{"title":"Certainty of uncertainty for asset pricing","authors":"Fuwei Jiang , Jie Kang , Lingchao Meng","doi":"10.1016/j.jempfin.2024.101501","DOIUrl":"10.1016/j.jempfin.2024.101501","url":null,"abstract":"<div><p>Uncertainty is known to be crucial in asset pricing, yet evidence from a comprehensive analysis of various uncertainty measures remains sparse. By machine learning, we construct a novel economic uncertainty index derived from a heterogeneous range of uncertainty measures and investigate its predictability of stock returns. Our composite uncertainty index exhibits robust in- and out-of-sample predictability of stock market returns over the one- to 12-month horizon. The predictive power stems from the volatility-orthogonal components of individual uncertainty measures and becomes more pronounced during high uncertainty and high sentiment periods. The predictability of our economic uncertainty index aligns with theoretical frameworks linking uncertainty to future investment, cash flows, and market expectations.</p></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"78 ","pages":"Article 101501"},"PeriodicalIF":2.1,"publicationDate":"2024-05-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141047505","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Walter I. Boudry , Crocker H. Liu , Tobias Mühlhofer , Walter N. Torous
{"title":"Assessing proxies for market prices of thinly traded assets with scheduled cash flows","authors":"Walter I. Boudry , Crocker H. Liu , Tobias Mühlhofer , Walter N. Torous","doi":"10.1016/j.jempfin.2024.101499","DOIUrl":"10.1016/j.jempfin.2024.101499","url":null,"abstract":"<div><p>Pseudo-market prices of infrequently traded assets with scheduled cash flows – commercial real estate appraisals and matrix prices of commercial mortgage backed securities – are compared against a VAR model to assess the extent to which these widely-used proxies are grounded in economic fundamentals. Property appraisals fail to fully incorporate the economic fundamentals underlying commercial real estate transactions. During the financial crisis, CMBS matrix prices captured underlying economic fundamentals and exhibited little pricing bias. However, matrix prices no longer exhibited such economic discipline after the financial crisis. Incorporating VAR forecasts considerably improves the predictive ability of appraisals and matrix prices.</p></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"78 ","pages":"Article 101499"},"PeriodicalIF":2.6,"publicationDate":"2024-05-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141030501","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Global and local information efficiency: An examination of samuelson's dictum","authors":"Yaqing Xiao , Hongjun Yan , Jinfan Zhang","doi":"10.1016/j.jempfin.2024.101500","DOIUrl":"10.1016/j.jempfin.2024.101500","url":null,"abstract":"<div><p>The global version of Samuelson's Dictum is the conjecture that there is more informational inefficiency for <em>global</em> information than for <em>country-specific</em> information. Consistent with this conjecture, we find that sovereign CDS spreads can predict future sovereign bond yields of their underlying countries and this predictive power arises almost entirely from CDS spread's global—rather than country-specific—component. Noting the striking similarities between the evidence in stock and sovereign bond markets, we examine the underlying mechanism for the results in both markets in parallel and find further similarities across these two markets. In both cases, information appears to flow in one direction: from the sovereign CDS market to stock and sovereign bond markets and not the other way around. Information transmission occurs mostly during the days surrounding announcements of credit-rating or outlook changes, especially downgrades. These results are broadly consistent with a setup in which information acquisition and processing is costly.</p></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"77 ","pages":"Article 101500"},"PeriodicalIF":2.6,"publicationDate":"2024-05-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141057718","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Yuanyuan Zhang , Qian Zhang , Zerong Wang , Qi Wang
