Daily Archives: June 23, 2023

Research Review | 23 June 2023 | Forecasting Equity Returns

The Realized Information Ratio and the Cross-Section of Expected Stock Returns
Mehran Azimi (University of Massachusetts Boston)
January 2023
This study investigates the predictability of asset returns with the information ratio and its specific variant, the Sharpe ratio. We find that the realized Sharpe ratio (rsr ) negatively predicts the cross-section of stock returns. The predictability is not due to the components of the rsr, that is, past returns and volatility, nor is it due to size, book-to-market, momentum, and several market microstructure and investor preference-related variables. A factor portfolio based on the short-term rsr generates alphas in the range of 0.67% to 0.89% per month against ten prominent factor models with t-stats well above 5. Our results suggest that a return-to-risk ratio metric is a strong predictor of cross-sectional stock returns, stronger than both risk and return. We provide evidence that the rsr is a proxy for stock-level sentiment. We find similar results using several information ratios and formation periods of up to one year when we control for momentum. The average monthly Carhart alpha of 60 factors constructed using five information ratios, each with formation periods ranging from one to 12 months, is 0.63%. The average of the corresponding t-stats is 4.5. The findings suggest that the predictive power of the information ratio, and the rsr in particular, differs fundamentally from its constituents.

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Macro Briefing: 23 June 2023

* Biden and India’s President Modi declare “new beginning” for trade disputes
* US economy appears far less sensitive to interest rates than economists thought
* CDC advisors recommend RSV vaccine approval for older adults
* Bank of England raises interest rates by 1/2-percentage point to fight inflation
* Existing home sales edged up in May but remain sharply lower vs. year-ago level
* US existing-home-sales prices fell in May from year ago by most in over 11 years
* Homes for sale dips to lowest on record in May, Redfin reports
* US jobless claims remain relatively elevated vs. recent history
* US Leading Economic Indicator forecasts recession starting late-2023/early 2024:

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