Getting Paid to Hedge: Why Don’t Investors Pay a Premium to Hedge Downturns?

2018 ◽  
Vol 54 (3) ◽  
pp. 1157-1192
Author(s):  
Nishad Kapadia ◽  
Barbara Bennett Ostdiek ◽  
James P. Weston ◽  
Morad Zekhnini
Keyword(s):  
Gross Domestic Product ◽  
Business Cycle ◽  
Expected Returns ◽  
Firm Characteristics ◽  
Cycle Frequency ◽  
Gross Domestic Product Growth ◽  
Market Index ◽  
Ex Ante ◽  
Out Of Sample ◽  
The Business Cycle

Stocks that hedge sustained market downturns should have low expected returns, but they do not. We use ex ante firm characteristics and covariances to construct a tradable safe minus risky (SMR) portfolio that hedges market downturns out of sample. Although downturns (peaks to troughs in market index levels at the business-cycle frequency) predict significant declines in gross domestic product growth, SMR has significant positive average returns and 4-factor alphas (both around 0.8% per month). Risk-based models do not explain SMR’s returns, but mispricing does. Risky stocks are overpriced when sentiment is high, resulting in subsequent returns of -0.9% per month.

scholarly journals Forecasting Macedonian Business Cycle Turning Points Using Qual Var Model

2016 ◽  
Vol 5 (3) ◽  
pp. 61-78
Author(s):  
Magdalena Petrovska ◽  
Aneta Krstevska ◽  
Nikola Naumovski
Keyword(s):  
Business Cycle ◽  
Predictive Power ◽  
Turning Points ◽  
Probit Model ◽  
Economic Conditions ◽  
Var Model ◽  
Leading Indicators ◽  
Out Of Sample ◽  
The Business Cycle

Abstract This paper aims at assessing the usefulness of leading indicators in business cycle research and forecast. Initially we test the predictive power of the economic sentiment indicator (ESI) within a static probit model as a leading indicator, commonly perceived to be able to provide a reliable summary of the current economic conditions. We further proceed analyzing how well an extended set of indicators performs in forecasting turning points of the Macedonian business cycle by employing the Qual VAR approach of Dueker (2005). In continuation, we evaluate the quality of the selected indicators in pseudo-out-of-sample context. The results show that the use of survey-based indicators as a complement to macroeconomic data work satisfactory well in capturing the business cycle developments in Macedonia.

scholarly journals Inequality over the business cycle: the role of distributive shocks

2021 ◽  
pp. 1-30
Author(s):  
Marius Clemens ◽  
Ulrich Eydam ◽  
Maik Heinemann
Keyword(s):  
Income Inequality ◽  
Income Distribution ◽  
Business Cycle ◽  
Parameter Estimates ◽  
Panel Estimation ◽  
Bayesian Techniques ◽  
Elasticity Of Intertemporal Substitution ◽  
Ex Ante ◽  
The Business Cycle

Abstract This paper examines how wealth and income inequality dynamics are related to fluctuations in the functional income distribution over the business cycle. In a panel estimation for OECD countries between 1970 and 2016, although inequality is, on average countercyclical and significantly associated with the capital share, one-third of the countries display a pro- or noncyclical relationship. To analyze the observed pattern, we incorporate distributive shocks into an RBC model, where agents are ex ante heterogeneous with respect to wealth and ability. We find that whether wealth and income inequality behave countercyclically or not depends on the elasticity of intertemporal substitution and the persistence of shocks. We match the model to quarterly US data using Bayesian techniques. The parameter estimates point toward a non-monotonic relationship between productivity and inequality fluctuations. On impact, inequality increases in response to TFP shocks but subsequently declines. Furthermore, TFP shocks explain 17% of inequality fluctuations.

scholarly journals Towards the Estimation of an Efficient Benchmark Portfolio: The Case of Croatian Emerging Market

2017 ◽  
Vol 20 (s1) ◽  
pp. 13-23 ◽  
Author(s):  
Denis Dolinar ◽  
Davor Zoričić ◽  
Antonija Kožul
Keyword(s):  
Emerging Market ◽  
Expected Returns ◽  
Trade Off ◽  
Risk Return ◽  
Market Index ◽  
Benchmark Portfolio ◽  
Out Of Sample ◽  
Shrinkage Method ◽  
Research Findings ◽  
To Come

Abstract The fact that cap-weighted indices provide an inefficient risk-return trade-off is well known today. Various research approaches evolved suggesting alternative to cap-weighting in an effort to come up with a more efficient market index benchmark. In this paper we aim to use such an approach and focus on the Croatian capital market. We apply statistical shrinkage method suggested by Ledoit and Wolf (2004) to estimate the covariance matrix and follow the work of Amenc et al. (2011) to obtain estimates of expected returns that rely on risk-return trade-off. Empirical findings for the proposed portfolio optimization include out-of-sample and robustness testing. This way we compare the performance of the capital-weighted benchmark to the alternative and ensure that consistency is achieved in different volatility environments. Research findings do not seem to support relevant research results for the developed markets but rather complement earlier research (Zoričić et al., 2014).

