 2008, we find that the rational expectation hypothesis is rejected and that none of the traditional extrapolative, regressive and adaptive processes fits the data by itself. We suggest a mixed expectation model defined as a linear combination of these traditional processes, which we interpret as the aggregation of individual mixing behavior and of heterogenous groups of agents using these simple processes. This approach is consistent with the economically rational expectations theory. We show that the target oil price included in the regressive component of this model depends on the long-run marginal cost of crude oil production and on short term macroeconomic fundamentals whose effects are subject to structural changes. For the two horizons, estimation results provide evidence for our mixed expectation model incorporating this break-dependent target price.     

The role of physical distribution services as determinants of product returns in Internet retailing

Pressure continues to build on Internet retailers to squeeze out inefficiencies from their day-to-day operations. One major source of such inefficiencies is product returns. Indeed, product returns in Internet retailing have been shown to be, on average, as high as 22% of sales. Yet, most retailers accept them as a necessary cost of doing business. This is not surprising since many retailers do not have a clear understanding of the causes of product returns. While it is known that return policies of retailers, along with product attributes, are two important factors related to product return incidents, little is known about which aspects of the online retail transaction make such a purchase more return-prone. In the current study, we seek to address this issue. We use a large data set of customer purchases and returns to identify how process attributes in physical distribution service (PDS) influence product returns. The first attribute involves perceptions of scarcity conditions in inventory availability among consumers when retailers reveal to consumers information on inventory levels for the products that they intend to buy. Our results show that orders in which items are sold when these conditions are revealed to shoppers have a higher likelihood of being returned than orders in which these conditions are not revealed. While prior research has argued that inventory scarcity perceptions have an effect on purchases, our findings suggest that they are also related to the likelihood of these purchases being returned. The second attribute involves the reliability in the delivery of orders to consumers. We find that the likelihood of orders being returned depends on the consistency between retailer promises of timeliness in the delivery of orders and the actual delivery performance of the orders. Moreover, we find that the effect that consistency in the delivery has in the likelihood of returns, is stronger for orders that involve promises for expedited delivery than for orders with less expeditious promises. That is, although the occurrence of returns depends on the delays in the delivery of orders to consumers relative to the initial promises made by the retailers, this effect is more notable for orders that involve promises of fast delivery.     

A threshold error-correction model for intraday futures and index returns

Index-futures arbitragers only enter into the market if the deviation from the arbitrage relation is sufficiently large to compensate for transaction costs and associated interest rate and dividend risks. We estimate the band around the theoretical futures price within which arbitrage is not profitable for most arbitragers, using a threshold autoregression model. Combining these thresholds with an error-correction model, we show that the impact of the mispricing error is increasing with the magnitude of that error and that the information effect of lagged futures returns on index returns is significantly larger when the mispricing error is negative. © 1998 John Wiley & Sons, Ltd.     

Foreign Currency Translation Reporting and the Exchange-Rate Exposure Effect

This study further explores a structural break in the relation between stock returns of firms with foreign currency positions and lagged exchange rate changes (exchange rate exposure effect) documented in Bartov and Bodnar (1994). We examine whether changes in the financial accounting reporting of foreign currency positions from SFAS No. 52 might have improved investors' ability to characterize firms' economic exchange rate exposures, and thus the impact of exchange rate movements on firm value. Our findings indicate that only firms reporting using the dollar as the functional currency (i.e., those reporting as if they were still under SFAS No. 8) retain a significant relation between the lagged change in the dollar and firm value in the post-SFAS No. 52 period. For firms reporting using the foreign currency as the functional currency (i.e., those who switched to the new translation method) the significant lagged relation disappears. This is consistent with the use of a foreign currency as the functional currency under SFAS No. 52 facilitating valuation of U.S. firms with foreign operations.     

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.     

Price support and spreads in the IPO aftermarket: An empirical microstructure study

Using the inventory components of spreads as a measure of inventory holding-risk, we test the hypothesis of Hanley et al. [Hanley, K. W., Kumar, A., & Seguin, P. J. (1993). Price stabilization in the market for new issues. Journal of Financial Economics, 34, 177–197] that price supports reduce market makers’ inventory holding-risk in the aftermarket of initial public offerings (IPOs). We find that both spreads and their inventory components are significantly smaller in the earlier periods of the IPO aftermarket than those in the later periods. More importantly, the inventory components of spreads are significantly smaller for stocks without over-allotment options (OAOs) exercised, and for stocks with lower or negative initial returns which are more likely to have price supports. The results are consistent with the price support hypothesis.     

