Marginal Explanatory Power Research Articles

Firm-level investor sentiment and corporate announcement returns

Behavioural models of investor behaviour propose that sentiment affects investors’ responses to corporate announcements. As beliefs can be cross-sectionally heterogeneous, firm-specific investor sentiment may differ from aggregate levels of investor sentiment. We provide empirical evidence about the explanatory power of both firm- and market-level investor sentiment for corporate announcement returns. We demonstrate empirically that firm-level investor sentiment has marginal explanatory power beyond market-level investor sentiment for corporate announcement returns, turnover and long-run reversals. Previous studies, which focus on market-level investor sentiment measures are likely to have under-stated the economic magnitude of the role that sentiment plays in corporate announcement returns.

The impact of geopolitical uncertainty on energy volatility

Energy and geopolitics have always been closely intertwined. In this paper, we empirically investigate the impact of geopolitical uncertainty (GPR) as measured by Caldara and Iacoviello (2018) on the volatility of major energy commodities: crude oil, heating oil and natural gas. Through the framework of GARCH-MIDAS, we find strong evidence that geopolitical uncertainty exerts a significantly positive impact on energy volatilities in the long run. The results emphasize that, first, after controlling the realized volatility, fundamental variables, financial market stress and economic policy uncertainty, geopolitical uncertainty still provides marginal explanatory power. Second, regarding to the transmission mechanism, the impact of geopolitical uncertainty on energy market is more likely to be transmitted through threats to adverse geopolitical events relative to their realizations. Third, by combining high frequency information, the GARCH-MIDAS model has a unique ability to capture long memory characters of geopolitical uncertainty and provides significant out-of-sample forecast of energy volatility. The robustness is solid with alternative proxies for geopolitical uncertainty, with GPR index constructed by search terms in French, Chinese and Arabic, with prices of energy futures, as well as with energy prices denominated in SDR.

Environment or management? Relative importance for floristic composition of sub‐Mediterranean hay meadows in Central Italy

AbstractQuestionsWhat are the separate and combined effects of natural and management factors on floristic assemblage in sub‐Mediterranean hay meadows? How are hay meadow dynamics affected by the environment excluding management?LocationCentral Apennines, Italy.MethodsVegetation was studied in 66 hay meadows by random plots, recording four groups of explanatory variables: management, soil, topography, and space. Using partial ordinations, the explanatory variables of the variation in floristic composition and plant traits were divided into sets. Then, to emphasize the relationship between purely environmental variables and vegetation, we considered only the partial ordination executed with soil and topographic variables using management and spatial data as covariables.ResultsThe soil variables had the highest marginal explanatory power. Organic matter was the main driver of floristic composition, indicating a gradient associated also with soil moisture. The pure effect of spatial variables was very important, reflecting historical processes. On the contrary, management and topography variables sets were relatively weak predictors. Partial ordination showed that two topographic variables, slope and height above the plain, had an important weight in the hay meadow floristic assemblage, influencing soil fertility.ConclusionsThis analysis (a) confirms the determining function of soil fertility and moisture in driving plant species composition and traits; (b) focuses on the marginal power of current management when past traditional agro‐pastoral activity undergoes changes in mode and intensity; (c) highlights the role of spatial variables and site history; and (d) improves knowledge about topographical factors as drivers of species composition. The maintenance of hay meadow mosaics requires preservation of grasslands in complete topographical catenae and prevention of the abandonment of parcels on steep slopes. Considering the spatial variability of the studied communities, it is necessary to include a high number of geographically and ecologically different areas in a conservation network.

Firm-Level Versus Aggregate Market Investor Sentiment: What Matters Most for Corporate Announcement Returns

Noise trader models of market behaviour propose that investor sentiment affects market responses to corporate announcements. As beliefs can be cross-sectionally heterogeneous, firm-specific investor sentiment may differ from aggregate levels of investor sentiment. Previous studies, which focus exclusively on market-level investor sentiment measures, are likely to have under-stated the economic magnitude of the role that sentiment plays in corporate announcement returns. We provide the first theoretical model for the relative importance of firm- and market-level investor sentiment for corporate announcement returns. We also demonstrate empirically that firm-level investor sentiment has marginal explanatory power beyond market-level investor sentiment for merger and acquisition announcement returns, turnover and long-run reversals. It is also shown that firm-level investor sentiment dominates when there is high divergence in investor sentiment across firms, whereas the effect of market-level investor sentiment increases during hot market periods.

Incremental variables and the investment opportunity set

Variables with strong marginal explanatory power in cross-section asset pricing regressions typically show less power to produce increments to average portfolio returns, for two reasons. (1) Adding an explanatory variable can attenuate the slopes in a regression. (2) Adding a variable with marginal explanatory power always attenuates the values of other explanatory variables in the extremes of a regression’s fitted values. Without a restriction on portfolio weights, the maximum Sharpe ratios in the GRS statistic of Gibbons, Ross, and Shanken (1989) provide little information about an incremental variable’s impact on the portfolio opportunity set.