A BIVARIATE AUTOREGRESSIVE PROBIT MODEL: BUSINESS CYCLE LINKAGES AND TRANSMISSION OF RECESSION PROBABILITIES

2013 ◽  
Vol 18 (4) ◽  
pp. 838-862 ◽  
Author(s):  
Henri Nyberg
Keyword(s):  
Business Cycle ◽  
Probit Model ◽  
The United States ◽  
Financial Variables ◽  
Method Of Maximum Likelihood ◽  
Special Cases ◽  
Out Of Sample ◽  
Explicit Formulae ◽  
The Business Cycle ◽  
The U.S

I propose a new binary bivariate autoregressive probit model of the state of the business cycle. This model nests various special cases, such as two separate univariate probit models used extensively in the previous literature. The parameters are estimated by the method of maximum likelihood and forecasts can be computed by explicit formulae. The model is applied to predict the U.S. and German business cycle recession and expansion periods. Evidence of in-sample and out-of-sample predictability of recession periods by financial variables is obtained. The proposed bivariate autoregressive probit model allowing links between the recession probabilities in the United States and Germany turns out to outperform two univariate models.

Leading Indicators of German Business Cycles. An Assessment of Properties / Frühindikatoren der deutschen Konjunktur. Eine Beurteilung ihrer Eigenschaften

2002 ◽  
Vol 222 (3) ◽  
Author(s):  
Ulrich Fritsche ◽  
Sabine Stephan
Keyword(s):  
Business Cycle ◽  
Predictive Power ◽  
Frequency Domain Analysis ◽  
Leading Indicators ◽  
Reference Series ◽  
Out Of Sample ◽  
Causality Tests ◽  
Short Run ◽  
The Business Cycle ◽  
German Data

SummaryA reliable leading indicator should possess the following properties: (1) The movements in the indicator series should resemble those in the business cycle reference series. (2) The relation between the reference series and the indicator should be statistically significant and stable over time. (3) The inclusion of the indicator in out-of-sample forecasting procedures should improve the predictive power. Our analysis deals with tests for these requirements applied to German data. We used frequency domain analysis, different Granger-causality tests and out-of sample forecasts. Only few indicators passed all tests. Their inclusion into VAR-based forecasts improves the forecast in the very short run. Further research should concentrate on the unsolved problem of the prediction of business cycle turning points.

scholarly journals Measuring the Business Cycle Chronology with a Novel Business Cycle Indicator for Germany

2021 ◽  
Author(s):  
Agnieszka Gehringer ◽  
Thomas Mayer
Keyword(s):  
Principal Component Analysis ◽  
Time Series ◽  
Gross Domestic Product ◽  
Business Cycle ◽  
Economic Activity ◽  
Principal Component ◽  
Economic Time Series ◽  
Economic Time ◽  
The Business Cycle ◽  
Cycle Indicator

AbstractThis paper introduces a Business Cycle Indicator to compile a transparent and reliable chronology of past business cycle turning points for Germany. The Indicator is derived applying the statistical method of Principal Component Analysis, based on information from 20 economic time series. In this way, the Business Cycle Indicator grasps the development of the broader economic activity and has several advantages over a business cycle assessment based on quarterly series of Gross Domestic Product.

Mismatch

2007 ◽  
Vol 97 (4) ◽  
pp. 1074-1101 ◽  
Author(s):  
Robert Shimer
Keyword(s):  
Business Cycle ◽  
Labor Markets ◽  
Dynamic Model ◽  
Duration Dependence ◽  
Cycle Frequency ◽  
Separation Rate ◽  
The Business Cycle ◽  
Job Finding

This paper develops a dynamic model of mismatch. Workers and jobs are randomly allocated to labor markets. Each market clears, but some have excess (unemployed) workers and some have excess (vacant) jobs. As workers and jobs switch markets, unemployed workers find vacancies and employed workers become unemployed. The model is quantitatively consistent with the business cycle frequency comovement of unemployment, vacancies, and the job finding rate and explains much of these variables' volatility. It can also address cyclicality in the separation rate into unemployment and duration dependence in the job finding rate. The results are robust to some nonrandom mobility. (JEL E24, J41, J63, J64)

Sign in / Sign up

Export Citation Format

Share Document