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.

The existence and source of stock return predictability : Evidence from dividend, output and consumption ratios

Date of Acceptance: 13/03/2015

The existence and source of stock return predictability : Evidence from dividend, output and consumption ratios

Date of Acceptance: 13/03/2015

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.

A random coefficient approach to the predictability of stock returns in panels

© The Author, 2014. Most studies of the predictability of returns are based on time series data, and whenever panel data are used, the testing is almost always conducted in an unrestricted unit-by-unit fashion, which makes for a very heavy parametrization of the model. On the other hand, the few panel tests that exist are too restrictive in the sense that they are based on homogeneity assumptions that might not be true. As a response to this, the current study proposes new predictability tests in the context of a random coefficient panel data model, in which the null of no predictability corresponds to the joint restriction that the predictive slope has zero mean and variance. The tests are applied to a large panel of stocks listed at the New York Stock Exchange. The results suggest that while the predictive slopes tend to average to zero, in case of book-to-market and cash flow-to-price the variance of the slopes is positive, which we take as evidence of predictability.

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.

Stock return comovements and integration within the Latin American integrated market

Financial integration has been pursued aggressively across the globe in the last fifty years; however, there is no conclusive evidence on the diversification gains (or losses) of such efforts. These gains (or losses) are related to the degree of comovements and synchronization among increasingly integrated global markets. We quantify the degree of comovements within the integrated Latin American market (MILA). We use dynamic correlation models to quantify comovements across securities as well as a direct integration measure. Our results show an increase in comovements when we look at the country indexes, however, the increase in the trend of correlation is previous to the institutional efforts to establish an integrated market in the region. On the other hand, when we look at sector indexes and an integration measure, we find a decreased in comovements among a representative sample of securities form the integrated market.

Rating downgrade and the price impact of CDS spread on stock return

We investigate the time-varying informativeness of credit default swap (CDS) trading on stock returns for 302 US firms from July 2004 to August 2010. Using the Acharya and Johnson (2007) measure, we find that CDS trading becomes informative for an increasing number of firms as we approach the global financial crisis (GFC). Firm numbers gradually decline post-GFC, but remain high compared to the pre-GFC period. furthermore, CDS trading imposes the largest conditional price impact on firms that are recently downgraded, regardless of rating levels. Interestingly, this holds during and after the GFC, but not before. We offer two implications. First, despite post-GFC outcry against the CDS market, our results suggest it exhibits enhanced price discovery during the GFC. Second, our findings support criticism that, in the lead-up to the GFC, rating agencies are slow in downgrading firms. However, if downgrade decisions made during and after the GFC induce informed trading in the CDS market, this necessarily implies that during the midst of the GFC, rating agencies have got their act together.

Nonparametric tail risk, macroeconomics and stock returns: predictability and risk premia

This paper proposes a new novel to calculate tail risks incorporating risk-neutral information without dependence on options data. Proceeding via a non parametric approach we derive a stochastic discount factor that correctly price a chosen panel of stocks returns. With the assumption that states probabilities are homogeneous we back out the risk neutral distribution and calculate five primitive tail risk measures, all extracted from this risk neutral probability. The final measure is than set as the first principal component of the preliminary measures. Using six Fama-French size and book to market portfolios to calculate our tail risk, we find that it has significant predictive power when forecasting market returns one month ahead, aggregate U.S. consumption and GDP one quarter ahead and also macroeconomic activity indexes. Conditional Fama-Macbeth two-pass cross-sectional regressions reveal that our factor present a positive risk premium when controlling for traditional factors.

Testing for predictability in panels of any time series dimension

The few panel data tests for the predictability of returns that exist are based on the prerequisite that both the number of time series observations, T, and the number of cross-section units, N, are large. As a result, it is impossible to apply these tests to stock markets, where lengthy time series of data are scarce. In response to this, the current paper develops a new test for predictability in panels where N is large and T≥. 2 can be either small or large, or indeed anything in between. This consideration represents an advancement relative to the usual large-. N and large-. T requirement. The new test is also very general, especially when it comes to allowable predictors, and is easy to implement. As an illustration, we consider the Chinese stock market, for which data are available for only 17 years, but where the number of firms is relatively large, 160.

Does the choice of estimator matter when forecasting returns?

While the literature concerned with the predictability of stock returns is huge, surprisingly little is known when it comes to role of the choice of estimator of the predictive regression. Ideally, the choice of estimator should be rooted in the salient features of the data. In case of predictive regressions of returns there are at least three such features; (i) returns are heteroskedastic, (ii) predictors are persistent, and (iii) regression errors are correlated with predictor innovations. In this paper we examine if the accounting of these features in the estimation process has any bearing on our ability to forecast future returns. The results suggest that it does.