This paper introduces a regime-switching combination approach to predict excess stock returns. The approach explicitly incorporates model uncertainty, regime uncertainty, and parameter uncertainty. ...The empirical findings reveal that the regime-switching combination forecasts of excess returns deliver consistent out-of-sample forecasting gains relative to the historical average and the Rapach et al. (2010) combination forecasts. The findings also reveal that two regimes are related to the business cycle. Based on the business cycle explanation of regimes, excess returns are found to be more predictable during economic contractions than during expansions. Finally, return forecasts are related to the real economy, thus providing insights on the economic sources of return predictability.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
•The interaction between the yield and macro factors shifts across distinct regimes.•Two regimes are closely related to the business cycle and monetary policy.•The RSDNS-X model is competitive in the ...out-of-sample forecasting of bond yields.
This paper presents a regime-switching Nelson–Siegel term structure model with macro factors and introduces a Markov chain Monte Carlo procedure to estimate the model. We find that regime shifts are important for understanding the interaction between the yield curve and economic activity. We also find that two regimes are closely related to the business cycle and monetary policy. Finally, we find that the proposed regime-switching model with macro factors is competitive in the out-of-sample forecasting of bond yields.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
3.
Average skewness matters Jondeau, Eric; Zhang, Qunzi; Zhu, Xiaoneng
Journal of financial economics,
10/2019, Volume:
134, Issue:
1
Journal Article
Peer reviewed
Average skewness, which is the average of monthly skewness values across firms, performs well at predicting future market returns. This prediction still holds after controlling for the size or ...liquidity of the firms or for current business cycle conditions. Also, average skewness compares favorably with other economic and financial predictors of subsequent market returns. The asset allocation exercise based on predictive regressions also shows that average skewness generates superior performance.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
This paper investigates the out-of-sample predictability of international bond risk premia. We endogenously construct a global common Cochrane and Piazzesi (2005) factor. We find that the global ...factor strongly predicts international bond risk premia and delivers economically significant gains relative to the historical average. The forecasting power of the global factor is above and beyond the predictive power contained in country-specific factors. As predicted by economic theories, bond return forecasts appear countercyclical. We also find that the global factor is related to international economic activity.
•A global Cochrane–Piazzesi factor predicts international bond risk premia.•The global factor delivers systematic economic value.•The global factor is related to international economic activity.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
We propose a regime-switching present-value model with latent variables to jointly investigate the predictability of stock returns and dividend growth. We find that both return predictability and ...dividend growth predictability are time-varying. Interestingly, the predictability of stock returns and dividend growth is a tug-of-war contest: when dividend growth is highly predictable in the high-volatility regime, stock returns are largely unpredictable; in contrast, when dividend growth is less predictable in the low-volatility regime, stock returns are significantly predictable. We also investigate macroeconomic determinants of regime switches and find that two regimes are intimately related to macroeconomic risk and economic activity.
We examine the macro-spanning hypothesis for bond returns in international markets. Based on a large panel of real-time macroeconomic variables that are not subject to revisions, we find that global ...macro factors have predictive power for bond returns unspanned by yield factors. Furthermore, we estimate macro-finance term structure models with the unspanned global macro factors and find that the global macro factors influence the market prices of level and slope risks and induce comovements in forward term premia in global bond markets.
This paper was accepted by David Simchi-Levi, finance.
The stock market is evolving, and investors are learning. This paper investigates the role of perpetual learning in excess return forecasts. We find that perpetual learning usually delivers ...statistically and economically significant out-of-sample gains relative to the historical average.
•Perpetual learning plays a significant role in excess return forecasts.•Perpetual learning generates economic gains in portfolio management.•The results suggest a slow learning process in the stock market.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
Abstract A well‐known puzzle in international finance is that, to predict exchange rate returns, existing predictive models often perform worse than the naive random walk (RW) model. In this paper, ...we construct an oil trend factor which performs better than the RW model. More importantly, an oil‐trend‐based dynamic trading strategy can generate superior economic values. This result holds in both developed and emerging markets, with different forecasting horizons, with different specifications of trend factors, and across different currencies. Finally, we explore the economic link for the powerful predictability of the oil trend factor.
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BFBNIB, CEKLJ, FZAB, GIS, IJS, KILJ, NLZOH, NUK, OILJ, SAZU, SBCE, SBMB, UL, UM, UPUK
Pástor and Stambaugh (2012) find that from a forward-looking perspective, stocks are more volatile in the long run than they are in the short run. We demonstrate that when the nonnegative equity ...premium (NEP) condition is imposed on predictive regressions, stocks are in fact less volatile in the long run, even after taking estimation risk and uncertainties into account. The reason is that the NEP provides an additional parameter identification condition and prior information for future returns. Combined with the mean reversion of stock returns, this condition substantially reduces uncertainty on future returns and leads to lower long-run predictive variance.
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CEKLJ, IZUM, KILJ, NUK, PILJ, SAZU, UL, UM, UPUK
•This paper investigates the effects of extreme sentiment on analyst forecast dispersion based on China's unique experimental environment during the COVID-19 pandemic.•We find extreme sentiment ...stemming from the COVID-19 pandemic leads to jumps in analyst forecast dispersion by employing manually collected data.•After controlling for common sentiment measured by air quality and investor sentiment, the effect remains.
We study the effects of extreme sentiment on analyst forecast dispersion using the COVID-19 pandemic as a natural experiment, building on China's unique experimental environment. Employing manually collected data, we find that unlike common sentiment measured by air quality and investor sentiment, extreme sentiment stemming from the COVID-19 pandemic leads to jumps in analyst forecast dispersion. After controlling for common sentiment, the effect remains. Our study suggests that jumps in analyst forecast dispersion can be explained by extreme sentiment.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
