This paper examines the relationship between the energy and equity markets by estimating volatility impulse response functions from a multivariate BEKK model of the Goldman Sach's Energy index and the S&P 500; in addition, we also calculate the time varying conditional correlations and time varying dynamic hedge ratios. From volatility impulse response functions, we find that low S&P 500 returns cause substantial increases in the volatility of the energy index; however, we find only a weak response from S&P 500 volatility to energy price shocks. Moreover, our dynamic hedge ratio anlysis suggests that the energy index is generally a poor hedging instrument.
This paper provides a rigorous and detailed analysis of the methods of bagging, which addresses both model and parameter uncertainty. We provide a multi-country study of bagging, of which there are very few to date, that examines out-of-sample forecasts for the G7 and a broad set of Asian countries. We find that, when portfolio weight restrictions are applied, bagging generally improves forecast accuracy and generates economic gains relative to the benchmark. Bagging also performs well compared to forecast combinations in this setting. We incorporate data mining critical values for appropriate inference on bagging and combination forecast methods. We provide new evidence that the results for bagging cannot be fully explained by data mining concerns. Finally, forecasting gains are highest for countries with high trade openness and high FDI. The potentially substantial economic gains could well be operational given the existence of index funds for most of these countries.
This paper builds on the recent debate on the in-sample and out-of-sample predictability of US aggregate returns using a wide range of predictors by providing new evidence for smaller and less market-oriented European countries.We find evidence that macro and technical predictors can (statistically) improve forecast accuracy and (economically) generate gains to investors; in contrast to the US results, predictability in our sample of European countries exists in recent data. We also find that simple forecast combinations consistently yield substantial benefits both in forecast accuracy and economic gain. For example, the magnitude of the forecasting gains for our European countries is often larger than those found for the US and other G7 countries. We provide initial evidence on the link between country characteristics and out-of-sample forecast performance. Our empirical results indicate market development is related to the forecast performance of macro variables. There is also some evidence that forecast performance is related to market size and liquidity.
This paper examines the UK equity premium over more than a century using dividend growth to estimate expectations of capital gains employing the approach of Fama and French (2002) . Over recent decades estimated equity premia implied by dividend growth have been much lower than that produced by average stock returns for the UK market as a whole; a finding corroborated by all economic sub-sectors. The empirical analysis suggests this is primarily due to a declining discount rate, during the latter part of the 20th century, which would rationally stimulate unanticipated equity price rises during this period. Thus, I conclude that historical stock returns over recent decades have been above investors' expectations. Copyright 2007 The Author Journal compilation (c) 2007 Blackwell Publishing Ltd.
We examine the relationship between managerial optimism and debt conservatism (i.e., the low-leverage puzzle). Our analysis demonstrates that optimistic tone, our time-varying optimism measure, significantly decreases leverage. This evidence supports the proposition that optimistic managers who consider external financing as unduly costly use debt conservatively. This reduced reliance on external financing can be explained by further evidence that optimistic tone significantly increases cash holdings and decreases dividend payment. The negative toneleverage relation is stronger in the presence of high insider purchase of own stocks, which confirms that optimistic tone reflects managerial optimism. This study suggests that managerial optimism can help explain the low-leverage puzzle.
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