US Returns Research Articles

US efficient factors in a Bayesian model scan framework

PurposeThe author examines the impact these efficient factors have on factor model comparison tests in US returns using the Bayesian model scan approach of Chib et al. (2020), and Chib et al.(2022).Design/methodology/approachEhsani and Linnainmaa (2022) show that time-series efficient investment factors in US stock returns span and earn 40% higher Sharpe ratios than the original factors.FindingsThe author shows that the optimal asset pricing model is an eight-factor model which contains efficient versions of the market factor, value factor (HML) and long-horizon behavioral factor (FIN). The findings show that efficient factors enhance the performance of US factor model performance. The top performing asset pricing model does not change in recent data.Originality/valueThe author is the only one to examine if the efficient factors developed by Ehsani and Linnainmaa (2022) have an impact on model comparison tests in US stock returns.

Confrontation between the United States and Iran: dynamics and results of nuclear negotiations under the Joe Biden administration

Election promises made by Joe Biden's team have raised hopes of a US return to the Iran nuclear deal. The article evaluates the initial parameters of a possible resumption of US participation in the nuclear agreement, analyzes the evolution of Biden's approaches to their implementation and examines the reaction of the Iranian side. The key factors that contributed to the change in US policy towards the previous strategy of coercion and pressure on Iran are identified. It concludes that the delay in the start of negotiations and the desire to renegotiate the original nuclear agreement by putting forward additional restrictions on Iran, along with the Biden administration's failure to ease sanctions, were the main reasons for the failure of the negotiations. The Biden administration currently does not have a clear policy regarding Iran and its nuclear program.

PORTFOLIO CHOICE WITH TIME HORIZON RISK

I study the allocation problem of investors who hold their portfolio until reaching a target wealth. The strategy suppresses final wealth uncertainty but creates a time horizon risk. I begin with a classical mean variance model transposed in the duration domain, then study a dynamic portfolio choice problem with Generalized Expected Discounted Utility preferences. Using long-term US return data, I show in the mean variance model that a large amount of time horizon risk can be diversified away by investing a significant share of equities. In the dynamic model, more impatient investors are also more averse to timing risk and invest less in equities. The optimal equity share is downward trending as accumulated wealth approaches its target.

The cost-effectiveness of a virtual intervention to prevent eating disorders in young women in Sweden.

To determine the cost-effectiveness of a virtual version of the Body Project (vBP), a cognitive dissonance-based program, to prevent eating disorders (ED) among young women with a subjective sense of body dissatisfaction in the Swedish context. A decision tree combined with a Markov model was developed to estimate the cost-effectiveness of the vBP in a clinical trial population of 149 young women (mean age 17 years) with body image concerns. Treatment effect was modeled using data from a trial investigating the effects of vBP compared to expressive writing (EW) and a do-nothing alternative. Population characteristics and intervention costs were sourced from the trial. Other parameters, including utilities, treatment costs for ED, and mortality were sourced from the literature. The model predicted the costs and quality-adjusted life years (QALYs) related to the prevention of incidence of ED in the modeled population until they reached 25 years of age. The study used both a cost-utility and return on investment (ROI) framework. In total, vBP yielded lower costs and larger QALYs than the alternatives. The ROI analysis denoted a return of US $152 for every USD invested in vBP over 8 years against the do-nothing alternative and US $105 against EW. vBP is likely to be cost-effective compared to both EW and a do-nothing alternative. The ROI from vBP is substantial and could be attractive information for decision makers for implementation of this intervention for young females at risk of developing ED. This study estimates that the vBP is cost-effective for the prevention of eating disorders among young women in the Swedish setting, and thus is a good investment of public resources.

Two pathways to Mexico: Forced deportation or voluntary return of parents and US citizen children.