Incremental Variables and the Investment Opportunity Set

Variables with strong marginal explanatory power in cross-section asset pricing regressions typically show less power to produce increments to average portfolio returns, for two reasons. (i) Adding an explanatory variable can attenuate the slopes in a regression. (ii) Adding a variable with marginal explanatory power always attenuates the values of other explanatory variables in the extremes of the regression’s fitted values. Without a restriction on portfolio weights, the maximum Sharpe ratios in the GRS statistic provide little information about an incremental variable’s impact on the portfolio opportunity set.

Rising complexity and falling explanatory power in ecology

Analyses of published research can provide a realistic perspective on the progress of science. By analyzing more than 18 000 articles published by the preeminent ecological societies, we found that (1) ecological research is becoming increasingly statistically complex, reporting a growing number of P values per article and (2) the value of reported coefficient of determination (R2) has been falling steadily, suggesting a decrease in the marginal explanatory power of ecology. These trends may be due to changes in the way ecology is studied or in the way the findings of investigations are reported. Determining the reason for increasing complexity and declining marginal explanatory power would require a critical review of the scientific process in ecology, from research design to dissemination, and could influence the public interpretation and policy implications of ecological findings.

VAR AND THE CROSS-SECTION OF EXPECTED STOCK RETURNS: AN EMERGING MARKET EVIDENCE

In this paper we investigate the explanatory power of the market beta, firm size, and the book-to-market ratio, as well as Value-at-Risk regarding the cross-sectional expected stock returns in a less developed stock market – Taiwan's stock market. The main purpose is to examine whether the Value-at-Risk factor has marginal explanatory power related to the Fama-French three-factor model. The empirical results show that Value-at-Risk can account for the average stock returns at both 1% and 5% significance levels based on cross-sectional regression analysis. Moreover, from the perspective of the time series regression, the Value-at-Risk factor can also demonstrate the variation of the stock market, especially for the larger companies in the Taiwan stock market.

China's Capital Controls: Through the Prism of Covered Interest Differentials

AbstractWe study the renminbi covered interest differential, an indicator of the effectiveness of capital controls. It is found that the differential is not shrinking over time and, in fact, appears larger after the global financial crisis than before. That is, capital controls in China are still substantial and effective. In addition to exchange rate changes and volatilities, the renminbi covered interest differential is affected by credit market tightness indicators. The marginal explanatory power of these macroeconomic factors, however, is small relative to the autoregressive component and the dummy variables that capture changes in China's policy.

Liquidity in asset pricing: New Australian evidence using low-frequency data

Employing a new proxy for liquidity, this paper examines its impact on stock returns in the context of the Fama-French framework. We augment the Carhart four-factor model with a liquidity factor in our asset pricing tests. Using an extensive dataset drawn from the Australian equities market, we find that liquidity explains a portion of the common variation in stock returns even after controlling for size, book-to-market and momentum. However, our findings suggest that the liquidity factor only adds marginal explanatory power to contemporary asset pricing models.

China's Capital Controls Through the Prism of Covered Interest Differentials

We study the renminbi (RMB) covered interest differential – an indicator of the effectiveness of capital controls. It is found that the differential is not shrinking over time and, in fact, appears larger after the global financial crisis than before. That is, capital controls in China are still substantial and effective. In addition to exchange rate changes and volatilities, the RMB covered interest differential is affected by credit market tightness indicators. The marginal explanatory power of these macroeconomic factors, however, is small relative to the autoregressive component and the dummy variables that capture changes in China’s policy.

China's Capital Controls - Through the Prism of Covered Interest Differentials

We study the renminbi (RMB) covered interest differential – an indicator of the effectiveness of capital controls. It is found that the differential is not shrinking over time and, in fact, appears larger after the global financial crisis than before. That is, capital controls in China are still substantial and effective. In addition to exchange rate changes and volatilities, the RMB covered interest differential is affected by credit market tightness indicators. The marginal explanatory power of these macroeconomic factors, however, is small relative to the autoregressive component and the dummy variables that capture changes in China’s policy.

The effects of childhood, adult, and community socioeconomic conditions on health and mortality among older adults in China.

Using a large, nationally representative longitudinal sample of Chinese aged 65 and older, this study examines the effects of childhood, adult, and community socioeconomic conditions on mortality and several major health outcomes. The role of social mobility is also tested. We find that childhood socioeconomic conditions exert long-term effects on functional limitations, cognitive impairment, self-rated health, and mortality independent of adult and community socioeconomic conditions. Achieved conditions matter for most outcomes as well, considering that adult and community socioeconomic conditions have additional impacts on health among Chinese elders. The majority of the effects of childhood conditions are not mediated by adult and community conditions. The results also show that social mobility and health in later life are linked in complex ways and that psychosocial factors have marginal explanatory power for the effects of socioeconomic conditions. Overall, this study provides new longitudinal evidence from China to support the notion that health and mortality at older ages are influenced by long-term and dynamic processes structured by the social stratification system. We discuss our findings in the context of the life course and ecological perspective, emphasizing that human development is influenced by a nexus of social experiences that impact individuals throughout life.

