Factor Momentum Versus Stock Price Momentum: A Revisit

Joint work with Nusret Cakici (FU), Christian Fieberg (CUAS), and Daniel Metko (UB).

Abstract: Does factor momentum drive the stock price momentum? Inspired by the recent findings from the United States, we revisit this relationship across 51 markets. The factor momentum effect remains strong—both within and across countries—regardless of typical drivers of return predictability. However, its ability to capture the stock momentum profits depends fundamentally on methodological and dataset choices. Consequently, the factor momentum cannot robustly subsume the stock momentum in global markets. On the contrary, the latter explains the former better than vice versa. Our conclusions challenge the view that momentum only times other factors rather than constituting a distinct anomaly.

Presentations: FMA European Conference 2023.

A Trend Factor for the Cross-Section of Cryptocurrency Returns

Accepted in  Journal of Financial and Quantitative Analysis (2024, forthcoming).

Joint work with Christian Fieberg (CUAS), Gerrit Liedtke (UB), Thorsten Poddig (UB), and Thomas Walker (CU)

Abstract: We propose CTREND, a new trend factor for cryptocurrency returns, which aggregates price and volume information across different time horizons. Using data on more than 3,000 coins, we employ machine learning methods to exploit information from various technical indicators. The resulting signal reliably predicts cryptocurrency returns. The effect cannot be subsumed by known factors and remains robust across different subperiods, market states, and alternative research designs. Moreover, it survives the impact of transaction costs and persists in big and liquid coins. Finally, an asset pricing model that incorporates CTREND outperforms competing factor models—providing a superior explanation of cryptocurrency returns.

Presentations: IBA SBS Conference 2024.

Pockets of Predictability: A Replication

Accepted in  Journal of Finance (2024, forthcoming).

Joint work with Nusret Cakici (FU), Christian Fieberg (CUAS), Tobias Neumaier (UB), and Thorsten Poddig (UB)

Abstract: Farmer, Schmidt, and Timmermann (FST) document time-variation in market return predictability, identifying “pockets” of significant predictability through kernel regressions. However, our analysis reveals a critical discrepancy between the method outlined by FST and the code actually implemented. Instead of using a one-sided kernel, which guarantees out-of-sample forecasts, they perform in-sample estimation with a two-sided kernel. As a result, future information leaks into the forecasting model, undermining its reliability. Rectifying this error qualitatively alters the findings, invalidating most conclusions of the FST study. Thus, attempts to exploit such “pockets”—should they genuinely exist—offer little help in forecasting market returns.

Interaction effects in the cross-section of country and industry returns

Published in Journal of Banking and Finance (2024, 165, 107200).

Joint work with Zaghum Umar (ZU), Mehmet Umutlu (EDU), and Aleksander Mercik (WUEB)

Abstract: We comprehensively examine the interaction effects in the cross-sectional predictability of country and industry returns. Using nearly five decades of data from 68 countries, we construct all possible double-sorted portfolios based on 44 portfolio characteristics and uncover numerous significant interactions. An out-of-sample value-weighted strategy that selects the top long-short country (industry) interactions generates a monthly World CAPM alpha of 0.33% (0.62%) with a Sharpe ratio of 0.58 (0.75). The strongest interactions stem from implementing momentum and technical analysis signals in small and illiquid countries or industries. Furthermore, the return patterns mainly emanate from frontier and weakly integrated markets—highlighting the role of market frictions and segmentation in the occurrence of abnormal returns. Consistent with these interpretations, the interactions decline over time as global markets mature and become more integrated.

Do Anomalies Really Predict Market Returns? New Data and New Evidence

Published in  Review of Finance (2024, 28, 1-44).

Joint work with Nusret Cakici (FU), Christian Fieberg (CUAS), and Daniel Metko (UB).

Abstract: Using new data from U.S. and global markets, we revisit market risk premium predictability by equity anomalies. We apply a repertoire of machine learning methods to 42 countries to reach a simple conclusion: anomalies, as such, cannot predict aggregate market returns. Any ostensible evidence from the U.S. lacks external validity in two ways: it cannot be extended internationally and does not hold for alternative anomaly sets—regardless of the selection and design of factor strategies. The predictability—if any—originates from a handful of specific anomalies and depends heavily on seemingly minor methodological choices. Overall, our results challenge the view that anomalies as a group contain helpful information for forecasting market risk premia.

Machine Learning Goes Global: Cross-Sectional Return Predictability in International Stock Markets

Published in  Journal of Economic Dynamics and Control (2023, 148, 104618).