Hundreds of thousands of undocumented Mexican immigrants were deported from the United States or returned to Mexico voluntarily in the past two decades, taking with them their US-born citizen children (USCC). A family's relocation-forced deportation or voluntary return-and the subsequent settlement and adjustment to Mexico affect everyone's well-being. We interviewed 18 USCC whose parents were forcibly deported and 18 whose parents returned voluntarily about their circumstances, experiences, and perceptions. Four categories of relocation and adjustment issues emerged. USCC with deported parents felt the sudden and harsh arrest, detention, deportation, and separation from parents, and family reunification after deportation. Those in the voluntary-return group told of concerns about the planned separation and relocation to Mexico. Both groups experienced issues of family reintegration and adjustment to a new environment. While relocation prompted similarities and differences in families' settlement, issues unique to families played a part in children's adjustment. Clinicians in both the United States and Mexico must take into consideration the nature of the relocation, families' distinctive reactions, and the individual child's experience as some USCC will remain in Mexico and others will return to the US Mexican clinicians will encounter USCC still settling and adjusting to Mexico, and USCC who decide to remain permanently in Mexico. US clinicians may encounter USCC facing the challenges of re-entering American society, joining educational institutions, and becoming part of the labor force. USCC forming families may feel the impact of their pasts in parenting dynamics.

Spillover effects of the US stock market and the predictability of returns: international evidence based on daily data

ABSTRACT This paper investigates the spillover effect of lagged US daily returns on stock return predictability across 17 developed markets from January 1st, 1972 through August 31st, 2022. Using daily returns series, we find that lagged US returns is a superior predictor for future returns in international markets while including the lagged domestic returns and considering US negative or extreme returns. The predictive power of lagged US daily returns, nonetheless, substantially weakens during the recent COVID period. Our results imply that the degrees of stock return predictability and spillovers across markets are driven by the evolutionary market conditions, the channels of information transmission, and information leadership.

The US Military Bases in the Post-9/11 Horn of Africa

Once entangled in an intense ideological contest and power play with the Soviet Union in the Horn of Africa (HOA) during the Cold War, the US saw little geopolitical interest to defend in the sub-region in the first decade of the post-Cold War period. Terrorism-induced security threats since the late 1990s, and particularly the 9/11 incident, have drawn the US's attention back to the geostrategic Horn region. This article explores the factors behind the US's return to the Horn in the aftermath of the new millennium with a militarised and securitised presence involving the establishment of permanent and ad hoc military bases. The study employs a qualitative research approach, with data drawn from articles, books, and reports. The study reveals that although the war on terror was the immediate reason for the US's focus and militarised presence, subsequent developments such as piracy, economic interest, and the advent of rival powers increased the strategic importance of Africa to the US. The US foreign and security policy priorities are currently shifting away from the war on terror to containing strategic and economic competitors, notably China and Russia, across the globe, including in the HOA.

Geopolitical risk and the returns and volatility of global defense companies: A new race to arms?

The ongoing war in Ukraine and rising geopolitical tensions between Russia and western countries have led several European countries to increase defense spending to historic levels. Under such intense circumstances, we examine the co-movements between the daily geopolitical risk (GPR) index and the daily returns and volatility of 36 global defense and aerospace companies covering ten countries and three continents. Using the wavelet coherence approach, we find significant co-movement concentrated around the eruption of the war in Ukraine, mostly for medium and longer scales, indicating a flight-to-arms phenomenon. The strong co-movement is significant for most of US and European companies. Specifically, the GPR index leads the return and volatility of several US and European companies at medium and longer scales throughout the war period, and its impact is mostly positive. Our findings offer new and interesting implications for multi-horizon market participants such as traders and investors.

