Fundamental Index Aligned and Excess Market Return Predictability

In this paper, we study the skewness risk and its return predictability in the energy market. Skewness risk is often used to measure the possibility of market crash. We study both physical skewness (market skewness and cross-sectional average realized skewness) estimated from underlying stock returns and risk-neutral skewness evaluated from the options market. We find a significant positive relationship between one-month-ahead market return and average realized skewness in the energy market. This unique feature should be noted by investors and carefully considered by energy policymakers.

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Trade Policy Uncertainty, Market Return, and Expected Return Predictability

Journal of Finance and Economics ◽

10.12691/jfe-9-3-2 ◽

2021 ◽

Vol 9 (3) ◽

pp. 106-114

Author(s):

Frederick Adjei ◽

Mavis Adjei

Keyword(s):

Trade Policy ◽

Return Predictability ◽

Policy Uncertainty ◽

Expected Return ◽

Market Return ◽

Trade Policy Uncertainty

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Stock market implications of Fed's balance sheet size

Journal of Economic Studies ◽

10.1108/jes-09-2020-0437 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Asif M. Ruman

Keyword(s):

Monetary Policy ◽

Stock Market ◽

Central Bank ◽

Market Performance ◽

Balance Sheet ◽

Return Predictability ◽

Unconventional Monetary Policy ◽

Content Type ◽

Market Return ◽

Stock Market Performance

PurposeConsidering the relationship between the central bank balance sheet and unconventional monetary policy after the 2008 financial crisis, it is crucial to see how the unconventional monetary policy, given near-zero interest rates, affects future stock market performance. This paper analyzes the impact of the Fed's balance sheet size on stock market performance.Design/methodology/approachTo analyze the Fed's balance sheet size's long-term stock market implications, this paper uses the asset pricing framework of market return predictability such as Ordinary least squares (OLS) and Generalized method of moments (GMM) analysis.FindingsFindings in this paper suggest that the Fed's balance sheet size, deflated by asset market wealth, presents evidence of return predictability during 1926–2015 that is robust against standard controls. These results can be explained through the redistribution of risk and the wealth channels of monetary policy transmission. The changing balance sheet size of a central bank (1) affects systemic risk, yields and expectations and (2) signals the future direction of monetary policy and thus economic outlook.Research limitations/implicationsThe main implication of these findings is that policymakers should avoid a severe imbalance between a central bank's balance sheet size and assets market wealth.Originality/valueThe empirical evidence in this paper documents a century-old relation between the Fed's balance sheet size and US stock market return using the Fed's balance sheet data for the last 100 years and stock market returns from the Center for research in security prices (CRSP) database.

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