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on Financial Markets |
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Issue of 2024‒07‒22
six papers chosen by |
| By: | Natalia Roszyk (University of Warsaw, Faculty of Economic Sciences, Quantitative Finance Research Group); Robert Ślepaczuk (University of Warsaw, Faculty of Economic Sciences, Quantitative Finance Research Group, Department of Quantitative Finance and Machine Learning) |
| Abstract: | Predicting the S&P 500 index's volatility is crucial for investors and financial analysts as it helps in assessing market risk and making informed investment decisions. Volatility represents the level of uncertainty or risk related to the size of changes in a security's value, making it an essential indicator for financial planning. This study explores four methods to improve the accuracy of volatility forecasts for the S&P 500: the established GARCH model, known for capturing historical volatility patterns; an LSTM network that utilizes past volatility and log returns; a hybrid LSTM-GARCH model that combines the strengths of both approaches; and an advanced version of the hybrid model that also factors in the VIX index to gauge market sentiment. This analysis is based on a daily dataset that includes data for S&P 500 and VIX index, covering the period from January 3, 2000, to December 21, 2023. Through rigorous testing and comparison, we found that machine learning approaches, particularly the hybrid LSTM models, significantly outperform the traditional GARCH model. The inclusion of the VIX index in the hybrid model further enhances its forecasting ability by incorporating real-time market sentiment. The results of this study offer valuable insights for achieving more accurate volatility predictions, enabling better risk management and strategic investment decisions in the volatile environment of the S&P 500. |
| Keywords: | volatility forecasting, LSTM-GARCH, S&P 500 index, hybrid forecasting models, VIX index, machine learning, financial time series analysis, walk-forward process, hyperparameters tuning, deep learning, recurrent neural networks |
| JEL: | C4 C45 C55 C65 G11 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:war:wpaper:2024-13 |
| By: | Elie Bouri (School of Business, Lebanese American University, Lebanon); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Asingamaanda Liphadzi (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Christian Pierdzioch (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Ham- burg, Germany) |
| Abstract: | We analyze whether changes in temperature anomalies, and its second, third, and fourth moments, carry valuable information in forecasting historical stock returns volatility of Canada, France, Germany, Italy, Japan, the United Kingdom (UK), and the United States (US), i.e., the G7 countries, after controlling for leverage, skewness and (excess) kurtosis of stock price fluctuations. Using centuries of monthly data, covering the period 1915-2024 for Canada and Italy, 1898-2024 for France, 1870-2024 for Germany, 1914-2024 for Japan, 1693-2024 for the UK, and 1791-2024 for the US, the results show that stock market moments matter more than climate risks for accurately forecasting stock returns volatility. Extended analyses confirm that climate risks are already captured by the moments of stock returns. We discuss the implications of our findings for investment decisions and economic policy. |
| Keywords: | Stock market, Volatility, Forecasting, Moments, Climate risks, G7 countries |
| JEL: | C22 C32 C53 G10 G17 Q54 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:pre:wpaper:202424 |
| By: | Yuichi Fukuta (Graduate School of Economics, Osaka University); Akiko Yamane (Graduate School of Humanities and Social Sciences, Hiroshima University) |
| Abstract: | We present novel insights into the Japanese equity return term structure by examining the re- versals of risk-adjusted returns on duration-sorted portfolios, as were particularly observed during the COVID-19 pandemic and are common during crises. Our analysis, conducted over the Japanese stock market from 1990 to 2022, reveals that market uncertainty significantly explains the returns of the long-short duration portfolio. Additionally, we find that the countercyclicality of the equity term structure can be attributed to di erences in the response of returns to considerably large neg- ative shocks. This study contributes to the understanding of the relationship between the timing of cash ows and stock returns and o ers valuable implications for studies on the cross-section of stock returns. |
| Keywords: | equity duration; cross-section of stock returns; market uncertainty; financial crisis; pan- demic |
| JEL: | G12 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:osk:wpaper:2408 |
| By: | Niels Joachim Gormsen; Kilian Huber |
| Abstract: | We study hand-collected data on firms’ perceptions of their cost of capital. Firms with higher perceived cost of capital earn higher returns on invested capital and invest less, suggesting that the perceived cost of capital shapes long-run capital allocation. The perceived cost of capital is partially related to the true cost of capital, which is determined by risk premia and interest rates, but there are also large deviations between the perceived and true cost of capital. Only 20% of the variation in the perceived cost of capital is justified by variation in the true cost of capital. The remaining 80% reflects deviations that are consistent with managers making mistakes. These deviations lead to misallocation of capital that lowers long-run aggregate productivity by 5% in a benchmark model. Forcing all firms to apply the same cost of capital would improve the allocation of capital relative to current corporate practice. The deviations in the perceived cost of capital challenge standard models, in particular the production-based asset pricing paradigm, and lead us to reject the “Investment CAPM.” We describe actionable methods that allow firms to improve their perceptions and capital allocation. |
| JEL: | E44 G1 G3 G4 O47 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32611 |
| By: | Cavallo, Eduardo A.; Cepeda, Ana; Panizza, Ugo |
| Abstract: | This paper studies the interplay between environmental performance and financial valuation of firms in Latin America and the Caribbean. We provide insights into how environmental considerations are integrated into financial decision-making and investor behavior by analyzing the stock market reaction to environmental news of firms with different levels of carbon emission intensity. We find that high emission intensity firms tend to underperform after the release of environmental damage news. Our baseline estimates indicate that, after the release of such news, firms at the 75th percentile of the distribution of emission intensity experience stock returns that are 17% lower than those of firms at the 25th percentile of the distribution of emission intensity. These results suggest that investors care about and price carbon risk, but only when this risk is salient. |
| Keywords: | Carbon emissions;climate change;Environmental news;Stock returns |
| JEL: | G12 G14 G18 G32 G38 Q54 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13537 |
| By: | Pandey, Radhika (National Institute of Public Finance and Policy); Mehta, Madhur (National Institute of Public Finance and Policy); Ramakrishnan, Bency (National Institute of Public Finance and Policy); Saksena, Utsav (National Institute of Public Finance and Policy) |
| Abstract: | This paper presents a comprehensive set of stylised facts on state governmentdebt markets in India.Based on the analysis of facts, it highlights some challenges pertaining to the debt market for states.Shallow liquidity, absence of risk asymmetry and concentrated borrowings by a few the realm of state market borrowings.The paperproposes some policy reforms to improve efficient and functional market for state government securities in India. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:npf:wpaper:24/410 |