The implications of Qassem Soleimani assassination on US- Iranian relations: تداعيات اغتيال قاسم سليماني على العلاقات الأمريكية الإيرانية

This study deals with the repercussions of the assassination of Iranian military commander Qassem Soleimani on US- Iranian relations, and the US- Iranian escalation and tension in Iraq and the entire surrounding region. The study tries to determine the indicators of the US- Iranian escalation and the effect of the bombing incident near Baghdad Airport on January 4, 2020, at the interior of Iranian, and at the regional and international level. It seeks to estimate the potential for escalation between the United States of America and Iran; the latter surprised the group of 4 + 1 countries on the anniversary of Soleimani assassination in 2021 by increasing the rate of uranium enrichment to 20%. This step will be taken in consideration in any future negotiations between Iran and the United States of America and the European Union if US President Joe Biden decides to return to the nuclear accord. The results of the study concluded that the previous US approach in the Trump administration affected negatively on any future negotiation about the return of US to the Joint Comprehensive Plan of Action. US President Joe Biden is trying to mitigate his predecessor’s escalation of US- Iranian relations; nonetheless, Israel seeks to obstruct any path that would end the tension between Washington and Tehran.

The Weight of Migration: Reconsidering Health Selection and Return Migration among Mexicans.

While migration plays a key role in shaping the health of Mexican migrants in the US and those in Mexico, contemporary Mexican migration trends may challenge the health selection and return migration hypotheses, two prevailing assumptions of how migration shapes health. Using data from the Mexican Family Life Survey (2002; 2005), we tested these two hypotheses by comparing the cardiometabolic health profiles of (1) Mexico–US future migrants and nonmigrants and (2) Mexico–US return migrants and nonmigrants. First, we found limited evidence for health selection: the cardiometabolic health of Mexico–US future migrants was not measurably better than the health of their compatriots who did not migrate, although migrants differed demographically from nonmigrants. However, return migrants had higher levels of adiposity compared to those who stayed in Mexico throughout their lives; time spent in the US was also associated with obesity and elevated waist circumference. Differences in physical activity and smoking behavior did not mediate these associations. Our findings suggest positive health selection might not drive the favorable health profiles among recent cohorts of Mexican immigrants in the US. However, the adverse health of return migrants with respect to that of nonmigrants underscores the importance of considering the lived experience of Mexican migrants in the US as an important determinant of their health.

Dynamic conditional eigenvalue GARCH

In this paper we introduce a multivariate generalized autoregressive conditional heteroskedastic (GARCH) class of models with time-varying conditional eigenvalues. The dynamics of the eigenvalues is derived for the cases with underlying Gaussian and Student’s t-distributed innovations based on the general theory of dynamic conditional score models by Creal, Koopman and Lucas (2013) and Harvey (2013). The resulting time-varying eigenvalue GARCH models – labeled ‘λ-GARCH’ models – differ for the two cases of innovations, similar to, and generalizing, univariate linear Gaussian GARCH and Student’s t-based Beta-t-GARCH models. Asymptotic theory is provided for the Gaussian-based quasi-maximum likelihood estimator (QMLE). In addition, and in order to test for the number of (linear combinations of) the time-varying eigenvalues, we consider testing and inference under the hypothesis of reduced rank of the GARCH loading matrices. The conditional Gaussian and Student’s t distributed λ-GARCH models are applied to US return data, and it is found that the eigenvalue structure for the sample considered indeed satisfies the hypothesis of reduced rank. Specifically, it is possible to disentangle time-varying linear combinations of the eigenvalues, or factors, from time-invariant factors which drive the dynamics of the conditional covariance.

American Exceptionalism: The Long-Term Evidence

In this article, the authors examine the evolving composition of the global equity market over the past 121 years. Using the DMS database from Morningstar, they study the long-term returns on all the main asset classes. The authors present investment returns based on 90 countries, 23 of which have histories starting in 1900. Over the long run, equity returns have systematically exceeded the investment performance of government bonds and Treasury bills. For the world as a whole, stocks beat bills by 4.4% per year and bonds by 3.1% per year. In the United States, stocks outperformed bills by 5.8% per year, compared with 3.7% per year in the world ex-US. Contrary to many equity investors’ expectations at the dawn of the 21st century, the United States continued to outperform non-US stock markets by a significant margin. <b>TOPICS:</b>Fundamental equity analysis, emerging markets, financial crises and financial market history, performance measurement <b>Key Findings</b> ▪ The long-term growth of US financial assets has been exceptional. The US stock market now represents 56% of the market capitalization of worldwide equities. ▪ Over the 1900–2020 period, the annualized real (inflation-adjusted) return on US equities was 6.6%, that on long government bonds was 2.1%, and that on Treasury bills was 0.8%. The US experience is not a guide to the typical non-US market. ▪ The 6.6% real USD return on US equities contrasts with 4.5% real USD return on a 90-country index of international, non-US equities over the same 121-year period. The US was an outlier. ▪ US stock market returns were superior not only in the 20th century. In the 21st century, real US returns (4.6%) have exceeded the world ex-US (2.8%) and Europe (2.5%). ▪ US markets have beaten non-US markets with the help of expansionary monetary policy and a high weighting in technology companies. Whether US exceptionalism will persist is an open question.

