Predictive Regression and Robust Hypothesis Testing: Predictability Hidden by Anomalous Observations

Tail risk premia and return predictability

“…Several recent studies have argued for the existence of a statistically significant link between the variance risk premium and future returns on the aggregate market portfolio, with this predictive relationship especially strong over three-to six-month horizons (see, e.g., Bollerslev, Tauchen, and Zhou, 2009;Drechsler and Yaron, 2011;Du and Kapadia, 2012;Bekaert and Hoerova, 2014;Bollerslev, Marrone, Xu, and Zhou, 2014;Camponovo, Scaillet, and Trojani, 2013;Vilkov and Xiao, 2013, among several other studies). The results from our predictability regressions complement and expand on these findings by explicitly considering the new jump tail variation measures, and the part of the variance risk premium due to jump tail risk, as separate predictor variables.…”

Predictability of stock returns of financial companies and the role of investor sentiment: A multi-country analysis

“…For this reason, we use as an alternative measure a survey-based Economic Sentiment Indicator (ESI) consisting of business and consumer surveys, and so being a broader index than CCI. 21 The overall correlation between these two measures is large and equal to 46.3% with the highest value for France (78.6%) and lowest for the U.S. (-9%). 22 Additionally, ESI might capture the role of retail investors which tend to buy and sell stocks in concert producing a systematic component that Kumar and Lee (2006) call retail investor sentiment with incremental predictive power for returns.…”

“…The impact of investor sentiment is robust across these three alternatives. Note that the negative impact of sentiment in Regime 1 is now significant, which mainly points out the special role of Australia and New Zealand, excluded from the 21 As for CCI, ESI is orthogonalized by a set of business-cycle variables (see Section 4 on the data construction and Table II in the Appendix). 22 Only the U.S., Australia (3.7%) and Switzerland (15.5%) exhibit such low correlations; the other countries are above 30%.…”

“…Nevertheless, following Fama and French (1992), the stocks of these companies were often excluded from empirical tests of return predictability because of the different role of their high leverage compared to other high leveraged firms. 3 Focusing on 1 See Keim and Stambaugh (1986), French (1988, 1989), Pesaran and Timmermann (1994, 2000, Cochrane (1999), Ang and Bekaert (2007), Bollerslev, Tauchen and Zhou (2009), Camponovo, Scaillet and Trojani (2012). Stock return predictability has been mainly investigated in the U.S. market, while the extension to other markets has been the research question of a few recent papers.…”

“…5 Among the most used business-cycle indicators we find output and consumption growth (Lettau and Ludvigson 2001), inflation (Erb, Harvey and Viskanta 1995), interest rates (Pesaran and Timmermann 1994), credit and term spreads French 1989, 1993). The most frequently used predictor among the financial variables is dividend yield which is found to have a predictive power on financial returns for different horizons (Lewellen 2004;Ang and Bekaert 2007;Camponovo, Scaillet and Trojani 2012).…”