Academic Abstracts monitor In April.:: Macquarie Research

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Quantitative Analysis
Academic Abstracts monitor
In April, we saw many interesting research papers in the published journals as
well as in the SSRN working papers.
Some of the ideas that caught our attention are…
 Predicting stock market returns – Bakshi, Panayotov and Skoulakis find
that the Baltic Dry Index predicts stock market returns in various countries and
for regional indices. Also, it is useful to predict returns of commodity indexes.
Neeley, Rapach, Tu and Zhou document the power of various technical
indicators such as moving averages, momentum and volume-based
measures to predict equity risk premiums, which is especially potent in
cyclical peaks.

 New Measures of Risk – Bollerslev and Todorov develop a ―fear index‖ that
estimates rare disasters from jump tails, and find that it explains a large
fraction of the average equity risk premium. This index suggests a large,
time-varying compensation for fears of disasters. In another paper in the
same vein, Bali, Cakici and Chabi-Yo, propose a stock-level risk measure
implied by option prices to predict stock returns. They find a significant
negative relation between this option implied measure of risk and future stock
returns.
 Predictive power of Idiosyncratic Volatility – Han and Lesmond argue that
liquidity biases such as zero daily returns and bid-ask spreads cause a
spurious relation between idiosyncratic volatility and future returns.
Consistent with this explanation, the cross-sectional relation is weaker in the
post- 2001 decimalization period, when such liquidity biases were lower.
 Interpreting Stock Market downturns – Campbell, Giglio and Polk study the
downturns in 2000-02 and 2007-09 to explain their causes. They use a vector
autoregressive model of stock market returns and valuations to extract
information about future corporate profits. They conclude that the market
decline in early 2000s was caused by an increase in discount rate, while in
late 2000s expectations of future profits were revised down dramatically.
 Word Power in 10-K filings – Jegadeesh and Wu present a new approach to
determine the tone of 10-K filings based on strength of words used. They find
that their measure of positive/negative tone is significantly related to the filing
period stock returns.
 Reactions to Stale Information – Tetlock examines whether individual
investors overreact to stale news stories that were previously reported.
Though stock returns respond less to stale news items, he finds that return on
the day of the stale news is negatively related to return in the following week.
This over-reaction effect is especially seen for stocks with higher individual
investor trading activity.