Effects of the COVID-19 pandemic on the US stock market and uncertainty: A comparative assessment between the first and second waves

This paper makes the first comparative assessment of the impacts of the first and second waves of the ongoing COVID-19 pandemic for the US stock market and its uncertainty. To this end, we investigate the dynamic conditional correlation and the asymmetric impacts of shocks on the correlation between the US and Chinese stock markets before and during the COVID-19 crisis. Furthermore, we analyze and compare the relationship between the COVID-19 pandemic and US returns and uncertainty during the first and second waves of the pandemic. First, we find that the dynamic correlation approach supports the presence of volatility spillovers (contagion effects) between the two stock markets, especially during the rapid spread phase of COVID-19 in the US. Second, the analysis of news impact correlation surfaces shows that the shocks to the US and Chinese markets have asymmetric effects on the correlation between the two markets. Finally, we find a persistent link between US returns, uncertainty, and the COVID-19 pandemic during the first and second waves of the outbreak. Our results prove that the pandemic has shown harmful consequences for financial markets in general and the US economy in particular.

MAX is not the max under the interference of daily price limits: Evidence from China

Proposing a proxy (MAX) for extremely positive returns (EPR) that trigger lottery demand, Bali et al. (2011) observe a negative relation between MAX and future stock returns in US. However, for China’s stocks with daily price limits, we observe that MAX understates EPR and their negative relation with future returns. By presenting a revised MAX (RMAX) explicitly considering price limits, we show that RMAX, free of such underestimations, exhibits persistent differences from MAX in explaining future returns. More importantly, attracted by stocks (consecutively) closing at the price limits, retail attention and subsequent retail trades contribute to the success of RMAX.

US Mutual Fund Turnover and Returns, 1991-2020

US Mutual Fund Turnover and Returns, 1991-2020

Construction of minimum spanning trees from financial returns using rank correlation

The construction of minimum spanning trees (MSTs) from correlation matrices is an often used method to study relationships in the financial markets. However most of the work on this topic tends to use the Pearson correlation coefficient, which relies on the assumption of normality and can be brittle to the presence of outliers, neither of which is ideal for the study of financial returns. In this paper we study the inference of MSTs from daily US, UK and German financial returns using Pearson and two rank correlation methods, Spearman and Kendall’s τ. MSTs constructed using these rank methods tend to be more stable and maintain more edges over the dataset than those constructed using Pearson correlation. The edge agreement between the Pearson and rank MSTs varies significantly depending on the state of the markets, but the rank MSTs generally show strong agreement at all times. Deviation from univariate normality can be related to changes in the correlation matrices but is more difficult to connect to changes in the MSTs. Irrelevant of coefficient, the trees tend to have similar topologies. Portfolios constructed from the MST correlation matrices have a smaller turnover than those from the full covariance matrix for the larger markets, but not for the smaller German market. Using a bootstrap method we find that the correlation matrices constructed using the rank correlations are more robust, but there is little difference between the robustness of the MSTs.

