Steven J. Jordan

Location, location, location: currency effects and return predictability?

Most international financial market studies that compare across countries utilize the US dollar as the common numeraire. We explore the little studied question of the appropriate choice for the base currency and ask if currency choice can affect the final conclusion of whether predictability exists. We provide empirical results for stock return predictability that demonstrate the importance of the numeraire. For example, the existence (absence) of predictability for a US investor does not necessarily imply the existence (absence) of predictability for other foreign investors.

Economically-Linked Economies and Forecasting Chinese Stock Returns

We explore whether economic links via trade affect aggregate Chinese stock market returns. We find that market return indices from countries that China net exports from can forecast the Chinese aggregate market return at the weekly time horizon. Countries that China net exports to have no consistently significant OOS predictability.The economic intuition for our results follows from the fact that China has positioned itself as a low-cost provider competing on price. As a low-cost provider China has a more difficult time passing cost increases through to export customers because of sticky prices. However, production must meet demand implying that costs will drive short term economic gains for the overall Chinese economy. One interpretation of our results is that supply shocks are absorbed within 2 weeks.

Stock returns forecasting with metals: sentiment vs. fundamentals

ABSTRACT Using six prominent metal commodities, we provide evidence on the out-of-sample forecasting of stock returns for the market indices of the G7 countries, for which there is little prior evidence in this context. We find precious metals (gold and silver) can improve forecast accuracy relative to the benchmark and performs well compared to forecast combinations. From an economic gains perspective, forecasting returns provides certainty equivalent gains in a market timing strategy for the G7 countries. These certainty equivalent gains are large enough to make active portfolio management attractive, even for individual investors. Gains remain after considering reasonable transaction costs.

Information Content in Sneer Asymmetry: An Application to OOS Implied Volatility Forecasting

The ad hoc Black-Scholes (AHBS) is one of the most widely used option valuation models among practitioners. The main contribution of this study is that we improve the out-of-sample forecast accuracy of the AHBS model. First, we make the empirical observation that the call and put sneers are discontinuous and have different slopes when moneyness is equal to one. Next, we propose a new data usage methodology that incorporates the information contained in the asymmetric response of the call and put sneers. Our new method provides more accurate out-of-sample forecasts for several intraday time horizons. Our results are robust across several dimensions, including time period, forecast horizon, moneyness, and model specification.

Scalpel or Hatchet? Program Trade Regulation

This study addresses the effectiveness of program trade regulation by conducting an analysis of program trading restrictions during large market moves. To address this issue, we analyze the effect of sidecars (halts that only affect program trades) using intraday data from the Korean securities market. The Korean market and regulatory environment have several unique properties not available in US data that lend itself to such a study. We find that sidecars, as currently designed, are not as effective at controlling the trade imbalance levels around large market movements as when program trade is allowed. Program trades, at least a subset, provide liquidity when it is at a premium. We conclude that program trade restrictions should be more carefully crafted as some program trades are market stabilizing.