The Importance of the Relationship between OPEC Oil Prices and Gulf Cooperating Economy Banking Stock Returns

The Gulf Cooperating Countries (GCC), which include Saudi Arabia and Kuwait, dominate other OPEC cartel countries in oil production. The GCC banking industry is the major component of the GCC stock market. The issue arises as to the strength of the relationship between OPEC oil price returns and GCC banking returns. The OPEC oil market and the GCC stock markets cannot be described as efficient. First order serial correlation exists in level series OPEC prices and in the GCC bank returns index values and in the returns of OPEC oil prices and banking index values. Regression models of unlagged price returns and index returns possess marginal explanatory power with a small positive relationship. A vector autoregressive model on lagged data also indicates this. However, the variables are cointegrated on an optimal one period lag. A vector error correction model indicates a stronger relationship between the variables than originally indicated. It appears that positive one-way causality runs significantly from GCC banking returns to OPEC oil price returns. These relationships are supported by impulse response analysis and variance decomposition. Despite lack of market efficiency, the question needs to be asked as to whether or not increased GCC banking returns partially influence the decisions by the OPEC cartel to restrict production and increase prices. The study should be of interest to regional bankers and economists. The findings reconfirm the interdependence and the importance of the banking industry and the oil industry in the GCC economies. The GCC needs to open stock markets to foreign investment and diversify away from oil dependence.

Alternative factor specifications, security characteristics, and the cross-section of expected stock returns

We examine the relation between stock returns, measures of risk, and several non-risk security characteristics, including the book-to-market ratio, firm size, the stock price, the dividend yield, and lagged returns. Our primary objective is to determine whether non-risk characteristics have marginal explanatory power relative to the arbitrage pricing theory benchmark, with factors determined using, in turn, the Connor and Korajczyk (CK; 1988) and the Fama and French (FF; 1993b) approaches. Fama–MacBeth-type regressions using risk adjusted returns provide evidence of return momentum, size, and book-to-market effects, together with a significant and negative relation between returns and trading volume, even after accounting for the CK factors. When the analysis is repeated using the FF factors, we find that the size and book-to-market effects are attenuated, while the momentum and trading volume effects persist. In addition, Nasdaq stocks show significant underperformance after adjusting for risk using either method.

The Role of Book Value in Equity Valuation: Does the Stock Variable Merely Proxy for Relevant Past Flows?

We propose an alternative explanation for the value-relevance of book value. Specifically, we suggest that book value can have an indirect role in valuation even under an earnings capitalization framework. We first show that past earnings are relevant for valuation (in addition to current earnings) when earnings have transitory components. Next, we argue that book value may correlate with stock price simply because it aggregates past (and current) earnings. That is, the stock variable does not have a direct role in valuation (in the sense of representing the net assets of the firm). Rather, its role arises indirectly because it proxies for past flows. Our findings are consistent with our predictions. We find that past earnings provide incremental explanatory power beyond that provided by current earnings. More important, we find that a model of current and past earnings outperforms a model of current earnings and book value in terms of explanatory power. Our results are striking when we split our sample into profit firms and loss firms. For profit firms we report that book value provides no incremental explanatory power beyond that provided by current and past earnings. However, for loss firms book value provides significant incremental explanatory power while current and past earnings provide only marginal explanatory power. This suggests a very restrictive direct role for book value in equity valuation, that is as a proxy for the firm's abandonment or liquidation value.

Stock-Market Equilibrium and the Dividend Yield

Can fundamentals account for the recent performance of the U.S. stock market? The price/earnings ratio is out of line with historical averages, and the dividend/price ratio has recently reached a historic low. These developments and record levels of inflows into mutual funds have led some to conclude that stock prices are above their fundamental levels. This paper assesses the recent rise in the stock market using a model for the equilibrium dividend/price ratio. While economic variables can account for most of the recent fall in the dividend/price ratio, mutual-fund inflows still have some marginal explanatory power.

Stock-Market Equilibrium and the Dividend Yield

Can fundamentals account for the recent performance of the U.S. stock market? The price/earnings ratio is out of line with historical averages, and the dividend/price ratio has recently reached a historic low. These developments and record levels of inflows into mutual funds have led some to conclude that stock prices are above their fundamental levels. This paper assesses the recent rise in the stock market using a model for the equilibrium dividend/price ratio. While economic variables can account for most of the recent fall in the dividend/price ratio, mutual-fund inflows still have some marginal explanatory power.

A Multivariate Time-Series Investigation of Annual Returns on Highest Grade Corporate Bonds

It involves a study of the structural relationships among variables selected primarily on the basis of their a priori theoretical soundness. For confirmation of the specified theoretical relationships, the Wherry-Doolittle procedure was used both to assist in the selection process among groups of regressor variables and to rank the variables in each group on the basis of their largest marginal explanatory power. The concern of the investigation was with financial market relationships, and no attempt was made to find a general solution to a larger economic model.1