Hidden Predictability

I decompose stock market return into return on a portfolio of dividend futures and a portfolio of bonds to study predictability. Stock market return predictability is driven by the portfolio of dividend futures and is weakened by presence of the portfolio of bonds. Returns on the dividend futures portfolio can be predicted with higher statistical and economic significance than the stock market returns. This is because predictability of the dividend futures portfolio is partially cancelled out by the portfolio of bonds that loads on dividend-price ratio with the opposing sign. Moreover, the two portfolios respond to different sources of risk. Therefore, instead of asking whether stock market returns are predictable, we should ask which component of the returns is predictable and what is the relevant source of risk.


Foreign-dominated banking sectors, such as those prevalent in Central and Eastern Europe, are susceptible to two major sources of systemic risk: (i) linkages between local banks, and (ii) linkages between a foreign parent bank and its local subsidiary. During and after the global financial crisis, the second source of risk has been stressed by local regulators. Using a nonparametric method based on extreme value theory, we analyze interdependencies in downward risk in the banking sectors of the Czech Republic, Poland, Slovakia, and Turkey during 1994–2013. We find that the risk of contagion from a foreign parent bank to its local subsidiary is substantially smaller than the risk between two local banks.