We provide evidence using data from the G7 countries suggesting that return dispersion may serve as an economic state variable in that it reliably predicts time-variation in economic activity, market returns, the value and momentum premia and market volatility.A relatively high return dispersion predicts a deterioration in business conditions, a higher value premium, a smaller momentum premium and lower market returns.Dispersion based market and factor timing strategies outperform out-of-sample buy and hold strategies. The evidence are robust to alternative specifications of return dispersion and are not driven by US data. Return dispersion conveys incremental information relative to idiosyncratic risk.
We consider terrorism acts in G7 countries over the period 1998-2017 and examine their impact on a sample of stock market indices from 66 countries. Using an event-study methodology we find that stock markets decline significantly on the event day and on the following trading day. We further consider the investor sentiment following the attacks, based on the content of country-level news stories and social media sources, and find that indices in countries associated with higher declines in the post-event sentiment, exhibit significantly higher economic losses. Our data and results are robust to several settings; these include using samples of events from different studies, excluding the 9/11 terrorist attack from the sample of events, excluding stock market indices of G7 countries from the sample of equity data and utilizing more sophisticated event-study methodologies.
We examine the association of the Bitcoin price crash risk with economic uncertainty and behavioral factors. We show that economic uncertainty displays a negative and significant association with Bitcoin price crash risk, indicating that when economic uncertainty is high, the crash risk of Bitcoin is low. We also find that behavioral factors have a weak association with Bitcoin crash risk. Our results suggest that investors can hedge economic uncertainty by investing in Bitcoin.
We examine the association of the Bitcoin price crash risk with economic uncertainty and behavioral factors. We show that economic uncertainty displays a negative and significant association with Bitcoin price crash risk, indicating that when economic uncertainty is high, the crash risk of Bitcoin is low. We also find that behavioral factors have a weak association with Bitcoin crash risk. Our results suggest that investors can hedge economic uncertainty by investing in Bitcoin.
Alternative assets have become as important as equities and fixed income in the portfolios of major investors, and so their diversification properties are also important. However, adding five alternative assets (real estate, commodities, hedge funds, emerging markets and private equity) to equity and bond portfolios is shown to be harmful for US investors. We use 19 portfolio models, in conjunction with dummy variable regression, to demonstrate this harm over the 1997-2015 period. This finding is robust to different estimation periods, risk aversion levels, and the use of two regimes. Harmful diversification into alternatives is not primarily due to transactions costs or non-normality, but to estimation risk. This is larger for alternative assets, particularly during the credit crisis which accounts for the harmful diversification of real estate, private equity and emerging markets. Diversification into commodities, and to a lesser extent hedge funds, remains harmful even when the credit crisis is excluded.
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