Joint work with Nusret Cakici (FU), Christian Fieberg (CUAS), and Daniel Metko (UB).

Abstract: We examine return predictability with machine learning in 46 stock markets around the world. We calculate 148 firm characteristics and use them to feed a repertoire of different models. The algorithms extract predictability mainly from simple yet popular factor types—such as momentum, reversal, value, and size. All individual models generate substantial economic gains; however, combining them proves particularly effective. Despite the overall robustness, the machine learning performance depends heavily on firm size and availability of recent information. Furthermore, it varies internationally along two critical dimensions: the number of listed firms in the market and the average idiosyncratic risk limiting arbitrage.

Presentations: Technical University of Munich, Robeco, Ono Academic College, American University of Sharjah, American University in Dubai.

Trade competitiveness and the aggregate returns in global stock markets

Published in Journal of Economic Dynamics and Control (2023, 148, 104618).

Joint work with Mardy Chiah (NBS), Huaigang Long (ZUFE), and Zaghum Umar (ZU).

Abstract: Using the change in the real effective exchange rate (REER) to reflect trade competitiveness, we examine its role in the cross-section of global equity returns. The changes in REER negatively affect stock market returns. The REER effect is robust after controlling for known risk factors and market characteristics. Furthermore, it remains pervasive across different periods and subsamples. Our findings support the conventional wisdom that appreciating currency harms trade values, consequently dampening a firm's stock market performance.

Misery on Main Street, victory on Wall Street: Economic discomfort and the cross-section of global stock returns

Published in Journal of Banking and Finance  (2023, 149, 106760).

Joint work with Nusret Cakici (FU).

Abstract: We hypothesize that local economic discomfort influences investors’ risk aversion, leading to cross-sectional variation in risk premia in segmented equity markets. To test this assertion, we employ the misery index (MI)—which aggregates both unemployment and inflation rates—as a gauge of macroeconomic welfare. Using six decades of data from 69 markets, we demonstrate that economic discomfort reliably predicts cross-sectional stock returns. A quartile of countries with the highest MI outperforms those with the lowest by 0.74% per month. The effect prevails in markets where prices are set locally and gradually declines over time as markets become more integrated.

Interest rate changes and the cross-section of global equity returns

Published in Journal of Economic Dynamics and Control  (2023, 147, 104596).

Joint work with Nusret Cakici (FU), Robert J. Bianchi (GU), and Huaigang Long (ZUFE).

Abstract: Interest rate changes typically affect equity values. However, if investors react slowly, the repricing may stretch over time. Using a century of data from sixty countries, we demonstrate that past interest rate changes predict the cross-section of equity returns worldwide. The quintile of stock markets with the highest change in government bond yields underperforms the countries with the lowest change by 0.76% per month. The phenomenon is distinctly robust and cannot be explained by known risk factors. Furthermore, the low correlation with other return patterns paves the way for effective country allocation strategies.

Salience theory and the cross-section of stock returns: International and further evidence

Published in Journal of Financial Economics (2022, 146(2), 689-725).

Joint work with Nusret Cakici (FU).

Abstract: Motivated by existing evidence of the salience theory (ST) effect in the United States, we investigate its importance in 49 countries over the past three decades. Initial results suggest a negative relationship between the ST measure and future returns. The underperformance of low ST stocks is the strongest in countries with high idiosyncratic risk. However, the salience effect has three vital limitations. First, a substantial part of the anomaly can be attributed to the short-term return reversal. Second, it is priced primarily among microcaps. Third, the premium is realized predominantly following severe down markets and volatility spikes. Outside of microcaps and extreme market conditions, the salience effect does not exist.

Macroeconomics matter: Leading economic indicators and the cross-section of global stock returns

Published in Journal of Financial Markets (2022, 61, 100736).

Joint work with Huaigang Long (ZUFE), Wenyu Zhou (ZU), and Elie Bouri (LEA).

Abstract: Leading economic indicators assist in forecasting future business conditions. Can they also predict aggregate stock returns? To answer this question, we examine six decades of data from 39 countries. Short-term changes in the composite leading indicator (CLI) positively correlate with future stock returns in the cross-section. The quintile of markets with the highest CLI increase outperforms the quintile with the lowest CLI change by 1.43% per month. The predictive power of the CLI survives multiple robustness checks and cannot be absorbed by established risk factors. Our findings imply an exploitable investment strategy that can be pursued with exchange-traded funds.

