Stock returns and real activity: a century of evidence

Article Abstract:

This paper analyzes the relation between real stock returns and real activity from 1889-1988. It replicates Fama's (1990) results for the 1953-1987 period using an additional 65 years of data. It also compares two measures of industrial production in the tests: (1) the series produced by Babson for 1889-1918, spliced with the Federal Reserve Board index of industrial production for 1919-1988, and (2) the new Miron and Romer (1989) index spliced with the Federal Reserve Board index in 1941. Fama's findings are robust for a much longer period - future production growth rates explain a large fraction of the variation in stock returns. The new Miron-Romer measure of industrial production is less closely related to stock price movements than the older Babson and federal Board Measures. (Reprinted by permission of the publisher.)

Analysis, Industrial productivity, Financial research, Fama, Eugene F.

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Heteroskedasticity in stock returns

Article Abstract:

We use predictions of aggregate stock return variances from daily data to estimate time-varying monthly variances for size-ranked portfolios. We propose and estimate a single factor model of heteroskedasticity for portfolio returns. This model implies time-varying betas. Implications of heteroskedasticity and time-varying betas fort tests of the capital asset pricing model (CAPM) are then documented. Accounting for heteroskedasticity increases the evidence that risk-adjusted returns are related to firm size. we also estimate a constant correlation model. Portfolio volatilities predicted by this model are similar to those predicted by more complex multivariate generalized-autoregressive-conditional-heteroskedasticity (GARCH) procedures. (Reprinted by permission of the publisher.)

Stock price forecasting, Investment analysis, Securities analysis

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Futures-trading activity and stock price volatility

Article Abstract:

We examine whether greater futures-trading activity (volume and open interest) is associated with greater equity volatility. We partition each trading series into expected and unexpected components, and document that while equity volatility covaries positively with unexpected futures-trading volume, it is negatively related to forecastable futures-trading activity. Further, though futures-trading activity is systematically related to the futures contract life cycle, we find no evidence of a relation between the futures life cycle and spot equity volatility. These findings are consistent with theories predicting that active futures markets enhance the liquidity and depth of the equity markets. (Reprinted by permission of the publisher.)

Financial futures

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