Using Fundamental Earnings Factors to Forecast Equity Market Volatility
This article introduces a model for forecasting future volatility using fundamental factors, including the extent to which the market's valuation deviates from its predicted value, the losses reported by companies with negative earnings, projected earnings growth rates, and Treasury bill rates....
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Published in | Journal of trading Vol. 11; no. 2; pp. 5 - 10 |
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Main Authors | , |
Format | Journal Article |
Language | English |
Published |
New York
Pageant Media
01.04.2016
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Abstract | This article introduces a model for forecasting future volatility using fundamental factors, including the extent to which the market's valuation deviates from its predicted value, the losses reported by companies with negative earnings, projected earnings growth rates, and Treasury bill rates. The main result is that fundamental factors provide significant incremental explanatory power for predicting volatility relative to that provided by past volatility realizations alone. The explanatory power of fundamental factors is greatest when the VIX Index is at moderate rather than extreme levels so there is no expectation of long-term mean reversion for volatility. In addition, the explanatory power of fundamental factors is greatest when the model forecasts an increase in VIX. The overall conclusion of this study is that forecasts of future volatility should incorporate fundamental factors. |
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AbstractList | This article introduces a model for forecasting future volatility using fundamental factors, including the extent to which the market's valuation deviates from its predicted value, the losses reported by companies with negative earnings, projected earnings growth rates, and Treasury bill rates. The main result is that fundamental factors provide significant incremental explanatory power for predicting volatility relative to that provided by past volatility realizations alone. The explanatory power of fundamental factors is greatest when the VIX Index is at moderate rather than extreme levels so there is no expectation of long-term mean reversion for volatility. In addition, the explanatory power of fundamental factors is greatest when the model forecasts an increase in VIX. The overall conclusion of this study is that forecasts of future volatility should incorporate fundamental factors. |
Author | Mozes, Haim A. Steffens, John Launny |
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Cites_doi | 10.21314/JOR.2012.237 10.1023/B:RAST.0000028186.44328.3f 10.1016/j.jfineco.2010.02.009 10.1111/j.1540-6261.2008.01393.x 10.1016/j.jbankfin.2013.08.005 10.1108/03074359810765570 10.3905/jpm.1996.409572 10.1257/000282803322157188 10.1257/.41.2.478 10.1002/jae.800 |
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Copyright | Copyright Euromoney Institutional Investor PLC Spring 2016 |
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References | Baik B. (bib2) 2006; 35 Brownlees C. (bib3) 2011; 14 bib14 bib13 bib10 bib9 Ali A. (bib1) 1990; 67 bib7 bib8 bib5 bib6 bib4 Mozes H. (bib12) Hwang L. (bib11) 1996; 1 |
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SubjectTerms | Bankruptcy Earnings per share Equity Interest rates Stock prices Treasury bills Valuation Variables Volatility |
Title | Using Fundamental Earnings Factors to Forecast Equity Market Volatility |
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