Fundamentals Versus Contagion Proxies to Explain Financial Assets Price Changes

Abstract

There is a general consensus that expected returns are notoriously difficult to predict for many reasons, including modeling and econometric problems. The bubble and contagion literature proposes fundamentals and contagion proxies as explanatory of financial asset's price changes. This paper uses mean and semiparametric methods to analyze the explanatory value of some of these variables. The goal of this study is to determine which variables have higher explanatory value as well as their differential impact throughout the distribution of returns. The findings suggest that none of the twelve different models used to proxy fundamentals have any explanatory value for price changes. The three models used to proxy contagion variables are found significant regardless of the methodology used: OLS, panel data or quantile regression. Also, in the three models, the effect of the independent variable is found to increase with the quantile.