Equity risk premia, corporate profit forecasts, and investor sentiment around the Stock Crash of October 1987

Article Abstract:

The possible causes of the Oct 19, 1987 crash of the stock market are examined. It is proposed that the crash, marked by the Dow Jones Industrial Average's 508-point decline and the 20.5% drop of the Standard and Poor's 500 Index, may have resulted from the sharp fall and rise of the equity risk premium around the time of the market's collapse or it could have been caused by the discrepancy between consensus forecasts of future corporate profit and investor expectations. Analysis of monthly forecasts from the Blue Chip Economic Indicators shows that the corporate profit forecasts theory cannot account for the 1987 collapse of the market. Likewise, evidence is found suggesting the weak explanatory power of the equity risk premium theory. The study offers a new hypothesis in light of these findings. It is proposed that the crash was caused in part by shifts in investor sentiment.

Stock Market Crash, 1987

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Detecting spot price forecasts in futures prices

Article Abstract:

Commodity characteristics that should be related to differences in forecast power across commodities are identified. Comparing forecasts based on futures' prices with forecasts based on current spot prices has led some researchers to question the forecasting ability of futures markets. The factors that generate predictable spot price changes and the factors that obscure the market's forecasts of these price changes are examined. It is concluded that, unless the variance of the expected spot price changes is a large fraction of the variance of the actual spot price changes, futures prices cannot provide forecasts that are reliably better than the current spot prices.

Financial futures, Commodity futures, Foreign exchange futures

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Luck versus forecast ability: determinants of trader performance in futures markets

Article Abstract:

Futures traders earn positive profits as a result of luck, not forecasting ability. Traders' forecasting abilities was evaluated by analyzing market data obtained from the Commodity Futures Trading Commission for the period from Jul 1, 1977, to Dec 31, 1981. Nine markets were investigated, including the wheat, cattle, and Treasury bond markets. The results indicated that luck was a determinant of trading success. There appears to be no explanation for the existence of a large group of traders with no forecasting ability, and the reason why traders obtained positive returns was also unclear.

Futures market, Futures markets, Futures, Financial research

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