{"title":"Option valuation via nonaffine dynamics with realized volatility","authors":"Yuanyuan Zhang , Qian Zhang , Zerong Wang , Qi Wang","doi":"10.1016/j.jempfin.2024.101486","DOIUrl":"10.1016/j.jempfin.2024.101486","url":null,"abstract":"<div><p>This paper evaluates the improvement in option pricing brought about by realized volatility (RV) through nonaffine dynamics as advocated by Christoffersen et al. (2014). We complement their studies by developing a closed-form approximation of option pricing for the nonaffine models with RV, and then study the trade-off between the degradation in data fitting and the computational convenience offered by the analytical formula. Our studies confirm the literature that the nonaffine dynamics consistently outperform the affine in option pricing. In particular, we find that RV can significantly improve return fitting and option pricing through both affine and nonaffine models. For the affine models, we find strong evidence in favor of the RV information for both returns and options; for the nonaffine models, the evidence is less convincing for option pricing. We also provide additional new evidence that RV and nonaffine structures are equally competent at improving option pricing; moreover, these two features are complements rather than substitutes for GARCH option pricing, and the importance of one feature for option pricing is further enhanced when the other is present. All of these results are robust across moneyness, maturity, and volatility levels, and point to the necessity of including RV in nonaffine option pricing models.</p></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"77 ","pages":"Article 101486"},"PeriodicalIF":2.6,"publicationDate":"2024-03-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140398979","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Do share repurchases facilitate movement toward target capital structure? International evidence","authors":"Zigan Wang , Qie Ellie Yin , Luping Yu","doi":"10.1016/j.jempfin.2024.101498","DOIUrl":"https://doi.org/10.1016/j.jempfin.2024.101498","url":null,"abstract":"<div><p>We use a new international setting to test and strengthen identification of the “target leverage” hypothesis in the payout policy literature. We conduct a quasi-natural experiment induced by staggered share repurchase legalization in 17 economies and analyze its influences on leverage dynamics. After controlling for other repurchasing motives, firms under-leveraged before legalization are more likely to buy back shares immediately after legalization. Post-legalization repurchases also facilitate firms’ movement toward target leverage, especially when firms are under-leveraged. This facilitating effect is stronger under lower repurchasing restriction, higher dividend tax penalty, and lower financial constraint.</p></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"77 ","pages":"Article 101498"},"PeriodicalIF":2.6,"publicationDate":"2024-03-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140620984","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"An empirical review of dynamic extreme value models for forecasting value at risk, expected shortfall and expectile","authors":"Claudio Candia, Rodrigo Herrera","doi":"10.1016/j.jempfin.2024.101488","DOIUrl":"10.1016/j.jempfin.2024.101488","url":null,"abstract":"<div><p>This work provides a selective review of the most recent dynamic models based on extreme value theory, in terms of their ability to forecast financial losses through different risk measures. The main characteristic of these models is that their dynamics depend only on the occurrence and magnitude of extreme events above a high threshold. Through an empirical analysis, we evaluate the predictive ability of these approaches on a set of stock market indices. In an in-sample analysis, we assess the goodness-of-fit of the different specifications. We also compare the adequacy of each model, considering how well they forecast the risk measures in the out-of-sample period. In addition, in order to identify the best-performing models, we use the model confident set procedure across different risk measures, loss functions, and score functions to identify the superior models. Finally, we identify some potential avenues for future research.</p></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"77 ","pages":"Article 101488"},"PeriodicalIF":2.6,"publicationDate":"2024-03-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140274428","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Doina Chichernea , Kershen Huang , Alex Petkevich , Pavel Teterin
{"title":"Options trading imbalance, cash-flow news, and discount-rate news","authors":"Doina Chichernea , Kershen Huang , Alex Petkevich , Pavel Teterin","doi":"10.1016/j.jempfin.2024.101491","DOIUrl":"10.1016/j.jempfin.2024.101491","url":null,"abstract":"<div><p>Using publicly available information on option volume totals, we develop new measures of directional option-to-stock (O/S) trading volume imbalance. The novel measures are strongly related to the cash-flow (CF) and discount-rate (DR) news components of unexpected stock returns and consistently predict future abnormal performance. While options markets respond more strongly to CF news than do equity markets, they still do not fully incorporate CF news into prices and therefore lead to returns predictability. This underreaction phenomenon is of smaller magnitude when the options market response is stronger and when short-sale constraints are less binding.