Trade imbalance Network and Currency Returns

(with  Lucio Sarno and Xiaoxia Ye)  SSRN version


We extend the theory of Gabaix and Maggiori (2015a, 2015b) to study currency risk premia in a multi-country world with imperfect financial markets. Currency returns are connected to financiers’ limited commitment, captured by the complexity of their balance sheets in the trade imbalance network. Guided by the theory, we construct a characteristic, CBC, based on the centrality of the imbalance network and variance-covariance of currency returns. Sorting currencies on CBC generates a high Sharpe ratio, and the resulting excess returns cannot be explained by standard currency factors and intermediary asset pricing factors, suggesting a novel source of currency predictability.

Inflation Risk Premium for Commodity and Stock Market Returns

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


We propose a novel measure of the ex-ante commodity downside-risk premium (CDP) for each commodity based on a term structure model of commodity futures. Our theory-based CDP, capturing forward-looking information in the futures markets, outperforms well-known characteristics in explaining the cross-section of commodity returns. The CDP factor -- the high minus low portfolio constructed from sorting CDP -- has the highest Sharpe ratio among existing factors, and none of the latter can explain it, implying it has substantial new information. Moreover, various aggregations of individual commodity CDP predict future stock market returns significantly, even after controlling for major economic predictors. The link between commodities and the stock market is stronger than previously thought.

Futures Trading Costs and Market Microstructure Invariance: Identifying Bet Activity

(with Lars Nordin and Caihong Xu) SSRN Version 


Market microstructure invariance (MMI) stipulates that trading costs of financial assets are driven by the volume and volatility of bets, that are, transactions intended to produce idiosyncratic gains based on investors’ beliefs. With futures transactions data, we estimate bet volume as the trading volume of brokerage firms that trade on behalf of their clients and bet volatility as the trade-related component of futures volatility. We find that the futures bid-ask spread lines up with bet volume and bet volatility as predicted by MMI, and that intermediation by high frequency traders does not interfere with the MMI relation.

Effects of forecasters disagreement on the crude oil volatility: a GARCH-MIDAS approach

(with Anton Hasselgran, Caihong Xu, Xiaoxia Ye). SSRN version


In this paper, we investigate whether the forecasted crude oil prices from the Survey of Professional Forecasters conducted by the European Central Bank contain information for the Brent crude oil return volatility predictions. With a variety of GARCH-Mixed Data Sampling, ie, GARCH-MIDAS specifications, our in-sample estimation results suggest that the oil market is more volatile when disagreement among the forecasters increases, and the variance model including both the realized variance and forecasters disagreement fits the data the best. Our out-of-sample forecasting results indicate that including forecasters disagreement into the GARCH-MIDAS significantly improves oil return volatility prediction. We demonstrate in the real world application that considering crude oil forecasts disagreement when forecasting volatility has important implications for the VaR risk management.

Term Premia Co-movement and Global Trade Network

(with Caihong Xu and Xiaoxia Ye) SSRN version


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.

The variance based efficiency test of the OMX Index option market

(with Magnus Wiktorsson,  RuiZhi, Zhao). SU Working Paper Version 


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.