China Markets and Global Stock Return Predictability

This paper explores the China equity market's impact on the global equity markets through the lens of asset pricing. We study the predictive properties of the lagged China returns for global stock returns and find that the lagged China returns can significantly predict other markets' stock returns, but not vice versa. We augmented three selected global equity pricing models (Chen, Roll, and Ross's model (CRR), Ang and Bekaert's model (AB), and Rapach, Strauss, and Zhou's model (RSZ)) with the lagged China returns respectively, and find that these popular global stock return predictors cannot explain the predictive power of the lagged China returns. Moreover, we find that only the lagged China returns can lead the international returns at the one-month horizon but not the lagged US returns. Further evidence reveals it is due to that the information diffusion of the China market occurs at the longer-horizons (e.g. one-month) while the information diffusion of the US market occurs at the shorter-horizons (e.g. one-week). Lastly, we documented that the lagged China returns during the low investor-attention period have stronger predictability compared to the predictive performance during the high attention period, which is in line with the information friction theory that when the attention-constrained investors make investment decisions they fail to allocate attention to certain economic state variables, which causes the slow information diffusion across markets and leads to the cross-market return predictability. Overall, our results indicate that the lagged China returns should be regarded as a global state variable that helps us predict future stock returns.

COVID-19 and investor sentiment influence on the US and European countries sector returns

Although some studies recently address the association between COVID-19 sentiment and returns, volatility, or stock trading volume, no one conducts an analysis to measure the impact of investor rationality or irrationality on the influence on countries and sectors’ returns. This work creates a text media sentiment and combines its influence with the outbreak cases on the stock market sector returns of the US, Europe, and their main countries most affected by the pandemic. This allows us to perceive the ranking impact of rationality or irrationality on country and sector stock returns. This work applies a random-effects robust panel estimation, with an M-estimator. This paper concludes that US returns are more sensitive to sentiment, and thus more prone to irrational factors than confirmed cases compared to Europe and that country factors influence the returns differently. In Italy and Spain as the most punished countries in Europe apart from the UK, present sector indexes return more reactive to verified cases, or rationality, namely, tourism, real estate, and the automobile (this last one in Italy). The importance of this work resides in providing a new in-depth analysis of irrational behavioral metrics among countries, which allows for comparison. Moreover, it allows observing which sectors’ and which countries’ asset returns are most sensitive to rational or irrational expressions of events, allowing for arbitraging, financial planning for investors, decision-makers, and academia on an in and out of pandemic context. AcknowledgmentThis work is funded by National Funds through the FCT – Foundation for Science and Technology, I.P., within the scope of the project Refª UIDB/05583/2020. Furthermore, we would like to thank the Research Centre in Digital Services (CISeD) and the Polytechnic Institute of Viseu for their support.

Is There a Connection between Sovereign CDS Spreads and the Stock Market? Evidence for European and US Returns and Volatilities

This study complements the current literature, providing a thorough investigation of the lead–lag connection between stock indices and sovereign credit default swap (CDS) returns for 14 European countries and the US over the period 2004–2016. We use a rolling VAR framework that enables us to analyse the connection process over time covering both crisis and non-crisis periods. In addition, we analyse the relationship between stock market volatility and CDS returns. We find that the connection between the credit and equity markets does exist and that it is time variable and seems to be related to financial crises. We also observe that stock market returns anticipate sovereign CDS returns, and sovereign CDSs anticipate the conditional volatility of equity returns, closing a connectedness circle between markets. Contribution percentages in terms of returns are more intense in the US than in Europe and the opposite result is found with respect to volatilities. Within Europe, a greater impact in Eurozone countries compared to non-Eurozone countries is observed. Finally, an additional analysis is also carried out for the financial sector, obtaining results largely consistent with those found using sovereign data.

Portfolio Choice with Time Horizon Risk

I study the allocation problem of an investors who holds her portfolio until reaching a target wealth. The strategy suppresses final wealth uncertainty but creates a time horizon risk. I begin with a simple mean variance model transposed in the duration domain, then study a dynamic portfolio choice problem with Generalized Expected Discounted Utility preferences. Using long-term US return data, I show in the mean variance model that a large amount of time horizon risk can be diversified away by investing a significant share of equities. In the dynamic model, more impatient investors are also more averse to timing risk and invest less in equities. The equity share is downward trending as accumulated wealth approaches its target.