</p></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"77 ","pages":"Article 101491"},"PeriodicalIF":2.6,"publicationDate":"2024-03-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140268906","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Factor correlation and the cross section of asset returns: A correlation-robust machine learning approach","authors":"Chuanping Sun","doi":"10.1016/j.jempfin.2024.101497","DOIUrl":"10.1016/j.jempfin.2024.101497","url":null,"abstract":"<div><p>This paper investigates high-dimensional factor models for cross-sectional asset returns, with a specific focus on robust estimation in the presence of (highly) correlated factors. Factor correlations can significantly compromise the robustness and credibility of commonly employed analytical methods. To address this, we utilize the stochastic discount factor (SDF) and integrate it with a recently developed Machine Learning methodology (Figueiredo and Nowak, 2016). This novel approach allows us to select factors while accounting for factor correlations and to disentangle correlated factors without imposing rigid assumptions. Our empirical findings consistently highlight the paramount role of the ‘market’ factor in driving cross-sectional asset returns. In contrast, other benchmarks, including the LASSO, the Elastic-Net, and the Fama–MacBeth regression, are adversely impacted by factor correlations, rendering the ‘market’ factor redundant. Additionally, our findings underscore the importance of ‘profitability’, ‘momentum’, and ‘liquidity’-related factors in driving cross-sectional asset returns.</p></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"77 ","pages":"Article 101497"},"PeriodicalIF":2.6,"publicationDate":"2024-03-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140196595","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Aggregate portfolio choice","authors":"Joachim Inkmann","doi":"10.1016/j.jempfin.2024.101494","DOIUrl":"https://doi.org/10.1016/j.jempfin.2024.101494","url":null,"abstract":"<div><p>Important portfolio choice decisions are made for large groups of heterogeneous individual investors. I propose solving the cross-sectional average of the individual Euler equations to find an optimal portfolio for an aggregate of investors under one-size-fits-all constraints. Using a dynamic portfolio choice model to design balanced default funds for 72 hypothetical industry pension plans, the average Euler equations depend on industry-specific per-capita earnings growth and moments of idiosyncratic earnings shocks. Inter-industry heterogeneity in moments of the joint distribution of earnings growth and the return on risky assets, including correlation and cokurtosis, explains the variation in optimal choice variables across industries.</p></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"77 ","pages":"Article 101494"},"PeriodicalIF":2.6,"publicationDate":"2024-03-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S092753982400029X/pdfft?md5=46eae4243eba34599ebdc1befa055d9c&pid=1-s2.0-S092753982400029X-main.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140179885","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Information acquisition and processing skills of institutions and retail investors around information shocks","authors":"Scott Fung , Khaled Obaid , Shih-Chuan Tsai","doi":"10.1016/j.jempfin.2024.101495","DOIUrl":"10.1016/j.jempfin.2024.101495","url":null,"abstract":"<div><p>Using audit trail data from the Taiwan Stock Exchange, this paper compares the trading skill of institutions and individuals around information shocks. We find suggestive evidence that institutions possess information acquisition and processing advantages over individuals. Specifically, net buying done by institutions (individuals) prior to and during jumps positively (negatively) predicts future intraday returns. This predictive relation is strongest among stocks with high limits to arbitrage and a limited information environment. Moreover, domestic institutions generate higher trading profits than foreign institutions. Unlike domestic institutions, the information acquisition and processing advantages of foreign institutions prevail across different sources of price jumps, such as prescheduled events and macroeconomic news. Prescheduled events and news lessen the information disadvantages for individuals.</p></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"77 ","pages":"Article 101495"},"PeriodicalIF":2.6,"publicationDate":"2024-03-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://www.sciencedirect.com/science/article/pii/S0927539824000306/pdfft?md5=af9135a1f75ddd3d3bce98945d62d830&pid=1-s2.0-S0927539824000306-main.pdf","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140271173","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}