Commodity Inflation Risk Premium and Stock Market Returns

(with Emmanouil Platanakis, Xiaoxia Ye and Guofu Zhou)  SSRN version  DATA PAGE

Abstract

We propose a novel measure of commodity inflation risk premium (cIRP) based on a term structure model of commodity futures. The cIRP, capturing forward-looking information in the futures markets, outperforms well-known characteristics in explaining the cross-section of commodity returns. The associated cIRP factor has the highest Sharpe ratio among the existing factors, and has substantial new information beyond them. Moreover, various aggregations of the individual cIRP predict stock market returns significantly, even after controlling for major economic predictors including the usual inflation measure. The link between commodities and the stock market is stronger than previously thought.

Conference: FMA 2022 (Semifinallist of the best paper award for investment); SGF 2023

Global Trade Network and Cross-Border Co-movement and Transmission of Bond Term Premia

(with Caihong Xu and Xiaoxia Ye) SSRN version, EJOR, Reject & Resubmit

Abstract

In this paper, we study how the global trade network provides a channel through which term premia comove and transmit across a large group of countries consisting of both developed and developing economies. We provide the theoretical derivations on why the term premia may decrease with the trade network centrality and conjuncture that the information contained in the trade network can predict the trading partners’ term premium change. We test our theoretical predictions with empirical analyses using both trade data and bond yields across different maturities from 37 countries. We show that the links of the global trade network contain useful information in explaining the variations in term premia through time and cross countries. Term premia co-movement and transmission are more pronounced among the developed countries than the developing countries. The theoretical and empirical evidence in this paper indicate the propagation of global and local country shocks transferring in the global macro-economy through the global trade network.

Conference: CICF 2023; AMES 2023

Permanent Working Paper

The variance based efficiency test of the OMX Index option market

(with Magnus Wiktorsson and RuiZhi, Zhao). Permanent Working Paper. SU Working Paper here

Abstract

We use the economic policy uncertainty indices of Baker, Bloom, and Davis (2016) in combination with themixed data sampling (MIDAS) approach to investigate the US and UK stock market movements. The long-runUS-UK stock market correlation depends positively on US economic policy uncertainty shocks. The US long-run stock market volatility depends significantly on the US economic policy uncertainty shocks but not on UK shocks while the UK depends significantly on both.