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Please use this identifier to cite or link to this item: https://dspace.lboro.ac.uk/2134/24796

Title: Predictability and underreaction in industry-level returns: Evidence from commodity markets
Authors: Valcarcel, Victor J.
Vivian, Andrew J.
Wohar, Mark E.
Keywords: Asset pricing
Commodity markets
Equity markets
Industry-level returns
Information and market efficiency
Predictability
Out-of-sample forecast ability
Underreaction
Issue Date: 2017
Publisher: © Elsevier
Citation: VALCARCEL, V.J., VIVIAN, A.J. and WOHAR, M.E., 2017. Predictability and Underreaction in Industry-Level Returns: Evidence from Commodity Markets. Journal of Commodity Markets, 6, pp. 1-15.
Abstract: This paper finds significant evidence that commodity log price changes can predict industry-level returns for horizons of up to six trading weeks (30 days). We find that for the 1985-2010 period, 40 out of 49 U.S. industries can be predicted by at least one commodity. Our findings are consistent with Hong and Stein’s (1999) “underreaction hypothesis.” Unlike prior literature, we pinpoint the length of underreaction by employing daily data. We provide a comprehensive examination of the return linkages among 25 commodities and 49 industries. This provides a more detailed investigation of underreaction and investor inattention hypotheses than most related literature. Finally, we implement data-mining robust methods to assess the statistical significance of industry returns reactions to commodity log price changes, with precious metals (such as gold) featuring most prominently. While our results indicate modest out-of-sample forecast ability, they confirm evidence that commodity data can predict equity returns more than four trading weeks ahead.
Description: This paper is in closed access until 17th February 2019.
Version: Accepted for publication
DOI: 10.1016/j.jcomm.2017.02.003
URI: https://dspace.lboro.ac.uk/2134/24796
Publisher Link: http://dx.doi.org/10.1016/j.jcomm.2017.02.003
ISSN: 2405-8513
Appears in Collections:Closed Access (Business School)

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