The relationship between information technology capability,inventory efficiency,and shareholder wealth: A firm-level empirical analysis

Inventories represent an important strategic resource for firms, with implications for shareholder wealth. As such, firms expend considerable effort in managing their inventories efficiently. Among other factors, information technology (IT) capability can play an important role in enabling inventory efficiency and financial performance. However, insight into the chain-of-effects linking IT capability, inventory efficiency, and stock market returns and risk remains limited. In this paper, we provide a conceptual model outlining the relationships between these constructs. Next, we evaluate the model using secondary information on firms from multiple industries across the 10-year time period of 2000–2009. Our analysis confirms that firms’ IT capability plays a significant role in enhancing their inventory efficiency, which, in turn, is observed to increase stock market returns. Our results also reveal that firms’ IT capability directly reduces their stock market risk and enhances their stock market returns. Taken together, these findings, along with the conceptual model that we advance, have important research and managerial implications.     

Application and research on the complex dynamics behaviour under price-discount promotion policy in inventory control system

In this paper, we study the inventory control system of the apparel industry supply chain in which the products are fast-fashion and mass-consuming goods. Retailers tend to promote by price-discount policy to regulate overstock situation caused by fluctuated demand, frequent product upgrading, etc. Here, we discuss the impact of fluctuated demand triggered by price-discount promotion policy on the comprehensive inventory control system in which the final inventory and supply line stock are considered and weighted differently according to corresponding practical operation situations. In this model, stock returns are permissible. Then we calculated the Lyapunov stable region of the decision parameters based on the state space model. These conclusions present the managers a big picture to inspect the inventory control system and serve as reliable references to make correct decisions.     

The role of U.S. Investors in international equity market inflows,outflows, and net flows for selected emerging asian markets

This paper investigates the relationship between international equity flows and returns in the eight largest emerging Asian markets from 1988 through March 2002. Both the feedback-trading hypothesis, which states that past returns affect flows, and the information hypothesis, which states that flows affect returns, are tested. Volatility effects are included, and effects of the 1997 Asian crisis on the relationships are also studied. While past studies have focused on net flows, this paper investigates outflows and inflows separately to determine whether their behavior patterns follow those of net flows.     

Market volatility and illiquidity during the COVID-19 outbreak: Evidence from the Saudi stock exchange through the wavelet coherence approaches

The aim of this paper is to examine the explanatory power of realized volatility on the illiquidity in Saudi stock market during the COVID-19 outbreak. To achieve this objective, we consider the Wavelet Coherence approaches as empirical tools to investigate the combined effect of realized volatility and COVID-19 counts on the market illiquidity across frequencies and over time space by taking in account the number of infected cases in Saudi Arabia and over the World, and the number of death cases in Saudi Arabia as well as over the World. Our study reaches two main findings. First, the preliminary results reported by the ARDL bound test as a benchmark model showed significant long-run and short-run effects of the market volatility on illiquidity in contemporaneous and lagged manner. Second, the wavelet coherence analysis tools exhibited important results: (i) the wavelet coherency between illiquidity ratio and realized volatility in Saudi Arabia appear highly pronounced over all time horizons. (ii) PWC plots showed a significant mutual effect between liquidity risk and realized volatility when eliminating the effect of local COVID-19 cases. (iii) MWC plots highlighted that the response of the market illiquidity index to both the amplification in confirmed local cases (resp. international confirmed cases) and the stock market volatility appear significant in the short and middle horizons.     

Probabilistic forecasting of output growth,inflation and the balance of trade in a GVAR framework

We apply a global vector autoregressive (GVAR) model to the analysis of inflation, output growth and global imbalances among a group of 33 countries (26 regions). We account for structural instability by use of country‐specific intercept shifts, the timings of which are identified taking into account both statistical evidence and our knowledge of historic economic conditions and events. Using this model, we compute both central forecasts and scenario‐based probabilistic forecasts for a range of events of interest, including the sign and trajectory of the balance of trade, the achievement of a short‐term inflation target, and the incidence of recession and slow growth. The forecasting performance of the GVAR model in relation to the ongoing financial crisis is quite remarkable. It correctly identifies a pronounced and widespread economic contraction accompanied by a marked shift in the net trade balance of the Eurozone and Japan. Moreover, this promising out‐of‐sample forecasting performance is substantiated by a raft of statistical tests which indicate that the predictive accuracy of the GVAR model is broadly comparable to that of standard benchmark models over short horizons and superior over longer horizons. Hence we conclude that GVAR models may be a useful forecasting tool for institutions operating at both the national and supra‐national levels. Copyright © 2010 John Wiley & Sons, Ltd.