When bad news is good news: Geopolitical risk and the cross-section of emerging market stock returns

Published in Journal of Financial Stability (2022, 58, 100964).

Joint work with Nusret Cakici (FU), Ender Demir (RU), and Huaigang Long (ZUFE).

Abstract: Using a news-based gauge of geopolitical risk, we study its role in asset pricing in global emerging markets. We find that changes in risk positively predict future stock returns. The countries with the highest increase in geopolitical uncertainty outperform their counterparts with the lowest change by up to 1% per month. The anomaly is not explained by other established asset pricing effects and remains robust to many considerations. We link the observed phenomenon with investor overreaction to geopolitical news driven by the availability bias.

Long-run reversal in commodity returns: Insights from seven centuries of evidence

Published in Journal of Banking and Finance (2021, 133, 106238).

Joint work with Robert J. Bianchi (GU) and Mateusz Mikutowski (PUEB).

Abstract: We perform the longest study of long-run reversal in commodity returns. Using a unique dataset of 52 agricultural, industrial, and energy commodities, we examine the price behavior for the years 1265 to 2017. The findings reveal a strong and robust long-run reversal effect. The returns of the past one to three years negatively predict subsequent performance in the cross-section of returns. The effect is robust to extensive subsample and subperiod analysis and is not driven by statistical biases, extreme events, or macroeconomic risks. Our findings support the explanation that the long-term reversal originates from supply and demand adjustments following price changes. Finally, the phenomenon is elevated in more volatile commodities and in periods of high return dispersion.

How to survive a pandemic? The corporate resiliency of travel and leisure companies to the COVID-19 outbreak

Published in Tourism Manaeement (2021, 84, 104281).

Joint work with Tomasz Kaczmarek (PUEB), Katarzyna Perez (PUEB), and Ender Demir (RU),

Abstract: What protects travel and leisure companies from a global pandemic, such as COVID-19? To answer this question, we investigate data on over 1200 travel and leisure companies in 52 countries. We consider 80 characteristics, such as company financial ratios, macroeconomic variables, and government policy responses. Using regressions and machine learning tools, we demonstrate that firms with low valuations, limited leverage, and high investments have been more immune to the pandemic-induced crash. We also find a beneficial effect of stringent containment and closure policies. Finally, our results indicate that countries with less individualism may be better positioned to cope with the pandemic. Our findings have implications for regulatory bodies, managers, and investors concerning future pandemic outbreaks.

Where have the profits gone? Market efficiency and the disappearing equity anomalies in country and industry returns

Published in Journal of Banking and Finance (2020, 121, 105966).

Joint work with Mehmet Umutlu (ENU) and Alina Maydybura (RIT).

Abstract: We are the first to demonstrate the decline in the cross-sectional predictability of country and industry returns in recent years. We examine 53 anomalies in country and industry indices from 64 markets for the years 1973–2018. The profitability of the strategies has significantly decreased recently, driven particularly by the disappearance of value and reversal effects. The phenomenon is strongest in large developed markets. Neither changes in country- and industry-specific risks, nor investor learning from the academic literature can explain the effect. Our findings support the view that the fall in return predictability is caused by the overall improvement in market efficiency.

The long-run reversal in the long run: Insights from two centuries of international equity returns

Published in Journal of Empirical Finance (2020, 55, 177-199).

Joint work with Renatas Kizys (US) Muhammad Wajid Raza (RIT).

Abstract: We perform the most comprehensive test of long-term reversal in national equity indices ever done. Having examined data from 71 countries for the years 1830 through 2019, we demonstrate a strong reversal pattern: the past long-term return negatively predicts future performance. The phenomenon is not subsumed by other established cross-sectional return patterns, including the value effect. The long-term reversal is robust to many considerations but highly unstable through time. Finally, our findings support the overreaction explanation of this anomaly.

Cross-sectional seasonalities in international government bond returns

Published in Journal of Banking and Finance (2019, 98, 80-94).

Abstract: We are the first to document the cross-sectional return seasonality effect in international government bonds. Using a variety of tests, we examine fixed-income securities from 22 countries for the years 1980–2018. The bonds with high (low) returns in the same-calendar month in the past continue to overperform (underperform) in the future. The effect is robust to many considerations, including controlling for established predictors of bond returns. Our results support the behavioural story of the anomaly, demonstrating its highest profitability in periods of elevated investor sentiment and in the market segments wotjstrong limits to arbitrage. Nonetheless, investment application of bond seasonality might be challenging due to high trading costs and the required short holding periods.